March 26, 2005

Lexar Wins $464 Million Trade Secret Suit Against Toshiba for its Backstabbing Partnership with SanDisk

Lexar Awarded $464 Million in Trade Secret Suit Against Toshiba Over SanDisk PartnershipMighty Toshiba succumbed to the legal assault of smaller Lexar, ultimately being ordered to pay almost half a billion dollars for a partnership backstabbing involving accusations Toshiba disclosed trade secrets to Lexar’s arch-rival SanDisk:

    Lexar Media’s stock doubled in value Thursday after a California jury awarded the company $380 million in a trade secret lawsuit against Toshiba. After the market closed, the jury added another $84 million in punitive damages for a total of $464 million.

    Lexar, one of the largest makers of memory cards and USB drives, contended that Toshiba stole its NAND flash memory inventions while partnering with the company, only to turn around and begin to work with Lexar Media’s arch rival, SanDisk.

    Eric S. Whitaker, vice president of corporate strategy and general counsel for Lexar, said the financial penalties were just punishment for Toshiba.

    "You've got to be able to trust your partners,” he said. “Toshiba was on our board, talking about more partnerships, and meanwhile they were planning to work with SanDisk. We thought Toshiba was going to be our partners for the long term."

    Toshiba had no comment while the case is pending, said company spokeswoman Keisuke Ohmori.

    Lexar’s stock closed up $3.15 at $6.32 per share before the jury decided on the punitive damage award. More than 127 million shares traded hands, more than 40 times the average daily volume of 3.1 million during the last 50 days.

    Punitive award hearing

    The jury granted the initial reward on Wednesday, then returned to hear arguments from both sides before deciding on the punitive award.

    “We accept the fact that you found Toshiba breached a fiduciary duty,” Toshiba attorney Alan “A.C.” Johnston told the panel. “If the issue is, ‘Did we get the message?’ I can assure you, you were heard, in the upper levels” of Toshiba’s management.

    But Lexar’s attorney, Matthew Power, decried Toshiba’s actions as “malicious,” and claimed Toshiba planned to “sustain Lexar” only long enough to take its inventions. Regarding the initial $380 million award, Mr. Power said: “That’s just money they should have paid Lexar to begin with.”

    Power asked for $1 billion in punitive damages “to punish Toshiba… and to (prevent) conduct like this by Toshiba or someone else.”

    After hearing both attorneys, the jury took less than two hours to decide on the punitive award. “Ten out of 12 of the jurors agreed with most of the outcome,” said one woman on the jury, who declined to be identified.

    Toshiba and SanDisk, based in Sunnyvale, California, have a joint venture to produce memory chips for making memory cards for storing photos and music files. But SanDisk was not a defendant in the suit.

    “We’ve never received any Lexar trade secrets,” said Lori Barker, SanDisk’s director of investor relations. “Certainly we weren’t involved in this action. Presumably if they had a case against us they would have filed it. We are a patent-intensive company, with $180 million from royalty revenues.”

    Mr. Whitaker said Lexar, based in Fremont, California, is also asking the court to bar Toshiba from selling, in the United States, memory chips and memory card products that were made using Lexar’s patents. That hearing is scheduled for April 13. Lexar also is pursuing a federal patent case pending against Toshiba.

    Lexar previously announced preliminary fourth-quarter net revenues are expected to be in a range of approximately $255 million to $260 million. That compares with $177.5 million in the same period last year. However, it has delayed reporting final results, citing volatility in the retail market for digital media products.

But don’t count Toshiba down for the count just yet:

    Toshiba Corp. vowed Friday (March 25) to fight a jury verdict in California earlier this week in favor of U.S. plaintiff Lexar Media Inc. The decision makes Toshiba liable for $465.4 million in fines related to alleged misappropriation of NAND flash memory trade secrets.

    Toshiba's response follows a jury verdict in a lawsuit brought by Lexar (Frement, Calif.) in California Superior Court in San Jose. The jury found Toshiba and its U.S. subsidiary, Toshiba America Electronics Components Inc. (TAEC), liable for the penalties in connection with the alleged misappropriation of NAND flash trade secrets.

    "Toshiba believes that the verdict rendered by the jury was in error, and we plan to pursue all available legal avenues to correct it," the company said in a statement. "Toshiba invented NAND flash memory technologies and has been a pioneer throughout its development."

    Toshiba's stock price dropped 2 percent Friday from the previous day's close.

    NAND flash is one of mainstays of Toshiba's chip business. It completed a 300-mm wafer fab last February at its Yokkaichi plant to boost NAND flash production. "Toshiba will continue pursuing technologies that enable it to scale down flash memories and enable it to go ahead of competitors on the market," said Toshiba President Tadashi Okamura said at the fab opening.

    To retain its position as a major NAND flash supplier, analysts here said Toshiba would wage an aggressive legal counter attack against Lexar.

Toshiba’s just got too much riding on this not to counter-attack and hit back harder… it’ll be interesting to see what twists and turns the assault promises to take, since Lexar essentially wants to put them out of business… the U.S. memory business anyhow. At least SanDisk doesn’t seem too worried… that makes one of us.

- Arik

Posted by Arik Johnson at March 26, 2005 08:48 AM