Running low on cash and unable to attract buyers for its assets, Eastman Kodak Co. put itself into bankruptcy court, where it hopes to slash what it owes retirees and force much bigger technology companies to pay to use its patents.
Kodak's move, which came early Thursday morning, sets up a highly uncertain process that, if successful, will allow it to emerge in a year or two as a smaller company with fewer employees and perhaps very little to do with the photography business, on which it built its name.
But there are doubts, even on Kodak's board, about whether its strategy of becoming a printer company and competing with giant rivals such as Hewlett-Packard Co. makes sense. That raises uncertainties for Kodak's work force of 17,000, which already has fallen from 64,000 in 2003.
During a town-hall meeting streamed to all Kodak employees Thursday, Chief Executive Antonio Perez, who has overseen just one profitable year since taking the top job in 2005, appeared downtrodden as he outlined strategies the company would pursue while in Chapter 11, said an employee who watched the broadcast.
Mr. Perez focused on building the confidence of Kodak customers and suppliers, retaining the value of Kodak's patent portfolio and reducing Kodak's legacy costs, meaning its obligation to retirees, this person said.
Kodak's board, meeting by telephone, voted to seek bankruptcy protection at 4:48 p.m. Wednesday after a 75-minute discussion of the company's position, a person familiar with the matter said. The company filed the documents shortly after midnight.
The key question now is whether Kodak will be able to squeeze the billions of dollars out of its patents that it thinks they are worth. By suing companies for alleged patent infringement and then striking license deals to settle the cases, Kodak says it raised $3 billion between 2003 and 2010.
After the pipeline of settlements ran dry last year, Kodak put a portfolio of digital-imaging patents on the block. At the company's opening hearing Thursday in bankruptcy court in Manhattan, Andrew Dietderich, a Sullivan & Cromwell lawyer representing Kodak, said the patents for sale are worth $2.2 billion to $2.6 billion. Kodak believes the patents could be worth more, as that valuation doesn't take into account strategic interest from possible suitors.
Kodak's bankruptcy filing and recent actions show a rising tension with technology companies. In a filing with the bankruptcy court, Kodak Chief Financial Officer Antoinette McCorvey said smartphone and tablet makers Apple Inc., Research In Motion Ltd. and HTC Corp. took advantage of Kodak's weakened financial condition to drag out litigation over alleged intellectual-property violations. That accelerated Kodak's slide into bankruptcy court, she said, by cutting off a source of funds the company has relied upon heavily as its film business shrank.
In the days leading up to Kodak's filing, the company sued Apple, RIM, HTC and Samsung Electronics Co., claiming they had violated patents covering processes like sending photos from a mobile device or previewing images with an electronic camera.
Kodak also said in its filing that it believes Apple's operating system infringes on now-expired Kodak patents related to so-called object-linking capability, something the company called a "fundamental technology."
In a companywide memo, Mr. Perez said the gadget makers had adopted delaying tactics that have kept Kodak from being paid "what was rightfully owed to us."
All of the companies have disputed Kodak's patent claims. Apple and HTC declined to comment Thursday. RIM said it was Kodak that delayed a trial and said it isn't violating the main patent at issue. A Samsung representative wasn't available to comment.
Kodak also acknowledges there were several factors behind its decision to file for Chapter 11 protection. Along with the patent issues, the company cited the burden of retiree benefits, the weak economy and moves by vendors to cut ties to the company.
The company now faces the prospect of fighting court battles with Apple and other better-capitalized technology companies over alleged patent infringements, while simultaneously courting some of the same companies to buy the digital patents. Selling the patents is crucial to Kodak's turnaround chances.
The company's $950 million bankruptcy-financing package, led by Citigroup Inc., required Kodak to submit procedures for auctioning the patents by the end of June.
How suitors will value the patents remains to be seen. Nortel Networks sold patents during its bankruptcy proceedings last summer for $4.5 billion, a much larger sum than expected. But Kodak's litigation with possible buyers could complicate a similar sale, said Jim Bromley, a partner in law firm Cleary Gottlieb Steen & Hamilton's bankruptcy practice who advised Nortel on its patent auction but isn't involved in the Kodak case.
"We didn't think it made sense to sue the people you want to pay a lot of money," he said. Still, Nortel was liquidating and didn't need to explore all options for raising cash, he said. In addition, Kodak's retention of investment bank Lazard Ltd., which successfully auctioned Nortel's patents, could bode well for the company, he said.
Even if the patent sale goes as hoped, and obligations to retirees can be pared back, Kodak still has to show that its printing businesses can sustain the company outside of Chapter 11 protection.
Mr. Perez has based the company's future on consumer and commercial inkjet printing. But that market has proved tough to crack, and Kodak is paying heavily to subsidize sales as it builds a base of users for its ink. Kodak ranks fifth world-wide, according to technology data firm IDC, with a market share of 2.6% in the first nine months of 2011.
The company said it expects to emerge from bankruptcy proceedings next year, and the Citigroup loan requires a reorganization plan to be filed in court by Feb. 15, 2013.
One person close to the situation said it could take "a couple of years" for Kodak to successfully reorganize as a smaller company with fewer employees and less debt.
In court Thursday, the company struck a more optimistic tone. "The transformation of Kodak at an industrial level is nearly complete," Mr. Dietderich, Kodak's bankruptcy lawyer, said at the standing-room-only hearing, adding, "We're here for liquidity."
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