Part I: When Insiders and Competitors Target Businesses

Lightwave Microsystems, America Online (AOL), Casiano Communications Inc., Corning Inc., Avery Dennison, Toshiba and Lexar Media, & Citroen and SigmaTel

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The Yangs were subsequently arrested. In 1999, U.S. District Court Judge Peter C. Economus convicted both Yang and his daughter of stealing trade secrets, and also convicted Four Pillars on economic espionage charges. Yang was sentenced to six months of home confinement and fined US$250,000. His daughter was fined $5,000 and received a year's probation. Four Pillars was fined $5 million for accepting the pilfered trade secrets. Lee pleaded guilty to wire fraud and defrauding his employer.

Yang's investment of approximately $150,000 resulted in estimated losses of $30 million to $50 million for Avery Dennison. Four Pillars appealed the conviction to the U.S. Supreme Court, but the convictions were upheld in October 2002.

Toshiba and Lexar Media

In 1994 and 1995, Cirrus and Toshiba were involved in discussions on how Cirrus would collaborate with Toshiba in creating flash memory controllers in support of Toshiba's preferred flash memory technology.

In mid-1996, some Cirrus employees founded Lexar Media.

On Dec. 1, 1996, Toshiba, Toshiba America and Toshiba America Electronic Components were given access to Lexar's intellectual property under a five-year non-disclosure agreement.

In 1997, Toshiba invested $3 million in Lexar, and also placed a member of its own on Lexar's board of directors. Lexar continued to share intellectual property.

In April 1998, Toshiba and Lexar entered into a partnership to compete in the flash memory market. The joint relationship apparently prospered throughout 1998 and most of 1999. But in October 1999, Toshiba entered into a joint agreement to develop and manufacture Gigabit Scale flash memory with SanDisk, Lexar's main competitor in the flash memory market. Lexar felt that its "partner" had sold it out. Not only had Toshiba been a partner in numerous joint development projects, but Toshiba's presence on Lexar's board of directors also provided Toshiba with intimate knowledge of all of its strengths and weaknesses.

Toshiba assured Lexar that the agreement with SanDisk did not involve Lexar technologies, and was between a separate division within Toshiba than that involved with Lexar.

Soon, SanDisk and Toshiba signed a $700 million deal to create a joint fabrication facility in Virginia to produce multilevel cell (MLC) flash memory chips. Lexar believed that its intellectual property, specifically the multipage write technology, was being used, and that without it the MLC flash memory initiative would not be financially viable. But Lexar didn't have the proof until 2001, when Toshiba published the technical specifications used in its MLC smart memory application.

In late March 2005, a California Superior Court jury found Toshiba guilty of the theft of Lexar Media's trade secrets, and assessed total damages of $465.4 million, including $84 million in punitive damages. According to Lexar Media, its trade secrets were being utilized in Toshiba products such as NAND flash chips, Compact Flash cards, xD-Picture Cards and Secure Digital cards. In December 2005, the same court agreed to Toshiba's request for a new trial. The litigation continues; no new trial date has been set.

Particularly noteworthy in this case is Toshiba's apparent brashness. It had a seat on the board of directors of the company whose intellectual property it allegedly purloined. It also participated in a number of joint development projects, during which Lexar's intellectual property was fully disclosed to Toshiba, and which Toshiba then apparently leveraged for its own benefit in another product line.

Citroen and SigmaTel

What do Citroen, the French automobile manufacturer, and SigmaTel, a U.S. manufacturer of audio entertainment devices, have in common?

Both corporations allege that patented methodologies were misappropriated by Chinese competitors and used in products marketed in China so that, in effect, Citroen and SigmaTel ended up competing against their own product designs. Furthermore, because the Chinese had little or no research costs associated with development, the products were made available at a price considerably lower than the company that owned the patent could possibly afford to offer.

In January 2005, SigmaTel filed suit against Actions Semiconductor Company (Actions Semi) of Zhuhai, Guangdong, China, alleging that integrated circuits inside of Action Semi's MP3 players infringe upon multiple patents related to SigmaTel's portable audio devices. In March 2005, it followed up by filing a complaint with the U.S. International Trade Commission (ITC) requesting that the ITC initiate a Section 337 investigation. (According to the International Trade Data System, under Section 337 of the United States Tariff Act of 1930, imported products that allegedly violate U.S. intellectual property rights can be barred from entry into the country. Complaints under Section 337 are made to the ITC, and generally involve allegations of infringement of intellectual property rights, such as patents, trademarks or copyrights. Relief, in the form of an exclusion order (import prohibition of a specific article) or a cease-and-desist order (an order prohibiting a party from importing) or both, may be granted to the successful complainant. In the complaint, SigmaTel identifies the specific patents that it believes have been infringed and requests a permanent exclusion order banning the importation of the products into the U.S. market, and also requests a cease-and-desist order to halt sale of these same products.

Actions Semi claims no infringement of SigmaTel's patents has occurred.

The trial found in favor of SigmaTel and concurred that Actions Semi infringed upon SigmaTel's patents. SigmaTel prevailed in the ITC trial, and it has protected itself within the United States, one of its prime markets, but the victory will have no effect on the Chinese or European markets.

Citroen alleges that Chinese auto manufacturer Shanghai Maple used Citroen's core chassis technology in producing a series of Shanghai Maple models. It claims that its patent on "special chassis technology" had already been filed with the world intellectual property rights organization, and had not been licensed to Shanghai Maple. Shanghai Maple, a subsidiary of Geely Automobile, claims no knowledge of any infringement, and that the automobiles are created from its own designs.

The unlicensed use of technology apparently is not an unusual occurrence within the Chinese automotive manufacturing sector. In May 2005, General Motors Daewoo alleged that Cherry QQ copied its "Spark" sedan design, and demanded 80 million yuan (approximately US$10 million) as compensation for patent infringement. Dongfeng Honda and Toyota Auto have also sued Hebei Shuanghuan Auto and Geely Auto for similar reasons.

Zhang Zhenzhi, a deputy engineer within the China Automotive Technology & Research Center, offers a remarkable perspective:

It's inevitable for domestic automakers to imitate other advanced technologies, no matter from other domestic companies or foreign firms. But in the future, we would be able to better our designs after getting more experience on developing our own autos.

It would appear that loss of intellectual property is expected within the nascent Chinese auto industry, and that "borrowing" of intellectual property should be considered the norm, to be expected of young companies and tolerated by more established firms.

Both Citroen and SigmaTel took all the right steps to protect their intellectual property, including filing patents. And yet, they find themselves caught up in a still-developing legal system, which some have described as a litigation quagmire, where it is almost impossible to effectively litigate patent violations.

Copyright © 2006 IDG Communications, Inc.

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