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Semiconductor Manufacturing Corp., the China-based chip manufacturer that just raised $1.8 billion in an initial public offering, will spend at least a little of that money battling what could be one of the biggest trade secret theft cases to hit Silicon Valley. In court documents filed in San Francisco federal court Monday, Taiwan Semiconductor Manufacturing Co. Ltd. likened its dispute with SMIC to Cadence Design Systems Inc.’s trade secret suit against Avant Corp. Avant settled that case in 2002 for $265 million. “The scale of SMIC theft and misuse of TSMC’s technology dwarfs by far any case brought in this district, including the landmark Cadence v. Avant! And People v. Avant! cases,” TSMC stated. The stakes are high. The companies compete to fabricate the chips designed and sold by scores of Silicon Valley semiconductor outfits. TSMC said it has 110 customers headquartered in California, many of them being solicited by SMIC’s Fremont office. “What seems exceptional about this case, based on what we’ve learned, is the extent of the theft,” said TSMC attorney Brian Ferrall, a partner at Keker & Van Nest. “It’s fairly brazen conduct.” TSMC filed suit against SMIC in December claiming the company had misappropriate trade secrets and infringed several patents. SMIC subsequently filed a motion to dismiss the trade secret portion of the case. TSMC opposed SMIC’s motion Monday, arguing that it had obtained new evidence of SMIC’s misappropriation. Specifically, TSMC alleges that SMIC lured away its key employees with offers of stock and stock options and asked them to steal and disclose proprietary information. Several former TSMC engineers who joined SMIC submitted affidavits to the court in support of TSMC’s claims. One former employee said SMIC copied about 90 percent of the sequence of steps TSMC uses to fabricate semiconductor chips. Another said it was “no secret that TSMC process information was being used” by SMIC and that SMIC engineers openly discussed this. SMIC attorney Douglas Olson, a partner at Paul, Hastings, Janofsky & Walker, referred questions about the case to his partner Ned Isokawa. Isokawa did not return calls Wednesday. A call to SMIC also wasn’t returned. SMIC discussed the litigation in its March 11 prospectus, warning investors that it may have to pay damages or face an injunction if TSMC were to win. The company also retracted a statement one of its officers made earlier this month describing TSMC’s complaint as “without merit.” “We believe this statement is inaccurate because we and our legal advisers are still in the process of reviewing the claims contained in such complaint and we have therefore not formed a definitive view on the merits of those claims,” the prospectus states. Founded in 1987, TSMC is the largest foundry in the world, fabricating semiconductors for customers that design, market and sell them. TSMC had sales of $5.9 billion in 2003. By comparison, the 4-year-old SMIC had sales last year of $172.7 million. TSMC filed a similar suit against SMIC in Taiwan in 2002. A Taiwan district court issued an ex parte provisional injunction prohibiting SMIC from hiring certain categories of TSMC employees or soliciting the company’s trade secrets. TSMC said it filed suit in California because the Taiwan injunction was limited to that country. According to TSMC’s complaint, a district attorney’s office in Taiwan obtained an indictment against a former TSMC manager who has been a fugitive since 2002 and was listed as an SMIC employee in late 2003. TSMC said it anticipates filing a motion for preliminary injunction against SMIC some time this summer.

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