Time Warner, Inc. and the ORC Patents

Optical Recording Corporation (ORC) was incorporated by John Adamson in 1984 to exploit a technology invented by James T. Russell, an American inventor, working in laboratories in Salt Lake City, Utah. Due to the desperate financial straits of SLC1, his employer, Russell had made little progress in the previous two years and both he and SLC were anxious to secure a buyer for the technology.

James T. Russell, an American inventor, idea initiator of recording a digital audio signal optically who was working in Salt Lake City, Utah

John Adamson 1972 MBA graduate from the University of Western Ontario, who was working with Dominion Securities in Toronto, Canada

Dr. R. Moses and Dr. A. Stein – two Toronto businessmen

Soon before that time Dr. R. Moses and Dr. A. Stein – two Toronto businessmen had been working for almost a year to buy Russell’s technology. Another guy Wayne White put John Adamson in contact with those businessmen when Adamson told him that he was thinking to start his own business preferably in electronics and software. That’s how Adamson got involved in project and later transferred Russell’s technology to Toronto by convincing those business men on the condition that he secures the necessary funding for a technology transfer by 1 April 1985. Later on he got funding from debentures (unsecured bonds) and completely hired Russell and transferred SLC’s technology to Toronto.

From Adamson’s viewpoint, Russell’s greatest achievement was not any one of his inventions, but his success in demonstrating the technical feasibility of recording a digital audio signal optically. Before Russell had successfully demonstrated this technical feat in 1975, no one else had even attempted it. By early 1984, however, the electronics trade papers were reporting that Sony and Philips were developing a so-called compact disc player.

Adamson did not see much point in continuing audio research toward a digital optical tape recorder however, with the insight of Russell, Adamson envisioned books, medical records, equipment schematics, maintenance instructions and records on this type of device - and all pocket-portable.

In order to determine what protection the existing Russell patents would provide to the new research focus, Adamson employed services of John Orange, a patent agent who informed Adamson that the Russell patents may not provide much protection to the new company’s research focus, as the most relevant patents appeared to be limited in their claims to audio applications. He concluded Philips and Sony’s newly released compact disc players and discs might infringe one or more of the claims in the Russell patents. What a finding!

Adamson met with Philips Corporation at its NY office in early summer 1986 with the purpose of licensing agreement because he thought ORC might get much money from Royalty fees. But the first meeting had no progress towards licensing agreement. Attorney representing Philips claimed that no patents were infringed and further that there was some question about the validity of the Russell patents in the first place.

After that Adamson went to Tokyo to present that case for Far East Associates, a technology licensing agency based in Tokyo. In his next visit, the most important of these meetings was with Sony Corporation, as the ORC team felt certain that Sony’s decision on whether to license the Russell’s patents would predetermine ORC’s success with all other firms in Japan. (It was a Philips-Sony partnership that had launched the compact disc and taught an industry how to make them.) Initially Sony had a strong defense and did not want to make licensing agreement. During that time ORC had also other problems with paying back the funds and investments. Despite all of those distractions, Adamson decided that ORC had to maintain the appearance of complete stability, control and competence, in order to avoid “losing face” before their Japanese prospective licensees.

By SONY’s second meeting with ORC, the Sony team stated that they wished to deal directly with ORC. They also indicated that if Sony agreed to a license, they would want the right to act as ORC’s exclusive agent to license all other manufacturers based in Japan, for their CD player production. This license, however, would only apply to CD players, with Sony assuming the role of exclusive agent, possibly for all of Asia. Adamson accepted this protocol with Sony, but he had to trust that Sony was in earnest in their desire to be the exclusive agent and not just leading ORC toward a dead end.

So a pattern developed. Every four to eight weeks, Adamson and Orange traveled to Tokyo, Osaka and other cities in Japan to hold patent infringement and licensing discussions with the major Japanese consumer electronics firms such as Matsushita (Panasonic), Toshiba, Hitachi, Sanyo, Pioneer, Sharp and particularly Sony. As the months passed, it was becoming increasingly clear to all that the Russell patents as presented by the ORC team, could withstand the invalidity challenges. Equally important, the compact disc technical standard that ensured manufactured compatibility across all compliant CD products included techniques claimed in the Russell patents. To comply with this CD standard was to infringe the Russell patents! In short it appeared that the Russell patents were valid and infringed by all CD products!

Finally in the fall of 1987, Adamson realized that neither Sony nor any other firm was likely to accept a license without more pressure that’s why, with nothing left to lose, Adamson flew to Tokyo in mid-January 1988, for a final meeting with Sony Corporation. He warned Sony that ORC is going to be bankrupt, if it announces bankruptcy Russell patents would revert to Salt Lake City a former owner of the technology which might sue Sony again further on. Only after that, Sony agreed to sign license agreement with ORC. The license, however, would only cover

CD players, not compact disc media. Further, ORC had to significantly reduce their royalty demands, accept Sony as the exclusive agent with full authority to license all CD player manufacturers based in Asia and pay Sony an administrative fee for their exclusive agency representation out of the royalties to be received. The proposal also required that ORC transfer the right to sue Asian CD player manufacturers for patent infringement to Sony as their exclusive agent. Adamson felt he had no choice but to accept this proposal if he wished to maintain his control of the Russell patents.

From this shaky last-minute effort, Adamson had managed to retain his full ownership of the Russell patents through ORC. By licensing Sony, ORC now had a royalty cash flow with which to maintain the research program underway in Toronto, as well as the resources to fend off the law suits from the Government of Canada and SLC. For the first time in its existence, ORC’s cash flow was positive and in that sense, time was on for ORC. In the summer of 1988, however, ORC succeeded in licensing the Philips Corporation for both CD players and media and with this success, somewhat confirming Sony’s earlier license commitment, Sony agreed to sign a license for CD media in November 1988. By the end of 1988, ORC had a cash position well in excess of US$10 mln and the licensing program was on a roll.

Among the more difficult challenges that ORC faced in mounting the licensing program was the determination of the size of the infringing production unit volumes and sales revenues. Nevertheless in the case of CD media, it was pretty obvious that the five sisters of sound; Philips (Deutsche Grammophon), Sony (Columbia), Time-Warner (Warner), EMI (London and Angel) and Bertelsmann (RCA) were the largest manufacturers of CD media.

WEA Manufacturing, a subsidiary of Time Warner Inc. was likely to be the largest compact disc maker in the United States by production volume, after American subsidiaries of Sony and Philips-Dupont. Commencing in 1987, Adamson held several discussions, by mail, telephone and face-to-face meetings, with Time Warner’s in-house counsel. These discussions lead nowhere however as Time Warner’s often-repeated view was the standard “non-infringement and invalid patents”. Adamson requested Time Warner to pay modest $ 3mln just to avoid patent infringement, and later he had no choice except filing the issue to the court when Time Warner did not change their position. Adamson has made a clever decision, as he first made a survey by employing consultants on how American people attitude if Canadian company sues American corporation to protect an American patent right. From the survey Adamson has got positive results and put the ball in the court against Time Warner.

The trial began in the last days of May 1992, and it was to run for five and one-half weeks. Adamson stayed in Wilmington and attended every court session, given the importance of its outcome for ORC. For the trials, around 30 attorneys from the entire recording industry, including a few Japanese and firms with still unlicensed CD plants in the United States, came to observe the trial while Adamson had 5defendents. Another challenge was explaining the technical concept to the judge who does not have any knowledge on this sphere.

ORC claimed 6cents on each CD.s sold by Time Warner since 1986 till 1992 which is 450 mln Disks with 27 mln Royalty fees. In spite of the good efforts of the Adamson’s team and with several other strong witnesses, including Russell, the inventor, and the prospect of an enormous court award, all was not well. After the court appearance by the Philips attorney, Adamson believed that ORC’s decision to sue Time Warner might have been wrong as he had already spent nearly 1 mln USD for court issues.

The Time Warner litigating team had mounted a very credible defense. They seemed to cloud the technical issues of patent validity and product infringement as these related to the Russell patent claims and the compact disc technology, so that even Adamson found himself confused with ORC’s claims from time to time. He had little hope left that the jury would be able to sort the things out for his side. Moreover he started worrying about the collapse of Sony’s quarterly royalty fees if ORC loses the case.

Over the course of the six years from 1986 to 1992, Adamson had been drawn away from ORC’s research effort and future prospects and ever deeper into patent licensing and then this litigation struggle. As he had testified in the Time Warner trial, “there seems little point in investing in the creation and development of new intellectual property rights if major industrial firms are prepared to ignore and infringe existing patent rights that you already own.” Adamson felt that he had bet ORC’s entire future on the outcome of the court case against Time Warner.

That’s where the case is over, actually there is nothing mentioned about whether ORC lost the case or won. Now what do you guys think what might be the judge’s decision?

According to our further research on ORC and Time Warner’s we have found that ORC

won more than $30 million from Time Warner in a suit that gave ORC 6 cents for every CD the

company manufactured from 1986 until 1992.

By 1985, Russell held over 25 patents to various technologies related to optical recording

and playback. Russell's intellectual property was purchased by Optical Recording Corporation

(ORC) in Toronto in 1985, and this firm notified a number of CD manufacturers that their CD

technology was based on patents held by ORC. In 1987, ORC signed an agreement with Sony

whereby Sony paid for licensing of the technology. Further licenses followed from Philips and

others. Warner Communications did not sign, and was sued by ORC. In 1992, the large CD

manufacturer, now called Time Warner, was ordered to pay ORC US$30 million in patent

violations.

By MBA Student of Asian Institute of Technology – Ilhomjon Isomiddinov