A former NASA engineer who invented the wildly popular Nerf dart guns has been awarded $72.8 million in a royalty fight with toy company Hasbro.
In issuing the award, arbitrator Richard Mainland of Fulbright & Jaworski held that Hasbro had breached a licensing agreement with Atlanta-based Johnson Research & Development Co. by failing to pay millions of dollars in royalties for company president and founder Lonnie Johnson’s invention of the toy that fires foam darts. Hasbro sold the line of dart blasters under its Nerf brand. The military and sports fantasy toy dart guns are most often used in games of dart tag.
Johnson, formerly an engineer at NASA’s Jet Propulsion Laboratory in Pasadena, Calif., has worked on the Galileo mission to Jupiter, the Mars Observer project and the Cassini Solstice Mission that explored Saturn. And he’s no stranger to toys. In addition to the Nerf dart guns, Johnson also invented the Super Soaker line of toy water guns, which he also licensed to Hasbro. He holds more than 80 patents, ranging from toys to advanced space systems, environmental technology and methods of power generation.
“It was a very hard-fought case,” said Jonathan Letzring, a member of a team of King & Spalding attorneys led by partner Benjamin Easterlin IV that also included Jessica Sabbath. Atlanta attorney A. Lee Baier also was associated with the litigation.
“What this case boiled down to is they [Hasbro] signed a contract they later determined they didn’t like. The law doesn’t allow you to get out of contracts just because you think the bargain isn’t good anymore.”
And, he added, “I think it’s fair to say we got everything we asked for.”
The award includes $51,663,853 in back royalty payments, $21,220,117 in interest, and $131,945 in fees associated with the binding arbitration. King & Spalding litigated the case on a contingency basis.
Los Angeles lawyer Jennifer Glad, one of a team of attorneys at O’Melveny & Myers who defended Hasbro, declined comment and referred questions to Hasbro’s corporate headquarters in Pawtucket, R.I.
Hasbro spokeswoman Julie Duffy said in a written statement, “We strongly disagree with the decision and are considering all possible appeals and challenges to this award.”
Letzring said the litigation was a contract rather than a patent dispute. Johnson developed and then patented the dart blaster technology before he licensed it to Hasbro. He then gave Hasbro the right to use his technology for Nerf dart blasters in exchange for royalty payments on each dart blaster sold, the lawyer said.
But Johnson went one step further. He wrote into his contract with Hasbro a provision that not only would pay him royalties on toys that used his patented technology, but also would pay royalties on dart blasters sold under the same or similar names, even if they no longer incorporated Johnson’s technology, Letzring said.
Johnson included the expanded royalty clause in the dart blaster contract because, “He was concerned that [Hasbro] would sell some of his dart blasters, build the brand, then abandon his technology” in order to avoid paying further royalties, Letzring said. Hasbro, he said, had limited Johnson’s royalties on his Super Soaker invention in just that way, he said.
Johnson had a claim to royalties stemming from his inventions, even if Hasbro eventually redesigned the toys, because, “he made the market; he created the demand,” Easterlin explained.
Hasbro eventually created a line of nearly two dozen Nerf dart blasters with names such as the N-Strike Elite Hail Fire, the N-Strike Elite Rampage and the N-Strike Elite Retaliator and which sell for prices as high as $49.95.
Hasbro also created auxiliary equipment for the dart blasters, including bandolier kits, training jerseys, ammunition boxes, dart clips, tactical vests and video games.
Mainland—who arbitrated the case in Atlanta but applied New York law as specified in the royalty contract—held that Johnson’s royalty contract was “unambiguous.”
“All toy gun products sold by Hasbro, whether or not they embody Johnson’s technology, that are sold under names the same or similar to names under which products using Johnson’s technology are sold, are subject to payment of the royalties by Hasbro to Johnson,” he wrote in his order.
Mainland also held that, based on evidence introduced at a four-day arbitration hearing in Atlanta in August, Hasbro “breached the agreement by failing to pay royalties on sales by [Johnson Research] of toy dart gun products not containing [Johnson Research's] technology that were sold under names the same as or similar to names under which products using Johnson’s technology were sold. …”
That provision, included in the original 1998 contract, remained in place in Johnson’s licensing agreement with Hasbro, despite several contract extensions and amendments, Mainland said.
In the arbitration reward,Mainland pointed out that the contract clause that paid Johnson royalties on toys similar to his invention was not part of Hasbro’s licensing agreement but one that Johnson negotiated.
Mainland said that Johnson did so after a “bad experience with the Super Soaker license.” Johnson originally licensed the Super Soaker to toy company Larami, which was acquired by Hasbro in 1995.
“He believed that Larami, after achieving success with the Super Soaker, introduced other products not using Johnson technology under similar names and benefitted from their association with the Super Soaker, without paying royalties on those products,” Mainland wrote. “In the Hasbro [dart blaster license] negotiations, Dr. Johnson first proposed that products not using Johnson technology could not be sold under names similar to products using Johnson technology. That was unacceptable to Hasbro, and the parties compromised by allowing Hasbro the right to sell such products under the same or similar names, subject to paying royalties to Johnson. This was a unique provision at Hasbro.”
The provision also mandated that Hasbro would pay royalties to Johnson on any secondary “toy gun-related products and services.”
By 2005, Hasbro had begun selling products that did not use Johnson’s compressed air toy dart gun technology under the “N-Strike” and “Dart Tag” brands that had incorporated Johnson’s invention.
In 2011, after a royalty audit, Johnson claimed that Hasbro had breached his licensing agreement by failing to pay him royalties on products that did not use his technology but which were sold under names that were similar to or the same as the toy dart guns that did, Mainland said.
Hasbro responded that the provision was unenforceable. Hasbro’s in-house counsel, Kevin Grady—who did not negotiate the original 1998 agreement—testified in an arbitration hearing that he “always thought Hasbro’s royalty obligations were limited to products with Johnson technology.”
But Mainland held that Johnson “had done nothing to suggest to Hasbro that Johnson was owed royalties only on product using Johnson technology or that Johnson would not enforce its rights. … To the extent Hasbro employees interpreted the agreement to limit Hasbro’s royalty obligations to Johnson technology products, they had done so on their own, without input from or reliance from Johnson.”
Mainland also labeled as “unconvincing” Hasbro’s assertion that had the company realized the breadth of Johnson’s royalty claims it would have planned its toy dart gun product development differently.
“In planning for introduction of N-Strike and Dart Tag products not using Johnson’s technology, Hasbro did not include a royalty to Johnson,” Mainland said. “Hasbro did not, however, present convincing evidence that it would not have introduced certain N-Strike or Dart Tag products, or given them different names, if it had known of Johnson’s rights to royalties.”
“Johnson’s royalty,” Mainland concluded, “was a relatively small component of the products’ total cost. The arbitrator believes is it likely that, even with knowledge of Johnson’s royalty rights, Hasbro would have acted as it did in introducing and marketing products within the N Strike and Dart Tag product lines.”