Sex-Toy Battle Shows Industry's Size Matters

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Is the sex toy business all grown up?

In a highly watched case for the adult-entertainment crowd, a U.S. trade panel has ruled that several sex toy makers are violating a patent held by a Canadian company for a two-armed vibrator. The U.S. International Trade Commission ordered those competitors to stop making and selling products similar to Standard Innovation Corp.'s We-Vibe toy.

While such intellectual property battles are common in the tech industry, they've been a rarity in the adult toy sector. And some experts say the patent case is just the latest sign that sex toys have moved from niche industry to big business.

Indeed, as the traditional video side of the adult entertainment world has gone through a recession, novelties have been the growth segment. Annual sales now top $15 billion, thanks in part to the rise of high-end toys, which some couples see as an investment in their love life.

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While the bullet-shaped vibrator is certainly still available, more and more manufacturers are looking to come up with unique designs and functionality to stand apart from the competition. Those differentiating factors not only allow the companies to charge a higher price, but (if patented) they give the company an exclusive market that can be quite lucrative if it catches on with consumers.

We-Vibe, which retails for $79-$170, has been one of those big hits. Over the past five years, the device has amassed cumulative sales of $100 million. And it's gaining momentum. In 2012, the company says, annual sales were 50 percent higher than the preceding year—and the company had revenues of $35 million. It expects those revenues to land between $45 million and $50 million this calendar year.

"We're clearly pleased," said Danny Osadca, CEO of Standard Innovation. "This is a substantial decision for our organization and we're very excited to get back to doing what we do best."

A primary target of Monday's federal order is Lelo, one of the industry's largest high-end sex-toy manufacturers, which has two products on the market that are similar to the We-Vibe.

Oscada says Standard Innovation next plans to continue a civil suit it had previously filed against Lelo in Texas to determine damages. (That suit was put on hold until the trade commission ruling.) The company hopes to learn how much Lelo has made off its similar products—named Tiani and Tiani 2—before it determines how much it will be seeking.

The commission has ordered Lelo to provide that information.

"We're very confident that we should be in very, very good shape in terms of the District Court," Oscada said. "The International Trade Commission, which is an expert in patents, and the judge [both] concluded that our patents were very strong."

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Lelo, in a statement, called the decision "a clear setback for the American consumer, and the industry as a whole"—and noted it is subject to review by a federal appeals court. The company said it plans legal action against Standard Innovation in federal court in California for alleged infringement of one of Lelo's own patents.

The commission ruling is subject to a 60-day review process by President Barack Obama.

The We-Vibe, a couples-focused device that's designed to be used in conjunction with sexual intercourse, first hit the market in 2008 and quickly became one of the industry's most popular products due to its unique functionality and significant differences from other products in the market. Similar products began to appear in 2011, Oscada said.

Despite the competition, the company is profitable. And as the mainstream market becomes more open to the idea of sex toys, it's looking to expand.

A fourth generation of the We-Vibe will be released this fall, and the company is in negotiations for placement in brick and mortar locations of two major U.S. drug chains, as well as at least one major retailer. (The We-Vibe is already available on the websites of Target, CVS and Walgreen—and is sold in physical stores of two major Canadian drug store chains.)

Should it make it into brick and mortar, it will find tough competition. Church & Dwight, owner of Trojan condoms, has released two sex toys, which it is selling alongside its other sexual health products in stores. That has opened the gates for several other companies, including high-end novelty companies. (Lelo's products, for instance, have been sold in Brookstone stores nationwide for roughly two years.)

Source: We-Vibe

Vibrator maker Standard Innovation wins patent case over We-Vibe.

When a patent issue is finally—and completely—settled, some companies might consider opening a licensing arm to expand their potential income. That's not in the cards for Standard Innovation, but Oscada says it has nothing to do with any lingering hostility toward Lelo or any other company.

"Lelo is a good company and they have some very good products," he said. "I don't take any exception to them or their products. We took exception to the patent [issues]."

He added: "This is a patent we feel very strongly about and for us, [it's about] bringing a product to market with the level of quality and sophistication we believe the market deserves to have. We are not interested in licensing [it]. This is our product."

—By Chris Morris, CNBC.com.