Oppenheimer’s Second Misleading Report after Whitewashing UDC at Its Conference

Oppenheimer has put out another report supporting the views of Universal Display Corporation (“UDC”; NASDAQ: OLED) management – that its patents are not weak and that litigation does not pose a material and imminent risk to UDC’s contractual Samsung revenues and its entire patent troll business.** Once again, Oppenheimer has made blanket assertions without any reference to independent outside sources and without discussion, this time after shielding UDC from questions at an Oppenheimer conference. We think this blatant reliance on the representations of interested parties instead of disclosing its due diligence and reasoning is harmful to investors. The fact that Oppenheimer has suddenly become “more confident” in the strength of UDC’s patents, apparently only based on a shallow, undisclosed discussion with UDC, seems like a promotional tactic that can only exacerbate investors’ misunderstandings of UDC. Oppenheimer has not addressed the substance of our original report on UDC’s November hearing, which is our first in a series of criticisms of UDC’s disclosure policies focused on the weakness of its key patents versus the “dramatic breakthrough” claims it makes to investors.

The truth is that the proceedings at the European Patent Office (“EPO”) challenging UDC’s “dramatic” key patents, especially European Patent No. 1449238 (“EP-238”), pose an imminent and serious threat to UDC that we believe is already reflected in the undisclosed terms of the Samsung contract. Oppenheimer does not acknowledge management’s unwillingness to disclose material information and is dismissive of the EPO proceedings and the entire jurisdiction of Europe as not representing “any serious threat.” Only a challenge “in US federal courts” would pose such a serious threat, according to Oppenheimer. We explain below the facts that make Oppenheimer’s view appear wholly misguided and inexpert. This is based on publicly available information about procedures at the EPO compared to the U.S. Patent and Trademark Office (“USPTO”) and our discussion with patent counsel, who has provided expert guidance on these issues in a peer-reviewed journal, and who made a filing in the EP-238 case.

The EPO is the most efficient venue to cause complete revocation of UDC’s “dramatic” key patents. Unlike the EPO, the USPTO does not have an opposition procedure, where newly granted patents may be opposed by any party. The EPO opposition procedure allows an opponent to challenge virtually any aspect of a patent, unlike in the U.S., where post-grant review of patents is materially narrower. An EPO opposition proceeding is significantly better for the opposition in a number of ways. EPO adjudicators are generally more technically proficient with backgrounds more suited for factual reviews, according to experts. The U.S. system, by contrast, tends to be more complicated, more expensive, and less likely to result in full revocation of a patent. The USPTO procedure is far less fact-based than the EPO, which allows broader challenges, including to UDC’s reliance on a simple “one embodiment” experiment. Oppenheimer’s blanket statement about “US federal courts” misunderstands the legal and procedural deficiencies of the U.S. system, especially at the appeal level. The U.S. has no final appeal process in its patent system and relies on general judges; the EPO’s Boards of Appeal is final for a market with a population of over 500 million. A revocation of UDC’s patent in Europe first would make revocation in the U.S. easier.

The EPO is ideal for a serious opponent seeking full revocation of all UDC’s overlapping “dramatic” key patents claims for another reason. Since the EPO’s Boards generally have backgrounds that are better technically matched to the subject matter and the EPO allows broader fact-based challenges, UDC has been forced to make dramatic admissions, or confessions, that its opponents can use in the U.S. and in other actions.

Crucially, an EPO decision to revoke UDC’s patent could allow for a much easier path to revocation in the U.S. system, with its complexities and limitations, and in other jurisdictions. The EPO system presents a far quicker path to absolute finality. Any decision by the USPTO can be subject to a lengthy appeals process in the general civil justice system, but if the EPO’s Boards of Appeal revoke EP-238, the decision will be final for ALL member states. UDC will not have appeal rights in any of the 38 countries that have signed the European Patent Convention.

Oppenheimer referred to UDC’s deal with Samsung, by itself, as a supposed validation of the strength of UDC’s key patents, without any further explanation. This does not seem to reflect an understanding of the internal decision-making at Samsung and the necessity of Samsung to obtain a freedom-to-operate opinion from patent counsel.

Samsung’s decision-making was undoubtedly guided by a legal “freedom to operate” and a cost comparison of having to pay-off a patent troll in an infringement lawsuit with licensing payments that could be meager relative to the scale of Samsung’s operations. This decision-making involves an assessment of Samsung’s total leverage as the only mass manufacture of OLED displays. UDC has redacted key portions of its August 2011 agreements with Samsung, including the rights that Samsung has to cancel the agreements in the event that a key patent is revoked and all other terms that protect Samsung.

Based upon a comparative analysis of the 2005 and 2011 Samsung agreements, and the 1998 DARPA public disclosures, which we have had reviewed by experts, we believe that Samsung’s cancelation rights, which UDC has petitioned the U.S. Securities & Exchange Commission (“SEC”) to hide from investors, are concrete and extensive. Furthermore, we see this as a clear explanation of UDC’s irregular revenue recognition policy that has been the subject of inquiries by the SEC. UDC’s explanation of its revenue recognition to the SEC was even more irregular, referring to “obsolescence” as a reason why UDC only recognizes license fee revenue only in the quarters when they are actually paid, which does not appear consistent with the most basic revenue recognition principles of U.S. GAAP, if in fact the fees are not contingent.

These matters that are central to valuing UDC shares – the validity of its patent claims, the science and experimentation behind those claims, and legal procedures that could result in revocation of a patent – are very complex. We believe investors deserve a full airing of these issues, not a whitewash.

** Oppenheimer’s report, dated Sept. 18, 2013, was issued after an Oppenheimer investor conference where UDC management gave a presentation. The report states:“We continued our discussion around the patent portfolio and became more confident in its strength. For example, we were reminded that prior to signing a license agreement, Samsung spent considerable time reviewing the validity of UDC’s patent portfolio. Additionally, UDC’s core patents haven’t been challenged in US federal courts—we believe this would be one of the first places we’d see any serious threat to its portfolio. And finally, after reviewing recent cases, we do not believe anything new has been recently disclosed to negatively affect our view.”

Posted in Complete Report Record, Current Coverage, Universal Display Corporation

Manuel Asensio doesn’t bet often. But when he does, it’s wise to pay attention.

Paul Kaihla
eCompany Now
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