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Business Observer Friday, Mar. 13, 2015 3 years ago

Bullet brawl

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Taking on the federal government is an inherently risky proposition. But a Gulf Coast business, engaged in a four-years-and-counting battle, has scored a potential multimillion-dollar victory.
by: Traci McMillan Correspondent

Executive Summary
Company. Liberty Ammunition Industry. Manufacturing Key. Enforcing your patent can be a business-killing proposition.

Not many people can say they've successfully sued the government.

But executives with a 20-employee ammunition company in Bradenton can. Not only that, but the firm, Liberty Ammunition, also might have an extra $15 million to prove it.

Liberty Ammunition filed a complaint in federal court against the U.S. Army in February 2011. It claimed the U.S. Department of Defense infringed a patent it had on a lead-free steel-tip bullet design. Company officials also alleged the government breached a contract, through violating a non-disclosure agreement signed during meetings with the Army and its Special Operations Command unit, SOCOM.

After an 11-day trial began in June 2014, the court ruled in Liberty's favor. The U.S., the court decided, owed Liberty $15.6 million for the 1.1 billion bullet rounds it bought up until August 2013, along with a 14-cent royalty for every bullet infringing on the patent through 2027, when the patent expires.

The government has appealed the decision, and attorneys from both sides declined to comment for this story while the appeal is pending.

Despite this victory, the whole process was a “big pain in the ass,” Liberty CEO George Phillips says. It was also a big expense: Liberty has already spent more than $5 million in legal fees, which will be covered if the court's decision is upheld.

And the biggest lesson learned? “Don't do it again,” says PJ Marx, the bullet's inventor and chief of research and development at Liberty.

The invention
Marx has always been an inventor. His career started in musical inventions, making guitar pickups. But after 9/11, he wanted to support the war effort. With a background in shooting, he decided to research current issues with military ammunition.

In the 1990s, there was an issue with bullets not being lethal enough. Soldiers would report they'd shoot an enemy, but the enemy was still able to return fire. In addition, there was an environmental concern that the lead bullet casings were polluting soil and water. So the military started the “Green Ammunition Program” in 1995.

While the Army started to present these issues looking for new designs, Marx came up with the design of the Enhanced Performance Incapacitative Composite (EPIC) round. Though it was a 5.56 mm bullet, it had enough mass to break through a hard target. But it would fragment upon striking a soft target, like a human, increasing the amount of injury.

Marx presented his ideas to the Army and SOCOM at the end of 2004 and beginning of 2005, and started Liberty Ammunition in 2005. He met with the chief of small arms for the U.S. Army and a contractor at SOCOM, and asked them both, and others who tested samples of his rounds, to sign a non-disclosure agreement. In May 2005, the Army announced it would no longer solicit designs of a new bullet, and instead decided to engage in a joint design effort with ATK, another defense contractor.

After his meetings with the Department of Defense, Marx knew there was interest in his design. He filed for a patent in October 2005, which was issued on July 6, 2010. “It was pretty apparent that they had an interest in a couple of contracts to develop products for them,” Marx says.

That was until he saw the new bullet co-designed by ATK and the Army, the 855-A1. Marx thought it looked surprisingly similar to his design, and therefore infringed on his patent.

Fighting Goliath
Yet the decision to file a lawsuit wasn't easy. Fighting a behemoth like the government can be intimidating for a small company, especially one completely reliant on military and law enforcement sales.

Phillips, Liberty's current CEO, started with the company as an adviser through American Defense International, a company that consults with businesses on the procurement process and other government affairs. Phillips, a former Marine Corps officer, had heard of Marx's round, but “I didn't believe the claims until I fired the weapons myself,” he says.

Phillips says the company needed to generate cash before it pursued the lawsuit. He wasn't worried about defending the “best patent in the small arms world,” but knew the lawsuit would impact sales with the military. “We needed cash, and the quickest path was to take commercial because PJ could design something better than what's out there,” Phillips says.

The company had to come up with different designs for the civilian market, because the EPIC rounds are restricted to government and law enforcement use.

By the end of 2010, Liberty had broken into the consumer market and also branched out internationally, selling to governments and contractors for friendly nations and allies. The expansion in the company's portfolio helped generate enough revenue to carry the firm through the suit. Executives had a feeling the publicity from the trial would just bring additional attention and attraction to their products.

Then Liberty geared up to prepare for the storm.

Phillips “found the best guy” in patent infringement, Stephen Judlowe, a retired lawyer. “He agreed to come out of retirement to take this case,” Phillips says. The company filed the suit in February 2011.

Liberty's contention, according to court records: “The army copied its design and violated the terms of three non-disclosure agreements by disclosing confidential information within the Army to unauthorized recipients, including some who worked with vendors of ammunition to the Army.”

But patent infringement cases are tricky. Not only did Liberty have to prove all of the claims in its patent were true, it also had to prove that the new products directly infringed on that patent. The government, represented by Walter Brown from the U.S. Department of Justice, argued the patent wasn't valid because its claims weren't true, and others had already developed the technology.

The court sided with the government on one side. It ruled there was no breach of contract because the individuals who signed the non-disclosure agreements didn't have the authority to sign a contract on behalf of the U.S.

But the court ruled in favor of Liberty in the patent infringement claim.

Though the process was grueling, Phillips says, “We were extremely lucky to get an excellent judge to hear the case. We would say that if we lost.”

Open Case
But the process isn't over yet.

In February, just a month and a half before the first report of royalties was due, the government gave notice of an appeal. The company is also still risking its business with the U.S. During the lawsuit, Liberty's executives made a “conscious decision not to pursue military business,” Phillips says.

They didn't want to diminish their chances at the case, and wanted to play it safe. That plan is in place until the appeal is over. Says Phillips: “We're not pushing until it's completely settled.”

Liberty's Lessons
The craziness of defending intellectual property is nothing new for Bradenton-based Liberty Ammunition's PJ Marx, who holds 10 U.S. patents. But it's still his biggest challenge. He says it's rare to find a person who is creative enough to invent, even rarer to find someone who also knows what it takes to bring the invention to market and protect the innovation. His tips for inventors include:

Find a good non-disclosure agreement

Find a good attorney

Be aware of what it takes to defend

Contract Work
Liberty Ammunition CEO George Phillips has worked with government contractors for years. Here are his tips for navigating the process.

Hire an outside adviser. Whether you are big or small, it's always worth the investment.

Know your enemy — or what's working against you winning a contract. “Ultimately the government gets to decide,” he says.

Understand that the government isn't just a single entity. “It's lots of individual stovepipes that don't really talk with one another, ” Phillips says.

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