Nichia Corporation Versus Shuji Nakamura: The Blue LED Dispute

Subject: Business    / Management
Question

Case 5.1. Nichia Corporation Versus Shuji Nakamura: The Blue LED Dispute

by Venkat Gopikanth and Teri Prahl

(Reprinted by permission of the authors)

This case analyzes a dispute between Nichia Corporation and Shuji Nakamura, a scientist who, while employed at Nichia in the 1980s and 1990s, made significant breakthroughs in the development of Blue LED (light-emitting diodes). Nichia Corporation filed and obtained patents for Blue LED and reaped profits in the range of ¥120.8 billion (about $120 million) over the lifetime of the patents. The company awarded Nakamura a sum of ¥20,000 (about $200) for his efforts, consistent with Nichia’s policy of rewarding employees for patents.

In 2001 Nakamura sued Nichia over the ownership of the patents and his compensation. A Tokyo court awarded him ¥20 billion (about $180 million). Nichia appealed, and the court ordered the parties to negotiate. Nichia and Nakamura settled in 2005 for ¥840 million (about $7 million).

On the surface, this dispute appears to be within a single culture: Japan. Nakamura claimed rights to patents for the Blue LED technology. The company rejected the claim on the grounds that it owned the patents because the work had been done while Nakamura was an employee of Nichia. However, as the dispute played out, a significant shift took place away from traditional Japanese practices regarding ownership of and compensation for patents. This shift began with Nakamura’s filing the claim in the first place, moved on to the Tokyo court’s several decisions, and ended with a negotiated settlement that was made public and therefore set a precedent for future settlements between Japanese corporations and their employee inventors. Thus the case provides insight into how influences from the global society in which Japanese business is embedded are changing the way Japanese firms conduct business.

Background

Shuji Nakamura graduated from the University of Tokushima, Japan, in 1977 with a degree in electrical engineering. He obtained a master’s degree in 1979 and a Ph.D. degree in 1994 from the same university. He joined Nichia Corporation, also located in Tokushima, in 1979. Nakamura began working on Blue LED in the 1980s. Despite resistance from within the company, he persisted with his research and encouraged Nichia to file for patents on his work. Nichia was granted those patents in 1993 and began producing Blue LED product that same year. By the late 1990s Blue LED were generating huge profits for Nichia Corporation. Based on court records, this profit was estimated in the range of ¥120.8 billion over the lifetime of the patents.1

Nakamura was paid his regular salary while at Nichia and, consistent with Nichia’s internal policy, was paid a special award of ¥20,000 (about $200) for his extraordinary work on the Blue LED. Nakamura gained an international reputation in his field for this work. He has subsequently been awarded Finland’s prestigious Millennium Technology Prize for his ongoing work to make cheaper and more efficient light sources. As of 2006 he was a professor of engineering at the University of California, Santa Barbara.

Negotiations

The case involved a series of disputes and negotiations dating back to the 1980s.

Negotiation 1: Ability to Continue Development. Nakamura began disputing with Nichia in the 1980s to receive funding to continue his research into the Blue LED. Management’s perspective at the time was that nothing invented by Nakamura had ever sold, leading them to question whether research into the development of the Blue LED should continue. In particular, Nakamura’s decision to work with gallium nitride provided more reason for management to question his decisions. At the time, gallium nitride was considered to be unsuitable for LED development, and no other company was pursuing this line of development. Yet Nakamura continued his research using gallium nitride despite direct orders from management to work on other projects.

Nakamura believed that gallium nitride was the correct material to be working with precisely because no other company was working with it. From his perspective the lack of sales of his previous inventions had nothing to do with their technical capabilities, but with Nichia’s failures at the development stage. Other companies with greater financial resources and development expertise were better than Nichia at turning basic science into products.

Nakamura had joined Nichia precisely because it would allow him more freedom in choosing the area of research than he would have had at a larger company; his salary and position were poor, a compromise that he had made in order to have this freedom.2 But now, the freedom was being challenged.

After six years battling with his superiors regarding his research, Nakamura escalated the dispute to the chairman of Nichia—a friend of one of Nakamura’s professors—to get approval to continue development and to receive funding for the project. Approval was given because he was the only person in the company who was producing new products, even though his inventions were not making any money for the company.3 Ultimately, Nichia gave Nakamura a $2 million budget to work on his invention.

Negotiation 2: Patent Rights. The patent in question dates to 1991 and relates to a vapor deposition technique that Nakamura used to produce indium gallium nitride, the active layer in Nichia’s Blue LED and lasers. After commercializing the technology, Nichia’s annual sales grew from just over ¥20 billion to ¥80 billion in 2001, about 60 percent of which was generated by nitride-based LED products. These figures reflect the fact that blue lasers can increase the storage capacity of compact discs and DVDs by a factor of four or five, and that blue LED, in combination with red and green LED, may replace conventional light bulbs.

In view of this success, Nakamura tried to negotiate with Nichia Corporation for a greater reward, asking for ¥100 million ($1 million). These negotiations were unsuccessful, and in 1999 Nakamura left Nichia.

Nakamura filed a lawsuit in August 2001, claiming ownership of the patent and requesting ¥2 billion (about $200 million) in compensation. Under Japan’s patent law, an employee owns a patent filed for while the employee is working for a company, although the company also has rights to use the invention.4 Japanese patent law also requires companies to reward their employees for patents that are transferred to the employer. Interestingly, Nakamura’s filing of the suit against Nichia ran so counter to Japanese norms that it made him persona non-grata in his hometown.5

Nakamura’s primary goal in filing the lawsuit was to license the technology to other firms and thus expand the usage of the product and eliminate Nichia’s stronghold in the industry.6 Nichia, however, had no interest in releasing the patent, as it was realizing significant profits from the technology. Nichia also took the position that the patent was the company’s to do with as it wished, having paid its standard compensation for a patent award to Nakamura.

The Tokyo court agreed with Nichia, stating that the patent had been awarded to Nichia. It based its decision on the belief that there had been a tacit contract assigning ownership to the company. The news was not all good for the company, though. In the same decision, the court left the dispute open for further scrutiny, indicating that the assignment of the patent in no way negated Nakamura’s claim to reasonable compensation for his efforts.7

Negotiation 3: Patent Compensation. Japanese patent law allows for “reasonable remuneration” in the event that the patent was assigned to the company for which the inventor works and significant profits are realized by the firm.8Remuneration is to be determined by a combination of the profits realized by the firm and the amount of contribution made by the inventor. However, the law does not address how to calculate this value. This was the primary source of contention between Nichia and Nakamura as well as other Japanese inventors and firms in the same situation.

By ruling that Nakamura should receive compensation for his invention, the court effectively indicated to both sides that they should come to an agreement on the amount of the reward. Unwilling or unable to agree, the two sides ended up back in court. Nichia argued that Nakamura’s work was part of a team effort, and that his invention was possible only because of support from the company and other workers. The district court did not agree, ruling that Nakamura’s sole contribution to the invention was worth ¥60 billion based on company sales and licensing fees. Nakamura had only demanded ¥20 billion in the initial lawsuit, filed in 2001, so the court awarded him the full amount he had sought. The company appealed.

In December 2004, the Tokyo High Court recommended that an amicable settlement be reached between Nakamura and Nichia without providing a ruling. However, the court said that should the two parties not be able to reach agreement, the court would provide a ruling on March 28, 2005. The high court proposed a settlement cap of ¥600 million, apparently out of concern over the effect that a larger amount would have on Nichia’s financial health. “A company’s reward for an employee’s invention should be offered within limits that would keep the employer competitive,” said presiding Judge Hisao Sato in recommending a settlement.9

This time the parties settled. The amount, ¥843 million (about $7 million) included ¥600 million for transfer of the patent; the remaining ¥243 million was assessed for delayed payment. The award also covered 159 other patents that were developed by Nakamura, but held by Nichia.10 This ruling effectively precluded future disputes between Nichia and Nakamura.

Epilogue

Nakamura’s invention is widely considered to be worthy of a Nobel Prize. At one point in the course of these events, he observed, “If this situation continues, researchers will flee to work overseas and Japan’s status as a top science country will decline.”11 As a result of this and other more recent disputes, many companies in Japan are reevaluating their systems for compensation to inventors. Internal guidelines are now being made part of corporate policy so that both parties know, in advance, how much of the profits will be shared with the inventor. While policies are unlikely to remove all disputes, they should reduce the frequency and ferocity of them.

The Japanese government is also making changes. Section 35 of the Patent Law has been amended to avoid costly lawsuits by ensuring that any prior contractual agreements are respected12 and arbitration is considered when an award is challenged.13 The following is the relevant section of Japanese patent law, current as of 2006.14

Article 35: Employee Inventions (1) An employer, a legal entity or a state or local public entity (hereinafter referred to as the “employer, etc.”) shall have a non-exclusive license on the patent right concerned, where an employee, an executive officer of a legal entity or a national or local public official (hereinafter referred to as the “employee, etc.”) has obtained a patent for an invention which by reason of its nature falls within the scope of the business of the employer, etc. and an act or acts resulting in the invention were part of the present or past duties of the employee, etc. performed on behalf of the employer, etc.(hereinafter referred to as an “employee invention”) or where a successor in title to the right to obtain a patent for an employee invention has obtained a patent therefore. (2) In the case of an invention made by an employee, etc. which is not an employee invention, any contractual provision, service regulation or other stipulation providing in advance that the right to obtain a patent or the patent right shall pass to the employer, etc. or that he shall have an exclusive license on such invention shall be null and void. (3) The employee, etc. shall have the right to a reasonable remuneration when he has enabled the right to obtain a patent or the patent right with respect to an employee invention to pass to the employer, etc. or has given the employer, etc. an exclusive right to such invention in accordance with the contract, service regulations or other stipulations. (4) The amount of such remuneration shall be decided by reference to the profits that the employer, etc. will make from the invention and to the amount of contribution the employer, etc. made to the making of the invention.

Conclusions

It is evident from this case that rights- or power-based arguments do not create integrative agreements. Nakamura and Nichia Corporation had the potential to negotiate an integrative agreement, but by relying on rights- and power-based arguments the negotiations generated a series of disputes and lawsuits. In the final analysis, both sides might have created more value by following an interests-based approach. Nakamura might have received reasonable compensation early on and might have stayed with the company to further enhance their research efforts. Nichia might have paid less and avoided the huge interest charges awarded by the court and chosen to use Nakamura as their ambassador for attracting future top talent and enhance their reputation in the market place. However, if Nakamura had not challenged Nichia in the Japanese courts, the changes in Japanese patent law may never have occurred.

Discussion Questions

1. Do you think Nakamura’s primary interest in filing the lawsuit was financial compensation? What other interests might Nakamura have had in pursuing his claim with Nichia ten years after the patents had been filed? How are Nakamura’s interests consistent or inconsistent with Japanese cultural values?

2. What rights arguments might Nakamura have made during the initial pre-lawsuit negotiations with Nichia? How are these rights arguments cultural?

3. What power options did Nakamura have in his dispute with Nichia? How are these strategic options cultural?

4. What were Nichia’s positions and interests in this negotiation with Nakamura?