Rising patent awards hint at a future increase in litigation

One example is Cree s recent decision to license a key white-LED patent to three firms in the Far East, which could mark a watershed in the evolution of solid-state lighting.

One of those three firms now able to sell white LEDs incorporating Cree s InGaN-on-SiC dice is Cotco Holdings, which is based in Hong Kong. Shortly after signing the deal, Cotco announced that it had already seen a big increase in white-LED sales and that it expected Chinese manufacturers of products containing white LEDs to fuel a strong upswing in demand.

Cotco s white LEDs will now be labeled with the all-important US patent number (6,600,175) and the message "powered by Cree". This branding approach is highly reminiscent of the "genuine Nichia LED" labels adorning products featuring the Japanese company s white emitters that were introduced exactly one year ago.

If Cotco s predictions are accurate, there could be a surge in business from China, with some commentators suggesting that the wall of intellectual property that has previously separated LED makers is now "crumbling". Calling a truce Cree and Nichia seem to have set the tone when they announced early this year that the two companies had signed an extended cross-license agreement specifically covering white LEDs. In the past few months, Nichia has resolved litigation with US retailer Sharper Image, Korea s Luxpia, and, most recently, US companies JM Group and ASP Inc.

But at the recent Blue 2005 conference in Hsinchu, Taiwan, patent-law specialist Patricia Martone suggested that while one part of the IP wall relating to LEDs may be crumbling, more lawsuits are inevitable as the solid-state lighting industry grows in size, and litigation becomes a more attractive business tool.

Martone, who is a partner in the Fish & Neave IP group of Boston law firm Ropes & Gray, says that the LED industry s patent strategy looks very similar to that of the wider semiconductor world. As a result, it is perhaps instructive to look at the developments that took place in the silicon industry when it underwent major expansion.

While initially there was a "patent peace", with cross-licensing agreements to ensure that early silicon-device manufacturing could get off the ground without concerns over IP violations, this came to a halt in the 1980s when chip sales revenues became large enough to make expensive lawsuits look like an attractive business ploy.

"Beginning in the mid-1980s, Texas Instruments (TI) began an aggressive licensing program to generate needed revenue," said Martone. "Prior to that, semiconductor firms regularly entered into royalty-free licenses." TI has since made billions of dollars from this policy, which has reportedly netted the firm $1 billion over 10 years with Hyundai alone. Similarly, IBM initiated its own licensing program in the early 1990s and increased its annual royalty revenue from just $50 million in 1988 to around $2 billion by 2002.

Martone has noted a rapid recent increase in the number of US patents filed into the Class 257 and Class 438 patent sectors that respectively cover LED technology and the manufacturing processes used to make the devices (figure 1). Much of this activity has taken place outside the US, with Japanese firms being issued with almost as many Class 257 US patents as their domestic colleagues over the past five years. Next down the list is Taiwan, while Martone expects awards to Chinese companies to surge in the future. Litigation on the rise While this shows that innovation is strong in the LED industry, it also indicates that litigation is likely to become an even more effective business tool in the future. And despite the recent cross-licenses and settlements, German firm Osram is enforcing its own IP against Japan-based Citizen Electronics. Citizen makes white LEDs under license from Nichia, and although Nichia and Osram have signed a cross-licensing agreement, it does not give third parties such as Citizen free access to Osram s technology.

Martone warns manufacturers that litigation will increase in the future, suggesting that firms not currently regarded as a threat, perhaps not even device manufacturers, will emerge to issue legal proceedings. "Companies not on your competitive radar screen may sue you to generate licensing revenue," she said.

While various elements of the LED industry face the prospect of more lawsuits, it looks like packaging and phosphors are the primary target of 2005 litigation, with less of a focus on chip-manufacturing technology.

Adams Harkness analyst Jed Dorsheimer, also speaking at Blue 2005, made his own predictions for 2005 and beyond. He expects to see more strategic relationships evolve, as a way to marry the high cost of technological innovation with low-cost volume manufacturing.

Dorsheimer and Martone both say that the current difficulties over patent enforcement in China will be reformed in years to come, as political pressure is applied from other countries and local judges gain experience in IP law.

Hans Mosemann from US investment company Moors & Cabot also made some predictions at the Taiwan event. Mosemann, who is a senior analyst and has covered key compounds firms including Cree, Anadigics and Skyworks during his time on Wall Street, says that there will be "significant" consolidation in the Asian LED industry as chip packagers and the "big five" global LED firms agree partnerships, set up joint ventures and establish vertical business models.

"The IP wall is no longer a wall," Mosemann told delegates in Hsinchu. "One year ago, this wall began to crumble as the top five [HB-LED manufacturers] started to license white-enabling technology." The analyst believes that Asian players now have all of the necessary elements not only to make and sell devices, but also to drive innovation in the global HB-LED market.

According to Mosemann, Wall Street does not consider the compound semiconductor field to be a particularly desirable one currently, and many institutional investors with large portfolios of blue-chip firms tend to regard the HB-LED sector in the same light, despite some very different market drivers. Some investors even compare the HB-LED industry to highly commoditized silicon markets such as that for dynamic random access memory (DRAM) chips.

Mosemann takes another view: "HB-LEDs are not like standard DRAMs. In DRAM, whoever has the biggest fab wins." In contrast, HB-LED manufacturers serve diverse markets and chip design is a major differentiator from supplier to supplier.

And despite the inevitable slowing growth rate of the HB-LED market, the sector will still expand twice as quickly as the overall semiconductor field, he says. As a result, Mosemann predicts that institutional investors in the US will increase their interest in the HB-LED sector in the coming years as the business matures. Fertile ground Mosemann says that while the days of the cell-phone handset as the major GaN LED market driver are beginning to end and therefore the days of 50% annual growth rates will soon be over, the HB-LED sector remains an attractive one for the investor community.

Although Mosemann, whose company currently has a "sell" rating on Cree stock (meaning that it expects the company s share price to underperform the market in the next 12-18 months), is expecting something of a lull in LED demand this year, he believes that investors will be keen to cash in on the growth of applications such as the backlighting of large LCD screens. In addition, the blue laser field - which shares much of the same manufacturing requirements as GaN LEDs, and in which Nichia, Cree and Osram are also likely to dominate - is seen as a fertile area for future investment.