FUSION SYSTEMS CORPORATION IN JAPAN CASE ANALYSIS Mitsubishi's Attempts to Appropriate Fusion's Unique Technology Fusion

Systems Corporation, a high growth, $25 million high tech manufacturing

company, has competed successfully in Japan for over a decade. Today, Fusion's
ability to continue marketing in Japan is seriously threatened by efforts of
Mitsubishi Electric Company to gain control of Fusion's core technology
through manipulation of the Japanese patent system.
Specifically, Mitsubishi purchased and reverse engineered Fusion's product in
1977, subsequently filing about 250 patent applications in Japan surrounding
Fusion's core technology. Some of these applications cover basic aspects of the
Fusion equipment purchased by Mitsubishi; others seek to patent insubstantial
or trivial changes in this technology; many aim at technology long in the public
domain-the "ABC's" of microwave lamp technology. So broad is the reach of
these applications that if they are granted Fusion could no longer sell to
Mitsubishi the same lamp they purchased in 1977. If issued, these patents
threaten Fusion's market position in Japan and, ultimately, worldwide.
Fusion has attempted to achieve a fair settlement since 1985. Negotiations have
been unsuccessful thus far, first because Mitsubishi insisted that any agreement
include a cross-license to Fusion's core technology. Fusion could not agree to a
cross-license. The company could not successfully compete head-to-head with
Mitsubishi if both companies were free to market Fusion's technology.
Mitsubishi now insists instead on a cash payment and running royalty on all
Fusion sales in Japan, in payment for the use of "their" technology.
Unfortunately, the Japanese patent system as it currently operates allows a large
Japanese company, by filing a flood of questionable patent applications, to
overpower a smaller, foreign competitor and thus appropriate innovative
technology created elsewhere.

Fusion Systems Corporation:

An entrepreneurial start-up in 1971, Fusion today employs approximately 300
people. The company manufactures and sells patented high intensity microwave
lamp systems used in the production of semiconductor chips, optical fibers,
graphic arts films, printed circuit boards, packaging materials and many other
items. In 1986 Fusion took the bold step of establishing its own direct presence
in Japan by opening Fusion Japan K.K., a Tokyo office staffed by Japanese
nationals.
Fusion began selling its products in Japan in 1976 through trading companies. It
has won adominant market share against Japanese competitors, including
Mitsubishi, in key niche markets. About one-third of Fusion's sales are exported
from the U.S. and half of these exports are to Japan.
Fusion's Technology: Fusion's core technology uses microwave energy to drive
high power ultraviolet lamps. Conventional lamps use metal electrodes, like the
filaments in a fluorescent light, to power the bulb. Microwave lamps have no
electrodes. They operate with longer life, greater reliability, superior output
spectrum ("color"), rapid on/off and other significant advantages over
conventional electrode lamps. These benefits have made Fusion microwave
lamps the system of choice for many industrial applications.
Fusion pioneered the development of microwave lamps for commercial
applications in the early 1970's. Prior to that, low power microwave discharges
were studied in laboratories but never developed for industrial use. Fusion
invented and commercialized high power, reliable cost-effective microwave
lamp systems to illuminate large areas as required on industrial production lines,
introducing products in 1974.
Fusion has invested significantly in patents as part of its corporate strategy,
obtaining patent coverage on all of its basic design features and technological

innovations. Fusion holds patents in the U.S., Japan, Canada and European
countries.
Mitsubishi's Activities: Mitsubishi Electric is the third largest lamp producer in
Japan, with total revenues of roughly $12 billion a year. It is a key member of
the giant Mitsubishi Group, with total annual revenues in excess of $150 billion,
representing approximately 10% of the entire GNP of Japan.
In 1977, Mitsubishi purchased a Fusion lamp system. The following December
Mitsubishi began an intensive program of filing patent applications on
microwave lamps. Between December 1977 and March 1987, Mitsubishi
applied for some 250 patents on various aspects of this technology. 1 Some
cover features so routine (e.g., necessary control switches, clamps for mounting
lamp parts) they are unworthy of patent protection by U.S. standards. Many
cover designs substantially identical to those in the patented lamp purchased
from Fusion. Others seek patents on information generally known to microwave
engineers and used in both the 1977 Fusion lamp purchased by Mitsubishi and
microwave ovens in the 1970's.
Mitsubishi's basic patent approach has been to file large numbers of broad-range
patent applications they have adopted the attitude that standard practice in Japan
is to file as many and as broad a set of patent applications as possible. In the
U.S., it would be considered fraudulent and improper for a company to apply
for claims which it knows to be anticipated by prior art.
Early Stages of Fusion-Mitsubishi Negotiations: In 1985, Fusion initiated
discussions with Mitsubishi to avoid a long and costly legal battle through the
Japanese patent opposition system. Fusion proposed to forego opposing
Mitsubishi's patent applications in exchange for Mitsubishi's agreement not to
assert any of its resulting Japanese patents against Fusion. This would have
allowed each company to compete freely on the merits of its own technology.

After six months of negotiating these terms, Mitsubishi suddenly demanded that
Fusion also grant Mitsubishi a worldwide, royalty free license of all Fusion
lamp technology.
1- Although Mitsubishi claims to have begun microwave lamp research and
development in 1965, their 1965 patent covered only a low-power device
unsuited for commercial use. Their commercial designs occurred only after
purchasing the Fusion unit in 1977.
2- A Mitsubishi Electric Company executive was quoted in an August 27,1987,
Wall Street Journal article as follows: "When a vital technology emerges, we
make it a target and then make a concentrated effort to apply for patents."
addition, Fusion was to make substantial cash and royalty payments. These
Mitsubishi demands effectively ended the first phase of negotiations.
In 1986 and 1987 Fusion products rapidly gained market share in Japan,
displacing Mitsubishi microwave lamp products introduced in 1983-1984.
Mitsubishi responded by attempting to intimate Fusion's leading Japanese
customer, implying that Fusion's products infringe Mitsubishi's patent
applications, a tactic that is illegal under Japanese law.
More Recent Negotiations: Negotiations resumed in 1987. In September,
senior Mitsubishi officials agreed verbally to a one-way license to Fusion in
exchange for Fusion's cessation of opposition to Mitsubishi's patent
applications, with no payments by either party. When the agreement was drafted
a week later, Mitsubishi refused to sign. They made no claim that the written
agreement diverged in any way from the verbal agreement. To encourage an
expeditious settlement, Fusion added a one-time $100,000 license fee to
Mitsubishi to the terms of the agreement. Mitsubishi rejected this offer as a
nuisance amount.

In October, 1987, negotiators failed to return Fusion's phone calls or to meet for
further negotiations, refusing to meet with Fusion's president during his weeklong visit to Japan. Mitsubishi adopted the position that there is nothing to
discuss since Fusion did not currently infringe any issued Mitsubishi patents
and was not interested in cross-licensing.
In April, 1988, the Fusion-Mitsubishi dispute was raised as a major agenda item
at the US-Japan talks in Tokyo. At the insistence of Ambassador Michael B.
Smith, Deputy U.S. Trade Representative, Mitsubishi agreed to meet with
Fusion representatives but no settlement resulted. Negotiations continued
intermittently through 1988 and early 1989. In the glare of publicity, Mitsubishi
eventually dropped its demand for a cross license but now insists on an upfront
cash payment and running royalty on all Fusion sales in Japan-payment
tantamount to a tax on Fusion for doing business in Japan.
Fusion-Mitsubishi Technical Meetings and Analyses: In a series of 1988
technical meetings in Tokyo between Fusion and Mitsubishi patent attorneys
and technical personnel, Fusion demonstrated that three of Mitsubishi's key
patent applications are substantially identical to features in the Fusion lamp
purchased in 1977. Mitsubishi has been unable to adequately refute the
conclusion that they copied these patent applications from Fusion's product In
addition, Fusion's Japanese patent attorney noted that Mitsubishi has acted
improperly in the methods used to pursue these patent applications. Mitsubishi
later commissioned a technical study by the Stanford Research Institute. SRI
was asked whether the Mitsubishi lamp is a "clone" of the Fusion lamp. It is not.
The correct issue is not Mitsubishi's lamp but its patent filings, filings that
would make it impossible for Fusion to continue making its own products. SRI
concluded repeatedly that parts of the technology have been well known to
microwave engineers for many years. That, too, is correct. However, Mitsubishi
is now attempting to get patents on this public domain material,

In the interest of time, Fusion counsel selected three key patent applications,
but the same case could be made for many others. Making it impossible to make
microwave lamp products without violating their patents, if issued. It was
Fusion's contention that it made a substantial and unique contribution to the
field of micro wave lamp technology and that Mitsubishi has not offered
significant improvements to that technology.

Conclusion:
Fusion is not looking for trade protection. It is a highly innovative company
already competing successfully in Japan. Fusion seeks only the right to continue
marketing its own technology but finds itself fighting for its economic life
against a multi-billion dollar conglomerate. Were Fusion to yield to Mitsubishi's
cross licensing demands, there might be substantial royalties on Mitsubishi sales
of Fusion's innovations. But the products would no longer be made in the U.S.
by U.S. workers and this promising high technology would be lost to the
Japanese. Submitting to Mitsubishi's demands for a running royalty on all sales
in Japan constitutes an unfair and burdensome tax on Fusion's business-in
effect, buying back the right to use its own technology.
The misappropriation of intellectual property exemplified here is sufficiently
prevalent to make it a matter of public concern to U.S. trade officials and
legislators. While Fusion hopes for a private resolution of its dispute with
Mitsubishi, this case raises issues of public concern, as well. It's essential that
there be greater public understanding of the way in which the Japanese patent
system is manipulated by giant Japanese companies to the disadvantage of small
U.S. companies. The results of this manipulation include loss of U.S. exports to
Japan, appropriation of leading edge American technology by the Japanese and
economic damage or destruction of innovative U.S. companies.