From the latest 10Q:
Samsung
In February 2002, ITC filed a Complaint against Samsung Electronics Co., Ltd. (Samsung) with the International Chamber of Commerce, International Court of Arbitration (ICC). During the third quarter of 2002, an evidentiary hearing was conducted before an arbitration panel. During the fourth quarter of 2002, final arguments were made to the arbitration panel. A decision has not yet been rendered. The arbitration panel has indicated to the parties that it expects to submit a draft decision to the ICC before the end of 2002 for its review. Therefore we expect that the final decision in the arbitration proceeding will be reached either later in 2002 or in the first quarter of 2003.
The dispute involves the election and applicability of the most favored licensee (MFL) clause contained in ITC’s patent license agreement with Samsung and Samsung’s alleged underreporting of, failure to report and failure to pay royalties on certain covered sales. MFL clauses typically permit a licensee to elect to apply the terms of a subsequently executed license agreement that are more favorable than those of the licensee’s agreement. The application of an MFL clause may affect, and generally acts to reduce, the amount of royalty obligations of the licensee. The application of an MFL clause can be complex, given the varying terms among patent license agreements.
As part of the evidentiary proceedings, Samsung stated that it was using its MFL rights to have its royalty obligations determined in accordance with ITC’s subsequent patent license agreement with Nokia. Samsung further argued hat the Nokia royalty terms should be applied to Samsung as of the date of the Nokia patent license agreement. We expect the arbitration panel to determine the manner in which the MFL clause should be applied, including the effective date as to when Samsung’s royalty obligations should be determined in accordance with the Nokia patent license agreement. Prior to the effective date, Samsung’s royalty obligations should be determined by reference to its own agreement. These determinations should resolve the amount of Samsung's royalty obligations from early 1999, the timeframe when the Nokia patent license agreement was entered into, through, generally, the date of the evidentiary hearing. We also expect Samsung's royalty obligations thereafter to be based on the applicable terms of the Nokia patent license agreement.
The Nokia patent license agreement provided that, in exchange for an upfront payment of $31.5 million, Nokia’s royalty obligation to ITC had been paid-up generally with respect to certain 2G and 3G covered products through the end of 2001. Further, the agreement provides that the parties will agree to Nokia’s royalty obligations to be made thereafter. The parties have not yet agreed to a royalty rate. In the absence of agreement on royalty rates between the parties, the Nokia MFL provision provides that Nokia’s royalty obligations will be defined by the relevant licensing terms applicable to certain other leading manufacturers of wireless telecommunications equipment, none of which are yet licensed by ITC. Nokia also has the option to elect to apply the relevant licensing terms applicable to certain other manufacturers, but has not yet done so. The license agreement provides that when a royalty rate is determined, the royalty rate will be applied to sales commencing January 1, 2002. Until such time as the royalty rate is established, we will not receive any royalty payments from Nokia, nor will we record any revenue related to Nokia's sale of covered products for the licensing period starting January 1, 2002. Nokia is not currently providing information related to sales of covered products since it is not obligated to do so. In the absence of any defined royalty obligation, we cannot reasonably determine the retroactive impact of any resolution to the terms of this agreement.
Along with determining the effective date of a Samsung MFL election, we expect the arbitration panel to determine whether Samsung’s royalty obligation through the end of 2001 should be the same as Nokia’s, or be adjusted and, if so, in what manner, including recognizing differences in market share. The arbitration panel may take into account Samsung’s prior non-refundable payments and credits under Samsung’s patent license agreement with ITC in the amount of $18.7 million, a portion of which the parties have agreed has been exhausted. We expect Samsung’s royalty obligation to be netted against their prior unexhausted royalty pre-payments and credits to determine if Samsung owes additional monies to ITC. Depending on the arbitration panel’s determination as to the amount of Samsung’s royalty obligation, Samsung might be obligated to pay ITC additional back royalties. Prior to the initiation of the arbitration proceedings in the first quarter 2002, we recognized $11.5 million of revenue related to our agreement with Samsung. No revenue has been recognized in the first nine months of 2002 pending the outcome of the dispute. |
