At the HonHai shareholders’ meeting this past June 8, chairman Terry Gou excitedly announced that for the first time in company history HonHai sales exceeded one trillion NT dollars in 2006, ranking it third overall in a CommonWealth Magazine survey of Chinese-owned corporations throughout Taiwan, Hong Kong and China.

A key resolution made during that meeting was that in the future all major patent licensing, negotiations, and litigation must be discussed at the board level, as “intellectual property licensing and alliances can form competitive industry alliances; they are the bases of not just lawsuits, but commercial competitive strategies.” Gou gave the example of Apple and Cisco’s collaboration over the iPhone, where Apple controls the patents on the handset end and Cisco on the telephony end, establishing reciprocal licensing and forming an industry alliance.

Nokia, the world’s largest handset manufacturer, and Qualcomm, the world’s top handset chip manufacturer, have brought suits against each other for patent infringement. HonHai, as an upstream assembler, must proceed with extreme caution. “The future is not about hardware wars but software wars,” offered Terry Gou to his shareholders on the key elements of future technology competition.

Why must Terry Gou, at the head of one of the top corporations in Greater China, approach intellectual property (IP) battles with Europe and North America with such caution?

HonHai’s circumspection exemplifies the new battleground of intellectual property that Taiwan now faces: having gotten started in contract manufacturing (OEM), Taiwan is increasingly susceptible to becoming embroiled in patent infringement lawsuits with major international brands.

At a legal briefing, Acer chairman Stan Shih expressed his confidence that Acer could successfully strike back legally against HP.

For Taiwan it’s an unavoidable global IP war.

The difficult straits of major Taiwanese OEM vendors is even more apparent in the case of Acer and HP’s suits and countersuits.

After HP brought its suit against Acer in mid-May for intellectual property infringement, Acer’s US subsidiary hit back with an injunction in US federal court. In its countersuit, Acer required that suppliers HonHai, Quanta, and Wistron honor their litigation guarantees, paving the way for suits and countersuits between brand and OEM vendors. When HP attempted to force Acer out of the US market through litigation, Acer sprang to action in kind, rallying its three OEM manufacturers in order to marshal more patent rights, and exerting its collective might to force a truce.

For Acer it means spreading risks; for HonHai, Wistron, and Quanta it’s like a nightmare from hell.

“When a company gets sued, anyone above or below it on the industry chain can get caught in the crossfire,” offers Kenneth Adamo, a partner at Jones Day, who won billion-dollar IP infringement cases against Samsung and Hyundai on behalf of Texas Instruments. “That move by Acer symbolized how IP wars are no longer one-on-one battles, but collective wars tied into the industry chain.”

Intellectual property wars run across borders and up and down the industry chain. Enemies are no longer just competitors, but could ostensibly be any given company along the industry supply chain.

In other words, if MediaTek (MTK) were to lose a court case for IP infringement and were excluded from the US market, then all Taiwanese products that employ the offending technology would be kept out as well. “There’s no longer such a thing as being out on your own,” relates Adamo.

For this reason no high-tech company can just watch on the sidelines as others fight it out; rather, they must be thoroughly versed in the IP terrain of each and every company along the industry chain.

When the giants of the global technology realm readily resort to claims of patent infringement to resolve commercial competition, what can Taiwan, starting from OEM business and sitting at the upstream position in the industry chain, do to defend itself?

Strategy 1: Know Thine Enemy

The first step toward self-protection is to cast a wider patent detection net. The object is not just to gain a firm grasp on competitors’ IP landscape, but also knowing everything there is to know about the patents of upstream suppliers and downstream clients so that all the relevant information is on your radar screen.

“Major OEM manufacturers are in a position similar to that of someone who goes into a card game with a lot of allies,” offers John Chou, former legal affairs director for HonHai and current general manager of A-Data Technology Co. As long as you know what cards everyone else holds, no move you make is too difficult. “The game takes place above the table, but under the table there is collaboration going on,” he says.

Still more aggressive major technology companies boost their R&D capabilities and build up their cache of IP weaponry. HonHai produces over 300 new patents on average per year. In addition to doing its own R&D work resulting in over 30 patents per annum, MediaTek buys patent rights from outside sources. In order to meet company plans to expand its patent team from the current level of seven members to 40, the company will have to operate in the major battlegrounds of China and the US. The key will be developing the IP equivalent of nuclear weapons.

Exercising control over a good quantitative and qualitative array of patents is not just an effective defense but can force enemies to step up and “pay tribute.” Not having patents “is like going to Las Vegas without money; you can’t even get to the table,” relates Paul C.B. Liu of the National Chengchi University Graduate Institute of Intellectual Property.

Nonetheless, despite going all out to apply for patents, Taiwan has thus far been unable to leverage patents to create value.

Taiwan owns the fourth highest number of patents in the United States, the world’s largest market (Table 1). Unfortunately, shelling out around NT$200 billion in intellectual property costs, Taiwan recoups only NT$2 billion generated from patent holdings.

What causes this massive gap between NT$200 and NT$2 billion?

The chief contributing factors are Taiwan’s inherently OEM industry makeup combined with the defensive posture of most CEOs.

“Because Taiwan deals mostly with contract manufacturing, most of the patents involve production process refinements rather than fundamental core technologies. This is the technical nature of Taiwanese patents, as well as an inherent restriction,” offers Gloria Wu, deputy general director of the Institute for Information Industry’s Science & Technology Law Center.

Flipping through the Taiwanese patent rankings put out by National Chengchi University (essentially a ranking of the number of patents submitted by Taiwan and approved by the United States Patent and Trademark Office) it is not difficult to notice that technical areas in which Taiwan is most active in patents are electrical engineering, digital communications, and semiconductors, at 44.5, 17.7, and 17.2 percent, respectively.

Strategy 2: The Best Defense Is a Good Offense

A lot of CEOs assume that patents are defensive protection, but that’s an incorrect concept.Offense is actually the best defense. An additional fatal flaw for Taiwan is the defensive attitude of the island’s corporate executives. In the past, major Taiwanese technology companies have adopted a strong defensive posture, resulting in repeated setbacks.

We don’t have to look far for ready examples. Each year over 100 cases of intellectual property infringement are brought up against Taiwanese companies in US courts. Intel’s suit against VIA Technologies knocked VIA out of the CPU market. Acer, which was generating over NT$100 million in profits in 1989, paid IBM over NT$200 million in patent reparations the same year. These are just two of the painful lessons the Taiwanese technology industry has been forced to learn over the years.

“A lot of CEOs assume that patents are defensive protection, but that’s an incorrect concept,” exclaims Adamo. “Offense is actually the best defense,” he offers emphatically.

If Taiwan just sits tight in a defensive position, all it can do is wait for lawsuits to come and do damage. On the other hand, taking the offensive with lawsuits is more likely to result in advantageous negotiations. For instance, Big Blue IBM generates over a billion US dollars in profits each year in IP lawsuit awards and licensing fees.

Dick Thurston, TSMC VP and legal counsel, advises Taiwan’s high-tech industry to give up its defensive posture on IP in favor of strategic thinking that seeks to create value for partners and clients.

Strategy 3: Enlivening IP Value

Apart from legal strategies and wrangling, companies with vision can use their patents to create value for clients and accelerate commercial growth.

TSMC, the world’s top OEM IC chip wafer maker, is a model of utilizing intellectual property to create value. Company president and CEO Rick Tsai has been known to proudly exclaim that TSMC’s investment of US$2 billion in production process R&D has given clients US$100 million in silicon IP value.

How have they done it? First of all, TSMC moved its strategic thinking on IP to a higher plane, positioning itself as a visionary atop the IP value pyramid.

Dick Thurston, vice president and general counsel for TSMC, breaks down the IP value pyramid into five levels: at the bottom is defense; next comes cost control; third is the profit center level; fourth is integrated intellectual property activity; and finally, at the top lies vision.

While most Taiwanese technology companies are still taking a defensive approach to IP usage, TSMC has created value through intellectual property for itself, partners, and clients. “Our objective is to give clients strong and effective IP, to help them protect their market share,” says Thurston. “Also, we seek to use IP to form R&D alliances and commercial strategic alliances,” he adds.

As an example, Thurston relates that if TSMC were to aim for the leading position in the 32-micron production process, it would first bring together legal counsel, production processes, R&D, and sales staff to identify core technology areas, after which the legal department would assess how to use trade secrets, patents or other methods to protect key core technologies. These patents or trade secrets then become bridges for forging commercial opportunities with company partners. Thurston offers, “Twenty years ago TSMC was a company with low production costs and a new business model. Today, TSMC is a technology leader.” One crucial reason for that difference is bringing IP value to life.

Taiwan remains embroiled in intellectual property battles around the globe, yet as long as it can gain command over where it stands in relation to its competition’s strengths and weaknesses, it can blaze a new path of innovation from out of the global IP wars.

Translated by David Toman

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Chinese Version: 台灣科技業，深陷全球智財戰