Strategic Dimensions of International Patent Litigation – the Experience of Taiwanese Firms in the US Legal Jurisdiction

Journal of Intellectual Property Rights Vol 18, November 2013, pp 534-547

Strategic Dimensions of International Patent Litigation – The Experience of Taiwanese Firms in the US Legal Jurisdiction

Chih Cheng Lo† Department of Industrial Education and Technology, National Changhua University of Education, Taiwan Received 12 April 2013, revised 14 October 2013

This paper aims to assess the characteristics and impact of patent disputes by investigating cases of litigation between Taiwanese and US firms. The research reported is based on a design that combines insights gained from interviews with an in-depth case study of two significant US International Trade Commission (ITC) actions. In the former, semi-structured interviews were conducted in six firms while in the latter, the strategic response and potential impact of US patent disputes of two significant ITC investigations associated with Taiwanese firms were analysed to unravel the impact and strategic dimensions of cross border patent litigation. This paper finally arrives at recommendations to reconcile the strategic dimensions of patent litigation in an international trade environment.

Keywords: International patent litigation, patent enforcement, patent infringement, patent strategy

Taiwan is well-known for its manufacturing Trade Commission (ITC) actions. In the former, semi- capabilities, but leading edge technologies are usually structured interviews were conducted with six firms controlled by multinational firms. Taiwanese firms (most interviewees have not been named to satisfy typically cross-license all patents in a field of use to confidentiality criteria) while in the latter, the strategic ensure adequate access to the technology or to ensure response and potential impact of two ITC investigations design freedom or freedom to manufacture.1 For associated with Taiwanese firms were analysed to example, Taiwan’s major computer and unravel the impact and strategic dimensions of patent semiconductor firms make extensive use of cross- litigation. Consequently, this paper intends to understand licensing to avoid the possibility of external parties fully how patents are enforced in business and how blocking their products by claiming infringement of enforcement options affect firms’ strategies and core patents.2 However, patent infringement actions behaviours in an international trade environment. occur in the US jurisdiction, sometimes legitimately due to ignorance of the terms of patent rights on the Literature Review part of Taiwanese producers, and sometimes due to Research with the market power in perspective argues strategic reasons on the part of US producers. that trade-relevant patent enforcement may effectively While several studies have shown strategic deter international trade flow,3,4,7 in particular, firms may motivation behind patent litigation,3-6 the full employ patent litigation as an isolating mechanism to understanding of how firms react to the cross border maintain their market power. In order to avoid an enforcement environment has not been fully explored. exporter penetrating the market, domestic firms can Different patent enforcement mechanisms in different withdraw the licensing agreements and claim patent regions operate differently and these infringement suits infringement in both civil and trade regulation may in turn influence the choice of a firm’s patent jurisdictions to increase the degree of threat brought strategies. This paper aims to assess the characteristics about by lawsuits. Domestic firms expect higher rents and impact of patent litigation by investigating cases of either from their efforts to protect patent rights by litigation between Taiwanese and US firms. The potentially excluding competitors’ products, or from the research reported is based on a research design that royalty fees. In other words, these observations from the combines insights gained from interviews with an strategic interactions of competitors in different regions in-depth case study of two significant US International may be beneficial to understanding the central point of ______market power arguments from the literature and its †E-mail: [email protected] implications on trade-relevant patent protection. LO: STRATEGIC DIMENSIONS OF INTERNATIONAL PATENT LITIGATION 535

Empirical analysis has shown that different capabilities are partly related to the quality of its R&D patenting strategies are used to avoid infringement personnel and reflected in the strength of its patent suits.5,6,8,9 A fencing strategy is often adopted for portfolios. Harhoff and Reitzig,10 for example, patenting activities. This strategy involves establishing showed that in the European Patent Office, the rate of a series of patents, typically a range of possibly patent opposition cases for firms with large portfolios different technical solutions to achieve a similar is lower than in the case of those with smaller functional result, in order to block certain lines or portfolios. Consequently, firms could enhance directions of R&D.9 For example, key integrated circuit in-house technological capabilities or build so-called (IC) component patents in CD/CDR are required to ‘free design or manufacture’ by licensing from improve the data transfer system as a means of leading firms or by gaining external knowledge avoiding infringement actions and capturing market through mergers and acquisitions.1,12 share. Apart from the fencing strategy, a surrounding Finally, financial distress occurs when a litigation strategy is one where patents surrounding a core or event has an indirectly adverse effect on firms’ sales basic technology patent are filed. Such patents are used and other financial income, apart from direct cost of to get access to the central technologies, for example 13 4 legal actions. For example, in order to avoid through cross-licensing. Patenting strategies are infringement claims and the threat of exclusive orders therefore, required to integrate the intellectual property by Intel, VIA Technologies, a Taiwanese firm, opportunities into an overall business strategy. acquired several firms to broaden its patented Since a patent system is designed as an incentive technology base. Therefore, a sound financial structure mechanism for firms to invest resources in R&D, the may provide breathing space for survival during costly issue of whether the R&D strategies are influenced by litigation. In addition, litigants with different resources the cost of litigation is addressed in the paper. This is decide upon their negotiation position during the period particularly the case in high risk predatory litigation of litigation.11,13 The expenditure in litigation may also 8 strategies in semiconductor industries. Such an involve indirect costs. This indirect impact may cause adverse effect may be exacerbated by trade-relevant decline in sales due to the threat of injunctive relief regulation that is concerned with restricting imported because customers prefer to reduce the risk of production in the short term. Consequently, when interrupted supplies due to legal action. A study by technologies are cumulative, a product must combine Mutti & Yeung13 found that complainant firms were several patented technologies; thus mutual hold-ups typically larger and no less profitable than a reference will become a threat to new product development. sample of firms in the same industry. Litigation becomes an efficient method for the While patent enforcement is a cross-cutting issue restriction of imported production and is a strategic tool based on fairly unexplored area in the legal framework, with which follow-up innovation based on an existing technological development and firm’s strategic technological standard can be controlled. The study by behaviour, any explanation should be a well-informed 6 Aoki and Prusa however, cast some doubts and showed one with a multi-disciplinary approach that combines that discriminatory protection may not increase R&D strategic management, economics of legal actions and incentives for domestic firms. The effect of asymmetric patent law. The current author takes a critical realist’s patent protection depends on pre-existing rival products, position to consider that the events of litigation the costs of R&D, and the value of the potential observed (and not observed) are caused by a variety of innovation. In addition, direct legal costs of litigation are different and conflicting business interests, making it enormous; larger businesses may benefit due to difficult to see what exactly the rationale is, behind economies of scale in legal activities. For example, large patent infringement. In addition, many scholars have firms with a specific patent legal division may be able to debated whether a patent right is desirable at the reduce the cost of legal action marginally as compared to appropriate level of such protection.14-17 It has also those firms without it. Consequently, larger firms are been noted that all pro-patent allegations against the 10,11 more likely to be complainant firms. ITC should be re-evaluated through other border Somaya’s study deals with the extent to which enforcement.14 Therefore, this paper does not intend firm-level differences in patent strategies may vary by enter above debate, instead the author examines the industry, by size of firm or market.3 With regard to issues that arise in cases where patent litigations are the litigation process, a firm’s technological related to trade regulatory protection in circumstances 536 J INTELLEC PROP RIGHTS, NOVEMBER 2013

where domestic firms have additional protection Firm A is a semiconductor manufacturing firm. It against alleged infringing products from abroad, has a successful business model and a leading including relaxed jurisdictional requirements, speed, position in IC manufacturers. While it has and unique remedies. Given this, the observation of the experienced litigation action, this has not occurred event of patent litigation cases between different frequently. Firm B too, is a semiconductor jurisdictions may reflect the characteristics of the sharp manufacturing firm. Its main products including IC dimension of trade competitiveness. solution and memory IC, were involved in several To sum up, by diversifying markets in several legal battles with US semiconductor manufacturers countries, firms can reduce the risk of a mono-market and others in the Federal Courts and the ITC. orientation because patent laws apply at a national Firm C was established in 2001 and provides level. However, a diversified product market has the solutions for system on chips (SOCs) in the consumer potential to increase the cost of litigation if the market. It focuses on PC display products, including complainant has to file multi-patent suits in different flat-panel monitors and televisions. A leading US firm jurisdictions. Given this, the negotiating position of a in controller chipsets filed a patent infringement suit defending firm may be increased when the market in against company C in ITC. which the action is brought is not its main market. Firm D is a computer peripheral company. Its main This leads to the inclination towards market power product is the traditional computer monitor, but has perspective in terms of patent protection in an recently moved to producing liquid crystal display international trade environment. (LCD) and display panel products. It has experienced litigation in the Federal District trials in the US in Methodology and Case Selection 2001 and also litigation in other jurisdictions. Advocating critical realism, the author believes that Firm E is also a computer peripheral company. there exists an objectively knowable, mind- This is a competitor of Company D in that its main independent reality, while acknowledging the role of 18 product is the traditional monitor. Firm F is a mother- individual perception and cognition. In such cross board manufacturer and its relevant product line border circumstances, a variety of different and includes lap-top computers. Both E and F have conflicting mechanisms determine what happens in any encountered litigation in the US due to the use of particular situation, making it difficult to identify the infringed upstream products. causes of any event. This paper benefits from a critical Table 1 shows the key features of two ITC realist perspective as its philosophical stance in two investigative case studies for which a more detailed ways. First, it provides a meta-theoretical tool with analysis is undertaken. The main Taiwanese parties are which to develop appropriate methodological and two IC design firms: VIA Technologies Incorporation theoretical framework that helps to present an (VIA) and Mediatek Incorporation (Mediatek). Both appropriate empirical work. Second, the critical realist firms experienced infringement suits by ITC point of view can expand our knowledge of the investigations and FDC. Their disputed products, VCD complex issues or events that lie outside statistic drivers and CPU, were related to personal computers. propositions and contradict the positivist viewpoint. In doing so, this study intends to enhance the scientific Empirical Results and Discussion value of the study by providing new methodologies to Interview Evidence address the impact of cross border patent litigation. It is widely believed that IPR protection is more Interviewing evidence and the two ITC investigative beneficial to domestic firms and less friendly to cases were selected to demonstrate strategic interactions foreign firms.13 To what extent does patent protection in cross border patent litigation. The interview evidence change firms’ behaviours is an issue that has been presented was gathered by a combination of face-to-face discussed at length in literature. Therefore, from the interviews, email communication and telephone Table 1  Main features of the concerned disputes interviews. Three samples of interviewees were with the Industries Litigation Product semiconductor industry and three were with computer Disputes experience peripheral manufacturers. All the interviewees were directly involved with the litigation process on behalf of Intel Corporation IC design ITC, FDC, multi- CPU and v VIA jurisdictions chipset their companies. Following are the key features of six Oak and Zoran IC design ITC, FDC DVD controller firms that were interviewed: v Mediatek chipset LO: STRATEGIC DIMENSIONS OF INTERNATIONAL PATENT LITIGATION 537

perspective of Taiwanese firms supplying products to entrepreneur creates a new firm to continue to a major market like the US, it is a major setback to produce the same product. Litigation becomes a incur litigation actions initiated by domestic useless strategy in this instance.’ producers. In addition, ITC and litigation actions A connection between the size of the patent portfolio triggered by domestic firms contribute to the hold-up and the venture capital investment was also made by problem but how do these actions influence the several interviewees, in particular from small firms (like strategic behaviours of importers? This section in Firm C). In general, they suggested that with a valuable terms of interviewing evidence attempts to address patent portfolio, firms find it easier to gain financial and above issue by exploring two practices of firms: capital support in the event of litigation. Of course the patent filing and the direction of R&D. smaller/younger the firm, the less likely it is that it will hold a wide portfolio. In this case, the quality of the Patenting Behaviour patent will be paramount. Overall cost of defending a A (Taiwanese) firm’s patent portfolio assumes litigation should not exceed expected benefits from great importance whenever disputes or litigation patent enforcement, including probabilities of occur. One of the reasons for this is because the more deterrence, detection, favourable settlements by courts related patents a firm holds, the better placed it is to or otherwise, and damages or licensing payments. If this negotiate its way out of trouble. Furthermore, if the is not the case, defending litigation actions will not be firm holds core patents in a given technology, these the best option, as it would lead to a waste of resources. may decrease the possibility of a lawsuit because it In such circumstances it would be better to negotiate a opens up the possibility for cross-licensing. This view settlement i.e. either pay a royalty or not use the has been confirmed in a number of the interviews infringed patent at all. A subsequent interview with a (interviewee, Firm A). However, one interviewee patent attorney confirmed the financial implications (Firm C), pointed to an information asymmetry with behind the patent portfolio, which can attract respect to the portfolio size. Firms with small stakeholders or business partners (interviewee, Firm A). portfolios are vulnerable, even if their own patents are infringed, since taking legal action against larger This is consistent with the previous literature that the size of a firm’s patent portfolio may affect the prospect firms or firms with large portfolios is a 10,11 time-consuming and costly exercise. Here of patent litigation. Securing strong bullet-proof patents in areas surrounding core product lines is cross-licensing is not necessarily a viable option and 9,10 they expect to pay higher rates in royalty fees. important. Semiconductor firms build infringement- Litigation, as discussed below, is one of the proof patent portfolios in order to have enough assets strategies to reduce market competition by large against possible lawsuits. However, interviewees also firms. Lanjouw and Schankerman10 show that pointed out that there is a financial consideration when patentees with small portfolios are at a significant they build their patent portfolio in order to avoid disadvantage in protecting IPRs due to the fact that possible lawsuits (interviewee, Firm A). they do not have a large patent portfolio to trade and In many cases of litigation disputes between to facilitate cooperative resolution of disputes. Taiwanese and US firms, the outcome has usually Taiwanese firms are generally in the small to medium been a settlement with regard to the disputed patent. category in terms of their capital base but are highly This will involve compensation in the form of royalty flexible in response to the change in the market. payments. Taiwanese firms often end up paying large Given that profitability and survival become a priority amounts of the royalty because of weak negotiating at the start of business, the size characteristics may skills. Partly because of this, one pre-emptive measure mean that firms are more vulnerable to litigation. But, that many firms follow is to patent as much as interestingly, one of the interviewees (Firm B) possible. They encourage engineers to apply for suggested that one of the advantages of her company patents even when the invention represents only a is that they are flexible enough to overcome the slight improvement over the existing technology. The restriction of patent litigation. She stated that, ‘Small cost of application is considered secondary to the firms are not always in the weak position under threat possibility of building a strong portfolio as a defence of litigation in IC design industries. Small firms are against litigation. Moreover, it is easy to abandon flexible in their response to market demand. patent rights by not paying maintenance fees Sometimes even if one firm becomes bankrupt, the (interviewee, Firm A). 538 J INTELLEC PROP RIGHTS, NOVEMBER 2013

There is little doubt that patenting practice has With emphasis by interviewees on market expanded in recent years and the USPTO is a popular competition and timing of marketing products, it is no destination for registering patents for Taiwanese surprise that they highlighted the importance of firms. When the author asked the question of what has maintaining upstream and downstream relationships essentially changed in IP practices during the last few when lawsuits were triggered. Litigation has the effect years, interviewees spoke of the organisation of disrupting the customer-supplier relationship, and (or reorganisation) and scale of IP department. One of therefore, plaintiffs and in fact litigants will probably the interviewees (Firm B) explained that their IP sue all of the product chain in order to have a better department was controlled by the CEO, because of the bargaining position. While downstream customers need to integrate the legal aspect of patenting with the usually have multi-suppliers to negotiate the supply overall corporate strategy. In his opinion, most price and risk; in the face of litigation action against Taiwanese firms still had the IP department as a any one firm, there is still a chance that the firm may separate legal department, which just dealt with be able to retain its customers. associated legal documentation and tasks. Some firms Firms embroiled in litigation try to convince their however, followed a different strategy. Compared to customers that such action will not affect product other firms interviewed, the new entrant, Firm C, uses supplies. Moreover, in the case of an initial ITC a US-based patent attorney to apply for patents and determination, they will work with customers to maintain its patent administration. There is no specific negotiate with the US tariff authorities to ensure legal division in this company. continuation of supply. But ultimately those with high In addition, with widening patent portfolios and technological capabilities will develop replacement increasing experience of litigation Taiwanese firms products through reverse engineering, of equivalent have become more aggressive, for example, in their function designed around the litigated technology litigation strategies, getting involved in counter-suits, (interviewee, Firm B). instead of waiting to defend the action or settling to Apart from that, an interview with a US attorney their disadvantage (interviewee, Firm A). revealed that the scope of patent claim, one of the The above discussion seems to confirm the proxies of its overall quality, is considered an defensive mechanism of patent protection. Aware of important factor in the patent suit determination. The the importance of US patents, Taiwanese firms have litigants are required to evaluate the scopes of patent emphasised on patenting quantity, focusing on many claims in order to respond to the litigation action minor developments. They appear to be aggressive in properly, because the cost of litigation will rise. their patent application strategy, applying for patents Moreover, with the added threat of exclusion order, even with marginal improvement early in the R&D firms are required to have capabilities to design and and innovation process. Holding a wide patent replace infringed products under ITC investigations portfolio gives the firm an added advantage in the and that too in a relatively short period of about event of litigation. In addition, developing an 18 months. This result is also consistent with extensive patent information database is perceived as previous literature, which shows that the risk of an important resource for R&D and business follow-on suits, the risk of court imposed strategies. With the increase in frequency of patent constraints, and rising transaction costs, including litigation and infringement, interviewees highlighted the threat of bankruptcy, may add to the litigation that they were concerned with the blocking powers of expense of defendants.6,8,12 their competitors to restrict their market access. Furthermore, reverse engineering and designing a Direction of R&D product of equivalent function around the litigated Before analysing how Taiwanese firms respond to technology is not always possible. This is due to the US litigation, it is important to understand their view limited technological capabilities of firms. One of the on why the litigation occurs. Interviewees emphasised interviewee states: ‘Strategies that invent around and that profits and market share were the main reason for patent around are more likely to fail. This is because the disputes, not solely infringement. Denying opponents recognize your attempt of imitation. They infringement in many cases, they felt the timing of have done their best to design mechanisms to prevent legal action as being important and a direct result of imitation, and our R&D capabilities limit this business strategies (interviewee, Firm A). strategy’ (interviewee, Firm E). LO: STRATEGIC DIMENSIONS OF INTERNATIONAL PATENT LITIGATION 539

Litigation increases transaction costs in business by cases in five countries involving several enforcement damaging a firm’s reputation and its relations with its mechanisms, such as ITC, FDC (Federal District trading partners, in particular, when a firm with Court) and CAFC (US Court of Appeals for the limited R&D capabilities cannot supply its customers Federal Circuit). Other downstream Taiwanese firms with replacement products. The costs and risks of were listed as defendants during this litigation. The litigation may increase if the litigation action lasts for Intel-VIA case therefore presents a unique opportunity a long period. for studying cross-border patent litigation and firms’ A major impression, which emerges from the litigation strategies. interviews, is that in many cases patent litigation The second case is the patent dispute between Oak results in a change in patenting activities and Technologies (Oak) and Mediatek Incorporation patenting behaviour. Prior literature has shown that (Mediatek). At the beginning of the litigation, Oak filed new entry biotech companies, for example, avoid a complaint in the ITC against United Microelectronics applying for the patents in some contested patent Companies (UMC) in 1997. Mediatek, a spin-off firm classifications.4 In discussing this behaviour with from UMC, was also one of the defendants in this ITC interviewees, they confirmed the change in patenting investigation. Although both companies reached a behaviour brought about by the threat of litigation. settlement in 1998, a further dispute of patent For example, ‘If competitors have litigation in similar infringement occurred again in 2004 again. Oak, which product areas, we may probably take this experience had merged with Zoran, filed a suit against Mediatek into consideration. Maybe we will not produce the and other relevant down-stream Taiwanese DVD driver same product or replace the possible litigated design manufacturing companies in 2004. This dispute reflects to avoid infringement action’ (interviewee, Firm F). the intensive global competition in VCD and DVD A litigation decision is no longer a legal or even control chipsets. technical decision but a corporate strategic decision. Facing a potential legal action can either enhance the Intel v VIA: Background competitiveness of a firm in the market place or cause VIA was established in 1995. Its main products it to suffer financial loss. included system logic ICs and peripheral ICs, which accounted for more than half of total sales. Other Patent Dispute Cases in the US ITC products including ICs and CPUs (central processing Table 2 below shows the key features of two patent unit) account for less than 10 per cent sales. Similar to disputes in the US ITC. Both cases were concerned the early phases of development of most Taiwan ICT with patent infringement of IC chipsets. The first case firms, VIA licensed from leading technology is a patent infringement suit between Intel Corporation corporations. For example, VIA negotiated a licence (Intel) and VIA Technologies Corporation. From 1999 from Intel in 1998 to produce AGP (Accelerated to 2004, both parties were involved in mutual lawsuits. Graphic Port) compatible products. After that, VIA The dispute was initiated by Intel’s lawsuit against grew quickly by focusing on low cost chipsets for VIA in 1999 charging them with breach of contract and CPU and other Intel products. patent infringement. This dispute was eventually The dispute in the VIA-Intel case arose from the resolved on 4 July 2004. The stakes and impact of this application of dynamic random access memory case were huge as the dispute encompassed 11 pending (DRAM) chipsets that all personal computers (PCs) Table 2  Basic features of the US ITC disputes

Intel Corporation v VIA Oak and Zoran v Mediatek

Period 1999 to 2004 1997 to 2004 Related court actions 1 California District Court 1 California District Court 2 ITC investigation 2 ITC investigation 3 CAFC 3 CAFC 4 Other country courts Contested US Pat Nos 5,333,276, 5,740,385, 5,581,782, 5,548,733, 5,581,715, 5,970,031, 6,229,773, 6,170,043 5,926,651, 5,051,622, 6,006,291 First International Computer Other Taiwanese DVD and VCD manufacturers Other firms involved Everex Systems Inc such as Delta electronics Previous ITC suits with ITC investigation 337-TA-352 (ref. 19) ITC investigation 337-TA-401 (ref. 21) Taiwan firms ITC investigation 337-TA-388 (ref. 20) 540 J INTELLEC PROP RIGHTS, NOVEMBER 2013

use to increase the speed of processors. At that time, Corporation withdrew the licence on 23 June 1999 the available synchronous dynamic random access and claimed that VIA infringed this technology memory (SDRAM) chipset was not compatible with (main litigated patent was the US Pat No 6,006,291). Intel’s newest and most profitable processors, the As a result of this dispute several lawsuits between Pentiums. Intel decided to back a powerful and Intel and VIA were announced worldwide. Multiple radically new type of memory chip invented by litigation events occurred between the two parties; Rambus Inc. By 1999, Intel spent two years and including the Northern District Court of California in hundreds of millions of dollars trying to establish July 1999 and the ITC investigation in January 2000 in Rambus Memory as the new industry standard among the US. Furthermore, Intel widened the legal action, to Taiwan’s motherboard and memory chip makers. include alleged infringers in Singapore and the UK. Rambus DRAM was twice as fast as SDRAM, but it VIA Technologies responded to Intel lawsuits with was a lot more expensive and complex to produce. several counter-suits in the above jurisdictions. Despite the effort to establish Rambus DRAM as the Settlement was reached on 5 July 2000 for some parts new industry standard, Intel struggled to build a of the dispute. But Intel modified the scope of the chipset that could support it. The end result was a lawsuit to continue the action. Intel alleged that VIA’s series of product delays and an embarrassing recall of chipsets supporting non-Intel processors, such as its motherboards.22 AMD-compatible chipsets, violated Intel’s patents. The At the same time, VIA introduced a slightly less first settlement did not cover these claims. Intel radical solution with low end product strategies based continued its appeal of the case. on the previous product standard. This new chipset The second stage of dispute related to whether VIA was 33 per cent faster than the existing standard, not technologies infringed five ‘Pentium 4’ microprocessor as fast as Rambus, but a lot cheaper and easier to patents. Intel filed the suit in the US state of Delaware integrate into existing PC architecture. With this and in three different jurisdictions: Germany, Great success, VIA also forayed into the CPU market, Britain and Hong Kong. Similarly, VIA Technologies which was dominated by Intel at the time. For responded to this legal action by several counter-suits example, the first CPU product, VIA Cyrix II, was and accused Intel of anti-competitive behaviour in announced in February 2000. This posed a threat to Taiwan’s Fair Trade Commission. VIA claimed that Intel’s market and during this time the licensing and some of the patents belonging to Cyrix, the former patent dispute between Intel and VIA worsened. CPU division at US-based National Semiconductor Table 3  Comparison between the patent disputes: VIA and Litigation Events in the Dispute Mediatek as defendants From 1999 to 2003, Intel and VIA were engaged in Case I: VIA Case II: Mediatek a legal battle over micro chipsets for CPU platform Features 22 Technologies and microprocessors. Broadly speaking, there were Industries IC design IC design five main litigation events and two settlement Relevant CPU and compatible CD driver chipset agreements between VIA and Intel. These are listed product chipset controller chronologically in Table 3. There were two main Multiple cases ITC+FC+CAFC ITC+FC+CAFC disputes, including several litigation events, in the Duration 1996-2001 1999-2001 and after Intel-VIA case. The first lawsuit resulted from a until 2004 2003 breach of contract and patent infringement suit filed Main dispute Twice Twice Downstream Motherboard maker: VCD maker: Behavior by Intel on 7 June 1999. VIA had licensed a new firms involved First international Tech Computer industry standard from Intel for certain computer-chip computer (FIC) Corporation, Delta specifications AGP in 1998. The new standard related Inc, etc. to the electronic interface and signal protocols by Background of Formosa Plastics UMC group capital group (FPG) which devices in a computer system communicated Timing of suit 4th quarter of the year 4th quarter of the year with each other. From 1996 to 1998 Intel announced Counter suit Yes Yes two AGP interface specifications, namely, AGP I and Relevant suit Antitrust suit by Anti-competition AGP II.23 But the dispute arose when VIA promoted VIA by Mediatek its own product, Apollo 133 chipsets which was Result of disputes Settlement Settlement and continuing backward compatible with older CPU’s. Intel argued Summary of Non-infringement Non-infringement that this contravened the AGP licence. Intel CAFC judgement (except in 1 patent) LO: STRATEGIC DIMENSIONS OF INTERNATIONAL PATENT LITIGATION 541

Corp, and Centaur Technology, another US-based chip filed a complaint with the International Trade designer purchased by VIA, were infringed by Intel Commission (ITC) in December 1997, against corporation. This dispute ended on 14 Feb 2003. The Mediatek and UMC for violation of Section 337 of CAFC ruled in favour of VIA by declining the liability the Tariff Act of 1930, claiming that Mediatek’s of patent infringement by VIA technologies. This final CD-ROM controller IC chipset infringed Oak’s settlement was also reached on 7 April 2003. patent. The ITC ruled that Mediatek did not infringe The Intel and VIA case was an unusual case due to Oak’s patent right, but Oak filed an appeal in the US the reason that foreign and relatively small sized firms Court of Appeals for the Federal Circuit (CAFC) are more likely to avoid cross-border litigation. against ITC’s decision. In May 2001, CAFC held that However, VIA Technologies responded to the Intel the reason for Oak’s appeal was not sustained, and threats by filing counter-suits several times. The affirmed the final determination of ITC.25 dispute has been cited by Rivette and Kline24 as a case With regard to the second dispute, Zoran and Oak in which relatively small firms challenged the leading sued Mediatek on 10 March 2004 in the ITC. They chipset giant successfully. claimed that Mediatek’s CD-ROM drivers and DVD player chipsets had infringed upon three patents of Zoran v Mediatek: Background Zoran and Oak (i.e., US Pat Nos 6466736, 6584527 Mediatek Inc is a fabless IC company established and 6546440) in violation of Section 337. Before this in 1997 (ref.17).The firm originated from the Taiwan- complaint, Zoran and Oak also filed a lawsuit with the based IC manufacturing: UMC. According to the Central District Court of California on 18 March 2004 report of IC insight, Mediatek grew 91 per cent on the three patents with a claim for indemnity for the between 2001 and 2002 and became one of the patent infringement. On 17 May 2005, ITC 25 leading suppliers to IC fabless firms. announced its initial determination that Mediatek’s IC Oak Technologies Corporation was acquired by the did not infringe Zoran and Oak’s patent 6466736 and Zoran Corporation in 2003. Both are US based firms patent 6546440, but some of Mediatek’s old model providing digital solutions-on-a-chip for applications chips were found to have infringed patent 6584527. in consumer electronics, such as DVD, digital camera, This dispute between Mediatek and Oak reflected DTV and imaging products. In the IC optical storage intense competition in the optical drive controller industry, Zoran was an important rival to Mediatek. market. In addition to the above lawsuits, for instance, The dispute in this case concerned the technology Mediatek also battled other competitors during this related to the transfer of information stored on a period. Those lawsuits included ESS Technology Inc CD-ROM (compact disk-read only memory) to a host in 2002, and VIA Technology and Aopen computer which in the context of this case contained a Incorporation from 2002 to 2003. CD-ROM drive, that managed the communication of data between the CD-ROM disk and the host ITC Investigation Cases: Discussion computer. The CD-ROM drive itself contained a Both cases were similar in that they involved cross- device known as a CD-ROM drive controller, border actions and multiple litigations in the Federal typically implemented as a semiconductor integrated District Court, ITC investigations and CAFC. The circuit. Therefore, the invention described and duration of disputes lasted more than five years and claimed in the disputed patent was concerned with an involved counter-suits by defendants. In addition, the improved CD-ROM drive controller that provided timing of litigation by the plaintiff was designed to faster and simplified data communication. punish the defendant financially because it occurred in the fourth quarter of the year, the most important part of The Progress of Disputes the selling season in personal computer and IT products There were two main disputes between Mediatek industry (Table 3).19-26 However, both firms responded and Oak Technology. The first dispute began in 1997 to legal action in different ways and the impacts of and the second in 2004 after Oak Technology merged litigation are diverse and multiple. A general theme that with Zoran Corporation.21,25 has run throughout this section – and made explicit in The original dispute arose between Mediatek and the discussion of enhancement of trade-relevant patent Oak Technology over a patent on CD-ROM drive enforcement – has been that neither legal protection nor controllers. This was close to a settlement after patent strategies alone are sufficient in understanding protracted negotiation. Before it was reached, Oak cross-border patent litigation. 542 J INTELLEC PROP RIGHTS, NOVEMBER 2013

Strategic Considerations in Avoiding Litigation litigation signals to the market (either fairly or unfairly) The above analysis provided evidence of hostile that defendants produced illegal products. This strategy behaviour involving infringement suits towards can isolate defendants’ trade relations with customers, Taiwanese firms. However in both cases, these firms distributors and investors etc., and damage their had attempted to develop a production strategy that reputation. Therefore, firms respond in several ways focused on producing comparable products within the but if they are to survive they have to promise existing standards rather than competing products on customers competitively priced replacement products the basis of new standards. For example, VIA had that involves extra investment on their part. licensed technology from Intel from the onset for In the VIA-Intel case, some downstream firms using developing chipsets. Mediatek has focused on IC and VIA products, such as motherboard manufacturers and chipsets compatible for optical storage drives, distributors were also involved in the disputes.22-24 At following the standards set for core technology for the same time, Intel was cooperating with two of VIA’s optical storage drives controlled by Japanese firms. Taiwanese competitors: Acer Labs and Silicon Such behaviour is consistent with the observations Integrated Systems. Both had obtained licences from of the development model of Taiwan ICT industries. Intel to make chipsets to be used with Pentium 4, as With the value chain of Taiwanese ICT industries, the Intel isolated VIA. Similarly, Zoran also employed the business model for initial development is to focus on isolated strategies to block the Taiwanese competitors the improved manufacturing and process innovation. and relevant products from entering the US market. For VIA developed an IC chipset compatible with Intel example, Zoran also filed suits against the CD ROM CPU and Mediatek improved the function of manufacturers, Lite-On and Aopen. The intention of transferring data in VCD drives. In addition, these actions (suits) is very clear; it is the use of the semiconductor industry’s structure also supplied ITC-efficient product constraint to isolate the reliable products to downstream firms, such as defendants’ trade partner relations. manufacturing firms of motherboard and personal To counter this, defendants need to convince their computers. For example, United Micro-Electronics trading partner that the suit was unjustified or that the Corporation (UMC), a leading Taiwanese IC foundry company would indemnify all its claims particularly, was a main IC manufacturing partner for Mediatek’s if it was found to be an infringer.13 The strategic products. VIA also interacted very closely with implications from both cases are as follows: downstream motherboard firms, which were joint defendants in the VIA v Intel lawsuit. Mediatek was a Counter-suit Strategies spin-off firm from UMC. VIA was one member of If defendants are more concerned with product sales Wang’s family business, Taiwan’s largest or second than the cost of attorney’s fees, they may extend the industrial conglomerate.18 duration of lawsuits by their counter-suit action. This is The literature suggests that young firms avoid particularly so in the short product life cycle industries, litigation in the early stages of development because such as computer and semiconductor industries. Such a of the cost and risk of litigation.10 Taiwanese firms strategy creates the opportunity to continue selling avoided those risks by developing Original irrespective of a guilty or not guilty of infringement Equipment Manufacturing (OEM) and Original verdict. Counter-suit actions create an uncertain legal Design Manufacturing (ODM) business models. environment for plaintiffs as well. Furthermore if the Those models provide a protective umbrella for defendant is found not guilty, other defendants in a development. In addition, it is quite evident that from similar position may believe that the possibility of the start both firms attempted to avoid the damaging winning the suit is favourable as in the Telex-IBM effect of patent disputes by licensing or cross- dispute which was specifically about antitrust 30 licensing with the leading technology firms. violation. This is also the case in patent invalidation suits. Once the court ruled a patent invalid in a patent Strategic Response to Patent Infringement infringement suit based on the fact that prior art Both plaintiffs in the two litigation cases demanded existed, the plaintiff loses the patent right. Thus, a product constraint (exclusive order) against the two counter-suits can also help defendants convince their Taiwanese defendants in the ITC. For Taiwanese firms trade partners that a company is confident in its product such actions lead to increased costs of maintaining their and its quality of patents even when such action is product supplies to customers. This is partly because expensive in terms of attorney fees. LO: STRATEGIC DIMENSIONS OF INTERNATIONAL PATENT LITIGATION 543

In both cases, when Intel employed litigation suits dominant patent portfolio, VIA’s negotiation power to maintain its rights, several counter-suits by VIA improved in the patenting domain. Technologies were used to postpone the threat of Mediatek also started by licensing from several leading litigation. VIA did not seek the settlement as soon as companies but went on to develop process innovations to possible in the beginning of the lawsuits. There are deal with electronic signals between IC and CD drivers. some reasons highlighted in newspapers.30 While the They were thus able to develop better and cost-effective sales of PC133 products peaked with the solutions in-house, which they went on to patent and announcement of litigation, VIA’s strategy was to licence to other firms. Through these developments extend the lawsuit to introduce uncertainty in the Mediatek improved their negotiation stakes with Zoran environment in order to continue selling. Similarly, and at the same time became a leading competitor in the Mediatek employed the same strategy to postpone the control IC technology of system-on chip. effect of litigation through counter-suits and broadening disputes under ITC jurisdiction. Formation of Alliances with Trade Partners VIA cooperated with Advance Micro Devices Promising a Competitive Replacement Product (AMD), a long-term Intel rival, to defend its market Reverse engineering is generally a lawful way to and infringement action brought against it. For acquire know-how about manufactured products for example, VIA and AMD filed a complaint against Intel the purpose of making a competing product.31 With charging, ‘Intel had abused its dominant position by the purpose of avoiding infringement claims, reverse tying makers of personal computers to rebate deals that engineering aims to design around and produce a were conditional on not buying chips from Intel’s competitive replacement product to maintain supply rivals’.31 In addition, during the litigation, VIA shifted to customers. towards producing an AMD-compatible processor and The chip manufacturing capabilities of both quickly accounted for about half of this market.23,24 Taiwanese defendants also helped to reduce the cost Similarly, Mediatek was able to form alliances with and time required to make exact or near-exact several downstream firms to jointly defend the competing chips. In particular, the Mediatek strategy litigation, and this had the effect of protecting their depended more on its high quality of staff whose trade-partners’ sales.25 For example Lite-On, a technological capabilities were flexible enough to Taiwanese DVD manufacturer, also listed as a enable a design around product to avoid infringement. defendant in the Mediatek-Zoran case, cooperated with Mediatek had provided a more efficient solution than Mediatek and continued using Mediatek’s products. other competitors during the lawsuits. VIA, on the other hand, preferred to continue providing a low end Uncertain Influences of Patent Litigation product to maintain its sales, while Intel was trying to Firstly, the competitiveness of IC chipsets and establish a new product standard. optical data storage markets are the main foci behind legal disputes. While the VIA case draws particular Using the Cross-Licensing Agreement of Other Firms attention to competition of CPU platforms and The use of the cross licensing defence against compatible chipsets, Mediatek highlights the infringement can also be seen in the case of VIA competitiveness of optical storage IC. In the VIA which strategically allied with Trident and the case, in particular, it can be observed how the product National Semiconductors Corporation. Both of these standards and litigation operated together in order to companies were covered by licensing deals with Intel control or extend markets. During litigation with Intel, and in so doing VIA was able to sell products with the VIA and AMD, the world’s second largest CPU Intel brand and not be the brunt of patent infringement maker behind Intel, jointly launched the double data suits. Such an alliance also increased VIA’s rate (DDR) 333 chipset standard in an attempt to negotiation position by widening its patent portfolio. capture the leading position in competition with Intel. Due to the asymmetric bargaining position in At the same time, Intel even as it awarded licences to litigation, VIA had to protect itself more aggressively Taiwanese companies seeking to build chipsets and strengthen its position within the industry by compatible with the new Pentium 4 processor, refused acquiring the Cyrix unit of National Semiconductor to provide VIA such a licence. It filed a suit in the US Corp and the Centaur Design Operations of Integrated District Court in Delaware, charging VIA with patent Device Technology Inc. Thus, despite Intel’s infringement to isolate its market potential.32 544 J INTELLEC PROP RIGHTS, NOVEMBER 2013

With regard to Mediatek, as a majority of PC users an agreement with Intel to manufacture the Pentium 4 moved toward high volume video multimedia and which was expected to boost their sales.22,23 document processing, the need grew for high-capacity Furthermore, despite VIA having established strategic removable optical storage. This shift of interest also alliances and having carefully managed its made optical storage products and digital consumer relationship with third-party providers, it was Intel electronics increasingly attractive. With increasing which held the stronger bargaining position in demand, most optical storage manufacturers dropped litigation enabling it to globally challenge VIA’s prices to augment their market share. This resulted in network relationship with customers, suppliers, intensive competition in the supply chain of optical investors and cross-licensors. storage products to supply a low-cost and efficient In contrast, the final determination (in September solution. The increased competition in this market 2005) of the ITC found that Mediatek infringed also spilled over to the legal environment as Zoran’s patent. At the same time the ITC dismissed a Mediatek, one of the technology leaders in this area, counter-suit that had been filed by Mediatek against also had legal disputes with several competitors at the Zoran. Given the relatively short period of time same time, including an infringement suit in FDC elapsed since the ITC judgment the author is unable to brought by Matsushita Electric Industrial Co in assess the impact of these judgements. However, August 2005 and VIA Technologies in 2004. Mediatek claims that they avoided infringement Secondly, key differences between the two cases claims by their new model of design-around chipsets relate to the firms’ characteristics. The asymmetry in and their sales continued to improve. Finally, if one characteristics of such cases may be found in the views litigation experience as a learning curve, both firms’ size, patenting behaviour and sales. The size firms have learnt how the strategic use of patent issue is clear in the contrast between VIA v Intel due enforcement can protect their market in the long term. to Intel’s dominant position in computer and IC Finally, patent strategies must be undertaken industries, although this did not seem to be an cautiously and involve marketing and management important issue in the Mediatek case. In the case of strategies to compete successfully in the global patenting behaviour, VIA employed generally more economy. The VIA v Intel case study highlights the aggressive acquisition and merger strategies to extend importance of identifying and overcoming linkages its patent portfolio during the litigation. Its sales between vertically related products and firms during downturn was partly due to the global decline of the litigation. In particular, Intel’s linking of two personal computers and the successful marketing of product markets - the CPU and its compatible chipsets the Intel Pentium 4 processor. Mediatek on the other - enabled it to exploit market power in one market in hand did not respond to the litigation in this manner. order to win a litigation battle. Similarly, the It quickly developed replacement products for its Mediatek-Zoran case illustrates that there are strong customers and consequently its sales continued to rise private gains in capturing a key component of a in contrast to VIA. Although Mediatek subsequently technology system by patent fencing strategies. bought out the IP and R&D department from Pixtel With regard to the trend of patent infringement Communications in 2004, this had more to do with lawsuits involving Taiwanese firms, several features securing itself in the wireless business than a specific from other representative cases in the ITC archive can response to patent infringement action. be considered. Firstly, during the 1980s most Thirdly, and related to the above, the ‘time to Taiwanese firms involved in ITC disputes were as market’ has become an important factor in market third party infringers due to the manufacturing competition, ITC investigations were used mechanism resulting from earlier industrialisation in strategically to delay or isolate the competitor’s new Taiwan. After that, Taiwanese firms had become products and imports in both case studies. The threat more directly involved in intensive patent litigation, of ITC investigation also gives a strong signal to an because the computer and IC industries began importer’s potential customers. In VIA’s case, CAFC booming since 2000 and Taiwan proposed to establish affirmed a District Court’s judgement of a suitable IP management system in the context of the non-infringement for VIA and no invalidity for Intel US.33 Secondly, in the majority of cases, Taiwanese patents.23 However, VIA’s sales performance did not companies acted as defendants and only in a few improve with this victory and they eventually reached cases as plaintiffs. Not surprisingly, the jurisdiction LO: STRATEGIC DIMENSIONS OF INTERNATIONAL PATENT LITIGATION 545

advantages are always a case in home countries. presented enable a highly particular and localised While an ITC investigation is recognised as an set of explanations for the strategic response of effective mechanism to protect IPRs, US firms Taiwanese firms toward patent litigation. These attempt to employ this mechanism to prevent foreign empirical cases contribute a number of key agenda infringement. When small firm attempts to settle with to the phenomenon of trade relevant patent complainants, the ITC investigation is a powerful litigation. mechanism for the complainant to hold an advantage Firstly, the findings highlight market competition in the settlement process. as a key variable in legal strategic calculations. Both However, there have been cases where litigants appeared to not take the cost of legal fees Taiwanese firms were the complainants. For into serious consideration by filing similar suits in example, the 337-TA-450 case in 2001, where different jurisdictions. The firms also sued the United Microelectronics Corporation, a Taiwan- relevant upstream and/or downstream firms of the based firm, initiated an investigation against Silicon targeted litigant in order to isolate the market Integrated Systems Corp, another Taiwanese firm, relationship of competitors. claiming infringement of their (UMC’s) own ICs. Secondly, the findings suggest ways in which Similarly, in investigation 337-TA-523 Mediatek foreign firms can employ domestic mechanisms to Inc and in 337-TA-525 Taiwan Semiconductor their advantage. Indeed, it has been seen that both Manufacturing Company, sued Taiwanese firms Taiwanese firms organised their legal actions to and Chinese firms, respectively. These cases are respond to the plaintiffs’ claims. These cases have very significant in showing the shifting attitude of demonstrated a strategic shift from merely avoiding Taiwanese firms towards a more aggressive litigation to employing the legal environment to approach than a defensive one. In addition, these contest claims against them. As the Mediatek case firms faced similar infringement suits in the ITC demonstrates, Taiwanese firms also use this from other competitors. These litigation mechanism to defend their markets. experiences therefore may help to build firm Thirdly, litigation also brings about specific capabilities to survive the litigation. temporary alliances. The Mediatek case points out This empirical result is consistent with previous 2,14,17 that a unified defence against litigation was a viable literature. Firms in ITC may be acting strategy to the infringement suits. This short-term strategically to threaten importers and increase their cooperation reflects closely the long term localised risks, and not solely to protect their valuable patent vertical cooperation among Taiwanese ICT firms. rights. Unlike district courts, the injunctive relief Fourthly, the analysis presents the strategic granted by ITC almost automatically could make response from defendants who have limited patentees necessarily defend infringement. These technological capabilities but who are able to features have been justified as needed to prosecute overcome these limitations in several ways. But the foreign infringers who would otherwise evade US initial loss of sales and the cost of acquiring or district courts. According to Chien’s study based on developing technologies in the short term may weigh an analysis at the ITC from 1995 to mid-2007, them down. plaintiffs at the ITC were more likely to win than 34,35 While these empirical results in the paper do not plaintiffs in district court. Furthermore, at least make a strong claim for positive or adverse impact of 65 per cent of the time litigants filed an infringement patent disputes on innovation activities, this study has suit in both district court and ITC, which led to the shown that innovation and commercialised products possibility of duplicate litigation and inconsistent 14 are complex processes, and mechanisms efficiently results. These mechanisms of the ITC, therefore, are restricting imported products may increasingly incline regarded as strategic use of litigation that may also firms to utilise legal enforcement strategically. The lead to inefficiency in US patent law. findings on the importance of the strategic use of Conclusion litigation in market competition address the This paper has attempted to demonstrate the deficiency of the patent strategy theory at the firm dynamic competitive process of litigation and its level. In addition, patenting litigation strategies are potential strategic behaviours. The case studies of still an emergent area of research, and theories for two ITC investigations and the interview evidence explaining patent-relevant questions are often not well 546 J INTELLEC PROP RIGHTS, NOVEMBER 2013

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