Lessons From Taiwan and U.S. IP Lawsuits

Taiwan and U.S. IP Lawsuits

Patent litigation in the United States may be a challenge for Taiwanese companies. Two experts in the field share some tricks of the trade.  

Companies in Taiwan are facing an increasing number of intellectual property (IP) lawsuits in the United States. While a handful of leading Taiwan companies have, combined, been party to hundreds of U.S. IP lawsuits and are now familiar with the risks and pitfalls involved in those cases, many others are just starting to face them. IP litigation, particularly patent litigation, can be intimidating, and when not carefully handled, can result in tens or hundreds of millions of dollars in damages, exclusion of a company’s products from the United States market, or threaten important business relationships and future opportunities. Fortunately, much can be learned from the experiences other Taiwan companies have already had – both what to do and what not to do. In this article, we discuss four such lessons.

Lesson #1: Licenses can serve many business purposes, but do not take one simply because your competitors have done so.

A company should not assume that it must also take a license just because a patent owner has been successful in licensing or litigation activities against other entities. Every company has different business strategies, different products and product designs, different points of leverage, and different strategies to deal with IP assertions.

Thus, while it may make business sense for one company to take a license to a certain portfolio of patents, it may not make sense for another, even if they are in the same industry. In March 2012, LSI Corp. and its subsidiary Agere Systems Inc. (together as “LSI”), filed a complaint with the International Trade Commission (ITC) accusing Taiwan’s Realtek Semiconductor Corp. of infringing two alleged standard-essential patents relating to Wi-Fi technologies. These patents were designated as essential by LSI’s predecessor to the Institute of Electronic Engineers. LSI had previously successfully licensed its Wi-Fi patents, including the asserted patents, to over a dozen other companies, including competitors of Realtek.

Recent changes in U.S. patent law have generally been more favorable to defendants, and those changes may make it more difficult for a patent owner to prevail in litigation.

Despite that fact, Realtek did not take a license and instead took LSI on in the ITC case and ultimately won. The ITC found that Realtek did not infringe, ruled that many of the asserted claims are invalid, and concluded that LSI – despite being based in the United States – had failed to establish the existence of a U.S. domestic industry, which is a requirement unique to ITC cases.

Companies should always evaluate their specific circumstances and products, as well as the validity of the patents asserted against them, to assess the risks and need for taking a license from a patent owner. Recent changes in U.S. patent law have generally been more favorable to defendants, and those changes may make it more difficult for a patent owner to prevail in litigation. Even if a company decides to take a license, it may be able to negotiate a much lower licensing fee than its competitors did a few years before.

Lesson #2: Take discovery in U.S. litigation seriously.

Discovery is perhaps the most notorious aspect of U.S. patent litigation, particularly for those that are not accustomed to U.S. litigation. Discovery is the process by which parties request and exchange documents and information from each other so that each side can prepare its case for trial. Discovery in U.S. litigation is very broad, and judges generally allow parties to request anything that might lead to relevant evidence, including a company’s highly confidential and sensitive information. It is time consuming, costly, and intrusive.

Despite the heavy burdens discovery places on a company, not taking it seriously or resisting it can make things worse for a company involved in U.S. patent litigation. For example, altering documents, hiding documents, or refusing to produce documents or information ordered by a court can lead to serious penalties. This is what happened in a patent infringement suit brought by Yasuo Kamatani and Laserdynamics, Inc. against a leading Taiwan technology company. In that case, a judge found that the defendant consciously decided to evade the court’s discovery order by purposefully not searching certain highly relevant documents and by repeatedly making misrepresentations to the court. As a result, the defendant was ordered to pay a US$500,000 fine, plus the other side’s attorneys’ fees and costs for filing its motions to compel discovery.

Another example is found in a case involving HTC and Intellect Wireless Inc. (IW). The plaintiff in this case, IW, and its attorneys were sanctioned because they failed to comply with one of the court’s discovery orders. Prior to the filing of the lawsuit, IW’s attorneys had knowledge that IW engaged in inequitable conduct when obtaining the patent at issue in the case. To obtain evidence of such knowledge, HTC sought documents from IW’s attorneys related to IW’s preparation for the lawsuit. Despite a court order requiring IW’s attorneys to produce responsive documents, IW failed to produce them. As a result, the court sanctioned IW and IW’s attorneys by awarding HTC’s attorneys’ fees and expenses, totaling approximately US$4.1 million.

Sanctions, such as those related to the discovery procedure discussed in the above two cases may have serious or even disastrous consequences to a company. Thus, companies should make every effort to comply with rules and laws governing discovery. Even before any litigation begins, companies should implement a reasonable document control policy that has clear procedures on how documents and information will be kept and handled. Once engaged in U.S. litigation, companies should implement litigation-specific document holds and act in good faith in dealing with discovery requests.

Lesson #3: Taiwan companies should consider using U.S. forums to protect their trade secrets.

As discussed above, discovery in U.S. IP litigation can be intrusive and burdensome, but discovery also has its advantages, particularly when a company suspects that a competitor has stolen its trade secrets. Unlike patent infringement actions, where one can often prove infringement by examining or reverse engineering a publicly available product, proving trade secret misappropriation typically requires documents and other evidence only found inside the accused company. Since U.S. law allows such broad discovery, some companies outside of the United States have chosen to bring trade secret misappropriation suits in the United States. One example is TSMC.

In 2000, China-based Semiconductor Manufacturing International Corp. (SMIC) was founded by several former employees of TSMC. After SMIC entered the market, TSMC saw its sales rapidly decline in certain markets that SMIC also competed in. After gathering evidence from reverse engineering results and other resources, TSMC suspected that SMIC used TSMC trade secrets to develop their products and sued SMIC in the United States in 2003-2004.

“People ask me why I sued in the U.S.,” said TSMC’s then General Counsel Richard Thurston. “One of the main reasons is that I can get discovery in the U.S. I can’t get it here [in Taiwan]. And in the case of trade secrets, you can’t win a trade secret case without discovery.” Given the comprehensive discovery schedule in the ITC, SMIC – which had not yet handed over any documents – knew it would be required to come clean. As a result, SMIC quickly agreed to settle the suit for about US$175 million and with other conditions.

Shortly after the 2005 settlement, however, TSMC found out that SMIC had breached the settlement agreement. TSMC brought a second legal action in California state court against SMIC for breach of contract, breach of promissory note obligations, and trade secret misappropriation. Through the course of discovery in this case, it was determined that SMIC had obtained hundreds of thousands pages of TSMC’s confidential documents through TSMC employees. In fact, SMIC ex-employees estimated that 90% of SMIC’s 0.18 micron logic process was copied from TSMC. Ultimately, in 2009, SMIC agreed to settle for another US$200 million cash payment and for a grant of 10% of SMIC’s shares to TSMC.

“In the case of trade secrets, you can’t win a trade secret case without discovery.”

It should be noted that certain requirements must be met in order to bring suit in the United States, as TSMC did. In general, litigating in U.S. courts requires the courts to have personal jurisdiction over the defendant. Establishing personal jurisdiction typically invokes the “minimum contacts” test, which requires that the action arises out of or is related to the defendant’s contacts within the state where the court is located. But the quantity of contacts necessary to establish personal jurisdiction may vary.

The ITC, on the other hand, does not need to have personal jurisdiction over a respondent. Instead, the ITC asserts jurisdiction over products that are imported into the United States. However, the party bringing the complaint at the ITC must show that there is a domestic industry in the United States relating to the patents-in-suit. This typically requires showing that there are employees or facilities in the United States that are directed to products that embody, use, or are manufactured by the claimed inventions in the patents-in-suit.

Nevertheless, in cases where a lawsuit can be initiated in the United States, discovery can be a valuable weapon. Without U.S. discovery procedures, it may not have been possible for TSMC to obtain such favorable settlements against SMIC. Thus, when facing litigations or infringement activities by competitors, companies should consider the possibility of bringing suit in a U.S. forum.

Lesson #4: Sometimes, the best defense is a good offense – strong patent portfolios should include patents that can be used against competitors.

According to Walter Isaacson’s biography of Steve Jobs, Apple’s former CEO once proclaimed: “I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40 billion in the bank, to right this wrong. I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.”

Several of the leading smartphone manufacturers, including HTC and Samsung, were targets of Apple’s “thermonuclear war.” Apple’s war against HTC started in 2010, and involved multiple litigations in the United States over a three-year span, both in the ITC and in district courts. Fortunately for HTC, it was heavily armed with its own patents and was able to file countersuits against Apple, and the two companies reached a global settlement in about three and half years.

If a company waits until it is sued to acquire patents, it may be too late or expensive to do so. There is little time to search for quality patents, and even if any are found, sellers sensing the buyer’s urgency will likely seek a hefty premium.

Apple’s war against Samsung, however, continues. Although Samsung and Apple decided to cease dozens of non-U.S. IP lawsuits, that agreement did not end the U.S. IP cases between them. One lawsuit resulted in a verdict against Samsung totaling US$920 million, though part of that verdict was recently overturned on appeal and now awaits re-trial. There is no telling when Apple and Samsung will call a truce in the United States.

The Apple wars with HTC and Samsung are good examples of why companies that plan to enter competitive markets and sell products that will likely enter the United States need to develop a strategy for dealing with patent assertions from competitors well before any assertions are actually made. One critical aspect of that strategy is developing a strong patent portfolio early on, through both applications and acquisitions. These patents can then be used not only to exclude others from using a company’s inventions, but also as defensive weapons for countersuits when facing patent infringement accusations.

If a company waits until it is sued to acquire patents, it may be too late or expensive to do so, as many companies – including ones in Taiwan – have found. The reason is because there is little time to search for quality patents, and even if any are found, sellers sensing the buyer’s urgency will likely seek a hefty premium.

Developing a strong patent portfolio takes time as well as strategic planning and effective organization. Without a strategy, a company will likely end up with a portfolio of patents that is of little value, yet costs more and more money to maintain as the number of patents increases and patent maintenance fees rise. A good strategy should include the following general steps: (1) identifying a company’s, as well as key competitors’, core technology areas, (2) determining where the company stands in those areas in relation to competitors, (3) evaluating the company’s existing portfolio to determine coverage areas and weaknesses, (4) performing a patent landscape analysis to identify opportunities as well as vulnerability to suits from competitors and licensing entities, (5) formulating a plan to take advantage of opportunities and address vulnerabilities and weaknesses identified, and (6) implementing that plan through patent prosecution and patent acquisitions. Overall, the strategy should prioritize patent quality over quantity.

High-quality patents are among the most valuable IP assets a company can have and are usually the result of a team effort among the company’s business personnel, engineers, in-house legal professionals, and outside patent attorneys or agents.

Conclusion

The battles fought by many leading Taiwan companies, won or lost, offer great lessons for other Taiwan companies. Leveraging your IP portfolio, managing IP issues with business and legal goals in mind, understanding the expectations and rules of U.S. courts, and protecting trade secrets can all reduce long-term risks and costs. Effective IP and litigation management can also avoid devastating results in litigation against competitors and, in many instances, can even prevent litigation altogether.

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