TSMC North America v. Semiconductor Manufacturing International Corp.: Semiconductor Manufacturing Trade Secret Misappropriation Dispute

California Semiconductor Manufacturing Trade Secret Lawsuit

TSMC North America v. Semiconductor Manufacturing International Corp., Case No. RG06286111 (Cal. Super. Ct., Alameda County), concerned allegations that Semiconductor Manufacturing International Corporation (SMIC) improperly used confidential semiconductor manufacturing technology belonging to Taiwan Semiconductor Manufacturing Company (TSMC). Filed on August 25, 2006, the lawsuit involved alleged trade-secret misappropriation, breaches of a 2005 settlement agreement, and the incorporation of protected manufacturing information into SMIC's 0.13-micron and smaller fabrication processes. TSMC and its affiliates sought damages and injunctive relief, while SMIC denied the allegations and pursued contractual and trade-secret cross-claims.

The litigation included preliminary injunction hearings, disputes over the earlier settlement agreement, electronic discovery sanctions, and a jury trial in Alameda County Superior Court. Engineering experts testified about semiconductor fabrication technology, while an economic expert addressed damages after the jury found that SMIC had misappropriated TSMC trade secrets and breached the 2005 agreement. In November 2009, before the jury determined damages, the companies reached a settlement involving $200 million in cash payments and additional consideration in SMIC shares and warrants.

Key Developments in the TSMC v. SMIC Trade Secret Lawsuit

December 2003–February 2, 2005 – Initial Semiconductor Patent and Trade Secret Litigation

TSMC initiated legal proceedings against SMIC beginning in December 2003, alleging patent infringement and misappropriation of confidential semiconductor manufacturing information. The disputes involved integrated circuit fabrication methods and proceeded in U.S. federal and state courts and before the U.S. International Trade Commission. On January 30, 2005, the companies exchanged settlement signature pages, with the agreement and related patent license identifying January 31 as their effective date. Subsequent amendments dated February 2, 2005, established terms that included a $175 million payment obligation, patent cross-licensing arrangements, and restrictions concerning confidential manufacturing technology.

The settlement resolved the earlier litigation without an admission of liability. Its patent cross-license was originally scheduled to remain in effect through December 2010, while separate covenants addressed potential trade-secret misappropriation claims. The agreement distinguished between 0.15-micron and larger manufacturing processes and 0.13-micron and smaller technologies. For the smaller processes, the relevant trade-secret covenant did not extend beyond July 31, 2005; the larger technologies remained subject to separate contractual conditions.

August 25–September 12, 2006 – TSMC Files a New Semiconductor Trade Secret Lawsuit

On August 25, 2006, TSMC and its affiliates filed a new action against SMIC and related companies in Alameda County Superior Court. An amended complaint submitted on August 30 alleged violations of the 2005 settlement agreement, breaches of promissory note obligations, and trade-secret misappropriation involving SMIC's 0.13-micron and smaller manufacturing processes. TSMC requested monetary damages, injunctive relief, and enforcement of contractual protections governing its manufacturing information. SMIC responded on September 12 with a cross-complaint alleging breach of contract and breach of the implied covenant of good faith and fair dealing.

September 7, 2007 – Court Denies Preliminary Injunction Against Manufacturing Processes

After hearings conducted from August 15 to 17, 2007, the California Superior Court denied TSMC's request for a preliminary injunction restricting SMIC's use of certain process recipes in its 0.13-micron logic technology. TSMC maintained that confidential manufacturing information had been incorporated into those processes, an allegation SMIC contested. Although the court declined to impose the requested manufacturing restrictions, it ordered SMIC to provide ten days' advance notice before certain planned disclosures of logic technology to entities outside the company. The ruling did not resolve the underlying claims of trade-secret misappropriation or breach of contract.

March 27, 2008 – California Court of Appeal Rules on Parallel Litigation in China

The California Court of Appeal decided TSMC North America v. Semiconductor Manufacturing International Corp., 161 Cal. App. 4th 581 (2008), addressing SMIC's separate litigation in China. TSMC had sought an antisuit injunction to prevent SMIC from pursuing those proceedings, arguing that the Chinese claims conflicted with the governing-law and jurisdictional provisions of the companies' agreements. The appellate court affirmed the trial court's denial of the injunction based on principles of international comity and judicial restraint.

The decision concerned whether California courts should restrict the parallel foreign litigation. It did not determine whether SMIC had misappropriated TSMC's semiconductor manufacturing trade secrets.

June 23–August 8, 2008 – SMIC Files Trade Secret Cross-Claims and Court Restricts Process Disclosures

On June 23, 2008, SMIC filed an additional cross-complaint accusing TSMC of improperly obtaining and using SMIC trade secrets to improve its competitive position. SMIC sought damages for the alleged misappropriation, introducing competing claims concerning confidential manufacturing technology. Both companies continued to dispute the allegations while pursuing their respective contractual and trade-secret claims.

Following a preliminary injunction hearing on July 10, the Alameda County Superior Court partially granted TSMC's request to restrict disclosure of specified manufacturing information. The August 8 order preliminarily prohibited SMIC from disclosing information concerning 14 process steps associated with its 0.30-micron logic technology. Unlike the 2007 injunction request involving the use of 0.13-micron process recipes, this order addressed disclosure of technical information to third parties. SMIC challenged the ruling by filing a notice of appeal on October 3, 2008.

January 13–March 10, 2009 – Court Resolves Disputed Settlement Agreement Terms

From January 13 to 16, 2009, the California Superior Court held a preliminary bench trial concerning disagreements over the companies' 2005 settlement agreement. The proceedings addressed the agreement's execution, subsequent amendments, and contractual requirements for the parties to meet and confer before initiating litigation. In its March 10 statement of decision, the court found that the parties had executed an agreement on January 30, 2005, and amended it on February 2, 2005. SMIC disputed the court's interpretation and maintained that portions of the ruling were erroneous.

May 1–July 20, 2009 – Summary Adjudication Motions and Beijing Court Decision

On May 1, 2009, SMIC filed motions for summary adjudication challenging TSMC's claims involving promissory notes and alleged violations of the California Uniform Trade Secrets Act. TSMC also sought summary adjudication of several affirmative defenses raised by SMIC. During the same period, litigation continued in China. On June 10, the Beijing People's High Court issued a first-instance judgment rejecting SMIC's claims against TSMC in separate proceedings involving alleged unfair competition and commercial defamation. SMIC appealed to China's Supreme People's Court.

On July 20, the California Superior Court denied SMIC's summary adjudication motions. It granted TSMC's motion in part and denied it in part, leaving additional claims and defenses for trial. The remaining California proceedings concerned disputed manufacturing information, alleged contractual violations, and the parties' competing legal positions.

August 10, 2009 – Discovery Dispute Results in Court Sanctions

On August 10, 2009, TSMC moved for sanctions, alleging that SMIC had intentionally destroyed documentary evidence relevant to the trade-secret litigation. The disputed materials included electronic records potentially associated with the companies' semiconductor manufacturing claims. The court subsequently granted the motion in part and severed SMIC's trade-secret cross-claims for a separate trial, allowing additional efforts to recover files from archived backups.

The court also addressed how the loss of evidence could be considered at trial. Jurors would be permitted, but not required, to draw certain adverse conclusions against SMIC based on the missing materials. The sanctions ruling formed part of the pretrial proceedings documented in SMIC's September 2009 regulatory filing.

September 8–October 2009 – Jury Trial Examines Semiconductor Manufacturing Evidence

The jury trial began on September 8, 2009, before Judge Steven Brick in Alameda County Superior Court. TSMC alleged that SMIC had improperly used confidential semiconductor manufacturing information and violated obligations established in the 2005 settlement. Technical records, fabrication process information, and evidence concerning the development and alleged use of proprietary technology were presented during the liability proceedings.

TSMC called several engineering experts, including Professor Stacey Bent, Dr. Costas Spanos, and Dr. Richard Fair. SMIC presented Dr. Peter Cottrell as an engineering expert for the defense. Their testimony formed part of the technical evidence considered by the jury as it assessed whether the disputed manufacturing information qualified as protected trade secrets and whether SMIC had improperly used that information.

November 3–5, 2009 – Jury Finds Trade Secret Misappropriation and Contract Breach

In early November 2009, the Alameda County jury found that SMIC had misappropriated TSMC trade secrets and breached the companies' 2005 settlement agreement. TSMC's November 5 disclosure identified November 3 as the liability verdict date, while SMIC's subsequent settlement announcement referred to November 4. Courtroom View Network's trial summary reports that TSMC prevailed on 61 of the 65 trade-secret claims considered during the liability phase.

The proceedings advanced to the damages phase on November 5. Dr. David J. Teece, an economic expert appearing for TSMC, testified about financial matters associated with the findings of misappropriation and contract breach. Before the jury could determine a final damages award, the companies negotiated a settlement that resolved the remaining litigation.

November 9–10, 2009 – TSMC and SMIC Reach a $200 Million Settlement

On November 9, 2009, TSMC and SMIC entered into an agreement resolving their pending litigation in California and China. SMIC agreed to pay TSMC $200 million in installments through December 2013, in addition to the $135 million already paid under the 2005 settlement. The agreement also called for SMIC to issue 1,789,493,218 ordinary shares, representing approximately 8% of its issued share capital as of October 31, 2009, together with warrants to purchase up to 695,914,030 additional shares. These equity arrangements were subject to adjustments, required approvals, and other contractual conditions.

The settlement extinguished approximately $40 million in remaining payment obligations under the earlier agreement and terminated the companies' 2005 patent cross-license. It provided for a stipulated judgment in TSMC's favor in California, withdrawal of SMIC's appeal in China, and mutual covenants not to sue, subject to specified exceptions.

The new confidentiality provisions permitted SMIC to continue using certain TSMC technology already embedded in its manufacturing processes, provided it complied with contractual restrictions. However, the agreement did not grant a replacement intellectual property license. TSMC publicly announced the settlement on November 10, 2009, after the parties reached their agreement during the trial's damages phase.

Expert Witnesses in the TSMC v. SMIC Semiconductor Trial

1. Semiconductor Process Engineering Expert Witness – Professor Stacey Bent – Plaintiff

   Professor Stacey Bent testified as an engineering expert for TSMC during the liability phase of the semiconductor trade-secret trial. Courtroom View Network's archived proceedings identify her direct examination by TSMC's counsel and cross-examination by SMIC's counsel on September 29, 2009. Her testimony was presented during the examination of the disputed semiconductor manufacturing information.

2. Semiconductor Manufacturing Expert Witness – Dr. Costas Spanos – Plaintiff

   Dr. Costas Spanos appeared as a technical expert for TSMC in September 2009. The archived trial proceedings document his direct and cross-examination during the presentation of evidence concerning semiconductor fabrication technology. His testimony was part of TSMC's liability case involving allegedly misappropriated manufacturing information.

3. Semiconductor Engineering Expert Witness – Dr. Richard Fair – Plaintiff

   Dr. Richard Fair testified for TSMC during the October 2009 trial proceedings. Courtroom View Network records his direct examination by TSMC's counsel and cross-examination by SMIC's counsel. He was among the engineering experts whose testimony was presented before the jury reached its findings on the trade-secret and contractual claims.

4. Semiconductor Engineering Expert Witness – Dr. Peter Cottrell – Defense

   Dr. Peter Cottrell appeared as an engineering expert for SMIC during the defense's October 2009 presentation. SMIC's counsel conducted his direct examination, followed by cross-examination from TSMC's counsel. His testimony was offered during the liability phase in which SMIC contested TSMC's allegations concerning semiconductor manufacturing technology.

5. Economic Damages Expert Witness – Dr. David J. Teece – Plaintiff

   Dr. David J. Teece testified as an economics and accounting expert for TSMC during the damages phase in November 2009. His direct and cross-examinations, documented by Courtroom View Network, concerned financial matters associated with the jury's liability findings. The parties settled before the jury issued a final damages award, ending the damages proceedings without a completed jury determination of monetary relief.

Takeaways from the TSMC v. SMIC Semiconductor Dispute

1. Semiconductor Fabrication Processes and 0.13-Micron Technology

   The 0.13-micron, or 130-nanometer, process node identifies a generation of semiconductor manufacturing technology used to produce integrated circuits. Fabrication involves controlled operations such as photolithography, deposition, etching, and thermal processing. TSMC alleged that SMIC incorporated proprietary manufacturing information into its 0.13-micron and smaller logic processes.

   The companies' 2005 settlement applied different trade-secret covenants to separate generations of manufacturing technology. The agreement distinguished between 0.15-micron and larger processes and 0.13-micron and smaller technologies, with the relevant covenant for the smaller processes not extending beyond July 31, 2005. Separate contractual conditions governed the larger manufacturing processes.

2. Trade Secret Protection for Semiconductor Manufacturing Recipes

   Semiconductor process recipes contain technical instructions governing manufacturing conditions, equipment settings, material treatments, and other parameters used to fabricate integrated circuits. Under California trade-secret law, such information may qualify for protection if it derives independent economic value from not being generally known or readily ascertainable through proper means and is subject to reasonable measures to preserve secrecy.

   TSMC's claims involved the alleged unauthorized acquisition or use of confidential fabrication information. Separate preliminary injunction proceedings addressed restrictions on the disclosure of specific manufacturing technology, including 14 process steps associated with SMIC's 0.30-micron logic processes. Those disclosure restrictions were distinct from the earlier request to restrict the use of certain 0.13-micron process recipes.

3. Patent Infringement and Semiconductor Trade Secret Misappropriation

   Patent infringement and trade-secret misappropriation concern different intellectual property rights. Patent infringement involves conduct that violates enforceable patent claims, while trade-secret misappropriation concerns the improper acquisition, disclosure, or use of legally protected confidential information.

   TSMC's initial litigation against SMIC included patent infringement and trade-secret allegations. The California action filed in 2006 focused on alleged misuse of manufacturing trade secrets and violations of the companies' 2005 settlement arrangements.

   Under the November 2009 settlement, the parties terminated their earlier patent cross-license and established mutual covenants not to sue, subject to specified exceptions. The new agreement preserved defined rights concerning future claims and contractual breaches without granting a replacement intellectual property license.

4. Electronic Discovery and Semiconductor Manufacturing Records

   Electronic evidence in semiconductor manufacturing litigation may include engineering files, process documentation, equipment data, internal communications, and archived records of technical development. These materials can provide information about how manufacturing methods were designed, modified, and implemented.

   The discovery dispute in TSMC v. SMIC concerned allegations that SMIC intentionally destroyed documents relevant to the parties' claims. Following TSMC's August 2009 sanctions motion, the court partially granted relief, severed SMIC's trade-secret cross-claims, and allowed additional recovery efforts involving archived backup files. It also permitted jurors to consider certain adverse inferences concerning missing evidence, without requiring them to draw those conclusions.

5. Semiconductor Trade Secret Damages and Settlement Payments

   Under California trade-secret law, monetary damages may include actual loss and unjust enrichment not already included in the calculation of actual loss. Other remedies, including reasonable royalties, may be available under specified statutory conditions.

   In TSMC v. SMIC, the jury decided liability but did not complete its assessment of damages. Instead, the parties negotiated an agreement requiring $200 million in cash payments, along with consideration involving SMIC shares and warrants. The settlement also extinguished approximately $40 million in remaining obligations from the 2005 agreement.

   The financial terms were negotiated settlement consideration, not damages independently assessed and awarded by the jury.

Conclusion

TSMC North America v. Semiconductor Manufacturing International Corp. concluded in November 2009 after an Alameda County jury found that SMIC had misappropriated TSMC trade secrets and breached the companies' 2005 settlement agreement. The findings followed litigation over semiconductor fabrication processes, contractual restrictions, electronic evidence, and competing allegations concerning proprietary manufacturing technology. Although the trial reached the damages phase, the parties settled before jurors issued a final monetary award.

The settlement resolved the pending California and Chinese proceedings and replaced earlier contractual arrangements with new confidentiality obligations and covenants governing the companies' conduct. SMIC retained permission to use certain TSMC technology already incorporated into its manufacturing processes under specified restrictions, while the previous patent cross-license was terminated. The agreement concluded the litigation through negotiated financial and contractual terms following the jury's liability findings.