Samsung Shouldn't Suffer From Legal Spat

Patent allegations made by rival Sharp may sting, but the Korean giant can take solace from the prospect of an upswing in the LCD and memory chip industries

by Moon Ihlwan

A U.S. lawsuit filed by Japan's Sharp (SHCAY) is the latest of a string of unexpected shocks for Samsung Electronics (SSNGY). On Aug. 6, in a lawsuit filed in the United States District Court for the Eastern District of Texas, Sharp accused the South Korean electronics giant of infringing upon five of its patents related to liquid-crystal display technologies.

Sharp is seeking compensation and a sales ban on Samsung products that allegedly infringe upon the patents. The legal challenge follows a recent power failure at Samsung that briefly halted production for some of its memory chips, a key revenue driver. And just last month, Samsung turned in its worst quarterly results in four years.

That said, industry analysts see Samsung pulling out of its funk soon. The notoriously cyclical LCD panel industry is finally moving into an upswing, and that is fabulous news for Samsung, a leader in this game. Indeed Samsung is expected to get back on a stronger earnings track thanks to a current shortage, not only of LCD displays but also of some memory chips, another business critical to the South Korean conglomerate (see BusinessWeek.com, 7/10/07, "The LCD Flat Panel Rises Again")

"The Worst is Over"

While somewhat embarrassing, few think that Sharp's legal assault will have much of an impact on Samsung's earnings, even assuming the Japanese company has a legitimate case and actually wins in court. "I don't think the legal dispute will have any major impact on Samsung's bottom line this year," says Jay Kim, technology analyst at brokerage Hyundai Securities (null). "The worst is over for Samsung, for its major businesses of memory chips and LCDs, and under the circumstances fairly routine legal disputes over patents among manufacturers won't loom large."

Executives at LCD makers say the industry, which suffered two years of a supply glut and dramatic price declines until earlier this year, is poised to have a sunny period until at least the end of next year. All major LCD panel makers, including Samsung, Sharp, and Korea-based LG.Philips LCD (LPL) have reported improving results in the quarter through June.

What's more, they all predict fatter profits ahead. Samsung, the largest LCD panel maker, forecasts a double-digit margin in the second half of this year, vs. a 9% margin from the LCD business in the April-June period(see BusinessWeek.com, 8/1/07, "Sharp's Mega-Wager on LCD TVs").

Countersuit Is Possible

Investors don't seem to be worried too much about the latest legal headache. Samsung stock rose 0.68% to $637 at midday on Aug. 7, slightly outperforming the benchmark Kospi index on the Seoul Stock Exchange that gained 0.49%.

Nevertheless the legal battle is expected to be a tough one. Sharp argues that it sued Samsung only after negotiations between them for a licensing agreement over technologies for improving LCD display quality fell through. Samsung says it respects "valid patents of others" but plans "strong legal actions"against irrelevant allegations. "We are considering countersuing Sharp over LCD patents that we hold," says Samsung spokeswoman Lee Soo Jeong.

Sharp's lawsuit does not specify how many products are in question, but says the infringing products include Samsung's LCD modules for TVs and computer monitors and mobile phones. Michael Min, a portfolio manager specializing in information technology stocks at fund manager Tempis Capital Management in Seoul, notes that lawsuits and countersuits among major manufacturers often are resolved in compromises such as cross-licensing of their patents.