I'm all too familiar with this storyline: OLED intellectual-property specialist Universal Display (Nasdaq: PANL ) faces a patent scare with the potential invalidation of its IP in a foreign country, investors panic, and shares tank.
That largely describes the first time I sold my UDC shares, and only recently have I decided to buy them back, thankfully at a lower price. So it's with an unshakable feeling of deja vu that I peruse a recently filed form 8-K from the company -- the same 8-K that's sparking a sell-off today. At a company that specializes in patents and licensing, patent litigation is par for the course, and it can have potentially major implications on UDC's business.
The update relates to two Japanese patents that UDC holds, referred to as JP '929 and JP '024.
This particular patent relates to UniversalPHOLED technology and was granted way back in August 2007. The request for an invalidation trial is old news, as it was filed in April 2010 by a Japanese company, Semiconductor Energy Laboratory, or SEL, a Japanese IP company that similarly focuses on R&D.
In February 2011, the Japanese Patent Office, or JPO, issued a decision that confirmed the validity of this JP '929 patent, while finding the "broadest claims" invalid. UDC subsequently filed an appeal with the Japanese Supreme Court. A year later in February of this year, both companies held a technical explanation hearing to support their respective cases.
The news today related to this patent is that the Japanese High Court is backing the JPO's initial decision, saying that certain parts of the patent are valid but those same "broadest claims" are not. Now, UDC plans to climb the legal ladder with appeals, this time going to the Japanese Supreme Court.
This patent is also related to the same UniversalPHOLED technology and was granted more recently in May 2010. SEL was also the culprit behind the request for an invalidation trial that was filed in June 2011. The JPO has now made a similar decision regarding this patent, saying the broadest claims are invalid, while other parts are legitimate.
UDC is appealing this decision to the Japanese High Court. Presumably, if things don't go well there (as with the JP '929 case), then the proceedings will similarly get escalated to the Japanese Supreme Court.
The good news
Here's an important sentence in the update: "We believe the above decisions should not have a material adverse impact on the Company's global portfolio of patents and pending applications or our ability to pursue licensing and material sales business opportunities." So while the decisions certainly aren't in UDC's favor, they aren't likely to weigh on its business.
UDC's two largest customers are Samsung and LG Display (NYSE: LPL ) , which are located in South Korea. With 59% of its revenue coming from there, I'm much more concerned with developments there than in Japan.
The bad news
The JP '024 patent is part of a counterpart patent to two South Korean patents (KR '632 and KR '857), which are also subject to invalidation trials of their own in South Korea. The culprit there is Duksan Hi-Metal, which competes with UDC in material sales and is also a Samsung supplier.
Samsung, UDC's largest customer, is openly hoping that Duk San Hi-Metal can win this one. When the invalidation was initially requested last summer, a Samsung official said, "If the relevant patents are invalidated, it will open doors for Korean materials makers to tap into the premium OLED materials market and will also help the AMOLED materials market grow faster." Thankfully, that didn't stop Sammy from inking a long-term contract with UDC just months later.
For now, UDC is confident and thinks "there is a substantial likelihood that the patents being challenged will be declared valid," but it's still up to the courts to decide. Since all of these patents are related (there are also U.S. and European counterparts and European invalidation trials), a finalized invalidation could have negative implications for UDC because it would give its opponents some ammo to work with.
The sell-off seems a bit premature, as the patent litigation process is long and drawn out, but in fairness, there is some cause for concern.
I'm not the only one who thinks we're seeing an overreaction. KeyBanc is out defending UDC, saying the news has "little to no impact" on UDC's financials. Japan remains among the least important geographies, while the U.S. and South Korea are much more important. KeyBanc even sees the dip as an "attractive buying opportunity."
In the end, the headline sounds much scarier than the fundamental impact, as UDC's monetization remains intact for now, particularly with its more important customers and geographical regions.
Patent scares and volatility are just the name of the game for UDC.
Looking for a way to play The Next Trillion-Dollar Revolution that's relatively safer from all the patent warfare? Well, there's another crucial component supplier gaining traction powering the smartphones and tablets of tomorrow. Grab a free copy of this report to find out more.