TOKYO When Canon Inc. (7751.T) was sued by a small, money-losing U.S. technology firm two years ago, the dispute was over a patent license that had cost the Japanese electronics giant a one-time payment of $5.6 million.
But now that the lawsuit has caused Canon to lose the license, a fresh agreement with Texas-based Nano-Proprietary Inc. NNPP.OB could be worth millions of dollars more, lawyers said.
Last week a U.S. court ruled against Canon, saying the company breached its deal with Nano-Proprietary by trying to share the flat display technology with Toshiba Corp. (6502.T).
The court's decision comes as a major setback and perhaps an embarrassment for Tokyo-based Canon, the third-biggest patent owner in the United States.
"It seems strange Canon managed to go all the way to trial and lose," said Peter Godwin, a Tokyo-based partner at law firm Herbert Smith. "Assuming they were advised they were at risk, you'd expect a company of the size of Canon to have reached a settlement before that."
Now, Canon is left with no plans for mass production of the displays. The sale of the new TVs, scheduled for the fourth quarter, will be limited to Japan and on a small scale.
The court has yet to address Nano-Proprietary's claims that Canon engaged in fraud to extend its license rights to Toshiba and perhaps other Japanese companies.
When Canon and Toshiba set up the joint venture in 2004 to develop the panels, the initial plan was to mass-produce the new type of flat TVs in time for the 2008 Beijing Olympics.
But it was the partnership itself that ultimately hurt the Japanese companies in the dispute two years later.
The original deal allowed Canon to license Nano-Proprietary's technology to its own units. Canon had claimed the venture with Toshiba was a subsidiary because Canon's 50 percent stake included one more share than its partner held.
To resolve the situation, Nano-Proprietary had offered to negotiate a separate license with Toshiba on the same terms as the initial deal with Canon, people familiar with the situation said.
But Canon told its partner not to worry and blocked Toshiba from talking to Nano-Proprietary, these people said.
Spokesmen at Canon and Toshiba declined to comment, saying the lawsuit was still going on. A Nano-Proprietary spokesman also declined to discuss its dealings with Canon and Toshiba.
A LATE MOVE
In April 2005, Nano-Proprietary sued Canon in U.S. District Court, challenging a company that has $35 billion in annual revenue and employs more than 500 intellectual property experts.
But after months into the litigation, the court ruled that the joint venture with Toshiba was not a Canon subsidiary.
For Judge Sam Sparks of Texas, Canon's decision in January to buy out Toshiba's stake in the unit came too late.
"But clearly, it takes two to settle and the patent is a very important one," Godwin said. "Both Canon and Nano may have taken the view that the legal fees involved were insignificant compared to the benefits should they win."
A person close to the trial said the parties may reach a settlement before the court rules on damages due the U.S. firm.
The next session of the trial is set for the first available date after April 2.
A new licensing deal between Canon and Nano-Proprietary could be a pay-as-you-use contract and may be priced well above the original one-time upfront contract, Credit Suisse analyst Kunihiko Kanno wrote in a note to his clients.
"That would have an impact on (Canon's) profitability."
On the other hand, last week's ruling sent Nano-Proprietary shares up 17 percent on expectations the firm may earn higher patent-related revenues. Nano-Proprietary, which has close to 200 patents and pending applications, also owns technology in carbon nanotube TVs and carbon nanotube backlights for liquid-crystal displays.
Nano-Proprietary's technology that was licensed to Canon is used for surface-conduction electron-emitter displays (SED) TVs, which are said to have brighter images and consume less energy than existing LCDs and plasma models.
Canon, also the world's top maker of cameras and copiers, had hoped to tap into the booming demand in the $84 billion global flat-panel TV market with brand new SEDs.
But some analysts including James Kim at Lehman Brothers said they are skeptical about cost-competitiveness of SEDs in an already crowded flat TV industry.
Separately, Nano-Proprietary is said to be in talks with various manufacturers to license patents used for other displays and related technology such as backlights for LCDs.
Earlier this week, technology publisher Smarthouse reported that Samsung Electronics (005930.KS) has made approaches to get access to SED technology from Nano-Proprietary, citing a source at the South Korean consumer electronics giant.
A Samsung spokeswoman denied that the company was considering SED technology but added that the company would be interested in entering the market if there was any sign of demand.
Nano-Proprietary spokesman William Spina said the company would talk to anyone who was interested.
"We will talk to Canon, Toshiba, Samsung or any interested party regarding SED licensing agreement on a non-exclusive or exclusive basis," Spina said.
(Additional reporting by Marie-France Han in Seoul)
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