TT-407 -- Dead dogs and Canon IP troubles

* * * * * * * * * T E R R I E 'S T A K E * * * * * * * *
A weekly roundup of news & information from Terrie Lloyd.
(http://www.terrie.com)

General Edition Sunday, February 4, 2007 Issue No. 407

+++ INDEX

- What's new
- News
- Candidate roundup/Vacancies
- Upcoming events
- Corrections/Feedback
- News credits

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+++ WHAT'S NEW

As Japanese electronics manufacturers rediscover their place
in the consumer electronics world, competing with Chinese,
Taiwanese, and Korean companies by introducing innovative
and high-end products, Intellectual Property
(IP) is increasingly becoming the point of leverage that
defines success or failure. As a result, the pressure is
on for firms to bring both their invention processes and
IP legal capabilities under control.

One company in the middle of the inventions and IP maelstrom
is Canon Inc., probably the best-run and most financially
successful major consumer electronics maker in Japan at
present. Firstly on the inventions front, Canon like many
other companies is having to adjust to the idea that it
needs to pay its engineers more than a small bonus for
creating world-changing technologies worth billions to
the company. The gap between management's perception of
how to reward talent (and not just hard work and loyalty)
and the changing stance of the Japanese courts is now being
brought into stark contrast through a series of inventor-
employer lawsuits.

The latest such episode was this week, when Canon was
ordered by the Tokyo District Court to pay JPY33.52m
(US$274,750) to former researcher Kazuo Minoura, for his
invention of a technology which stopped ghosting problems
in laser printer print-outs and thus ushered in the era of
high-quality office and consumer printing. The former
researcher, who was originally paid a paltry JPY850,000
(US$6,970) for his discovery demanded JPY1bn
(US$8.19m) in compensation, on the basis that Canon made
at least JPY1.146bn (US$9.39m) on licence income, as well
of course as having superior products which resulted in
billions more in sales. The courts assessed the researcher's
contribution as being 3% of the overall provable profit.

Probably the Canon researcher was hoping that he would get
more of a windfall, as a collegue did in October last year.
Seiji Yonezawa, a former Hitachi employee, took Hitachi to
court for fair compensation over his invention of 3 key
optical disk processes that have allowed Hitachi to earn
licence revenues around the world. In Yonezawa's case, the
courts awarded him JPY163m ($1.37m) -- but not before Hitachi
took the case to the Supreme Court on two appeals!

Yonezawa's award was Japan's second highest, after a JPY600m
(US$4.9m) payout made in January 2005 to Shuji Nakamura, the
inventor of the blue LED, by his former employer Nichia.
We covered this case in detail (prior to the final ruling)
in the November 2002 issue of the Japan Inc. magazine.

http://www.japaninc.com/article.php?articleID=936.

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[...Article continues]

We'd have thought that companies of the pedigree of Canon
and Hitachi would by now be understanding the huge value
that they gain from their researchers and that improving
the treatment and level of cash awards is an act of self-
preservation, not something to fight over tooth and nail.
Certainly, paying one's own researchers good money is MUCH
cheaper than having to licence the technology off someone
else.

Furthermore, a grateful researcher is more likely to stay
with the business and keep pumping out excellent products.

Indeed, as Nichia has found after their parsimony with
Nakamura, they have created an enemy who has now aligned
himself with the Americans and is getting ready to potentially
pitch Nichia out of business. Just a couple of days ago,
Nakamura's UC Santa Barbara lab announced that they have
successfully fabricated and demonstrated the world's first
non-polar blue-violet laser diode. If brought to
commercialization, now very likely, the new diodes will be
lower power and and have longer service life than existing
Nichia products. Given that every HD-DVD and Blue Ray DVD
uses one of these diodes, this could have serious ramifications
for Nichia in the future.

Next, on the IP litigation front, Canon is once again an
interesting study. Late last year, the company was subject
to a US-based lawsuit over its SED (Surface-conduction
Electron-emitter Display) TV technology by US IP holder
Nano-Proprietary (NP). If you didn't know, SED TVs are being
touted as the new standard in large flat panel TVs.
Apparently the quality and responsiveness of SED screens will
pose a serious challenge to slower and somewhat "ghosty"
plasma units, and may take over the high end of the consumer
market. Since approximately 80m flat-panel TVs will be sold
worldwide in 2007, this is big business.
Canon licenced the technology from NP back in 1999 for a
one-time fee of US$5.6m.

Anyway, NP alleged that Canon, by virtue of forming its
SED subsidiary in Japan in conjunction with fabrication
partner Toshiba, was breaching the terms of the licence,
which requires Canon to keep the IP in-house. Canon argued
that since it had 50.002% of the shares in the j/v with
Toshiba, technically it was the senior partner and could
consider the j/v as a fully-controlled subsidiary. And
there the story may have ended, until NP discovered that
Canon had signed an agreement with Toshiba saying that in
the event of a dispute, it would not vote its extra share.

As Digitimes.com reported last week
(http://www.digitimes.com/print/a20070126VL200.html), Judge
Sam Sparks took a dim view of the j/v agreement and pointed
out that Canon's supposed control of the j/v had in fact been
emasculated. We just love the Texas judge's comments when he
wrote his final opinion -- it's a classic:

"Dead fish don't swim, dead dogs don't hunt and Canon's dead
voting rights don't give it a majority of SED."

Ah, yes, Canon's IP department has discovered the reality of
not following IP contracts to the letter. Now, their faux pas
may cause them to not only have to pay NP a royalty on every
TV made in the future, but also they may miss the market window
for SED technology all together, given that next-generation
LCD and Carbon Tube (CNT) TVs are just around the corner.

The lesson to be learned here is that as companies such as
Canon move upstream from their basic manufacturing roots,
the stakes climb and they have to get more sophisticated
in managing their own and licenced IP. Possibly they may
need to change their IP law firm and to educate their
in-house team in the process.

Readers may recall that last year, Japan Inc. assisted
a specialty IP firm from California, called Knobbe Martens
Olson & Bear LLP, or KMOB for short, to do an interesting
seminar -- a mock deposition -- to Japanese corporate IP
specialists in Tokyo. Judging from the response of
participants, litigation indeed looms large in the minds of
corporate counsels these days, and we expect that the KMOB
presentation is the start of a trend for Japanese firms to
try to get a better handle on their IP dealings in key
overseas markets.

*** This week's FEEDBACK section is about the Monkeypod
tree that Hitachi paid US$4m for the rights to use in
its advertising.

...The information janitors/

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+++ NEWS

- Rents up 15 months in a row
- Exporters sell dollars
- Hangings resume
- Diamond imports down almost 5%
- Sharp doubles solar cell production in Europe

-> Rents up 15 months in a row

If your office rent hasn't gone up recently, it probably
will. According to Tokyo realtor Building Kikuku Company,
the median rent in December 2006 for large downtown office
buildings was up 3.2% over November, increasing for the 15th
straight month to JPY26,133/tsubo (3.3 m2). At the same time,
the vacancy rate also rose for the second straight month,
suggesting that equilibrium between supply and demand has
been reached for the time being. (Source: TT commentary
from nikkei.co.jp, Feb 2, 2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070202D02HH222.htm

-> Exporters sell dollars

While currency trading professionals may be selling yen on
the basis of a likely soft landing for the US economy and
continuing low interest rates in Japan, Japanese exporters
disagree. It appears that they expect the yen to strengthen
to 114 to the dollar over the coming months, and are therefore
buying record numbers of forward contracts to buy yen and sell
dollars. It seems that the exporters are worried that the weak
yen will become a political football and that the EU and USA
will demand the BOJ to either increase interest rates or for
the government to do something about strengthening the currency.
Last year at around the same time, the yen suddenly rebounded
from 121 to the dollar in December 2005, to just 114 in
mid-January 2006. (Source: TT commentary from nikkei.co.jp,
Feb 2, 2007)

http://www.nni.nikkei.co.jp/AC/TNKS/Nni20070202D02HH213.htm

-> Hangings resume

Japan, like the USA, is one of the few OECD countries still
invoking capital punishment, and it typically hangs its
criminals. Authorities put to death four death row inmates
last Christmas day, one of whom was 75 and confined to a
wheelchair. These are the first death sentences to have
been carried out since September 2005 because the previous
Justice Minister was a Buddhist and wouldn't sign any of the
execution orders. Unfortunately for those on death row, he was
replaced last November and the new guy has no such compunction.
(Source: TT commentary from washingtontimes.com, Feb 2, 2007)

http://tinyurl.com/2kyn2w

-> Diamond imports down almost 5%

A good indicator of just how well off the Japanese feel is to be
found in the import levels of polished diamonds.
According to importer JClub Inc., imports dropped 22.9% by
value to $61.7m last December. this is the 5th straight
month of decline. While the value was down, people were
buying larger cheaper stones and as a result 191,191 carats
of stones, about 20.4% more than normal, were imported.
This is mainly due to an increase in cheaper stones from
india. ***Ed: So people are still getting engaged, but they
are less choosey about what they buy.**
(Source: TT commentary from diamonds.net, Feb 1, 2007)

http://www.diamonds.net/news/NewsItem.aspx?ArticleID=16727

-> Sharp doubles solar cell production in Europe

Solar cells are selling like hot cakes in Europe and Sharp
is cashing in. the company has said that it spent JPY2.2bn
to double the output capacity of its UK plant, and is now
shipping 220MW of capacity yearly. Sharp is the world's
largest solar cell maker and expects 2006 sales (ending
March 2007) to hit JPY235bn, up 18% over the previous year.
(Source: TT commentary from scotsman.com, Feb 2, 2007)

http://business.scotsman.com/latest.cfm?id=174872007

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.

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in the world, with about 5.6m machines, or one for every
23 people. You can buy almost anything, and the Japanese
do, with about JPY6.67trn (US$56bn) being spent every year.
Yet, apart from the obvious players such as major soft drinks
companies, there have been no foreign owners of this massive
direct sales medium - until now.

Market Pioneer Japan is proud to announce that as of December,
2006, it has built a network of 1,500 vending machines placed
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+++ CORRECTIONS/FEEDBACK

In this section we run comments and corrections submitted
by readers. We encourage you to spot our mistakes and
amplify our points, by email, to editors@terrie.com.

-> TT 406 -- Monkeypod trees. We ran a news commentary
about a Hawaiian Monkeypod tree that Hitachi has agreed
to pay the owners US$4m for the exclusive rights to use
the tree's image in Hitachi ads.

*** Our reader says: Though Hitachi will be paying much
more than the previous US$20,000/year exclusive rights fee,
it won't be burdened with the owner's US$600,000/year cost
of running and maintaining the park (not ranch), which is
open to the public. Besides being used in Hitachi
advertising, busloads of Japanese tourists visit and
snap photos of the tree daily. Maybe you should think of
it as an expensive billboard?

*** Our response: Honestly? We think Hitachi was at best
just being lazy, and at worst, there is more to this deal
than is first apparent.

Like you, we saw the maintenance fees in the article and
thought the deal was probably reasonable. But then we
started thinking: "If you wanted to simply take photos
(and remember that it's US$4m worth) of this tree, what
do you care about the rest of the grounds? You could simply
do basic maintenance on the rest, which we're sure wouldn't
cost US$600K a month. You'd just keep the field with the tree
in top shape... Surely the other 20 acres would only take a
crew of two to maintain in basic condition?

Indeed, Hitachi even has a subsidiary that specializes in
gardening, landscaping and management of facilities, so
there is little doubt that they could look after such a
facility.
http://www.hitachi-metals.co.jp/e/corp/pdf/2003/40.pdf.

Also, a second point is that even if the park did cost
US$600K a year to run, we presume that the owners also
make revenue from all those tourists. Thus, using this
as an argument for boosting the charge by 3,000% doesn't
wash with us. There's something fishy here.

Anyway, thanks again for your feedback. Do you know this
particular park? Where is it exactly?

*** Our reader's follow-up was: Yes, I know the park well
since I grew up down the street. [Ed: OK, we bow to local
expertise here...!] It's 5-10 minutes away from the
Honolulu International Airport, bordered on one side by the
H1 freeway and on another side by Moanalua Elementary School.
It's a gorgeous park: the kind of thing private money buys.

I think you're right about there being more than meets the
eye to this deal. I could list a lot of reasons why the
property is expensive: to maintain (historical buildings,
etc.), but when the property went up for sale I wondered
myself why Hitachi didn't buy it. Anyway, it was fun to
dream of ways to make the park self supporting while it
was still on the market.

...The information janitors/

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