Accounting case study hw

Master wiki

the_cat_toy_case_study.pdf

Home >Business & Finance homework help >Accounting homework help >Accounting case study hw

Comerford v. SportPet

This case is a work of fiction and intended only for teaching purposes. There is no

confidential information in the case. I have pulled both an actual complaint and the

patent from real life, generated financial data using the random number generator in

Excel, and the remaining facts of the case are purely a work of fiction and any

resemblance to real life is accidental.

The Invention In 2007 as Paul Comerford was exercising his cat with a laser pointer he started thinking about how the

cat might be just as amused by an automated exercise toy. After going online to see what automated

cat toys were available, he purchased a few. However, he was uniformly disappointed in the toys. If

they were interesting to his cat, they were too fragile, if they survived for any period of time, it was

because the cat simply got bored and ignored the toys. The one activity that he could count on to

entertain his cat endlessly was moving something under a blanket.

Paul worked as an engineer for Raytheon so he was quite

comfortable building things. He went down to his basement and,

after a few weeks of playing with motors and small controllers he

developed a prototype of a toy he called the Undercover

Mouse®. The original Undercover Mouse was made from wood

and metal with some gears, motor and a controller he purchased

online. But it worked. Very well in fact. He could start it up and

his cat would play with it for hours.

Paul’s mind started grappling with the possibilities. He was

pretty sure that other cat owners would find his toy compelling –

if he could sell it at the right price. Getting the price down low

enough meant that he would have to work with a partner – most likely overseas – to manufacture the

Undercover Mouse. This would require him to pay for product design, development and tooling. Paul

had enough experience in business to know that if the Undercover Mouse started selling successfully, he

would soon see imitation products in the market. He was deeply concerned that he would spend

hundreds of thousands of dollars in development and marketing costs only to see his invention copied

by others.

After looking at other cat toys and spending half a day going through the US Patent and Trademark

Office (USPTO) website looking at cat toy patents, Paul didn’t see anything like his Undercover Mouse.

That led him to think that he might have something patentable. He contacted a patent attorney who

had been recommended by a friend of his. After several weeks of discussion, the patent attorney told

Paul he was reasonably sure that his idea was patentable. So Paul went to work. After months of

working with the patent attorney, Paul filed US Patent Application No. 12/129,974 on May 30, 2008.

The filing of the application was just the beginning of the process. The patent attorney told Paul that it

typically takes three years for the USPTO to grant a patent and the process involves a great deal of

discussion and revision of the claims in the patent. There was nothing for Paul to do at the moment

except go back to work and respond to questions from the USPTO when they came up.

Going to Market While he was in the process of filing the patent application, Paul began locating companies that would

be capable of manufacturing his cat toy. The most promising company he found was CHY Manufacturer

Co. Ltd. in Shenzhen, China. CHY specialized in helping inventors like Paul get their ideas to market.

They would do all the product development, tooling, manufacturing and distribution of the product for

$300,000 up front, an initial price of $2.35/product delivered to Paul’s warehouse in California and a

minimum annual commitment of $150,000. In July of 2008, Paul signed a five year contract with CHY

with the first shipment of 500 cat toys expected in January of 2009.

Paul’s idea for selling his toys was to promote them on TV. He decided to sell directly to consumers

instead of going through retailers. His bet was that he could keep more of the profits for himself if he

sold directly.

Now Paul had to get busy. He had to rent a warehouse, develop a logo, advertising campaign and

distribution center. The next several months were both busy and nerve‐wracking as Paul kept working

full time at Raytheon while depleting his savings and taking out a $300,000 loan from the bank. If this

didn’t work, he was going to be in a lot of debt.

The first shipment of cat toys arrived six weeks later than promised, but Paul needed the time to finish

his advertising promotional spots. By March of 2009, Paul aired his first TV commercial on the Animal

Planet channel. And the phone started ringing. His commercial was compelling. It just showed a cat

that was fascinated with his toy while the owner sat in the background. He was hearing stories of

people watching TV with their cats and the cats would sit and stare at his commercial. The pets and

their owners were fascinated.

Paul targeted the initial price for the toy at $24.95. However, with discounts and various credits, he

achieved somewhat less than that. He found it particularly compelling to advertise a special in which

customers who called and said the name of their hometown got 10% off. This enable him to find out

where his customers were located and the customers felt like they were getting a deal.

Success After several months of success, Paul quit his engineering job and turned full time to selling the

Undercover Mouse. It was an exciting time for him. It seemed as though he was eating, breathing and

sleeping cat toys. But they were selling very well and he could see that there was a lot of money to be

made if the market held up for him. However, until that time, he paid himself a small salary and

managed to pay his mortgage.

In the ten months of sales during 2009, Paul’s company posted sales of $600 thousand. In 2010, Paul’s

sales almost tripled and the company had positive net income and positive cash flow. While most of his

sales were direct to consumers through TV ads, the TV ads had also brought inquiries from pet store

owners about carrying the Undercover Mouse. So he negotiated deals with several small stores to sell

them packages of 10 Undercover Mouse toys for a reduced price.

Then came the day in 2010 that Target called. One of Target’s buyers for pet supplies had a cat, bought

an Undercover Mouse and just loved it. He wanted to know if Paul was prepared to supply Target. Paul

took a deep breath and said he was. He could call the factory in China and get as many as he needed

with 6 months lead time. Of course the price that Target was going to pay was substantially less than

he’d been getting direct or through his existing stores, but there was too much potential there for him

to pass up. He signed the deal. In the last 5 months of 2010, he sold almost $300,000 of product to

Target alone. And of course he had all his other customers too. Life was looking pretty great for Paul.

Competition In 2010 Paul found he had a competitor. SportPet located in

Wisconsin had been selling a toy that looked remarkably like

his Undercover Mouse, but they called it the “Catch Me If

You Can.” It had the same central motor with a rotating

wand and a cloth cover. For all intents and purposes, it was

the same as Paul’s Undercover Mouse. But it was selling at

retail for $19.95 before any discounts or promotions.

SportPet was founded in 2004 originally to sell foldable

cathouses and toys. SportPet’s business model was similar

to Paul’s. All the toys were manufactured in China but

SportPet’s sales were mostly handled through commissioned

salespeople who visited pet stores throughout the country.

However, SportPet did have one major account; Walmart. While Paul had been selling to Target,

SportPet had been selling to Walmart.

In 2009 when SportPet introduced the Catch‐Me‐If‐You‐Can (“CMIYC”) it was already a profitable and

established company. In 2009, SportPet sold around $700,000 in toys other than the CMIYC. But the

CMIYC was a hit. In 2010, SportPet made sales of over $500 thousand of the CMIYC and it looked like

sales were going to grow rapidly.

After Paul found out about SportPet’s product, he contacted his attorney to see what could be done.

The attorney advised Paul that until his patent issued, there was no legal way to prevent SportPet from

selling its products. He would have to wait until the USPTO granted his patent before he could make a

move.

The Lawsuit Finally, after spending $32,156 in legal fees, in November of 2010, Paul’s patent issued. He was granted

U.S. Patent No. 7,823,541. Paul framed the patent and hung it on his wall.

Paul then called his attorney and asked him to contact SportPet. Paul was hoping that SportPet would

agree to stop selling its version of the toy. He was aware that, in some cases, the patent gave him the

legal ability to stop SportPet from selling an infringing product. He was hopeful that a business

resolution could be found whereby Paul would get something from SportPet to compensate him for his

innovation. In his ideal world, he would simply sell his products to SportPet at the same price at which

he was selling to Target: $7.95/unit.

But it was not to be. SportPet’s owners were not interested in buying product from Paul and were

unwilling to negotiate a license to Paul’s patent. They claimed to have independently developed the toy

and did not believe Paul’s patent was valid. After some back and forth between Paul and SportPet, Paul

decided to file suit against SportPet.

It is now three years after the suit was filed and Paul’s attorney has called and asked for your help

estimating damages for Paul.

Topics to consider:  What types of damages are available to Paul? (e.g. Unjust enrichment, Reasonable Royalty, Lost

Profits)

 What is the damages period?  How does it affect your damages calculation if there is evidence that SportPet lied and actually

copied Paul’s design?

 How does Paul’s offer to sell product to SportPet for $7.95 affect your damages calculation?