Japan's Nippon Steel sues South Korea for patent infringement

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Japan's Nippon Steel sues South Korea for patent infringement

TOKYO - - Nippon Steel’s patent infringement lawsuits against Baoshan iron steel and China's Toyota Motor are an extremely rare case of a Japanese material company taking one of its main domestic customers to court.

What forced the steelmaker to stop abrupt action? Some observers say it could be linked to past technology leaks about China and South Korea.

At stake is electrical steel sheet, a important material for electrified vehicles.

For Nippon Steel, electro-electric steel sheet brings back bitter memories of the technology leaked to Asian rivals.

In April 2012, the Japanese steelmaker sued a former engineering contractor and South Korea's POSCO for stealing trade secrets in electrical steel sheet technology.

The lawsuit surprised many. Although engineering leaks by retired engineers had long been pointed out, few cases had been brought to courts because of the difficulty of convincing the technical theft.

Nippon Steel was able to sue competitor POSCO because of shocking court testimony by a former POSCO employee in another case in South Korea.

The case involved the illegal sale of ex-employee's electrical steel sheet technology to Baoshan.

How innocent are former employees, the Korean judge said.

The technology that POSCO alleges I stole was originally technology stolen by Nippon Steel, the former employee said. He simply handed it over to Baoshan. The employee was found guilty by a high court in South Korea in 2008 in the High Courts in 2008.

The testimony gave Nippon Steel the evidence it was looking for. And with it, the Japanese steelmaker sued its former engineer and POSCO in Tokyo District Court.

A coworker sued POSCO in the U.S. while the Korean steelmaker countersued in South Korea, denying the allegation.

The dispute was suddenly settled back with POSCO in September 2015, with Nippon Steel announcing an out-of-court settlement with Nippon Steel. Given that the Japanese company agreed to pay 30 billion yen $262 million at current rates, the most significant settlement payment ever received by a South Korean company in a dispute over intellectual property, it is fair to conclude that there was industrial espionage committed by POSCO.

The patent infringement that POSCO allegedly acquired this time is related to nonoriented electrical steel sheet, which is different from conventional electrical steel sheet obtained by Baoshan back then, according to the Japanese steelmaker.

But despite differences in technology, there could be links. Nippon Steel has been conducting research and development in the nonoriented electrical steel sheet since the 1980 s. In light of the spying described by former POSCO employee, it may be the case that the technology which was passed from Nippon Steel to Baoshan and then to POSCO constituted the basis of the electric steel sheet in question.

Baoshan declined to comment on the possibility of leakage from Nippon Steel to Baoshan.

From the 1970's to the mid 2000's, Japan led the world in patent applications. It has since dropped to third, with less than 300,000 applications in 2020. China filed 1.4 million, while the United States paid 650,000.

Patent lawsuits, meanwhile, numbered about 170 in China for 2017 - less than a twentieth the U.S. figure and roughly a hundredth of Japan's.

The number of lawsuits is small in Japan, not because there is less infringement, but because disputes are often resolved out of court.

Japanese companies tend to avoid disputes with customers. Even with rivals, they often opt for cross-license agreements to mutually recognize intellectual property rights out of fear that both sides might end up unable to produce goods once they go to court.

A civil battle between Nippon Steel and Toyota, leaders of the Japanese steel and auto industries, is therefore quite extraordinary.

One reason may be that electrified sheet is used in motors for electric vehicles and is a key technology in this age of decarbonization. It is hoped to become vital to economic security, like semiconductors.

Requiring a specialized manufacturing process, production of the sheet is difficult. Fabricators need proprietary technology and know-how. Nippon Steel sees the sheet as something that cannot easily be made by other companies.

For Nippon Steel, which is exposed to cost-cutting competition from South Korea and China, electrical steel sheet is an important add-on product of high value. It was unacceptable to Nippon Steel that Baoshan continued to produce the sheet in violation of its patent and had even won a supply order from Toyota.

That the top Japanese steelmaker sued not only Baoshan, but also Toyota was likely aimed at keeping other carmakers in check.

It is highly regrettable that we have been sued since the latest lawsuit should be addressed between the material suppliers, said Jun Nagata, an operating officer at Toyota. On the electrical steel sheet in question, we confirmed with the producer that there had been no infringement of other companies' patents before concluding a contract, he said.

The battle over open technology has blown the lid off a tradition of Japanese companies inavoiding key disputes.