Taiwan Semiconductor Manufacturing Corp (TSMC) yesterday announced that it had launched legal action against Shanghai-based Semiconductor Manufacturing International Corp (SMIC) over the alleged misappropriation of trade secrets.

Taiwan-based TSMC filed a lawsuit on Friday in the United States against SMIC at the California State Superior Court in Alameda County, according to a TSMC statement.

TSMC spokesman JH Tzeng yesterday accused SMIC of failure to abide by the terms of a settlement reached between the two firms last year.

Tzeng accused SMIC of continuing to use TSMC's trade secrets, but refused to elaborate.

He added that TSMC, the world's largest contracted semiconductor maker, also demanded compensation from SMIC, the mainland's biggest semiconductor maker.

Although SMIC did not make any immediate comment on TSMC's statement, a press officer said that the company was working on a response.

SMIC shares on the Hong Kong stock exchange fell almost 3 per cent yesterday to HK$0.99 (13 US cents), while TSMC shares in Taiwan fell 0.80 per cent to NT$56.20 (US$1.75).

The two companies started their legal battles in December 2003, when TSMC claimed SMIC infringed its patents and improperly used its trade secrets.

TSMC then launched several rounds of legal action, with the number of alleged patent infringements rising to 14.

The alleged trade secrets refer to semiconductor fabrication operations and the manufacturing integrated circuits.

SMIC CEO Richard Chang used to work at a Taiwanese semiconductor maker, which was later acquired by TSMC. After leaving Taiwan, he launched SMIC in Shanghai in 2000 in anticipation of the huge potential of the semiconductor market on the mainland with engineers from Taiwan-based semiconductor firms, including TSMC.

SMIC quickly built four factories in Shanghai, Beijing, Tianjin and Wuhan, with globally competitive production lines and technology.

In the past years, SMIC grew very rapidly, becoming the world's third-largest contracted semiconductor maker, following TSMC and United Microelectronics Corp from Taiwan Province. Its cheap pricing strategy also attracted a number of TSMC customers.

TSMC finally reached a settlement with SMIC in January 2005.

According to the agreement, SMIC was expected to pay US$175 million to TSMC over the next six years, while TSMC would drop its legal action against SMIC. They also agreed to cross-license patents to each other.

But the agreement did not say SMIC would be able to use TSMC's trade secrets.

SMIC also said in its 2005 annual report that it would be put at a disadvantage in terms of licensing technologies from other firms, as its patent portfolio is smaller due to its shorter history.

Source: China Daily