Mti Case Analysis

FUSION SYSTEMS CORPORATION IN JAPAN CASE ANALYSIS Mitsubishi's Attempts to Appropriate Fusion's Unique Technology Fusion Systems Corporation, a high growth, $25 million high tech manufacturing company, has competed successfully in Japan for over a decade. Today, Fusion's ability to continue marketing in Japan is seriously threatened by efforts of Mitsubishi Electric Company to gain control of Fusion's core technology through manipulation of the Japanese patent system. Specifically, Mitsubishi purchased and reverse engineered Fusion's product in 1977, subsequently filing about 250 patent applications in Japan surrounding Fusion's core technology. Some of these applications cover basic aspects of the Fusion equipment purchased by Mitsubishi; others seek to patent insubstantial or trivial changes in this technology; many aim at technology long in the public domain-the "ABC's" of microwave lamp technology. So broad is the reach of these applications that if they are granted Fusion could no longer sell to Mitsubishi the same lamp they purchased in 1977. If issued, these patents threaten Fusion's market position in Japan and, ultimately, worldwide. Fusion has attempted to achieve a fair settlement since 1985. Negotiations have been unsuccessful thus far, first because Mitsubishi insisted that any agreement include a cross-license to Fusion's core technology. Fusion could not agree to a cross-license. The company could not successfully compete head-to-head with Mitsubishi if both companies were free to market Fusion's technology. Mitsubishi now insists instead on a cash payment and running royalty on all Fusion sales in Japan, in payment for the use of "their" technology. Unfortunately, the Japanese patent system as it currently operates allows a large Japanese company, by filing a flood of questionable patent applications, to overpower a smaller, foreign competitor and thus appropriate innovative technology created elsewhere.

Fusion Systems Corporation: An entrepreneurial start-up in 1971, Fusion today employs approximately 300 people. The company manufactures and sells patented high intensity microwave lamp systems used in the production of semiconductor chips, optical fibers, graphic arts films, printed circuit boards, packaging materials and many other items. In 1986 Fusion took the bold step of establishing its own direct presence in Japan by opening Fusion Japan K.K., a Tokyo office staffed by Japanese nationals. Fusion began selling its products in Japan in 1976 through trading companies. It has won adominant market share against Japanese competitors, including Mitsubishi, in key niche markets. About one-third of Fusion's sales are exported from the U.S. and half of these exports are to Japan. Fusion's Technology: Fusion's core technology uses microwave energy to drive high power ultraviolet lamps. Conventional lamps use metal electrodes, like the filaments in a fluorescent light, to power the bulb. Microwave lamps have no electrodes. They operate with longer life, greater reliability, superior output spectrum ("color"), rapid on/off and other significant advantages over conventional electrode lamps. These benefits have made Fusion microwave lamps the system of choice for many industrial applications. Fusion pioneered the development of microwave lamps for commercial applications in the early 1970's. Prior to that, low power microwave discharges were studied in laboratories but never developed for industrial use. Fusion invented and commercialized high power, reliable cost-effective microwave lamp systems to illuminate large areas as required on industrial production lines, introducing products in 1974. Fusion has invested significantly in patents as part of its corporate strategy, obtaining patent coverage on all of its basic design features and technological

innovations. Fusion holds patents in the U.S., Japan, Canada and European countries. Mitsubishi's Activities: Mitsubishi Electric is the third largest lamp producer in Japan, with total revenues of roughly $12 billion a year. It is a key member of the giant Mitsubishi Group, with total annual revenues in excess of $150 billion, representing approximately 10% of the entire GNP of Japan. In 1977, Mitsubishi purchased a Fusion lamp system. The following December Mitsubishi began an intensive program of filing patent applications on microwave lamps. Between December 1977 and March 1987, Mitsubishi applied for some 250 patents on various aspects of this technology. 1 Some cover features so routine (e.g., necessary control switches, clamps for mounting lamp parts) they are unworthy of patent protection by U.S. standards. Many cover designs substantially identical to those in the patented lamp purchased from Fusion. Others seek patents on information generally known to microwave engineers and used in both the 1977 Fusion lamp purchased by Mitsubishi and microwave ovens in the 1970's. Mitsubishi's basic patent approach has been to file large numbers of broad-range patent applications they have adopted the attitude that standard practice in Japan is to file as many and as broad a set of patent applications as possible. In the U.S., it would be considered fraudulent and improper for a company to apply for claims which it knows to be anticipated by prior art. Early Stages of Fusion-Mitsubishi Negotiations: In 1985, Fusion initiated discussions with Mitsubishi to avoid a long and costly legal battle through the Japanese patent opposition system. Fusion proposed to forego opposing Mitsubishi's patent applications in exchange for Mitsubishi's agreement not to assert any of its resulting Japanese patents against Fusion. This would have allowed each company to compete freely on the merits of its own technology.

After six months of negotiating these terms, Mitsubishi suddenly demanded that Fusion also grant Mitsubishi a worldwide, royalty free license of all Fusion lamp technology. 1- Although Mitsubishi claims to have begun microwave lamp research and development in 1965, their 1965 patent covered only a low-power device unsuited for commercial use. Their commercial designs occurred only after purchasing the Fusion unit in 1977. 2- A Mitsubishi Electric Company executive was quoted in an August 27,1987, Wall Street Journal article as follows: "When a vital technology emerges, we make it a target and then make a concentrated effort to apply for patents." addition, Fusion was to make substantial cash and royalty payments. These Mitsubishi demands effectively ended the first phase of negotiations. In 1986 and 1987 Fusion products rapidly gained market share in Japan, displacing Mitsubishi microwave lamp products introduced in 1983-1984. Mitsubishi responded by attempting to intimate Fusion's leading Japanese customer, implying that Fusion's products infringe Mitsubishi's patent applications, a tactic that is illegal under Japanese law. More Recent Negotiations: Negotiations resumed in 1987. In September, senior Mitsubishi officials agreed verbally to a one-way license to Fusion in exchange for Fusion's cessation of opposition to Mitsubishi's patent applications, with no payments by either party. When the agreement was drafted a week later, Mitsubishi refused to sign. They made no claim that the written agreement diverged in any way from the verbal agreement. To encourage an expeditious settlement, Fusion added a one-time $100,000 license fee to Mitsubishi to the terms of the agreement. Mitsubishi rejected this offer as a nuisance amount.

In October, 1987, negotiators failed to return Fusion's phone calls or to meet for further negotiations, refusing to meet with Fusion's president during his weeklong visit to Japan. Mitsubishi adopted the position that there is nothing to discuss since Fusion did not currently infringe any issued Mitsubishi patents and was not interested in cross-licensing. In April, 1988, the Fusion-Mitsubishi dispute was raised as a major agenda item at the US-Japan talks in Tokyo. At the insistence of Ambassador Michael B. Smith, Deputy U.S. Trade Representative, Mitsubishi agreed to meet with Fusion representatives but no settlement resulted. Negotiations continued intermittently through 1988 and early 1989. In the glare of publicity, Mitsubishi eventually dropped its demand for a cross license but now insists on an upfront cash payment and running royalty on all Fusion sales in Japan-payment tantamount to a tax on Fusion for doing business in Japan. Fusion-Mitsubishi Technical Meetings and Analyses: In a series of 1988 technical meetings in Tokyo between Fusion and Mitsubishi patent attorneys and technical personnel, Fusion demonstrated that three of Mitsubishi's key patent applications are substantially identical to features in the Fusion lamp purchased in 1977. Mitsubishi has been unable to adequately refute the conclusion that they copied these patent applications from Fusion's product In addition, Fusion's Japanese patent attorney noted that Mitsubishi has acted improperly in the methods used to pursue these patent applications. Mitsubishi later commissioned a technical study by the Stanford Research Institute. SRI was asked whether the Mitsubishi lamp is a "clone" of the Fusion lamp. It is not. The correct issue is not Mitsubishi's lamp but its patent filings, filings that would make it impossible for Fusion to continue making its own products. SRI concluded repeatedly that parts of the technology have been well known to microwave engineers for many years. That, too, is correct. However, Mitsubishi is now attempting to get patents on this public domain material,

In the interest of time, Fusion counsel selected three key patent applications, but the same case could be made for many others. Making it impossible to make microwave lamp products without violating their patents, if issued. It was Fusion's contention that it made a substantial and unique contribution to the field of micro wave lamp technology and that Mitsubishi has not offered significant improvements to that technology.

Conclusion: Fusion is not looking for trade protection. It is a highly innovative company already competing successfully in Japan. Fusion seeks only the right to continue marketing its own technology but finds itself fighting for its economic life against a multi-billion dollar conglomerate. Were Fusion to yield to Mitsubishi's cross licensing demands, there might be substantial royalties on Mitsubishi sales of Fusion's innovations. But the products would no longer be made in the U.S. by U.S. workers and this promising high technology would be lost to the Japanese. Submitting to Mitsubishi's demands for a running royalty on all sales in Japan constitutes an unfair and burdensome tax on Fusion's business-in effect, buying back the right to use its own technology. The misappropriation of intellectual property exemplified here is sufficiently prevalent to make it a matter of public concern to U.S. trade officials and legislators. While Fusion hopes for a private resolution of its dispute with Mitsubishi, this case raises issues of public concern, as well. It's essential that there be greater public understanding of the way in which the Japanese patent system is manipulated by giant Japanese companies to the disadvantage of small U.S. companies. The results of this manipulation include loss of U.S. exports to Japan, appropriation of leading edge American technology by the Japanese and economic damage or destruction of innovative U.S. companies.