Samsung Could Cut IP Ties With SanDisk

SAN FRANCISCO -- Samsung is the top dog in the market for flash memory chips, but the company wears an uncomfortable leash that requires it to pay hefty fees to SanDisk(SNDK).

As the current intellectual property licensing agreement between the two firms nears its expiration date, there are signs that the South Korean chipmaker may be ready to wiggle out of its costly collar.

Last month, Samsung tried to resolve the situation by buying SanDisk, and its trove of patents, outright.

The acquisition offer was rebuffed and rescinded, though many investors expect Samsung will eventually come back with a new bid to buy SanDisk -- otherwise, Samsung will need to renew its costly IP license with SanDisk by August 2009.

But there's a third path that's much vaguer and potentially much riskier for each company and its shareholders. Option C entails Samsung bypassing a SanDisk license for flash memory altogether.

As the world's No.1 producer of flash memory, Samsung cannot afford to put its business at risk on a legal gambit. Given some of the changes in the flash memory business and in the legal landscape though, Samsung may have a better chance of fighting the license than in the past.

"That would clearly lead to litigation," says Cowen and Company analyst Daniel Berenbaum. "But certainly Samsung could take its chances." Cowen and Company makes a market in SanDisk shares.

According to most estimates, Samsung gives SanDisk about $400 million a year in royalty payments related to flash memory technology (the exact amount is confidential) - an annuity that bolsters SanDisk's bottom line but that Samsung would understandably like to get out of paying.