Canon's U.S. court loss could cost it millions

By Aiko Wakao

TOKYO (Reuters) - When Canon Inc. (7751.T) was sued by a small, money-losing U.S. technology firm two years ago, the dispute was over a patent license that had cost the Japanese electronics giant a one-time payment of $5.6 million.

But now that the lawsuit has caused Canon to lose the license, a fresh agreement with Texas-based Nano-Proprietary Inc. NNPP.OB could be worth millions of dollars more, lawyers said.

Last week a U.S. court ruled against Canon, saying the company breached its deal with Nano-Proprietary by trying to share the flat display technology with Toshiba Corp. (6502.T).

The court's decision comes as a major setback and perhaps an embarrassment for Tokyo-based Canon, the third-biggest patent owner in the United States.

"It seems strange Canon managed to go all the way to trial and lose," said Peter Godwin, a Tokyo-based partner at law firm Herbert Smith. "Assuming they were advised they were at risk, you'd expect a company of the size of Canon to have reached a settlement before that."

Now, Canon is left with no plans for mass production of the displays. The sale of the new TVs, scheduled for the fourth quarter, will be limited to Japan and on a small scale.

The court has yet to address Nano-Proprietary's claims that Canon engaged in fraud to extend its license rights to Toshiba and perhaps other Japanese companies.

When Canon and Toshiba set up the joint venture in 2004 to develop the panels, the initial plan was to mass-produce the new type of flat TVs in time for the 2008 Beijing Olympics.

But it was the partnership itself that ultimately hurt the Japanese companies in the dispute two years later.

The original deal allowed Canon to license Nano-Proprietary's technology to its own units. Canon had claimed the venture with Toshiba was a subsidiary because Canon's 50 percent stake included one more share than its partner held.

To resolve the situation, Nano-Proprietary had offered to negotiate a separate license with Toshiba on the same terms as the initial deal with Canon, people familiar with the situation said.

But Canon told its partner not to worry and blocked Toshiba from talking to Nano-Proprietary, these people said.

Spokesmen at Canon and Toshiba declined to comment, saying the lawsuit was still going on. A Nano-Proprietary spokesman also declined to discuss its dealings with Canon and Toshiba.

A LATE MOVE

In April 2005, Nano-Proprietary sued Canon in U.S. District Court, challenging a company that has $35 billion in annual revenue and employs more than 500 intellectual property experts.