It is no secret that the semiconductor sector has been buffeted by geopolitical winds since the supply chain disruption caused by the COVID-19 pandemic. Examples abound of countries taking steps to on-shore semiconductor production and secure supply chains in each of the four main chip sub-sectors: logic, memory, analog, and optoelectronics, sensors and discretes. These include: the US CHIPS And Science Act 2022; the EU CHIPS Act 2023; the USPTO's announcement of the launch of a 'Semiconductor Technology Pilot Program' (a potential system for fast-track examination of qualifying semiconductor-related inventions); the UK Government's Semiconductor Sector Strategy; the South Korean K-Chips Act; the Japanese Government's US$8 billion subsidy to build two TSMC-led semiconductor manufacturing plants in Kumamoto (the first for 12-28 nm nodes; the second for more advanced logic chips with 6nm nodes); the Italian Government's EUR2 billion subsidy (approved by the EU) towards ST Micro's EUR5 billion Silicon Carbide analog chip manufacturing plant in Catania… The list goes on.
A recent patent entitlement dispute currently pending in the US District Court for the Northern District of New York, The Research Foundation for the State University of New York v Inpria Corporation, has, curiously, shed light on yet another example: the acquisition by Japan Investment Corporation (JSC), a Japanese Government-backed fund whose investments are overseen by the Japanese Ministry of Economics, Trade and Industry, of Tokyo Stock Exchange-listed JSR Corporation (JSR) for US$6.4 billion. JSR is one of the world's leading suppliers of photo-resist materials for use in semiconductor chip manufacturing, with a 30%-40% global market share.
The story unfolded as follows:
Dr Robert Brainard, a Professor in the Department of Nanoscale Science and Engineering at The State University of New York (SUNY), is a leader and early pioneer in the development of photo-resists for use in Extreme Ultraviolet (EUV) lithography.
EUV lithography is a cutting-edge technology that is essential for the continued reduction in node size (ie the dimension of structures on chips) in semiconductor manufacturing from 3 nanometers downward. ASML in the Netherlands is developing the hardware/process machinery for EUV lithography, which is amazing in its sophistication. For example, ASML's latest generation EUV machine (High NA EUV) is the size of a double-decker bus and costs US$373 million per machine. But it will only work if dielectrics (which historically have worked in visible or UV parts of the spectrum) can be developed which work in the EUV part of the spectrum (13.5nm). This is where SUNY and Dr Brainard's research comes in.
Back in 2015, SUNY entered into a multi-year joint development agreement with Inpria, a spin-out from the University of Oregon. Like SUNY, Inpria is a specialist in EUV metal oxide photo-resists. Inpria was founded in 2008 and was backed by top-quality specialist semiconductor venture funds, including TSMC Partners, Air Liquide Venture Capital ALIAD, Applied Ventures, Intel Capital and Samsung Ventures. It was acquired by JSR as a wholly-owned subsidiary in October 2021 for US$514 million.
The Research Foundation for the State University of New York (SUNY RF), the tech transfer arm of SUNY, brought the above-captioned patent entitlement claim against Inpria on 25 January 2024, claiming that twenty-five patents (the Challenged Patents) which had been filed by Inpria in its sole name claimed inventions relating to EUV-photoresist materials which had actually been developed by Professor Brainard and his team under the joint development agreement. The claim is still pending. Suny RF is seeking relief including an order for the correction of inventorship, and order for the transfer of the Challenged Patents into its sole name (or joint names), the imposition of a constructive trust over any proceeds made by Inpria from the commercialisation of the patents, and damages.
So far, so straightforward.
However, matters took a more unusual turn on 31 January 2024, when SUNY RF filed a request for a temporary restraining order and preliminary injunction against Inpria to require it immediately, pending trial and final judgement, to: (1) cease licensing the Challenged Patents to any party, including but not limited to JIC; (2) cease assigning or transferring the Challenged Patents to any party including JIC; and (3) contribute US$2.3 billion into an escrow account.
At the time, JIC's acquisition of JSR had been announced, but was not due to close until 14 April 2024. SUNY RF argued that JSR had indicated an intent to frustrate any judgement on the merits which it obtained and it would suffer irreparable harm when JSR consummated the JIC acquisition as this would leave control of the Challenged Patents (and the decision to pay any judgment) in the hands of the Japanese Government.
SUNY claimed that “JIC plans to take SUNY's IP and run”. Its brief made much of what was a single statement from JIC in its tender offer announcement for JSR that as it is "incorporated outside the US", any claims against it would be "difficult to enforce".
Many observers (us included) thought that these grounds were weak, and the preliminary injunction application was unlikely to succeed. The evidence of any irreparable harm to SUNY RF (one of the requirements both in the US and UK for a preliminary injunction to issue) was thin, or non-existent. Inpria (a US company) was already at the time of the application owned by JSR (a Japanese company, listed in Tokyo). There didn't seem to be any reason to believe (and none was pleaded) why the transfer of ownership of JSR from current shareholders on the Tokyo public market to JIC would result in any increase in ability or intent to avoid enforcement of a US court judgment. SUNY RF's brief also attributed the whole deal value of the JIC-JSR deal (US$6.4 billion) to the Challenged Patents. This was clearly incorrect, as JSR had paid US$514 million to acquire Inpria as recently as November 2021 and was itself a substantial and highly successful corporate group before it acquired Inpria.
Sure enough, in an order dated 29 March 2024, the Court dismissed the application for a preliminary injunction. It held that (i) the JIC statement on which SUNY RF relied appeared to be no more than a routine disclosure of the type made by foreign issuers seeking exemption from the requirements of US securities laws; (ii) SUNY RF had presented no evidence that either Inpria or JSR had made any effort to hide or secrete its assets or taken any steps to transfer ownership of its assets offshore for the purpose of avoiding judgement. The Court concluded that SUNY RF's argument that Inpria and JSR intended to frustrate any judgement on the merits in its case was "speculative and conclusory" and was insufficient to establish the "actual and imminent" harm required for a preliminary injunction to issue. The Court also commented that the SUNY RF was in effect asking to infer that Inpria and JSR intended to frustrate a judgement from the mere fact that the JIC-JSR transaction was an international transaction involving a sovereign wealth fund. This was self-evidently unjustified.
In one sense, the real story here is that the JIC tender offer for JSR was, according to commentators, triggered by an approach to JSR by Merck Performance Materials (part of the German Merck Group). Merck has been pushing to bulk up its performance materials unit as chip makers and their suppliers seek to profit from an explosion of demand for data centre chips that power generative AI services. It bought London-listed specialty chemicals group AZ Electronic Materials for GBP1.6 billion, including debt, in 2014. In October 2019, Merck also completed a EUR5.8 billion acquisition of US-based Versum Materials, which makes critical components used in semiconductors
The Japanese Government is likely to view JSR as one of its remaining national champions in the semiconductor value chain, and wants it to remain under Japanese ownership, not German ownership. Presumably the Ministry of Economics, Trade and Industry (METI) prodded JIC into making a tender offer, and at a sufficient premium over the share price to dissuade Merck or anyone else from making a rival bid. Japan has in the past, for example, banned the export of JSR's photo-resist materials to South Korea, seeking some geopolitical leverage from JSR's key role in the semiconductor ecosystem. It can only maintain that leverage if JSR continues to be headquartered, and has significant production facilities within Japan. Under foreign ownership, the centre of gravity of the business could move to other parts of the world. It looks as if this was not acceptable to the Japanese Government. This in turn indicates that the geopolitical tensions at play in the sector show no sign of abating any time soon.
