Taiwanese LCD Panel Maker Chimei Innolux Files Patent Infringement Lawsuit Against Sony

Taiwan's Chimei Innolux Corp, a maker of liquid-crystal displays (LCD), recently filed suit in the United States against Sony over alleged patent infringement. A similar complaint was also filed in Beijing No 2 Intermediate People's Court. The lawsuit came after Sony initiated legal proceedings in US district court this past March, claiming that Chimei and Hong-Kong-listed LCD monitor maker TPV Technology Ltd infringed on its patents in making televisions and computer monitors. In its lawsuit, Chimei Innolux is seeking to halt the sale of all Sony products in the United States - including Bravia televisions and its Cybershot digital cameras and digital photo frames - and is asking for compensatory damages. Does this lawsuit have merit? Is the compensation requested material? Should Sony investors be concerned?

In a recent response, representatives from Chimei Innolux noted that "their filing is completely unrelated to Sony's earlier complaint against it. Corporate officials noted that they were committed to protecting their intellectual property, their industry partners, as well as their customers." Chimei Innolux recently underwent a three-way merger, one that significant strengthened and diversified their intellectual property portfolio. In fact, Chimei Innolux, is itself a new shell company - one that was formed this past March by the merger of Chi Mei Optoelectronics Corp, Innolux Display Corp and TPO Displays Corp. Together, these companies supply panels and partially assembled screens for use in TVs, computer monitors and other electronics products.

While Chimei's actions might come as a shock to industry outsiders, investors should not be surprised. In fact, this new lawsuit follows Chimei's recent patent battles with Acer, Hewlett-Packard, HTC and Apple; battles, that attempted to block competitor production and sales. Interestingly enough, in the high stakes world of technology and intellectual property development, it seems that patent litigation has become a viable way to snag or block competitors, particularly when those competitors threaten niche markets, look to other suppliers, or consider significant vertical integration which threatens a producers revenue stream.

While it will be interesting to watch the outcome of the Chimei lawsuits, it is important to step back and recognize that other significant players are invested in the lawsuits outcome. For example, Foxconn Technology Group, a controversial company that has recently been in the news due to labor issues (and one which currently maintains a vast majority of the patents for Taiwanese component products), recently purchased a major stake in Chimei Innolux. As Foxconn has extended its business along the industrial chain from component making to the sale of complete products, many are beginning to question whether this lawsuit is being pushed by Foxconn with the goal of disrupting foreign competition while insulating its competitive advantage in the market. In fact, one could argue that the motivation for the lawsuit could stem from Foxconn's desire to seek more LCD orders for Chimei Innolux's products from Sony and other manufacturers. While it is too early to identify the specific intentions, or predict whether the outcome of this lawsuit will be material for Sony or other technology manufacturers, investors in technology companies need to maintain their awareness and take note of this important trend. Moreover, while Chimei could have only chosen to sue Sony within China, the decision to sue Sony in both the US and China shows how aggressively Chimei and Foxconn are ready to use their patents to secure share, or, more likely, to use the lawsuit to leverage Sony's cooperation in the supply chain, particularly on the Chinese mainland.