Of all the technologies Japan has staked out since World War II, video is the crowning success story. In 1992 alone, shoppers around the world bought more than 50 million VCRs and camcorders, nearly all of them built by Japanese companies and their Asian licensees. It's a $17 billion market. So when Eastman Kodak Co. sued Sony Corp. in Texas recently for allegedly violating its patent on the recording technology used in many video machines, the action sent a chill through Japan's electronics sector.

The two companies are digging in for what could be the fiercest patent battle of the 1990s. If Kodak wins, it will likely demand hundreds of millions of dollars in damages and royalties from Sony and from other Japanese companies who rely on the same technology. In an encouraging sign for the Rochester (N.Y.) company, it recently won a patent on the disputed "microgap" technology in Japan, reversing a 1990 decision by Tokyo's patent office. Kodak's patent covers the optimal size for tiny gaps in magnetic recording heads used to store images on tape in most camcorders and VCRs. Sony is fighting back: As it prepares for a confrontation in U.S. courts, it's also seeking once again to overturn Kodak's hard-won Japanese patent. The technology, says a Sony official, "was in the public domain long before" Iodak filed its patent. Kodak declines to comment.

Whichever side wins, the clash is bound to touch one of the rawest nerves in the U.S.-Japan technology relationship: intellectual property rights. In the past two years, U.S. companies and private inventors have filed more than 100 patent and copyright suits against Japanese companies. Encouraging these actions is a string of huge damages American juries have awarded U.S. patent holders. Under siege, the Japanese have become fierce street fighters, boning up on U.S. law and aggressively countersuing (table, page 100).

In the new, confrontational climate of U.S.-Japanese relations established by President Clinton, "I'm sure these kinds of disputes are going to be raised more and more," says Mark Foster, a Portland (Ore.) technology attorney and former U.S. legal counsel in Tokyo. "It's only a matter of time before the Clinton team takes these up." Indeed, many American trade experts consider Japan's long delays in granting patents a nontariff barrier. The U.S. Trade Representative's Office says it is studying the patent disputes with the possibility of raising the issue in bilateral talks. And Clinton just nominated an aggressive advocate of patent and copyright enforcement, Bruce Lehman, 47, as commissioner of patents and trademarks.

LESS RED TAPE. The patent wars go to the heart of U.S.-Japanese relations. Facing growing costs, big companies in both countries are pooling technology. Collaborations such as the chip partnership of Texas Instruments and Hitachi, AT&T and NEC, and of IBM, Toshiba, and Siemens reduce licensing burdens and make it easier for the partners to strike bargains because they can negotiate groups of patents. By raising the cost of infringement, patent battles have hastened the rush to cross-licensing and alliances. But they've also sown mistrust, making most high-tech alliances less productive than they might be otherwise.

At the same time, the patent battles close doors to dozens of smaller companies that lack the money to fight drawn-out court battles and don't possess the technological assets with which to barter. Says Jerry Rogers, president of chipmaker Cyrix Corp. in Richardson, Tex.: "If Intel had to pay the kind of price [in litigation] that we have to pay, there wouldn't be an Intel today." The patent clashes also add to overall costs of making goods. "Companies putting out good, cheap products are getting dragged down, and the additional cost will land mn consumers," says Hisao Yuasa, general manager of the legal office at Ricoh Co. in Tokyo.

Even so, the potential costs haven't dampened the litigation frenzy. U.S. electronics companies for years have blasted Japanese rivals for ripping off ideas and rushing them to market. Finally, courts in Japan and America are lending a sympathetic ear. Patent holders have won a series of high-profile victories against Japanese companies in the U.S., culminating in Honeywell Inc.'s defeat of Minolta Camera Co. in 1992. Minolta was forced to cough up $127 million in settlement fees and license payments for autofocus technology covered in Honeywell's patents. Honeywell then collected an even larger sum from more than 10 other camera makers, pushing the total over $300 million.

The Kodak-Sony showdown is now raising the stakes even more. In 1979, Kodak filed a patent for microgap technology based on research by James U. Lemke of its Spin Physics subsidiary. Although a U.S. patent was issued in 1981, the Japanese Patent Office rejected Kodak's application when Sony and other Japanese companies challenged it. Sony claimed that the move to narrower gaps was a well-established industry trend.

In subsequent meetings, however, Kodak was able to persuade Japanese authorities to grant the patent. The approval in April lends tacit support to Kodak's suit in the U.S., though there's a downside as well to the timing: Kodak is launching electronic imaging based on compact-disk technology, on which Sony owns some key patents. Kodak declines to comment, but experts say the U.S. giant will require cooperation from Japanese consumer electronics companies that its suit is starting to alienate. Sony and others say they intend to challenge the Tokyo patent office decision.

In Japan, meanwhile, the string of legal attacks has become fodder for anti-Americanism. Last summer, TV announcer Soichiro Tahara railed against patents as a "nuclear weapon prepared by America. People everywhere will be frozen, unable to produce anything." Others decry the American jury system, which they argue is biased against Japan.

The Japanese apparently have decided that the best defense is a strong offense. Company executives have buried themselves in books on the U.S. trial system and patent code. Scores of company recruits have been sent to U.S. law schools while American lawyers and patent scholars are jetted to Tokyo. Based on U.S. legal advice, the Japanese also are trying to bog down their accusers. In the past two years, six major Japanese corporate defendants in patent trials have wheeled around and sued their accusers: Fujitsu and Sanyo Electric sued Texas Instruments, hoping to escape paying heavy licenses on its integrated-circuit patents. Mitsubishi Electric Corp. sued Wang Laboratories Inc., claiming that demands for royalties on Wang's semiconductor-related patents violated American antitrust law. And Ricoh countersued Honeywell for allegedly violating a Ricoh patent on air-conditioner sensors.

SUMO MENTALITY. Can the patent wars be defused? The best way, say experts in both countries, would be to harmonize the starkly different patent systems. The U.S. grants patents to those who claim to have invented something first. In Japan and most other countries, patent rights go to whoever first files an application. Applicants and their inventions are kept secret in America until a patent is granted. But in Japan and Europe, the information is published 18 months after filing, which gets technical data into the public domain sooner. Most important, American inventors can patent an invention and all obvious spin-offs in a single application. Authorities in Japan grant separate patents for minor variations.

Nobody doubts that the Japanese and European systems are tougher on inventors: Publishing information encourages imitators. And the flood of minor applications creates horrendous backlogs. An electronics patent filed in Tokyo today would take at least five years to clear, instead of two years in the U.S.

But in the current climate, it's hard to see how the patent systems can be harmonized. The epic Kodak-Sony case suggests that the "yokozuna, or sumo champions, of America and Japan are squaring off for battle," says Tokyo attorney Toshiaki Hasegawa. As long as the costs--and profits--of fast-moving technology are so steep, there's little sign that the courtroom fighting will fade anytime soon.

        EASTMAN KODAK SUES SONY in Texas, claiming patent infringement for recording 
      heads used in VCRs and camcorders.
        IBM SUES KYOCERA in Tokyo for selling personal computers containing 
      proprietary IBM operating software.
        HONEYWELL WINS $127 MILLION in autofocus suit against Minolta. Then, settles 
      with more than 10 other Japanese companies. Total gain: $300 million.
      patents for image sensors in videocameras and faxes.
      imaging patents.
        AMGEN WINS SUIT AGAINST CHUGAI, which stops distributing contested drugs.
      inspection systems declared invalid.
        RICOH SUES HONEYWELL in New Jersey court over sensor patents.
        MITSUBISHI ELECTRIC SUES WANG claiming it violated U.S. antitrust laws in 
      efforts to enforce patents on chip modules.
        SANYO ELECTRIC SUES TEXAS INSTRUMENTS in San Francisco, claiming TI's 
      coercion over chip licensing breaches antitrust laws. The parties settle out of 
        FUJITSU SUES TI in Tokyo to exempt Fujitsu from TI's chip patent. 
Before it's here, it's on the Bloomberg Terminal. LEARN MORE