Settlement of legal battles between semiconductor foundries


SMIC (Semiconductor Manufacturing International Corporation), the largest chip foundry in China and TSMC (Taiwan Semiconductor Manufacturing Corporation), the global leader of chip manufacturer reached a settlement of legal actions on 9 November 2009 to resolve all pending court litigations between the parties, including a patent infringement and trade secret lawsuit brought by TSMC in California and SMIC's appeal in Beijing regarding unfair competition.

As a booming foundry in the semiconductor industry in strong demand for sophisticated know-how to operate advanced chip fabricating processes, such as design rules, process flow and quality control information, SMIC has, since its establishment, recruited hundreds of engineers who previously worked for Taiwanese rival chip manufacturers.  Many of these technical personnel were former directors and senior managers of R&D in the Taiwanese chip manufacturers, and were named as inventors in numerous patents of these companies.

TSMC believed SMIC has spied know-how of proprietary processes through former employees and their network in order to speedily set up new operations for advanced fabrication processes to compete with the market.

In December 2003, TSMC brought litigation in the United States alleging theft of trade secrets and patent infringement by SMIC.  The parties settled the case in February of 2005 with the Shanghai foundry paying $175 million.

In August 2006, TSMC filed a new suit in California State Court for more than $130 million, alleging breach of the 2005 settlement agreement, claiming that SMIC continued stealing TSMC’s proprietary technology for newer processeses and developed new process using know-how of TSMC.

In November 2006, SMIC played a counter-strike in China by filing a lawsuit in Beijing Higher Court claiming unfair competition and defamation by TSMC.  Nevertheless, the Court found in favour of TSMC, and SMIC subsequently filed an appeal against the Beijing Higher Court judgment.

Under the new settlement agreement, which was reached five days after the jury in the California trial gave a verdict against SMIC, the two parties settled all the lawsuits in China and the United States with SMIC agreeing to pay $200 million in cash and a considerable amount of stock and warrants to TSMC.

While international IP owners are building confidence in the developing IP system of China, the TSMC battle against SMIC demonstrates an alternative way to protect their patents and trade secrets: by litigating in overseas courts and hence blocking entries of infringing products into foreign market instead of merely relying on direct IP enforcement under the Chinese judicial system.