IP violations remain a serious problem in Taiwan’s ultra-competitive chip-making market.
In recent years, trade-secret theft has become increasingly common in Taiwan’s highly competitive semiconductor industry, one of the world’s largest by output value and a bedrock of the island’s economy.
The perpetrators have usually been Chinese companies seeking to close the technology gap with leading Taiwanese IC firms. Flush with cash thanks to generous government subsidies and abundant private capital in China’s tech ecosystem, the Chinese chip-makers lure Taiwanese engineers across the Taiwan Strait with salaries up to five times what they had been earning. The offers are made on the understanding that the new hires will bring “gifts” of valuable proprietary information along with them.
There have also been cases of trade-secret theft by Taiwanese domestic competitors.
While some local IC firms like Taiwan Semiconductor Manufacturing Co. (TSMC) invest heavily in research and development, others look to take shortcuts. They’re focused on “making the quick dollar,” says Mario Morales, vice president of semiconductor research at the International Data Corp. (IDC) in California.
Sometimes that tendency to skimp on R&D spending causes companies to resort to intellectual-property violations. “Employees have left [one employer for another] and taken proprietary information with them, usually in violation of their employment agreements,” says Gary Ma, a Taipei-based U.S. attorney. “It’s a big issue that has affected both local and foreign companies in a variety of industries.”
In April, Hsinchu District Prosecutors indicted a former TSMC employee who allegedly pilfered trade secrets related to the chip-making giant’s 28-nanometer process technology. The engineer allegedly misappropriated the information in September last year just before taking up a new position with CSMC Technologies, a Chinese IC maker based in Wuxi, Jiangsu Province, according to local media reports. CSMC’s manufacturing technology is considered much less advanced than TSMC’s.
Boise-based Micron Technology Inc., which has invested heavily in operations in Taiwan, is currently involved in litigation here arising from alleged trade-secret theft. In the criminal case, Taiwan’s United Microelectronics Corp. (UMC) and three of its employees – two of whom formerly worked for Micron – were indicted in September 2017. The former Micron employees allegedly stole trade secrets from Micron that were passed on, through UMC, to the Fujian Jinhua Integrated Circuit Co., prosecutors say.
Fujian Jinhua, in which the Fujian provincial government holds a majority stake, reportedly had contracted with UMC to help the Chinese company develop its memory product design and manufacturing process technology in memory chip production.
In December 2017, Micron also filed a civil lawsuit in Northern District of California against UMC and Fujian Jinhua after learning that its former employees had made electronic copies of company files which they reportedly provided to UMC.
IP thieves would have reason to target Micron, given the company’s strength in DRAM technology. Along with Samsung and SK Hynix, Micron is one of the world’s top DRAM chipmakers. Of Micron’s US$20.3 billion net sales in fiscal year 2017, the DRAM business accounted for about 66%.
DRAM is a massive industry. Semiconductor research firm IC Insights forecasts that it will generate US$101.6 billion in sales this year, up 39% over 2017. If that prediction is correct, it will mark the first time that annual DRAM sales have exceeded US$100 billion.
Taiwan is Micron’s global DRAM production hub, says Kate Liao, the company’s managing director of public affairs in Taiwan. Micron operates two wafer fabs here – one in Taichung and one in Taoyuan – and one test, assembly and advanced packaging operation. It plans to add 1,150 new employees through 2019 to support DRAM chip-manufacturing process upgrades and the construction of its first 3D DRAM chip-packaging operation.
In the past several years, Micron has expanded rapidly in this market by acquiring the Taiwan facilities of Japanese DRAM-maker Elpida Memory, taking over full control of Inotera Memories where it had previously been a joint venture partner, and most recently acquiring the backend assets of Cando Corp. As of May 2018, Micron had invested US$13.7 billion in Taiwan, making it the island’s largest foreign investor.
Micron has clear evidence of the misappropriation of its intellectual property by the ex-employees, says Suzanne Chou, senior assistant general counsel in Micron Taiwan. “One employee started collecting information [about Micron’s DRAM manufacturing process and product design technology], unlawfully downloaded the Micron files and replicated them into his personal devices about a month before he left Micron. Many of those files contain highly confidential and sensitive technical information with ‘Micron Confidential and Proprietary’ marking.”
In April 2016 that employee went on to join UMC, which had a contract from Jinhua to help provide it with DRAM technology, although the memory-chip business was not UMC’s area of specialty in the semiconductor industry. “As the indictment indicated, the prosecutor and MJIB found the same Micron files – and in fact many more others – in UMC. We have reason to believe that UMC is involved in this trade secret-poaching conspiracy, rather than just an ‘innocent victim’ of some of its employees’ violation of the law,” Chou says.
In addition to the ongoing cases in Taiwan and California, Micron is also involved in litigation in China. In that case, Micron is the defendant in a January 2018 lawsuit filed by UMC and Jinhua in Fuzhou, where Jinhua is based. UMC and Jinhua allege that Micron’s China subsidiaries infringed on UMC’s patent rights.
In a January statement, UMC said that it had expended considerable resources to research and develop logic-chip and DRAM manufacturing technology. Following an extensive review, UMC said that it discovered products sold by Micron “in mainland China did indeed infringe upon the patent rights of the company, and thus patent infringement litigation has been pursued in order to obtain fair judgment.”
In July, the Fuzhou Intermediate People’s Court granted a preliminary injunction against two of Micron’s Chinese subsidiaries, preventing them from producing, selling, or importing certain DRAM modules and solid-state drives in China. The products affected by the injunction account for roughly 1% of Micron’s annual revenue.
In a July statement, Micron contends that UMC and Jinhua’s patent-infringement claims are “retaliation” for the criminal indictments in Taiwan and the civil suits Micron brought in California against UMC and Jinhua for misappropriation of Micron trade secrets. Others close to the semiconductor industry speculate that UMC and Jinhua may be trying to use the litigation in China to force Micron into patent-licensing negotiations.
Meanwhile, Micron said in the statement that UMC’s patents are invalid “because they are directed to technologies that were previously developed and patented in other countries by other technology companies.” Further, Micron stated that it does not use the patents in question in its DRAM and NAND technology or products.
While complying with the ruling, Micron has filed a motion asking the Fuzhou Court to reconsider or stay its preliminary injunction.
Stepping up security
In its efforts to promote foreign investment, Taiwan has long emphasized its dedication to the rule of law and superior IPR protection compared to many other locations in the region.
Taiwan offers Micron a rule-of-law based environment, notes Chou. “We appreciate when there is a legal regime in place to protect trade secrets,” she says.
She cites the 2013 amendment to Taiwan’s Trade Secrets Act that strengthened the law’s enforceability, introducing criminal punishment including imprisonment and criminal fines for offenders aside from civil liability. In cases involving the misappropriation of trade secrets with the intent to use them in China, Hong Kong, or Macau, the penalties under the law are particularly harsh, with criminal fines ranging from NT$3 million to NT$50 million and prison sentences one to ten years. If illicit gains from the theft of trade secrets exceed the maximum fine threshold, the court has the discretion to increase the fine up to tenfold.
Observers say that an important catalyst for the amendments was the lenient sentencing of a former employee of Hsinchu-based IC designer MediaTek convicted in 2011 of leaking the company’s trade secrets to rival MStar Semiconductor, also a Taiwanese chip designer. The Taipei District Court sentenced the former MediaTek employee to nine months in prison, with the option to commute the sentence to a modest NT$270,000 fine.
“The amendments are a bid to deter industrial espionage in the Taiwanese market as growing business ties across the Taiwan Strait and worldwide have made Taiwanese companies vulnerable to the threat of trade secret misappropriation,” wrote local law firm Formosa Transnational, in a 2013 press release.
“The government continues to be very interested in strengthening trade-secret protection and IP protection in general,” says attorney Gary Ma. However, the Taiwan legal system’s lack of a pre-trial discovery mechanism poses a problem. “There are very few instances where you find clear evidence in the public domain that someone has taken your trade secrets, so it can be difficult to prove that the theft took place and that another company used the secrets,” he says.
In the absence of discovery, companies are implementing stronger security measures internally, Ma observes. “The idea is that when trade-secret theft occurs, a company can sometimes find evidence of it internally through its IT security systems.”
Hsinchu-based GlobalWafers, the No. 3 silicon wafer maker globally, “has taken legal measures to protect its intellectual property” given regular attempts by Chinese IC makers to poach its employees, according to an April report in the English-language Taipei Times.
Phison Electronics Corp, which designs NAND flash memory controllers and modules, restricts its employees from using their mobile-phone cameras at work, the report notes. The company requires that the camera lenses be physically covered, with an app installed to prevent access to the camera. Phison boosted internal security following the discovery last year that two of its engineers were stealing trade secrets.