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Trade Secret Theft Victim Downplays Chinese Espionage Angle

by Chris Brook on Monday April 15, 2019

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The manufacturer, which recently won an intellectual property case involving the theft of proprietary algorithms, source code, and programming language scripts, doesn't deny it was a victim of corporate theft but disagrees with the implication it was "Chinese espionage."

Yet another supplier in the semiconductor industry has confirmed its fallen victim to corporate espionage, this time to former employees who stole “large files” on memory sticks, but the company disagrees with how some are reporting on the news.

ASML Holding, a Dutch manufacturer of photolithography systems for the semiconductor industry, confirmed last week that several of its former employees breached their employment contract by stealing and sharing data on the company’s software with a competing company, XTAL Inc.

The company took umbrage however with a report on the incident in Het Financieele Dagblad, a Dutch paper, that classified the theft as Chinese espionage. While some of the former employees happened to be Chinese nationals, individuals from other nations were also involved, the company said last Thursday.

“The suggestion that we were somehow victim of a national conspiracy is wrong. The facts of the matter are that we were robbed by a handful of our own employees based in Silicon Valley, who had broken the law to enrich themselves," ASML President and Chief Executive Officer Peter Wennink said.

In the semiconductor industry, via photolithography systems like those made by ASML, silicon wafers are patterned with a light sensitive polymer called a photoresist to aid in the creation of semiconductor chips and in turn circuits. ASML - which has offices in Europe, the U.S., and Asia - researches, develops, designs, manufactures, markets, and services these systems.

The company confirmed last week that in 2015, while still employed by ASML, some of its employees working in ASML's Brion division - a San Jose-based computational lithography company ASML acquired in 2007 - stole software for mask optimization from the subsidiary in hopes of creating a competing product. In lithography, mask optimization allows for higher resolution imaging; the technique relies on a set of mathematical and proprietary algorithms.

The news revolves around a case that ASML sought legal action around in 2016 and won last year against XTAL. In November, a Santa Clara County Superior Court jury found that XTAL, which makes electrical design automation for semiconductor systems, misappropriated ASML’s confidential and proprietary information and trade secrets.

The semiconductor space, rife with proprietary data, has seen its fair share of data theft as of late. Police in Taiwan arrested six suspects earlier this year over accusations they stole formulas for manufacturing chips. Another Dutch firm, Lumileds, was awarded $66 million last year after it was determined a Chinese competitor had stolen the company's trade secrets and used them to develop its own products.

According to a court filing, two high-level ASML employees, Hua-yu Liu and Song Lan, left the company for XTAL in 2015 but not before copying data, including trade secret information, from their work machines to external storage devices. In a complaint, ASML also accused the employees of taking ASML source code, programming language scripts and business information and not returning it.

XTAL was founded in 2014 by two former ASML employees but the company wasn’t a concern early on. ASML didn't believe XTAL’s business was going to include computational lithography. It turns out the company's business not only included computational lithography, it unlawfully capitalized on Brion's work.

The court awarded the company $223 million on the trade secrets claim, $135 million for inducing former employees to breach their contracts with ASML, $169 million for aiding and abetting former employees to breach their duty of loyalty to ASML, and $1.2 million in forensic investigation costs for breach of California’s computer fraud statute. It’s unclear if the sum will ever be collected following XTAL’s filing for bankruptcy last December however.

Key to the verdict was the fact that Bartko, Zankel, Bunzel & Miller, lawyers for ASML, were able to uncover evidence by "obtaining critical Court orders requiring XTAL to turn over its computers, devices, and source code for inspection, which exposed XTAL’s massive theft of intellectual property."

Despite the jury's verdict in favor of ASML coming four months ago, news of the case and subsequent trade secret theft gained renewed attention with Financieele Dagblad’s report last week.

In particular it was the Financieele Dagblad's reporting that XTAL’s parent company, China’s Dongfang Jingyuan, has ties to the Chinese Ministry of Science and Technology that ratcheted up the Chinese espionage narrative. In defense, according to ASML, the company's funding came from both South Korea and China and the main goal of theft wasn't to benefit China, it was to create and sell a competing product to an existing ASML customer in South Korea.

ASML, which claims its substantially increased its efforts to protect its assets in recent years, used the story as an opportunity to laud last week's trade agreement between the EU and China.

Chinese Premier Li Keqiang told the EU last week China will no longer force foreign companies to share sensitive data when operating in China.

"We do protect our proprietary knowledge carefully and are very sensitive to information security. We believe we can serve all our customers, including our Chinese customers, and help them build their businesses," Wennink said, "We are encouraged by the recent constructive talks and agreements between the European Union and China that China will step up its efforts to respect and protect corporate intellectual property of non-Chinese companies, including effective enforcement actions.

Tags:  Data Theft IP theft

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