Analysis: background on TSMC, SMIC lawsuit

by Mike Clendenin, EETimes
Silicon Strategies
01/05/2004, 10:39 AM ET

TAIPEI, Taiwan -- A potentially damaging lawsuit filed late last month by Taiwan Semiconductor Manufacturing Co. Ltd. <> against fledgling Chinese foundry Semiconductor Manufacturing International Corp. recounts a two-year tale of alleged industrial espionage and corporate raiding.

The legal clash between foundry giant TSMC and up-and-coming SMIC could reshape the budding relationship between China's booming foundry industry and global chip makers, the source of billions of investment dollars annually.

TSMC's suit alleges systematic intellectual-property (IP) theft and patent infringement by SMIC. The Taiwanese foundry seeks immediate injunctive relief against further use of its technology by its Chinese rival, as well as "exemplary damages" for harm already done, according to the suit, filed December 19, 2003, in the U.S. District Court of Northern California. SMIC is registered to conduct business in California, and TSMC has a subsidiary in the state.

For SMIC, the timing couldn't be worse. The foundry is expected to launch an initial public offering during the first quarter through which it hopes to raise $750 million to $1 billion to keep its expansion plans on track.

TSMC's suit will probably force SMIC to rethink the IPO, but it's unlikely to disrupt SMIC's momentum severely, especially given the industry's tightening capacity and SMIC's location at the heart of the high-growth China market. The best-case scenario is that SMIC's stock would be priced at a discount because of the lawsuit's overhang, said Chris Hsieh, a semiconductor analyst at ING Barings. The worst case would see SMIC postpone the IPO.

Historically, lawsuits in the IC industry have proved difficult to win in a timely manner. And TSMC is seeking a jury trial, which would make proving its complicated, technology-laden case even tougher.

"Even if it is clear-cut, with the delays and the countersuits and everything, it is typically years before you are going to settle anything," said Bill McClean, president of chip industry watcher IC Insights. "And by that time, it's a bit of a moot point . . . because you're so far down the road, and everyone has moved on to another process."

Shanghai-based SMIC has said little about the suit. Soon after it was filed, a spokeswoman said the company had not yet seen the complaint and added that SMIC always respects the IP of others.

Less than a week later, on Christmas Day, SMIC issued a statement warning against "artificial or unfair restrictions" on fair competition. SMIC said it has been "consistently investing a significant portion of its annual budget in both R&D activities as well as the acquisition of technologies from its partners in order to develop and build up its own technology and know-how."

TMSC's 72-page document is no John Grisham thriller, but with its straightforward, pull-no-punches language, it is intriguing, detailing what TSMC claims was SMIC's relentless attempts to pilfer the "crown jewels" of the industry's most successful foundry.

Probably the most dramatic piece of evidence involves an e-mail allegedly sent by SMIC's vice president of operations, Marco Mora, to then-TSMC quality control program manager Katy Liu. In the e-mail, Mora is claimed to have asked Liu for "detailed process flows . . . including process target and equipment type" for the 0.35-, 0.25-, 0.22- and 0.18-micron logic nodes; 0.28-micron ROM; and 0.25-micron 6T SRAM.

According to the lawsuit, Mora also asked Liu for TSMC training materials, in English and Chinese, which were to be used in training local technicians and engineers. At the end of the e-mail, he is alleged to have written: "Sorry for the long list, but we need a lot of material to set up the new operation."

TSMC alleges that Liu worked as a corporate spy for about six months, until she was fired. During that period, she allegedly also sought out information regarding the layout of TSMC's lab equipment, mask shop layout and practices, design criteria, defect analyses, usage and specification of raw materials-including gases, water, power and natural gas-and lists of vendors and equipment.

The Taiwanese foundry claims this was part of a larger effort by SMIC to obtain proprietary process flow, fab layout and operations information.

In early 2002 TSMC filed suit in Taiwan and won an injunction prohibiting SMIC from hiring senior TSMC managers. But TSMC says SMIC ignored that ruling, which has no effect outside Taiwan. On Dec. 12, 2002, a court in Taiwan indicted Liu for disclosing TSMC trade secrets. She is reportedly in Beijing, still working for SMIC, and "remains a fugitive from justice," according to the new lawsuit. SMIC has said that Liu no longer works for the company.

TSMC's new suit resurrects IP protection issues thought to have been resolved with China's accession to the World Trade Organization. WTO membership also includes adherence to the rules of the World Intellectual Property Organization, which develops global rules for handling IP. While China has made progress on IP protections since joining the WTO, observers have warned that it still may lack the legal infrastructure needed to enforce IP protection rules.

Since its inception, SMIC has hired away hundreds of engineers from Taiwan-based semiconductor companies to accelerate the development of its foundry business, and it is aggressively looking for more engineers to support its expansion plans.

Many of SMIC's senior managers came from TSMC and rival foundry United Microelectronics Corp. TSMC claims that SMIC has hired away more than 140 of its personnel, raiding key positions in its fab operations or those of its affiliates, such as the director of R&D, the technical director of TSMC's North Site and Fabs 4 and 5, the program manager of quality and reliability, the technical manager of R&D, the manager of the thin-film department and a manager of the technology transfer division.

Those key people, as well as others, are named in more than 60 TSMC patents, the company said. TSMC claims the Chinese foundry has tapped those people's collective knowledge of TSMC proprietary processes to achieve "an implausibly quick ramp-up of its production facilities and fabrication processes."

TSMC contrasts SMIC's "uncanny ability" to quickly develop advanced processes to that of Grace Semiconductor Manufacturing Corp., a Shanghai-based foundry that was established around the same time as SMIC but that has been much slower with its own ramp-up.

Grace has set an "aggressive" timetable of 21 to 24 months for qualifying its 0.18-micron node, according to the lawsuit. "Miraculously, SMIC, with no track record, announced [achievement of the] 0.18-micron process node and . . . commenced 0.18-chip production in less than one year's time," it says.

That could not have been done "with such astonishing speed without reliance on TSMC's proprietary technical and operational information," the suit states.

The suit further alleges that such "outright theft" has enabled SMIC "to price its products at a substantial discount to what would have otherwise been possible had SMIC incurred its own research-and-development and ramp-up expenses."

Specifically, TSMC claims that some of those patents were used to fabricate an 0.18-micron chip for Broadcom Corp. Examination of the chip "revealed identical or nearly identical structures . . . that TSMC believes could only have been fabricated using TSMC's proprietary process steps," the lawsuit says.

It might be tough to convince a jury, though, said IC Insights' McClean. "There are so many ways of producing something that could look similar to something that TSMC is doing," he said. "That's where it gets tricky and is difficult to prove."