Have you noticed a shortage of Ford and Toyota vehicles? Have you had trouble finding a new washing machine? Are you wondering if you will ever get your hands on a PlayStation 5? You are likely not alone in having these thoughts. All of the aforementioned products require semiconductor chips for their electrical components to function properly and to “provide a variety of functions ranging from computing to storage and memory.” These chips have become scarce because of various factors, including a global pandemic and difficulties acquiring and enforcing semiconductor chip patents.
The COVID-19 pandemic was the impetus for a series of unfortunate circumstances that led to a shortage of semiconductor chips and, thereby, the products that need them. As the pandemic took hold worldwide and lockdowns were imposed, there was a surge in demand for consumer devices like gaming consoles, tablets, and streaming devices for home entertainment. When the pandemic spread westward from China, car manufacturers like General Motors and Ford Motor Company shut down production lines. They canceled orders for semiconductor chips in anticipation of a prolonged market slowdown. Chip manufacturers responded to the spike in demand for consumer devices and the drop in demand by the automobile industry by switching production to chips for consumer products.
When the automobile market recovered faster than expected, chip manufacturers lacked the supply to keep up with the increased demand. Another wrinkle in the chip supply chain was a decision by the Trump administration to impose sanctions on Chinese tech companies like Huawei, which prevented the companies from purchasing chips made with American components. The ban prompted Huawei to stockpile chips before the sanction took effect, requiring massive orders, further increasing chip demand. There are only a few semiconductor fabrication facilities or “fabs” globally, and the ones operational during the pandemic suffered delays due to weather that slowed the manufacturing process. Constructing fabs is highly expensive and time-consuming, requiring investors to make a multibillion-dollar gamble on whether to fund a plant in an unstable market. That uncertainty, coupled with the lack of reliable patent protection for semiconductor chips and the threat of litigation by non-practicing entities (“NPEs”), have contributed to decreased capital investment in fab construction over the past decade.
Semiconductor chip design layouts comprise an intricate series of electrical components and connections configured into three-dimensional patterns on the chip surface called masks or mask work for a set of masks. The Semiconductor Chip Protection Act (“SCPA”) of 1984 promulgated a new form of intellectual property protection for “masks that are fixed in semiconductor chips.” A flaw in the SCPA is that it permits reverse engineering a patented mask for commercial use as long as the reserve-engineered chip is incorporated into an original semiconductor mask or three-dimensional pattern. Reverse engineering is an affirmative defense under the SCPA with a two-prong test to determine whether the reverse engineering exception applies.
For the exception to apply: “(1) the work must not be substantially similar to the original chip, and (2) the competing work must be accompanied by a record of investment and toil by the reverse engineer.” A law review article from Golden Gate University noted that the SCPA would provide better patent protection for existing chips if it included a provision that restricted the exception to cases where the copying did not improve the original product. This would lessen the burden on the Court during litigation to make a fact-intensive inquiry of evaluating documentation to determine whether there was sufficient effort in the reverse engineering process and the copied chip is substantially similar.
Aside from the difficulties of enforcing chip patents, semiconductor manufacturers are further burdened by increased patent litigation over semiconductor chips, specifically from NPEs. NPEs include a person or company that “acquires a patent or patent rights but does not practice the patented invention.” NPEs take advantage of their acquired patents by “enforcing the patent rights against alleged infringers.” Litigation regarding semiconductor chips has steadily increased since 2017, with NPE litigation in particular on the rise, accounting for “nearly 80 percent of all litigation in 2021.” The NPEs are able to sue so prolifically thanks to financial backing from third parties who generally receive a portion of any recovery from the suit in return. The percentage of U.S. fabs among the global total has decreased significantly from 1990 to 2018, ironic since the U.S. dominated the semiconductor/integrated circuit market in the 1970s with a 70 percent market share. That percentage has moved over to Asia, with Taiwan’s TSMC and South Koreas’ Samsung Electronics combined controlling over 70 percent of the semiconductor manufacturing market. Asia’s dominance in chip manufacturing has made patent enforcement more difficult, in part because of the limited discovery tools available in non-U.S. jurisdictions.
There is hope for American chip manufacturers from the White House through an executive order from President Biden to allocate $50 billion for chip manufacturing and research and through Congress by way of a bill that will incentivize chip research and development and secure the supply chain if it passes. While this may be a step in the right direction, the fact that a single fab could cost upwards of $20 billion means that the money will likely only make a small dent in the issue. An increase in patent protection for semiconductor chips, preventing competitors from reverse-engineering patented chips of other companies, would encourage investors to fund more domestic chip fabrication facilities and prevent existing manufacturers from wasting money on senseless litigation.
While these proposed solutions are not an instant cure for the chip shortage, hopefully, they will make the market less hostile so that consumers can finally purchase the cars and electronics they desire.
Ryan Mahabir is a second-year law student at Wake Forest University School of Law. He holds a Bachelor of Arts in Biology and Bachelor of Science from the University of North Carolina at Chapel Hill and worked in the intellectual property department at Barnes & Thornburg’s Raleigh office after his 1L year. Upon graduation, he intends to practice intellectual property law.