UDC misrepresents latest adverse decision, while other more important EPO opinions go undisclosed.

Wednesday, October 16, 2013.  In the late evening two days ago, on October 14th, Universal Display Corp. (“UDC”; NASDAQ: OLED) decided to announce that the European Patent Office (“EPO”) had “narrow[ed] the scope” of its key patent claims contained in European Patent No. 1933395 (“EP-395”). UDC issued its press release almost instantly following a hearing by an EPO Opposition Division panel that was held earlier the same day, according to EPO records. None of UDC’s statements about the purported decision are verifiable, since the EPO has not yet released a written decision (see EPO docket here), which may take several weeks. Yet at least two UDC securities analysts took the bait and published erroneous reports that exacerbated the misunderstanding.

UDC’s announcement should backfire with informed, objective readers.

UDC’s past disclosures concerning decisions on its patents have repeatedly obscured their meaning and substantial impact on UDC’s financial value. Thus any negative admission by UDC is an indication of the severity of the negative implications of the actual decision. When an EPO panel invalidated more than half the original claims in UDC’s cornerstone “key patent”, European Patent No. 1449238 (“EP-238”) after a hearing exactly like the one that just occurred, UDC didn’t say a word to investors and only stated in SEC filings that “the EPO panel announced its decision to maintain the patent with claims directed to OLEDs comprising phosphorescent organometallic iridium compounds”, according to UDC’s latest 10-Q. Again, we reiterate UDC did not put out a press release following the EPO Opposition Division ruling on EP-238 in 2011, which contains UDC’s only known claims of any material economic value, those pertaining to the use of phosphorescent organometallic iridium compounds in OLEDs.

The October 14th announcement demonstrates the weakness of UDC’s claims (the source of this weakness is explained in layman’s terms using an expert’s insights into the alleged basis of UDC’s claims and its actual experimental disclosures), even with a patent like EP-395 that is far narrower than the cornerstone EP-238. The announcement also confirms the procedural method of dealing with UDC’s patent trolling where invalidation of claims at the EPO panel level positions patents for more sweeping invalidation decisions that are only made by the higher level EPO Boards of Appeal in complicated trolling cases, rather than the Opposition Division. The EPO Boards of Appeal will issue a final ruling on EP-238’s broadest iridium compounds claims after a hearing scheduled for November 21-22, and based on our research, it is highly likely that the EPO will revoke EP-238 in its entirety.

UDC is attempting in press releases aimed at investors to downplay the ability “of any one patent in any one jurisdiction to have a material impact on the Company’s commercial business.” This is typical patent troll nonsense. In our view UDC is merely a case of a complicated and complex stock promotion layered on top of a combination of an accounting scheme built on a hilariously outrageous patent troll. And herein lies UDC’s dilemma. It has been repeatedly forced to contradict itself in legal securities filings. In this particular case, UDC has actually admitted that just the existence of patent litigation can damage its patent troll business, which is its only source of revenue. In SEC filings UDC has admitted that “the pendency or adverse outcome of any intellectual property litigation to which we or our licensees are subject could disrupt business operations, require the incurrence of substantial costs and subject us or our licensees to significant liabilities, each of which could severely harm our business. Costs associated with these actions are likely to increase as AMOLED products using our [alleged] PHOLED and other OLED technologies and materials enter the consumer marketplace” [emphasis added].

More importantly, we believe that the invalidation of UDC’s broadest key patent contained in EP-238 by the Board of Appeal next month will significantly strengthen real OLED manufacturers’ ability to protect themselves from UDC’s patent troll schemes through legal “freedom to operate opinions” and will likely trigger termination clauses in its agreement with Samsung. UDC has not disclosed any of the termination provisions from its 2011 deal with Samsung including any renegotiations rights under “most favored nation” clauses.

While UDC is making statements about an unreleased EPO decision, the EPO has been issuing other written decisions that are undeniably negative for UDC. Most importantly, the EPO Board of Appeal considering EP-238 issued findings in March that strike at the heart of UDC’s broadest iridium claims, questioning whether UDC should have claims to “every organometallic iridium compound” and “every OLED wherein the emissive layer includes a phosphorescent organometallic iridium or osmium compound” (emphasis in original).

For yet another UDC key patent under challenge at the EPO, EP-1394870, the Opposition Division issued an opinion in September finding that UDC’s most significant claim in that patent was too broad and unsupported an invention that can be understood much less allowed under law. Specifically, the opinion states that “neither the skilled person nor the public have any guidance how to carry out the alleged invention.”

UDC has not disclosed either of these two above adverse EPO opinions to investors, nor has any other analyst or reporter covering UDC. Yet out of the blue UDC issues an unverifiable proclamation about a loss that merely ratchets up the pressure on UDC’s patent troll scheme.