Elpida's foreign case gets U.S. recognition; stay hearing continued

By Jim Witters

Wilmington, Del., April 18 - Elpida Memory, Inc. received final U.S. recognition of its bankruptcy proceedings in Japan on Wednesday, but the company's request for expansion of a temporary stay of litigation met with mixed response from the U.S. Bankruptcy Court for the District of Delaware.

Judge Christopher S. Sontchi granted the extended stay in nearly all of a series of patent-infringement lawsuits brought against Elpida, its U.S. subsidiary and downstream customers who included the company's dynamic random access memory (DRAM) cards in products they made or sold.

Sontchi exempted three cases - the one before the International Trade Commission, one brought my Mosaid Technologies Inc. and one by Round Rock Research, LLC.

The Mosaid case was the subject of lengthy testimony during the April 18 hearing, which is scheduled to resume on May 10.

As previously reported, Elpida filed its Japanese insolvency proceeding as a result of the historic appreciation of yen, the sharp decline in DRAM prices because of an intensification of competition in the industry and the sluggish demand for DRAM stemming from a severe flood in Thailand.

Elpida's position

Elpida needs a stay blocking all litigation against the company and its downstream clients and customers during the bankruptcy case, because responding to discovery requests and handling other case preparation would cost too much in terms of money and focus, debtors attorney James I. McClammy told the court.

Applying the stay only to Elpida and allowing cases against its customers to move forward still would necessitate heavy involvement by Elpida, because all the cases hinge on whether Elpida infringed on patents, McClammy said.

"The debtors need the stay to provide breathing room and the protection of the debtors' assets," he said.

The downstream clients need the expertise and information only Elpida can provide regarding how its products were developed and manufactured without infringing on any other patent rights, McClammy said.

If a case against non-debtors proceeded without Elpida's involvement, a court finding that the patents were infringed could then be persuasive in future litigation in which Elpida is a defendant, he said.

Elpida has been paying attorneys fees for all its downstream clients, including those who used the company's dynamic random access memory in their products and those who sold the finished products, such as Best Buy and Walmart, McClammy said.

He said allowing the cases to move forward would further strain a company that already is struggling with a cash shortage.

Elpida has a written indemnification agreement with one customer, Buffalo Inc.

Mosaid Technologies objections

The expansion of the court's stay of litigation to non-debtor parties runs counter to case law and the U.S. bankruptcy code, said Mark D. Gately, Mosaid's attorney.

Mosaid sued Elpida, Buffalo and Axiontech Technologies in the U.S. District Court for the Eastern District of Texas, claiming seven infringements of its patent rights.

While acknowledging that the court has the authority to include non-debtor parties in the stay, Gately asked that the court not use its discretion to do so.

Neither Mosaid nor the court can be certain what the Buffalo indemnification agreement calls for, because it has not been entered into evidence in the U.S. bankruptcy case, Gately said.

McClammy said the agreement exists only in Japanese.

"We don't know the breadth of it or to whom it applies," Gately said, adding that he learned of the agreement on April 17.

Including the non-debtors in the stay of litigation gives them a significant competitive advantage against companies using DRAM from the nine of the top 10 suppliers who paid licensing fees to Mosaid, Gately said.

Sontchi said that if another court determined that Elpida did not infringe on patent rights, those cases would end. He then asked Gately if another court's finding against the downstream customers would mean that under the law Elpida was infringing on patent rights.

"The finding would not be binding on Elpida, because they are not a party to the case," Gately said. "But it certainly wouldn't help them."

Round Robin case

Brian Farnan, representing Round Rock Research, said his client was give just two days' notice of the hearing on the stay.

The lawsuit in which Round Rock is a party is in the U.S. District Court for the District of Delaware and involves claims of patent infringement by Asustek Computer Inc., Dell Inc., Acer Inc. and Amazon.com Inc. in computers, notebooks, laptops and the Amazon Kindle e-reader, Farnan said.

Ten or 11 patents are at issue, including a patent on a radio-frequency identification device (RFID) in the Kindle, he said. Many of the patents in question are parts of systems that "have nothing to do with Elpida," he said.

The bankruptcy court has no jurisdiction in the Round Rock cases and should not be involved, Farnan said.

He dismissed the notion that participation by Elpida is essential to the defense of non-debtor entities.

The companies Round Rock is suing are large, independent companies capable of defending themselves in court, he said.

"Dell is not going to flea markets to get products for their computers. They don't put things into their products without knowing how they work," Farnan said.

McClammy said he is not trying to stay any of the Round Rock cases that make no claims against Elpida.

The debtors are named in the Amazon lawsuit, but the others could proceed to a point when Round Rock decides to involve Elpida, McClammy said.

Sontchi's comments

Sontchi said he would approve the extension of the litigation stay for all cases in which no objection was filed with the court, carving out Mosaid and Round Rock.

The stay is not permanent, Sontchi said.

A large part of the insolvency case will be concluded by the end of the summer, with the sale of the company at auction and the adoption of a plan of reorganization, he said.

For Round Rock, Sontchi ruled that the lack of notice entitles Round Rock to more time to respond.

He also said he has "serious doubts" about whether the bankruptcy court holds jurisdiction to stay the Round Rock lawsuits.

Sontchi told the debtors and Round Rock to confer and determine a date in "three weeks or four weeks" for a hearing on the Round Rock stay.

"Each side can make further argument" regarding the proposed stay, "but the existing record is very limited," Sontchi said.

In the Mosaid case, Sontchi said he needed additional evidence before making a determination.

After hearing about three hours of testimony from Kota Takemura, Elpida's professional in charge of licensing, Sontchi declared that "we have made progress on the record."

He determined that the Mosaid case remains "in the early stages of discovery, and that is significant."

Sontchi also said he developed a better understanding of the relationship between Elpida and its customers.

But the evidentiary record remains incomplete, he said, and the parties need to review the indemnification agreement between Elpida and Buffalo. He ordered that it be translated to English, with a copy going to Mosaid counsel under a confidentiality agreement.

"Elpida has at least established a prima facie case to extend the initial order (granted March 20), but there are open issues to flesh out," Sontchi said.

Those issues include the question of Elpida's legal obligation to Buffalo and other downstream customers and the possibility that a stay may cause "significant prejudice" to Mosaid, Sontchi said.

The judge did not close the hearing, which is scheduled to resume at 12:30 p.m. ET on May 10.

Sontchi suggested that the Round Rock issue could be placed on that agenda. He said May 11 also is open on the court's calendar.

Elpida, a Tokyo-based manufacturer of DRAM integrated circuits, filed for bankruptcy in the United States on March 19. The Chapter 15 case number is 12-10947.

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