Innovation is not enough

Here is an excerpt from the 1990 book
Agents of Influence:
How Japan Manipulates America's Political and Economic System

by Pat Choate.
Paragraphs 8.3.1-5 just introduce one of the main characters
and set the background;
the main story begins with 8.3.6.
The emphasis is added.

Chapter 8
The Politicians’ Politician


[pages 125-131]

James [H.] Lake presents another prominent example
of someone who advises the President on politics
while lobbying on behalf of the Japanese.
Lake was George H. W. Bush’s press adviser in the 1988 presidential campaign.
During Lake’s tenure on the campaign,
he was also a lobbyist on the payrolls of
Mitsubishi Electric,
the Japan Auto Parts Industries Association,
and Suzuki.

Lake was an integral cog in the Republican campaign machine
in 1980, 1984, and 1988.
More important to his success as a lobbyist, however,
is his intimate friendship with Clayton Yeutter,
U.S. Trade Representative from 1985 to 1989 [and then Secretary of Agriculture].

in 1988, a veteran investigative journalist from Japan noted that
it was common wisdom in Tokyo business and government circles that
one of the surest ways to gain access to and influence with Yeutter
was to hire James Lake.
And in case after case, that’s just what the Japanese did.

In 1987, during a critical moment in
the market-oriented, sector-selective (MOSS) auto parts negotiations,
for instance,
Lake was hired to represent the interests of
the Japan Auto Parts Industries Association.
Lake and his staff worked closely with the Senate and the Commerce Department
to ensure Japan’s success in persuading the American government
to adopt its weak MOSS proposals.

When the U.S. government found that
Mitsubishi Electric and other Japanese companies
were dumping semiconductors on the U.S. market,
Lake gave Mitsubishi the uncontested access it needed
to persuade the USTR and the rest of the Reagan [40] Administration
to lift the sanctions that had been placed upon Japanese electronics companies.

The clout that Lake offers his clients is illustrated by
the entrée he sold to Mitsubishi—
the world’s largest electronics conglomerate—
when he signed on as their lobbyist
in a battle against Fusion Systems,
a tiny high-tech firm in Rockville, Maryland.
Then Lake showed America how effective a true politician’s politician can be.

In the 1970s,
Fusion Systems invented and produced
a unique kind of commercial ultraviolet curing equipment.
Mitsubishi soon began a major effort
to wrench this proprietary technology away from Fusion Systems.
Fusion sought help from the American government.
Lake was hired by Mitsubishi to see that Fusion did not get it.

The story begins with Don Spero, a prototypical American entrepreneur.
Spero—a tall, slim former athlete—
is the last American to win a world championship in single sculling.
Spero first traveled to Japan in 1964,
when he competed in the Tokyo Olympics.
He holds a Ph.D. in plasma physics from Columbia University.

Fusion’s production facility,
located [at the time of writing this book, 1990]
in a suburban Washington office park,
looks more like the most advanced high-technology Japanese plant
than it does a typical American factory.
Its employees resemble graduate students more than factory workers.

Fusion’s principal product is
a high-power microwave lamp system used in industrial production
The core of that system is an ultraviolet (UV) lamp.
When bombarded with microwaves,
the lamps emit UV rays
that instantly dry special inks, adhesives, and other materials.
Once twenty to thirty hours were needed to dry the inks on plastics.
Fusion’s UV system can do the same job in a matter of seconds.

Spero and his colleagues developed their system for
a wide variety of commercial uses
and carved out a niche in a highly specialized market.
Fusion’s lamps are used in the production of
semiconductor chips, optical fibers, graphic arts films,
and printed circuit boards.

Unlike most small U.S. companies,
Fusion markets its products extensively in foreign countries.
Almost one-third of its sales are exports; half of these are to Japan.
Fusion’s conflict with Mitsubishi began with one of those Japanese sales.

In 1977, Mitsubishi Electric bought a Fusion lamp.
Over the next decade,
Mitsubishi flooded Japan’s Patent Office with some 257 applications
surrounding the technology in the Fusion lamp.
If successful in obtaining these patents,
Mitsubishi could actually prevent Fusion from selling its own products in Japan.

Mitsubishi was using a common Japanese tactical maneuver
called “patent flooding.”
Japanese companies file enormous numbers of patent claims
on such generic technologies as screws, clamps, or other features
that surround or support an invention.
At a Senate hearing in June 1988,
Maureen Smith, Deputy U.S. Secretary of Commerce for Japan,
explained how this tactic is used against foreign inventors:
It is common practice for a Japanese company
to learn of an invention that it would like to have,
and to surround the patent applications for that invention
with its own applications.
These applications may cover what are, taken individually,
relatively insignificant aspects of the new invention.
However, if enough of these “nuisance” patents are filed,
the inventor of the original product may discover that
he is unable to produce his [own] product
if these [nuisance] patents are granted.

Once a Japanese company files these nuisance patents,
Smith added, it will
“offer not to apply them against the original inventor of the product,
but at a price.
The price is generally
a licensing or cross-licensing arrangement
that gives the Japanese company rights to the technology in question.”

Time after time,
Japanese companies have used this tactic to share their best technology
often leaving them with nothing more than token royalty payments.

Frequently, when this occurs,
the Japanese firm adds a secrecy clause to the contract,
thereby prohibiting the U.S. firm from revealing
either the deal or the practice of patent flooding.
This has enabled the Japanese to use this scheme—largely unnoticed—for years.
Regis McKenna, an adviser to Apple Computers,
estimates that between 1950 and 1978,
Japan paid $9G for 32K technology licenses that are actually worth $1T.
(In other words, they paid less than one cent on the dollar.)
Most of these licenses were acquired from small, innovative American firms.

[One can only be amazed that
all those people who keep claiming that
innovation is the answer to America’s economic woes
totally fail to mention this issue.]

Only a handful of American companies have the financial resources
to fight a large Japanese company in Japan’s parochial legal system.
To contest each initial application in a patent-flooding case costs $3K to $5K.
To appeal applications can cost as much as $100K
and take five to ten years.
For Fusion, the cost of litigating the case from start to finish
could easily have come to $25M—
or as much as the firm’s revenues for one year.

Mitsubishi’s patent siege on UV microwave lamp technology
placed an impossible financial drain on Fusion’s limited resources.
In 1985,
Spero approached Mitsubishi with an offer:
“Why don’t we just agree that, in Japan,
you will not assert your patents against us?
In exchange, we will agree not to challenge your applications,
and together we’ll just compete for the market.”
Mitsubishi agreed.
Its price:
a royalty-free, worldwide cross license to Fusion’s core technology.

It was a counteroffer Spero had to refuse.
He explains:
“If we gave Mitsubishi the unlimited right to use our proprietary technology,
Fusion would be out of business in five years.”

So Spero began a long-term struggle to defeat
the most important patent applications Mitsubishi had filed
to “surround” the UV lamp.
Spero claims he knew the early cases would be legal “slam dunks”
for his company.
After all, the technology under dispute was virtually identical
to that in the lamp Mitsubishi Electric bought from Fusion in 1977.
And sure enough,
when the first two applications were reviewed two years later,
the Japanese patent examiner found in Fusion’s favor
and denied the issuance of Mitsubishi’s patents.
Still, the matter was far from settled.

Mitsubishi demanded a review by
a three-person tribunal from the Japanese Patent Office.
Conveniently for Mitsubishi,
MITI—which is charged with helping Japanese firms
acquire advanced foreign technologies—
is also responsible for Japan’s patent system and its tribunal reviews.
In January 1987, the MITI/Patent Office tribunal
overturned the rulings favoring Fusion.
It ordered the challenged patents to be issued to Mitsubishi.
At the same time, Fusion learned,
Mitsubishi officials had contacted some of Fusion’s largest customers,
saying that they were considering a patent infringement suit against Fusion.
Spero knew he could not win without the help of the U.S. government.

Like many American entrepreneurs,
Spero was reluctant to ask for help.
But unlike most American businessmen,
he was located just outside Washington and knew something about politics.
By chance, he had a friend who worked in the Geneva office of the USTR.

When they were ten years old,
Spero met Michael Samuels at summer camp.
They had stayed in touch over the years.
In 1985,
Samuels was appointed Deputy U.S. Trade Representative.
At Samuel’s swearing-in, Spero met Clayton Yeutter.
In what Spero describes as a two-minute cocktail conversation,
Yeutter learned that Fusion did business in Japan
and suggested that Spero meet Joseph Massey,
the Assistant U.S. Trade Representative for Japan and China.
Later that year,
Spero met with Massey and discussed
how Fusion could expand its distribution system in Japan.

Two years later,
when Fusion’s patent rulings were overturned by the Japanese Patent Office,
Spero went to Massey again.
Fusion’s difficulties with Japan’s patent system were similar to
those experienced by dozens of other U.S. companies.
But because many feared that criticisms of the Japanese system
would jeopardize their business ties with Japan,
few American CEOs would ask for help.
Massey thought Fusion’s case should be used
to highlight intellectual property rights as a trade issue
between the United States and Japan.

At about this time,
Spero learned that Mitsubishi was bringing in a heavyweight lobbyist
to plead its case before the U.S. government:
James Lake.
Once he heard about the Lake-Yeutter friendship,
Spero knew that his biggest battle would be
getting his own government to take Fusion’s side.

Fusion and Mitsubishi opened new negotiations in September 1987.
The Japanese company made an oral offer to settle
if Fusion would stop its opposition
to Mitsubishi’s patent applications in Japan.
One month later,
Mitsubishi reneged on this agreement and refused further negotiations.

Fusion stepped up its efforts with Congress.
In December 1987,
it persuaded Lloyd Bentsen, chairman of the Senate Finance Committee,
to write on Fusion’s behalf to the Japanese Ambassador in Washington.
Bentsen’s letter stressed that
if Japan would not take action to help Fusion,
then Congress would.
As an added measure,
Fusion hired Paula Stern,
former chairwoman of the International Trade Commission,
to help make its case to Yeutter.

Lake and Mitsubishi pursued a very different tack.
They portrayed the issue as a simple commercial dispute.
It was, they said, an issue for technicians—not politicians.
The argument worked.
In January 1988, a Mitsubishi executive told Inside U.S. Trade that
Yeutter had agreed that their conflict with Fusion
was simply a private commercial affair.
Mitsubishi “was assured
the Administration would not get involved
and ‘put their arm’ on a Japanese company for commercial reasons.”

Spero increased pressure on the USTR and Mitsubishi.
He gave an interview to Frontline, the national news show.
Then he saw to it that Fusion’s story made
The Wall Street Journal, the National Journal, and the Washington Post.

Though Yeutter had, in effect, assured the Japanese
that the U.S. government would stay out of the matter,
Deputy U.S. Trade Representative Michael Smith,
a career civil servant and trade negotiator,
decided to get involved.
Like Massey,
Smith had become an advocate for
using the Fusion-Mitsubishi conflict
to highlight trade difficulties between the two countries
over matters of intellectual property.
In April 1988,
Smith raised the issue with the Japanese in biannual trade talks.
He also met with Mitsubishi officials in Tokyo,
and demanded that they settle the case.
Mitsubishi clearly took him seriously enough to resume negotiations with Spero.

The Japanese government also took Smith seriously.
Japanese officials were furious that he had involved himself in the matter,
and voiced their complaints to the State Department and the USTR.

Though the efforts of Smith, Massey, and others held promise,
time was working against Fusion.
In addition to the costs of lawyers, lobbyists, and patent experts,
Spero was devoting much of his own time, and that of his senior staff,
to the fight with Mitsubishi.

In a May 1988 article in the National Journal,
James Lake offered an update on the Fusion-Mitsubishi case.
Lake said:
“Spero has done everything he can to solve this politically or thought the press.
I have tremendous respect for his efforts to try to make this
more than a commercial issue.
Every time we think we have this tamped down,
it pops up somewhere else.”

Keeping the issue tamped down, of course,
was the Lake-Mitsubishi strategy.
One way that the Japanese company did so
was to open negotiations with Fusion
whenever there was political pressure,
only to end them whenever the pressure was removed.
Needless to say, these talks never produced an agreement.

In June 1988,
Mitsubishi quickly reopened negotiations after the Senate announced hearings
to examine U.S. problems with the Japanese patent system.
After three days of intensive negotiations,
Spero thought an agreement was in sight.
A key sticking point was an insistence
by Mitsubishi’s Washington legal counsel—the firm of Baker and McKenzie—
that neither Spero nor anyone else at Fusion Systems could ever
reveal the settlement, discuss the Japanese patent system,
or publicize Fusion’s experiences.
The final straw was a demand that Spero refuse to testify before
a June Senate Commerce Committee hearing on U.S.-Japan patent conflicts.
Spero was outraged.
He rejected the offer and testified.

In June 1988,
Lake became the media adviser to the Bush [41] presidential campaign.
Meanwhile, he continued to represent Mitsubishi.

In late 1988,
several members of Congress showed a renewed interest in the Fusion case,
prompting Mitsubishi to reopen its negotiations yet again.
In January 1989, following still another negotiating session,
Spero asked Takeshi Sakurai,
Mitsubishi Electric’s top representative in Washington,
why Mitsubishi had raised the settlement stakes so high
during their talks the summer before-
high enough to kill the talks.
Sakurai told Spero that
he personally had upped the settlement demands when it became clear that
“your government will not help you.”

Fusion’s case against Mitsubishi remains “tamped down”—
both in Japan and in the United States.
USTR Carla Hills raised the issue with the Japanese in October 1989.
Spero has testified again before Congress.
Mitsubishi continues to file patents in Japan.
For now,
Fusion remains the market leader even in Japan but operates under the growing threat of Mitsubishi’s mounting pile of patent filings.
Spero has nothing but praise for the career USTR negotiators
who have supported his company’s efforts.
But he never heard from James Lake’s good friend Clayton Yeutter,
despite all the congressional letters and public attention.

Spero’s wisdom, in retrospect:

“Japan’s political power in Washington is awesome.
Mitsubishi and its lobbyists are just sitting there laughing at us.
If they can continue to pick off the little guys like me,
you can just wave goodbye to America’s creative power.”

[End of Chapter 8]

The book from which the above was taken was published in 1990.
Here are some comments from the author of this blog,
written in September 2012.

Fusion Systems is still alive and well, in the same business area,
if its website is any indication.
So the worries implicit in Choate’s final words seem not to have come to pass.
However, to fend Mitsubishi off
Spero relied on connections which many other entrepreneurs might lack,
also a lot more media access (Frontline!) than many might have.

Spero has moved on into a more financial area.

Lake was convicted in 1998 of making illegal corporate campaign contributions
as part of the Federal criminal investigation of Mike Espy,
the former Agriculture Secretary.
I do not know what he has done since.