Patent Dispute Not True to FormFactor

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Depending on whose account you read, a recent court ruling in Korea either endorses the position of FormFactor (Nasdaq: FORM), a manufacturer of wafer probe test cards, or it validates the claims of rival Phicom, a Korean card maker. It looks to me that FormFactor is trying to put spin on an otherwise disappointing ruling.

The case dates back to 2004, when Phicom sold probe cards to one of FormFactor's customers, Korean memory chip maker Hynix Semiconductor. FormFactor uses a proprietary "microspring" technology in its probe cards, and it said that Phicom had infringed on four of its patents, two from production and two from processes.

In addition to Hynix, FormFactor has several high-profile customers, including Intel (Nasdaq: INTC) and Infineon (Nasdaq: IFX). FormFactor's leading technology has enabled it to charge premium prices for its product, which -- in its latest iteration -- allows chip makers to test their chips for defects in just one pass.

FormFactor's patent offensive was an attempt to stop its Korean competitor from inserting a wedge between it and its customers. The battles haven't been going FormFactor's way, at least not in Korea.

Over the past two years, the courts there have ruled that three of the four patents are invalid and that Phicom's cards are the result of independent research and development. They also refused to allow a preliminary injunction in the one case that went in FormFactor's favor.

So how does FormFactor see the latest invalidation of its Korean patents as a victory? It points out that the ruling invalidated 17 points in the two patents, but did not address 27 claims in one or 77 points in the other. Further, the patent that was upheld previously is still in place. Moreover, FormFactor has lawsuits pending in Oregon against Phicom.

Maybe so, but perhaps there wasn't much hope for winning in Korea to begin with. While much improvement has been made in the country's patent laws, Korea still remains on the U.S. Trade Representative's "Watch List," meaning that "problems exist in that country with respect to (intellectual property rights) protection, enforcement, or market access for persons relying on intellectual property." Korea has moved up the list and finds itself ahead of China, Russia, and Israel, for example, but it's not yet a safe haven for U.S. companies seeking to have their intellectual property fully protected.

While certain claims in FormFactor's patents have been ignored, and thus still stand, the ruling remains a setback for the tech company. Phicom has admitted that FormFactor's legal maneuvering has slowed its ability to attract customers, but with much of that out of the way now, the rival will be free to move in and undercut prices.

Not that FormFactor is in danger of folding as a result of the ruling, not by a long shot. It just might make profit margins a bit tighter at a time when the company was seeing them expand, something it won't be able to spin.