Western Digital Moves to Court in a Bid to Block Sale of Toshiba Chip Unit

HIGHLIGHTS
WD has sought a court injunction to stop Toshiba’s chip unit sale
The court injunction details that Toshiba needs to take WD’s consent
Toshiba wants to complete the deal as quickly as possible
Western Digital Corp has sought a court injunction to prevent Toshiba Corp from selling its chip business without the US firm’s consent – a move that threatens to throw the fiercely contested auction into disarray.

The escalation in the spat between Western Digital, which jointly operates Toshiba’s main chip plant, and its business partner follows tense last-minute jockeying by suitors for the world’s second-biggest producer of NAND semiconductors.

According to a person familiar with the matter, the California-based firm has been left out of a new Japan government-led group being formed to bid for the unit.

Toshiba’s “attempts to circumvent our contractual rights have left us with no choice but to take this action,” Western Digital’s Chief Executive Steve Milligan said in a statement.

ALSO SEEJapan Urges Toshiba, Western Digital to Get Along as Chip Spat Flares

“Left unchecked, Toshiba would pursue a course that clearly violates these rights,” he added.

Western Digital has filed its suit with the Superior Court of California, seeking an injunction until its arbitration case against Toshiba is heard. It is concerned about how Toshiba, the Japanese government and other stakeholders are handling the auction process, a second source said.

The second source added it had submitted a revised bid on Wednesday that satisfies Toshiba’s requests on deal certainty and price but did not receive a favourable response. Toshiba has demanded at least JPY 2 trillion ($18 billion) for the unit.

Sources declined to be identified due to the sensitivity of the negotiations concerning the auction.

Toshiba said in a statement that it was proceeding with selecting a preferred bidder for its memory unit by the second half of June as planned and hoped to reach a definitive agreement on a sale by June 28.

Western Digital Moves to Court in a Bid to Block Sale of Toshiba Chip Unit

Toshiba wants to complete the deal as quickly as possible to help cover billions of dollars in cost overruns at its now-bankrupt Westinghouse nuclear unit and to dig itself out negative shareholders’ equity that could lead to a delisting.

Satoru Oyama, senior principal analyst at research firm IHS, said Western Digital’s argument made sense from a common-sense point of view and that developments were moving towards a worst-case scenario for the Japanese company.

“Toshiba has more to lose in the dispute because it is running out of time,” he said. “Toshiba and Western Digital eventually have to talk. They cannot afford to keep fighting when Samsung is taking advantage of the NAND market boom and investing massively.”

A third source familiar with the matter said Western Digital expects to get a ruling on its injunction request by mid-July and that arbitration cases generally take 16-24 months to resolve.

A state-backed fund, the Innovation Network Corp of Japan (INCJ), has been at the centre of trade ministry efforts to forge a successful bid that will keep the highly prized unit under domestic control. But the nature of its partnerships appears to be going through drastic changes compared to just last week.

It has been in talks with Bain Capital and the group now includes South Korea’s SK Hynix Inc, sources have said.

INCJ was, however, also part of a proposed bid tabled by Western Digital last week that also included US private equity firm KKR & Co LP, other sources familiar with the matter have said.

Other bidders include Foxconn, the world’s largest contract electronics maker. Foxconn, formally known as Hon Hai Precision Industry, is leading a consortium that includes Apple Inc computing giant Dell Inc and Kingston Technology Co.

The highest known bid so far is one from US chipmaker Broadcom and its partner, US private equity firm Silver Lake. They have offered JPY 2.2 trillion, sources have said.

Facebook's Virtual Reality Ambitions Could Be Threatened by Court Order

Facebook Inc’s big ambitions in the nascent virtual reality industry could be threatened by a court order that would prevent it from using critical software code another company claims to own, according to legal and industry experts.

Last Thursday, video game publisher ZeniMax Media Inc asked a Dallas federal judge to issue an order barring Facebook unit Oculus from using or distributing the disputed code, part of the software development kit that Oculus provides to outside companies creating games for its Rift VR headset.

A decision is likely a few months away, but intellectual property lawyers said ZeniMax has a decent chance of getting the order, which would mean Facebook faces a tough choice between paying a possibly hefty settlement or fighting on at risk of jeopardizing its position in the sector.

For now, Facebook is fighting on. Oculus spokeswoman Tera Randall said last Thursday the company would challenge a $500 million jury verdict on February 1 against Oculus and its co-founders Palmer Luckey and Brendan Iribe for infringing ZeniMax’s copyrighted code and violating a non-disclosure agreement.

Randall said Oculus would possibly file an appeal that would “allow us to put this litigation behind us.”

She did not respond to a request for comment for this article.

An injunction would require Oculus, which Facebook acquired for $3 billion in 2014, to stop distributing the code to developers or selling those games that use it.

Such a court order “would put a huge stumbling block in front” of Oculus, said Stephanie Llamas, an analyst with gaming market research firm SuperData. It would offer the company’s rivals in the new market, which include HTC, Sony Corp, Alphabet Inc and others an “important opportunity for them to become first movers.”

Sales of the Rift itself would not be barred, but Llamas, said a lack of available titles could hinder Facebook’s offering relative to HTC’s Vive headset and Sony’s PlayStation VR.

That market is relatively small at the moment – sales of VR hardware and software totaled $2.7 billion in 2016 – and mainly limited to gaming. But Facebook chief executive Mark Zuckerberg has predicted the technology “will become a part of daily life for billions of people,” revolutionizing social media, entertainment and medicine.

SuperData says the VR market will be worth $37 billion by 2020. Likewise, investment firm Cantor Fitzgerald last year issued a report predicting VR would account for 10 percent of Facebook revenue in four years’ time.

ZeniMax’s lawsuit arose from 2012 correspondence between Luckey and famed video game developer John Carmack, creator of the Doom and Quake series and then a ZeniMax employee. Luckey signed a non-disclosure agreement with ZeniMax covering his communications with Carmack.Facebook's Virtual Reality Ambitions Could Be Threatened by Court Order

Carmack joined Oculus in 2013 as chief technology officer. ZeniMax sued in 2014, claiming Carmack’s work while its employee was crucial to the Rift. At trial, Facebook said ZeniMax concocted its claims because of “sour grapes” over missing the VR trend.

Zuckerberg testified that “the idea that Oculus products are based on someone else’s technology is just wrong.”

The jury decided Oculus had not stolen trade secrets but had infringed ZeniMax’s intellectual property. It also said Oculus breached the non-disclosure agreement.

IP lawyers said the judge would consider factors such as whether ZeniMax continues to be harmed and whether money is sufficient compensation.

Edward Naughton, a Boston-based copyright lawyer with Brown Rudnick, said ZeniMax has a strong argument because its technology continues to be used without its permission and the jury’s verdict does not compensate for that.

“I think they have a pretty good shot here,” Naughton said.

Mitchell Shelowitz, a copyright lawyer in New York, noted that the non-disclosure agreement explicitly stated ZeniMax would be entitled to an injunction in the event its terms were violated.

Not all lawyers agree ZeniMax has the stronger position. Chicago-based IP lawyer Joshua Rich said he thinks Facebook has a good chance to repel the injunction by arguing that ZeniMax is not being harmed by the sale of the Oculus products because it is not direct competitor.

If Facebook can get past the injunction fight, the calculus could change, said Naughton. Facebook may believe it has strong arguments on appeal or, because it has so much cash on hand, it may hope to wear ZeniMax down to the point where it settles on favorable terms.

“Facebook has deep pockets,” said Naughton. “That allows them to put their opponent into litigation fatigue.”