Jacob Schindler

In a patent dispute that seems tailor-made for the Trump era, a US semiconductor company says a Chinese competitor has relied on IP infringement and government subsidies to significantly undercut its business. But although New York-based Veeco won a key preliminary injunction battle in front of a US district judge last month, a court in China hit the US company with an injunction of its own four days ago, causing one analyst to surmise that its patent enforcement campaign has badly backfired.

Veeco makes equipment used to manufacture LEDs, and until recently had about 60% market share in a technology known as MOCVD reactors. It makes the reactors itself, but has licensed German company SGL to manufacture a specific component called a wafer carrier. SGL also supplies wafer carriers to Advanced Microfabrication Equipment (AMEC), a new Chinese player in the MOCVD space.

As the competition between Veeco and AMEC hotted up, the former asked SGL to stop selling wafer carriers to the Chinese company in early 2017, saying such sales infringed its patents. Having apparently failed to convince its supplier to cease doing business with a growing rival, Veeco filed a patent suit against SGL in April.

In court filings, Veeco tells a story that sums up many of the semiconductor sector’s concerns about IP infringement and unfair competition stemming from China’s efforts to become more self-sufficient in critical technology areas. AMEC, it says, had less than 10% of sales in the MOCVD space in 2016, but could now eclipse former leader Veeco in sales before the end of this year. Veeco says this meteoric growth is founded on using its patented technology while simultaneously undercutting its prices, thanks in part of Chinese government subsidies.

AMEC responded by filing a patent infringement complaint against Veeco’s Shanghai subsidiary in the Higher People’s Court in Fujian on 13th July. Several days later, Veeco signaled its intent to amend its US complaint, asking for a preliminary injunction banning SGL from supplying wafer carriers to AMEC on 21st July. The two litigation battles have since continued in parallel.

In New York, Judge Pamela K Chen ordered a preliminary injunction prohibiting SGL from supplying the allegedly infringing components to AMEC and two weeks later refused to stay that order pending an appeal, meaning it is likely to remain in place for some time. According to Veeco’s complaint, it will be very difficult for AMEC to line up an alternative source for these particular components.

But Veeco’s US success has been answered with a major blow in China. The infringement suit was suspended while the two sides contested a PRB validity review, which the AMEC patent asserted against Veeco survived in somewhat narrower form. But last Thursday, barely two weeks after the PRB’s decision, the Fujian court slapped an injunction on numerous Veeco MOCVD systems.

It is not clear whether the China injunction is a preliminary or permanent one, or what the next steps are, but Veeco claims the decision was handed down “without providing notice to Veeco and without hearing Veeco's position on alleged infringement” - which suggests it could be the former. The NASDAQ-listed company told investors that it will appeal the ruling, which it affirned applies only in China and only to some of its products in that market.

AMEC praised the Chinese court’s decision in a press release, saying the “stringent injunction terms” would take effect immediately and are “unappealable”. It says that in addition to a permanent injunction, it has asked for more than 100 million RMB ($15 million) in damages.

The ruling certainly seems to have caught Veeco by surprise, underlining the huge risks that come with the uncertainty around China’s burgeoning patent litigation environment. As one analyst pointed out, it is no small matter for the US company, which derives 60-70% of its MOCVD revenue from China. A report in Newsday on Friday suggested that the company’s shares fell up to 20% on news of the ruling.

Surprise is rarely a good thing when it comes to publicly-traded companies, but China’s patent environment over the last couple years has consistently found new ways to knock the rest of the world aback. Any tech company with investors to answer to had better be working out ways to minimise its risks there – and that will have a global effect on patent strategies.