EU Chips Act: Key Intellectual Property Considerations

Semiconductor companies operating in the EU need to start thinking about what the Chips Act means for them.

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The European Chips Act is the EU’s response to the global chip shortages we’ve seen since the onset of the Covid-19 pandemic. The legislation proposes a series of initiatives to support semiconductor R&D and manufacturing in the EU, as well as a package of public and private investment worth up to €43 billion.

The act is currently making its way through the EU’s legislative process. It was first put to paper by the EU Commission in February 2022 and will shortly be debated in the EU Parliament. The act is expected to become law in the first half of 2023.

Semiconductor companies operating in the EU need to start thinking about what the Chips Act means for them. While most companies will find parts of the legislation that will support their businesses, they will need to consider various legal issues, not least with respect to intellectual property.

This article highlights some of the key areas that semiconductor companies should be thinking about ahead of the act’s coming into force.

European Chips Act

Document your IP

A main theme of the Chips Act is collaborative R&D. The EU is keen for companies around Europe to pool their expertise to develop semiconductor technologies that can compete on the global stage. Under Pillar 1 of the act, collaboration might occur through a proposed virtual design platform or through new pilot lines. Companies will need to consider what happens to their intellectual property when they take part in this sort of collaborative R&D.

Collaboration agreements typically define background and foreground IP. Background IP is the IP owned by each company prior to entering the agreement, and foreground IP is the IP developed as part of the collaboration. It is important for companies to be clear about the extent of their IP and the scope of the collaboration. Preferably, this should be recorded as part of the collaboration agreement, to reduce the chances of disagreements between the parties.

New technical developments are typically protected in one of two ways. The first is a patent filing. Patents are an inherently effective way of documenting ideas, as the idea must be adequately described in a patent application. That application is then filed at one of the national or regional patent offices, after which it gets an officially recognized filing date. Ultimately, this information is made public, providing a clear record of what a company has developed and when the development occurred.

Second, new developments may be kept as confidential know-how, often referred to as trade secrets. Trade secrets may be more appropriate for ideas that can’t be reverse-engineered, such as certain semiconductor-manufacturing processes. The problem with trade secrets is that many companies do not adequately document them, making it difficult to demonstrate what was developed and when. This can cause problems when an SME is fundraising or being sold; registered rights like patents are generally easier to assess than undocumented know-how. It is therefore good practice to keep an internal record of important trade secrets, similarly to the record-keeping done for filed patents.

It is also good practice to keep records of other relevant IP rights, such as copyrights on embedded software code or design rights covering circuit topography.

If there is a likelihood that your company will engage in collaborative R&D under the Chips Act, it would be good practice to begin reviewing your IP documentation now. Be clear about which technologies in your portfolio are or should be patented and which are being kept as trade secrets, as well as any technologies that may be protected by other rights. Ensure that any technology you wish to patent is filed before you undertake any collaboration activities, and confirm that your register or trade secrets are up to date. In addition, it is important to ensure that any disclosures made before or during a collaboration are subject to enforceable nondisclosure agreements.

Ownership of collaboration-derived IP

Who owns IP developed as part of a collaboration? Ownership of foreground IP is typically defined by the collaboration agreement. This ensures that ownership is dictated by the intentions of the collaborators, rather than being determined by applicable national laws. Typically, each party would own particular parts of the IP, depending on the technology, with licenses back to the other parties. The Chips Act doesn’t include provisions related to IP ownership; however, in its Staff Working Document, the EU Commission has set out some principles it expects to apply.1 In short, strong IP protection for individual companies will likely be watered down. Companies that wish to obtain funding or other benefits may be expected to share IP with other participants and may be required to enter joint-ownership arrangements.

Semiconductor companies will need to carefully consider whether collaborative IP ownership provisions are right for them. Do the benefits of collaboration, and any associated funding, outweigh the downsides of shared IP ownership? If IP is to be owned jointly, what would that mean for your ability to use the IP for your own purposes in the future? The balance of this equation will differ for different types of organizations.

For example, established semiconductor companies that have the means to fund their own R&D may prefer more traditional, private joint-development arrangements. They are likely to have more control over IP ownership and therefore to have exclusive use of R&D outputs. For such companies, the benefits of taking part in EU-funded R&D collaborations may seem marginal.

SMEs, in contrast, are far more likely to find that access to the proposed design platform and pilot lines, together with the associated funding, is more important than IP ownership considerations. Nonetheless, SMEs must be particularly careful when signing on to the EU’s IP policies. Those that do not properly understand the relevant IP policy run the risk of giving away too much of their technology.

Patents vs. trade secrets

Patents and trade secrets are an important part of any IP strategy. But which form of protection should be used and when?

Patents are typically better suited to inventions that are easily discernible from the end product. For example, a new design for the structure of a transistor could be protected in a patent, assuming the improvement is not obvious. Conversely, trade secrets may offer a better form of protection for improvements that cannot be determined from the end product. For example, an improvement to an etching process may be better off as a trade secret. However, there is no clear rule about when to use patents and trade secrets, and there are other factors, such as cost and competitor activity, that may influence the IP strategy.

Any company entering a collaborative R&D agreement must consider the balance of patents and trade secrets. When entering a collaborative R&D project, it may be necessary to disclose confidential know-how to other collaboration partners. While confidentiality provisions will exist, the number of organizations involved will inevitably increase the risk of know-how leaking between organizations, particularly when employees move around. It may therefore be appropriate to turn the IP strategy dial toward patents and away from trade secrets. Ideas that might ordinarily be better kept as trade secrets when R&D is being conducted in-house might be more suitably protected using patents in the context of collaborative R&D. If so, the parties to the collaboration will need to agree on who can patent a particular innovation and when. University participation may complicate matters, as university partners will require that their rights to teach, research and publish be respected.

Patent-filing strategies

Patent-filing strategies typically involve covering the national territories of the manufacturing base or the consumer base, or both. Traditional semiconductor patent-filing strategies in Europe have focused on Germany, as that country has the EU’s highest concentration of manufacturing facilities and is one of the largest consumers of semiconductors, especially in the home appliance and automotive sectors.

The Chips Act will likely increase R&D and manufacturing activity in Europe, in a greater number of countries. Therefore, a Germany-only approach may no longer be appropriate.

Under Pillar 1 of the Chips Act, we will see collaborative R&D via the virtual design platform and via new pilot lines. Semiconductor companies will need to monitor activity under Pillar 1 to understand where those activities are taking place. They may have to adjust their patent-filing strategies to reflect new centers for semiconductor R&D.

Pillar 2 of the act is intended to fast-track new semiconductor-manufacturing facilities in the EU. Toward that end, it establishes a so-called First of a Kind (FOAK) status for qualifying facilities. A FOAK facility is one that brings a new manufacturing technology to the EU.

2022 saw a number of announcements regarding new chip-manufacturing facilities in Europe. Intel has committed to opening two FOAK facilities in Magdeburg, Germany, as well as to expanding its Leixlip facility in Ireland. STMicroelectronics and GlobalFoundries have teamed up to announce a new 300-mm FD-SOI facility near Grenoble, France. According to reports, TSMC is also considering building a fab in Dresden, Germany. We’ve already seen the EU apply the Pillar 2 principles in approving state aid for STMicroelectronics’ new silicon carbide facility in Italy.

Semiconductor companies should keep a careful eye on new applications for FOAK status and adjust patent-filing strategies accordingly.

Contract terms

Another aspect of the Chips Act is the provision of mandatory information requests and priority-rated orders (PROs). These provisions appear under Pillar 3 and can be initiated during semiconductor supply shortages. For example, if shortages limit the supply of chips to certain critical healthcare devices, the EU could mandate that a particular manufacturer prioritize supply of those chips to certain manufacturers.

While these provisions clearly have the goal of protecting certain critical EU industries for the greater good, individual companies that supply chips to these sectors will no doubt be nervous about how PROs will be implemented.

The Chips Act does include some safeguards, including the requirement for PROs to be assessed based on the principles of necessity and proportionality, but these principles are inherently uncertain in scope and meaning. Companies can ask for PROs to be reviewed in certain circumstances.

The act also includes a provision protecting companies from liability when they must breach a supply contract to fulfill a PRO obligation. However, as with force majeure clauses, the scope and effect of such protection can be uncertain, and it is not clear how quickly any remedies might be available. In view of this, companies might be advised to include additional terms in their supply contracts, to allow them to breach contract terms if they are subject to PROs. Such clauses can be quite specific and are not uncommon in supply contracts that require the supplier to prioritize customers when there is a shortage of raw materials.

It’s important to note that responses to mandatory information requests risk breaching confidentiality clauses. Therefore, careful attention should be paid to the nature of any information provided under these provisions to ensure that confidentiality is maintained.

Time to act

The European Chips Act will pose plenty of opportunities for EU-based semiconductor companies, but companies must carefully consider which initiatives are right for them. IP ownership and strategy will play a central role in those determinations.

Companies should keep an eye on developments and review their IP strategies now to ensure that they are ready to benefit from the Chips Act as soon as it comes into force.

Reference

1European Commission. (May 12, 2022). “A Chips Act for Europe.” Commission Staff Working Document.


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