Nov. 4 (Bloomberg) -- Taiwan Semiconductor Manufacturing Co., the world’s largest custom-chip maker, won a jury verdict that Semiconductor Manufacturing International Corp. improperly used its trade secrets and breached a $175 million settlement.

Taiwan Semiconductor’s U.S. unit accused its rival, China’s biggest chipmaker, of causing more than $1 billion in damages by using 65 of its trade secrets and breaching a 2005 agreement, Jeffrey Chanin, an attorney for the Hsinchu, Taiwan-based company, said in an interview. That agreement resolved claims that Semiconductor Manufacturing earlier infringed trade secrets for chip-making processes, Chanin said.

A state court jury in Oakland, California, yesterday found that Semiconductor Manufacturing improperly used most of the 65 trade secrets and violated the deal starting in February 2005, according to a jury verdict form supplied by Chanin.

Taiwan Semiconductor is seeking payment for lost profits on U.S. sales since about 2002 and unjust enrichment on Semiconductor Manufacturing sales of chips that infringe on its trade secrets, said Chanin. The jury will decide how much in damages should be paid after hearing evidence from both sides starting Thursday, he said.

Semiconductor Manufacturing last posted a profit in the first quarter of 2007. Its third-quarter net loss widened to $69.3 million from $30.3 million a year earlier, the company said Oct. 28. The company expects to report an annual profit for 2010 on lower depreciation costs and improved demand, Chief Executive Officer Richard Chang told analysts that day.

Status Quo

The ruling won’t change the status quo in the industry given Taiwan Semiconductor’s size, said Sophie Chuang, an analyst at SinoPac Securities in Taipei, who rates the stock “hold.” “Semiconductor Manufacturing isn’t a big player,” Chuang said.

Taiwan Semiconductor, which commands more than half of the custom chipmaking market, rose 0.7 percent to close at NT$59.60 in Taipei trading. Semiconductor Manufacturing shares, which were suspended in Hong Kong today, fell 2.6 percent to 38 Hong Kong cents yesterday.

Semiconductor Manufacturing, based in Shanghai, denied wrongdoing and said Taiwan Semiconductor breached its agreement to negotiate disputes over the settlement and sued to stifle competition, according to court filings in Oakland.

“We’re disappointed,” Matthew Szymanski, Shanghai-based vice president of corporate relations at Semiconductor Manufacturing, said today in a phone interview. “There are many appealable issues, and we’re considering all of our options.”

Company’s Chips

JH Tzeng, a Taiwan Semiconductor spokesman, acknowledged the verdict today.

Taiwan Semiconductor makes chips for mobile phones and medical equipment, among other uses. Companies such as Nvidia Corp. and Qualcomm Inc. order from it to avoid the expense of building chip factories.

The company originally sued its Chinese rival in 2003, claiming it stole its logic chip processes and other secrets and incorporated them into its own manufacturing, Chanin said.

The two companies agreed in 2005 that Semiconductor Manufacturing could use Taiwan Semiconductor information for existing processes and was barred from using it for new manufacturing, said Chanin. Semiconductor Manufacturing also signed a six-year license with Taiwan Semiconductor.

The case is TSMC North America v. Semiconductor Manufacturing International Corp., RG06-286111, Alameda County Superior Court (Oakland).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net.

Last Updated: November 4, 2009 12:47 EST