TSMC: SMIC Violated Terms of ’05 Settlement

Taiwan Semiconductor Manufacturing (TSMC) has accused rival Semiconductor Manufacturing International (SMIC), China’s largest chip maker, of breaking the terms of a 2005 settlement agreement that ended a patent-infringement lawsuit between the two companies.

In the complaint, TSMC contends that SMIC continues to use its trade secrets, despite having agreed in the settlement not to use them. “SMIC’s continuing misappropriation of TSMC’s trade secrets … allows SMIC unlawfully to build a reputation that SMIC does not deserve,” the complaint said. TSMC is seeking unspecified monetary damages and injunctive relief in the case.

The claims, filed on Aug. 25 in California Superior Court for the County of Alameda, threaten to revive a long-dormant legal battle between the two contract chip makers.

In December 2003, TSMC filed a suit in the U.S. District Court for the Northern District of California that alleged SMIC, in Shanghai, had infringed five of TSMC’s chip-making patents and misappropriated trade secrets. In August 2004, TSMC expanded that suit to include three additional allegations of patent infringement and asked the court to ban the import of certain SMIC-made products in the United States.

In January 2005, the two companies announced a settlement to resolve the legal dispute. Under the terms of that agreement, SMIC was required to pay TSMC US$175 million over six years, with five annual payments of $30 million to be followed by a final payment of $25 million. In addition, the two companies agreed to cross-license their patents to each other through December 2010.

The settlement agreement did not give SMIC the right to use TSMC’s trade secrets.

The alleged misappropriation of those trade secrets remains at the heart of TSMC’s claims against SMIC. The Taiwanese chip maker claims an audit of SMIC materials placed in escrow as a result of the 2005 settlement shows that SMIC stole trade secrets related to the production of microchips from TSMC.

“Worse still, SMIC’s promises in the settlement to cease using any TSMC confidential information were just as counterfeit as SMIC’s presettlement protestations of innocence,” TSMC said, alleging that SMIC continues to use its trade secrets to produce chips.

In asking for relief from the court, TSMC said SMIC plans to transfer semiconductor manufacturing technology based on its trade secrets to two other Chinese companies. These companies own semiconductor manufacturing plants in China that will be managed by SMIC, it said.

“SMIC’s operation of these fabs will entail a transfer and disclosure of TSMC information that is embedded within SMIC’s process technologies,” the complaint said. This planned transfer is grounds for TSMC to terminate its patent licensing agreement with SMIC, it added.

In a filing Monday with the Taiwan Stock Exchange that announced the lawsuit, TSMC offered few details of its case. “Among multiple allegations, the complaint alleges that SMIC is in breach of the 2005 settlement agreement with TSMC and that SMIC continues to misappropriate TSMC’s trade secrets,” it said, adding that TSMC is seeking unspecified damages and injunctive relief.

On Monday, SMIC denied the allegations and accused TSMC of acting in bad faith. “SMIC has worked diligently to honor the agreement and has complied with its terms,” the company said Monday in a filing with the Stock Exchange of Hong Kong.

SMIC has already paid TSMC $45 million under the terms of the settlement agreement, the filing said.

-Sumner Lemon, IDG News Service (Beijing Bureau)

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