Much of what goes on regarding the Foxconn Technology Group is secret, from its negotiations with the State of Wisconsin on the development agreement to the details of its operations in Racine County.
But two lawsuits might shed some light on how Foxconn operates and the types of relationships the company has with other businesses.
To be clear, most businesses have some level of secrecy when it comes to their operations and products. But most businesses aren’t Foxconn.
The state lured Foxconn with a $2.85 billion incentive package, a pay-for-performance deal in which Foxconn would receive tax credits after meeting certain hiring and construction goals.
So far the deal has worked to the state’s favor, as Foxconn has lost out on $9.5 million in tax credits after failing to hire enough full-time workers to meet the threshold.
In return for the incentive package, Foxconn plans to invest up to $10 billion to build its operations in Wisconsin, along with hiring up to 13,000 workers, with as many as half having jobs in Racine County.
But many remain skeptical of the Taiwanese manufacturing giant.
Gov. Tony Evers is one of the most prominent skeptics of the deal; on Wednesday he told reporters “the present contract deals with a situation that no longer exists” and he does not believe Foxconn can provide the 13,000 jobs.
The Journal Times looked at court documents of two lawsuits involving Foxconn, in different parts of the country, which accuse Foxconn of allegedly breaking a contract, failure to pay royalties and illegally receiving propriety information.
Of the two lawsuits, the one that has generated the larger share of the attention has been with Microsoft.
On March 8, Microsoft sued Hon Hai, the parent company of Foxconn, in the Northern District of California, accusing it of breaching its agreement with Microsoft and failing to pay royalties associated with a contract.
Microsoft is trying to recoup lost royalties, with interest, along with getting the court to force Foxconn to comply with the agreement.
It appears Microsoft has been attempting to settle the dispute for months, but the lack of success led the company to take legal action against Foxconn.
According to the complaint filed by Microsoft:
In April 2013 Microsoft and Hon Hai agreed to a “confidential patent license agreement,” which Microsoft “granted a worldwide patent portfolio license that permitted Hon Hai, to make, have made, use, sell or otherwise dispose of certain ‘covered products’ for a period of time.”
In exchange for Microsoft’s patents, starting on Jan. 1, 2013, Foxconn agreed to submit “royalty reports” that “provided specific information about Hon Hai’s sales of covered products on a per-unit basis, to make certain per-device royalty payments to Microsoft for the license of the term, and to submit to audit by independent public accounting firm, if requested by Microsoft, to resolve any contracts disputes.”
Microsoft contends that Hon Hai has continuously failed to honor its obligations under the contract.
“For example, for over three years Hon Hai has failed to submit the royalty reports required by the agreement, and Hon Hai has refused to cooperate with the contractually required audit by an independent public accountant, all in breach of the agreement,” the complaint states.
The complaint goes on to state that in March 2018 “Microsoft formally invoked the dispute resolution provision of the agreement. During negotiations that followed over many months, Hon Hai continued its refusal to allow an audit and refused to provide Microsoft with any information concerning its manufacture or sales of covered products or to engage in any way concerning the amount of historical royalties it owed under the agreement.”
Instead, Microsoft said, Hon Hai has tried to renegotiate the contract.
It appears Microsoft has a lack of trust with Hon Hai; in the suit it states that “court-supervised discovery of Hon Hai books and records, including document and written discovery and witness examinations under oath, is therefore necessary to ensure Hon Hai compliance with the agreement’s provisions and to ensure an accurate determination of the total amounts due under the agreement for each royalty period.”
A Microsoft spokesman released the following statement to The Journal Times regarding the suit: “Microsoft takes its own contractual commitments seriously and we expect other companies to do the same. This legal action is simply to exercise the reporting and audit terms of a contract we signed in 2013 with Hon Hai. Our working relationship with Hon Hai is important and we are working to resolve our disagreement.”
Foxconn and Hon Hai have a policy of not commenting on ongoing legal issues. But because of the high-profile nature of this suit, the company broke with policy to issue a statement.
“As a global leader in manufacturing services, Hon Hai upholds the highest level of international business standards,” the statement says. “We will continue to honor our contractual obligations while maintaining the absolute trust of our customers, as well as protecting the confidentiality of third party information. We remain confident that the current legal matter will be resolved swiftly. Further updates on this matter will be provided in due course, as appropriate.”
While the lawsuit involving Microsoft and Hon Hai has received a lot of attention, another suit hits much closer to home and involves JST Corp., a electronic interconnection manufacturer based in Waukegan, Ill.
In January, JST filed suit against Hon Hai, Foxconn, several subsidiaries and TE Connectivity Corp., an automotive and industrial manufacturing company that houses its executive headquarters in Pennsylvania, alleging the companies knowingly received stolen proprietary information regarding an electronic connector that JST had designed and manufactured.
The lawsuit was filed in federal court in the Northern District of Illinois. Spokespeople for Foxconn and Hon Hai declined to comment on this suit.
Bruce Sendek, an attorney for JST, said it had been working with Robert Bosch, LLC, a multinational engineering and electronics company in Germany, to build a 183-pin HIT2 header connector for vehicles manufactured by General Motors.
Sendek said JST began researching and designing the connector in 2005, designed it specifically to fit in GM cars and started selling them to Bosch in 2008.
“Over time, my client sold 15 million of them to Bosch,” Sendek said. “Over time, Bosch wanted to look for a lower-cost producer for supplying the product, which they can do. What they couldn’t do is take JST’s design … and Bosch could not find another supplier lest they supply the design.”
According to court documents, JST is alleging that “Bosch also obtained HIT2 (connector) trade secrets during multiple plant visits to JST manufacturing facilities that, upon information and belief, were performed at the direction and under the control of Bosch for the purpose of wrongfully acquire confidential information to be passed to Foxconn and TEC.”
Foxconn then began producing the connector in 2013, Sendek said, adding that information “should not have been used by Foxconn or anyone else.”
“Bosch eventually gave Foxconn and others design documents that were almost all of JST’s creation,” Sendek said. “We don’t believe Foxconn had the engineering capability, the design capability, the manufacturing capability to do what they did — which was to take our design and make a copy of it — without Bosch.”
In 2015, JST filed suit against Bosch in U.S. District Court in the Eastern District of Michigan, alleging the company stole its trade secrets and gave them to other suppliers.
Bosch declined to comment for this report.
Tim Sendek, son of Bruce Sendek and also an attorney for JST, said the company does not believe that there is any coincidence between what JST manufactures and what Foxconn manufactures.
“There’s a lot of ways that this can be done, and it doesn’t have to be too specific as to where the line needs to be or stuff like that, and all of theirs is exactly the same as ours,” Tim Sendek said.
Because JST had been manufacturing the connector for several years, Tim Sendek said he does not believe that Foxconn did not know about the product prior to manufacturing the connector.
“Foxconn knew that, they knew they were being asked to design a connector for an existing part and they obviously knew that that existing part had an existing connector made by somebody else,” Tim Sendek said. “There’s no chance they didn’t know it was JST.”
Foxconn filed a motion to dismiss the lawsuit, citing several reasons including jurisdiction.
According to the motion, Foxconn states that “this court’s exercise of jurisdiction would be particularly burdensome for foreign-country defendants FIT and Hon Hai because they would be required to defend this action in the United States legal system.”
The attorneys for JST said they were troubled by that claim.
“They think they can’t be sued in Illinois, and it’s not clear to me whether they think they can be sued in the United States at all,” Tim Sendek said.
Regardless of whether Foxconn believes it can be sued in the U.S., the legal system might feel differently.
On April 12, U.S. International Trade Commission Chief Administrative Law Judge Charles Bullock ruled that Foxconn and Bosch were in violation of section 337 of the Tariff Act of 1930 which, according to its website, “determines whether there is unfair competition in the importation of products into, or their subsequent sale in, the United States.”
Tim Sendek said JST is “extremely pleased with the decision.”
“While Foxconn and Bosch may seek to have the ITC overturn the CLJ, we believe the ruling is correct and should stand,” Tim Sendek said.