China’s SMIC settles lawsuits with TSMC for US$175M

Semiconductor Manufacturing International Corp. (SMIC), China’s largest chip maker, has settled a legal battle with rival Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC) over allegations of patent infringement and misappropriation of trade secrets, the two companies said Sunday.

“We are pleased that the litigation has been settled peacefully and believe that the settlement is in the best interests of the company’s long term development,” said Richard Chang, SMIC’s president and CEO, in a prepared statement.

Under terms of the settlement agreement, SMIC will pay TSMC US$175 million over six years. SMIC will pay US$30 million each year for the first five years and US$25 million in the sixth year. In addition, TSMC and SMIC have agreed to license their patent portfolios to each other through December 2010 under a cross-license agreement, they said.

TSMC had brought legal action against SMIC over allegations of patent infringement and misappropriation of trade secrets in U.S. District Court, California State Superior Court, the U.S. International Trade Commission, and Taiwan District Court. These cases will now be dismissed without prejudice, the two companies said. As part of the settlement agreement, TSMC has agreed not to sue SMIC for alleged acts of trade secret misappropriation itemized in the lawsuits, SMIC said. The agreement does not give SMIC the right to use TSMC’s trade secrets and the lawsuits may be reinstated if SMIC breaches the terms of the settlement, SMIC said. Additional details of the settlement were not disclosed.

The settlement ends all pending litigation with SMIC and is in the best interest of TSMC shareholders, the TSMC statement said.

The legal battle between SMIC and TSMC, the world’s largest contract chip maker, began in earnest in December 2003, when TSMC filed suit in the U.S. District Court of Northern California against SMIC over patent infringement and trade secret misappropriation claims.

That complaint alleged that SMIC had infringed on five of TSMC’s chip-making patents and claimed SMIC hired more than 100 former TSMC employees and asked some of them to provide SMIC with TSMC trade secrets. The claim also alleged that SMIC asked a TSMC manager to obtain information related to TSMC’s chip-making process technology and pass it to SMIC.

In August 2004, TSMC expanded that suit and alleged SMIC had infringed on three additional chip-making patents. At the same time, the company also filed a complaint against SMIC with the U.S. International Trade Commission.

In response to TSMC’s allegations, SMIC executives repeatedly denied any wrongdoing.

The financial impact of the settlement on SMIC was not immediately known. SMIC was scheduled to report its fourth quarter results on Monday, but that announcement has been delayed pending a review by auditors who are assessing the financial impact of the settlement, said Calvin Lau, a spokesman for SMIC in Shanghai.

SMIC now expects to release its fourth-quarter results at the end of February or in early March, Lau said. The reassessment by auditors is necessary because some settlement payments to TSMC are being backdated by SMIC and will impact the company’s fourth quarter and full-year results for 2004, Lau said. SMIC had been expected to report a net profit of US$19 million during the fourth quarter of 2004 and a net profit of US$120 million for the year, according to a Jan. 17 estimate by Celestial Asia Securities Holdings Ltd. in Hong Kong. By comparison, SMIC reported a net loss of US$66 million for 2003, despite recording a net profit of US$11 million during the fourth quarter of 2003.