The Rainbow Loom Story
Sample Chapter from Plight of the Patentee: The Case for Restoring Inventors' Rights
Entrepreneurs see things others don’t. This was definitely the case with Choon Ng, a former engineer with Nissan Motors and an ethnic Chinese emigre from Malaysia.
In 2010, Choon observed his two daughters making bracelets and other accessories with colored rubber bands. While many parents would consider rubber band weaving as nothing more than a cute pastime, Choon saw the seeds of a commercial opportunity. But before the roots of any such opportunity could take hold, Choon would have to make it easier for children to design more sophisticated bracelets and accessories with rubber bands. An obvious constraint to making such accessories was that children have a limited number of fingers to hold and manipulate the colored rubber bands. Choon put on his engineering hat and designed a loom with multiple rows of pins that would hold rubber bands. These pins enabled users to loop and crisscross rubber bands to make thicker bracelets as well as a variety of patterns such as squares, triangles, rectangles, rhombuses and honeycombs. The resulting product was christened the Rainbow Loom.
With the help of a patent attorney friend, Choon filed a provisional patent application in November of 2010. A non-provisional patent application was filed in September of 2011 and issued as U.S. Patent No. 8,485,565 in July of 2013. The examination of this patent application went smoothly. In my opinion, a patent pendency of less than two years is perfectly reasonable.
However, Choon pointed out that the toy industry is a hits business where few products are relevant for more than a year. Thus, he would have liked to have seen a more rapid examination of his patent application. In fairness to the United States Patent and Trademark Office, Choon could have also filed a patent application for accelerated examination, where pendency is usually a matter of mere months.
In any event, subsequent to the issuance of his ‘565 patent, Choon grew his patent portfolio dramatically. At the time of my writing these pages, Choon maintained 23 patents issued by the USPTO as well as patents issued in the United Kingdom, Germany, France, Japan and China. Choon invested approximately $250,000 in terms of drafting, filing, prosecuting and paying the associated maintenance fees and annuities related to these patents.
A Business is Born
Choon began trying to turn the invention claimed in his initial provisional patent application into a viable business at the end of 2010. One of his first steps was to learn more about the potential users of the Rainbow Loom. He conducted multiple study groups whereby kids would practice using prototypes in his home. While Choon had no background in marketing or sales, he was convinced that there would be sufficient demand for the Rainbow Loom. The product resonated with both genders and all ethnicities but was most warmly embraced by children between the ages of nine and twelve.
While the Rainbow Loom logged its initial sales—mostly word-of-mouth—in July of 2011, the product was not an instant hit. The product required the user to expend energy creating bracelets and accessories. The sophistication of the patterns possible to create with the Rainbow Loom intimidated many potential customers. A lot of pounding of the pavement was required to gain traction. Choon’s lack of sales experience did not deter him. He tried to get the mass merchants such as Walmart, Sam’s Club, Target, and Toys “R” Us to carry the Rainbow Loom but had no immediate success. He visited independent retailers, often with his daughters in tow. Many of these proprietors asked the Ng family to leave their stores. Choon was only able to convince a few of these mom-and-pop toy and gift stores to carry the product—and then only on consignment.
Choon, ever constrained by his limited resources, tried to sell the Rainbow Loom online. While he was able to upload videos on YouTube at no cost, resulting sales were sluggish. So, Choon’s marketing tactics took a more guerilla-like turn. He went to shopping malls and handed out ready-made bracelets to shoppers, together with cards that contained the Rainbow Loom’s website.
Choon’s first big break on the sales front arose when Learning Express in Alpharetta, Georgia showed kids how to make bracelets with the Rainbow Loom. With rooms dedicated to parties where art projects were taught, Learning Express proved to be a great outlet for Choon’s product. The store in Alpharetta quickly sold all of the looms it had on hand. This Learning Express store related its success with the Rainbow Loom to many other of that chain’s franchisees.
Choon had more success on the social media front in 2012. This success was sparked when a young YouTuber named Angelynn began uploading videos of her Rainbow Loom creations to her popular OfficialTutorialsByA YouTube channel. Choon fueled the growing interest in the product by featuring some of the Rainbow Loom aficionados and their creations on the Rainbow Loom website. Often, these Rainbow Loom artists would place pictures of their Rainbow Loom designs on their own websites and then link back to the product’s official website.
Scaling Production
How did Choon produce the Rainbow Looms? Initially, he created the designs for the loom and sourced the components from Dongguan, China. Shipping of the individual components—the loom, hooks, and rubber bands—was inexpensive because they could be packed with density. Assembly was a home-business affair: The components were delivered to the Ng home in Michigan, where final assembly and repackaging was completed by Choon, his wife and, intermittently, his daughters. This arrangement worked well enough until the end of 2012, when sales of the Rainbow Loom skyrocketed. From the end of 2012 to the end of 2013, sales surged 50% a month. In August of 2013, Choon entered into a one-and-a-half-year exclusive sales agreement with Michaels, the largest arts and crafts retail chain in the United States. Also, in 2013, Choon sold the product to Walmart stores under the Wonder Loom name. Choon began selling the Rainbow Loom in some of Target’s stores in 2014 as well as related components through Hobby Lobby. Choon’s crowning moment in 2014 occurred when the Rainbow Loom received four TOTY Awards, the most prestigious award in the toy industry.
To keep up with soaring demand, Choon outsourced all of the production (including the printing of the manual), assembly, and packaging to China by the end of 2012. Production problems naturally arose. Initially, the colors of the parts delivered did not match specifications. Some of the parts had sharp edges, a significant liability given how many times children’s fingers would graze the looms and pins. Every now and then a foreign object would find its way into a Rainbow Loom box. Choon was able get these kinds of start-up snafus resolved relatively painlessly as he had experience dealing with suppliers at Nissan, and is a Mandarin speaker. But Choon did not leave anything to chance: He appointed his own quality control expert on the ground in China to inspect the products manufactured there.
Choon’s initial manufacturer proved to be conscientious and quickly corrected the inevitable manufacturing hiccups. That initial manufacturer also made concerted efforts to scale its operations to meet the surging demand for the product. At peak production, Choon’s dedicated manufacturing firm managed two factories, where a combined 2,500 employees were churning out Rainbow Looms. Choon and his manufacturer were continuing to work together at the time of my writing these pages.
This rapid expansion required capital that Choon didn’t have. Choon applied for a line of credit with Comerica Bank. What happened with Choon’s application? That bank only agreed to extend a $30,000 line of credit to Choon, hardly enough considering that filling one container of Rainbow Looms consumed $90,000 in capital. Fortunately, Choon’s father and brother stepped forward and lent $250,000 to Choon’s venture.
The Rainbow Loom Becomes Infested with Infringers
The Rainbow Loom was quite popular in 2013—and not just with customers, but also with infringers. Infringers were popping up everywhere. In 2013, Walmart.com was selling seven copycat versions of the Rainbow Loom and at least five times more infringing products were sold on both Amazon.com and eBay.com. When Michael’s dispatched Choon to China to source more manufacturing capacity for its surging demand, Choon saw that some manufacturers producing on behalf of infringers had mountains of low-quality rubber bands piled up. A pandemic of infringement also broke out in shopping malls across the country in the form of kiosks selling knockoff Rainbow Looms. One New Jersey-based owner of dozens of shopping mall kiosks initially ordered Rainbow Looms directly from Choon but failed to remit payment—leaving Choon with a $50,000 outstanding invoice—when it found a source of much less expensive infringing alternatives.
The outbreak of infringement oversaturated the market, causing demand for Rainbow Looms to crash by the end of 2013. Choon wasn’t the only one hurt by the sudden and dramatic reduction in demand—his dedicated manufacturer in China was flooded with excess inventory. Not comfortable with his loyal manufacturer being stuck with as much as $300,000 worth of inventory, Choon acquired the excess production and arranged for those units to be sold in Japan, Germany, Eastern Europe and Russia. In 2018, Choon was only selling five percent of the volume of Rainbow Looms that he was selling in 2013.
In addition to depriving Choon of volume, the infringers who sourced their products from China damaged the Rainbow Loom brand and the pricing of the product. The infringers seemed to be indifferent to product quality. The counterfeited looms were not inspected, did not bother with placing warning labels on the packaging, were rife with sharp edges, were manufactured with low-quality recycled plastics and even contained cancer-causing agents. In fact, the Assay Laboratory in Birmingham, UK determined that some charms (attachments to bracelets and necklaces woven on the looms) made by knockoff brands contained high levels of phthalates, a class of carcinogenic chemicals. Much of the reporting of the Assay Laboratory’s study associated these carcinogenic chemicals with Rainbow Loom, even though the same laboratory determined that Rainbow Looms were free of any traces of cancer-causing agents. For instance, a related article posted by Mother Jones was titled, “Are Your Kids’ Rainbow Bracelets Toxic?”1 This combination of reckless manufacturing and guilt-by-association reporting must have deterred the purchase of at least tens of thousands of Rainbow Loom units.
A somewhat similar story relates to the creator of a copyright. This Ohio-based app developer published a free-to-download app which was pirated and then illegally downloaded thousands of times. Not only was the developer of the pirated app depriving the creator of all of the ad revenues generated by the pirated app, but the legitimate developer of the free app was required to pay the invoices presented by the hosting service for the promotional videos generated by the pirated app.2
Rather than repel retailers, such shoddy manufacturing attracted them—especially those of the here-today-gone-tomorrow variety. And once infringers got going, the only thing that could stop them was their own eroding profit margins. For a while, infringers and their confederate retailers were able to juice demand by slashing retail prices—in some situations to as little as $2.00 per unit. Such pulverized pricing forced Choon to reduce the price of Rainbow Looms from $15 to $11.99 a unit.
Many infringing products were sold to small time retailers, for which patent assertion was uneconomic for Choon. Online retailers often placed the burden of proof of infringement on Choon. For instance, in Choon’s experience, Amazon usually refrained from removing allegedly infringing looms (or even disclosing the names and addresses of the alleged infringers) unless Choon first purchased the suspected products from that online retailer. When Choon complied, Amazon began its weeks-long investigations. In some cases, Amazon did remove infringing looms. Such removal did not always discourage infringers. Quite often, they would repost their infringing items under a different name.
By the end of 2013, Choon had had enough. He decided to put his patents to use by initiating lawsuits against 15 infringers. Most of the damages sought were directed towards recovering royalties from earlier sales as revenues from Rainbow Looms declined precipitously in 2014. Choon had some success with his efforts to collect damages for past infringement; settlements were reached with 13 small infringers. Some of these infringers got away with paying almost nothing as they threatened to file for bankruptcy protection. At the time of my researching Choon’s story, these settlements only amounted to a fraction of the $5 million (and counting) in legal fees that Choon incurred in asserting his patents in the countries where he received patent protection.
Litigation against two large infringers—Tristar Products and Idea Village (whose CEO is the brother of A.J. Khubani, CEO of Telebrands)—was still pending five years after Choon filed patent infringement lawsuits against them. In the case against Idea Village, the defendant filed a petition for inter partes review with the Patent Trial and Appeal Board. Litigation was stayed during the time of the inter partes review, where Choon was pressured to give up some of his claims’ scope.
The drawn-out lawsuits in the United States contrasts with the relative speed of corresponding litigation in Japan. Choon filed a lawsuit for patent damages against a Japanese infringer with the Tokyo District Court in 2014. A very favorable judgment was rendered in Choon’s favor three-and-a-half years later.3 (However, the Japanese defendant appealed the Tokyo District Court’s decision to the Tokyo Supreme Court and then Choon countersued. In 2018, the litigants negotiated a settlement that Choon considers to be very fair.)
Postscript
Choon is a relatively fortunate patentee. It is true that revenues from the Rainbow Loom have decreased by 95% since their 2013 highs. But not all of that revenue shortfall can be attributed to infringers: Much of the decline in the popularity of the Rainbow Loom is a function of the nature of the toy industry. I don’t know how much money Choon made from the Rainbow Loom, but it must have been enough to finance roughly $5 million in net legal expenditures. Based on my discussions with Choon, his business continues to hum along and he stands a good chance of being awarded significant damages. Infringers have exited the market and his manufacturing and distribution channels seem to be well-oiled.
Still, Choon would have made much more money had infringers not pervaded the crafts market. A back of the envelope calculation suggests that the infringers deprived Choon of roughly 12 million units. This means that if Choon earned one dollar per unit, the infringers stole at least $17 million in lost profits and unnecessary legal fees.
And let’s not forget that the infringers benefitted from a de-risked investment opportunity. They only latched on to the Rainbow Loom when its success was widely known. They didn’t invest a dime or a moment pursuing patent protection. The infringers did not have to conduct study sessions. They did not have to pass out sample bracelets in shopping malls, which must have been demeaning to a former senior engineer. The infringers did not have to suffer the indignities of being asked to leave retail stores in the presence of their children. They did not have to evangelize a new product concept to discerning buyers at big-box retailers; Choon already paved the way to these vendors. The infringers took the fastest route to making money. These modern-day marauders infringed patents, invaded shelf-space, slashed prices, burned the goodwill associated with the entire product category, placed their carcinogenic chemical-laden pirated products in the hands of unsuspecting children, took their liberties with the legal system, impregnated legitimate manufacturers with unwanted inventory, and walked away almost scot-free.
1 https://www.motherjones.com/politics/2014/08/rainbow-loom-bracelets-phthalates-cancer-risk/
2 https://www.ipwatchdog.com/2018/07/12/house-small-business-committee-holds-hearing-on-ip-in-digital-economy/id=99288/
3 While the decision was favorable to the patentee, my research indicates that it was rendered in almost twice the two-year timeframe such cases are said to normally require in Japan.
