In March 2002, Charles Hiang C. Chan - who handled TSMC's account for Broadcom, a United States-based maker of broadband chips - left the company for SMIC. Shortly after, Broadcom moved some of its orders to the mainland foundry, apparently attracted by its lower costs.

TSMC said Mr Chan had access to proprietary business and other confidential information 'that would be of critical help to a competitor seeking to take Broadcom's business from TSMC'.

It said a comparison of chips made by SMIC for Broadcom with similar ones manufactured by TSMC 'revealed identical or nearly identical structures' and it believes 'they could only have been fabricated using TSMC's proprietary process steps'.

But there could be other reasons to explain the similarities.

'The [intellectual property] licence could be coming from Broadcom,' Gartner analyst Dorothy Lai said.

Still, should TSMC be able to prove its claims, SMIC would face difficulty selling to other clients in the US market.

'Other US fabless companies may have to double check with SMIC in the future on where it gets its process technology,' she said.

Officials from Broadcom were unable to be reached for comment.

In its suit, TSMC also accused SMIC of targeting employees at its 'Fab 5' plant in Hsinchu, as part of efforts to gain access to technology at the facility.

According to TSMC, the mainland company solicited more than 60 per cent of senior staff at the fab and was successful in recruiting its director and at least 12 other managers and engineers.

'In total, the employees hired by SMIC are named inventors on over 60 TSMC patents,' the suit said.

The Taiwanese company claimed the hiring of TSMC workers helped SMIC rapidly develop 0.18-micron processing technology, an industry measure which refers to the line-width of circuits etched onto silicon wafers. Smaller line-widths allow more circuits to be carved onto wafers, thus reducing costs.

'Miraculously, SMIC, with no track record, announced 0.18 micron process node, and ... commenced 0.18 chip production in less than one year's time,' the suit said. 'SMIC could not have qualified its 0.18 micron process node with such astonishing speed without reliance on TSMC's proprietary technical and operational information misappropriated from TSMC.'

But there are alternative reasons to explain SMIC's rapid advancement up the technology ladder.

'It could be a transfer of technology from [Texas Instruments],' Ms Lai said, noting there had been earlier speculation of co-operation between SMIC chief executive Richard Chang and his former employer.

'It could be a transfer of technology from Chartered Semiconductor,' she said, pointing to a December 2001 press release announcing the transfer of 0.18 micron technology from the Singaporean company to SMIC. Under the deal, Chartered exchanged technology for an equity stake and access to production capacity.

Mr Chang said at the time: 'Working with a proven technology leader like Chartered will enable us to move quickly along the learning curve.'

Much of the evidence TSMC cites in its suit is devoted to the three-year-old case of Katy Liu Yun-chien, a former TSMC quality control manager who later became a consultant at SMIC.

In 2001, the Taiwanese firm accused Ms Liu of sending 11 e-mails to SMIC which allegedly contained the company's trade secrets. TSMC said documents discovered from Ms Liu indicated she 'covertly served as a founding SMIC project team member for approximately nine months before she was terminated by TSMC'.

One particular piece of evidence which could be potentially damaging is an e-mail apparently sent to Ms Liu from SMIC vice-president of operations Marco Mora while she was still a TSMC employee.

The e-mail said: 'I need a help from you to pull out information from [TSMC]. I think you can ... some help from your people or eventually you can ask to Shinmo.'

The e-mail asked for detailed information on TSMC process flows and copies of training manuals in Chinese and English. 'Sorry for the long list, but we need a lot of material to set up the new operation,' the e-mail said.

SMIC denied Ms Liu gave the company trade secrets.

The case surrounding Ms Liu was referred to Taiwan authorities in 2001, with the Hsinchu District Court enjoining SMIC from using TSMC trade secrets or luring away its workers. But as the suit noted, the Hsinchu court 'has no extraterritorial powers over SMIC', hence the US action.

According to TSMC, SMIC said Ms Liu was no longer an employee but the Taiwanese chipmaker did not believe the claim. 'TSMC is informed and believes that Liu is being harboured in Beijing, where she is employed by SMIC,' it said.

There is an outstanding warrant for her arrest in Taiwan. As TSMC dramatically put it in its complaint: 'Liu remains a fugitive from justice.'

At the end of the day, the possibility that SMIC may be forced to pay damages or royalties to TSMC could give investors pause to consider whether to buy into the mainland company's initial public offer, planned for the first quarter.

'I really think that this case will slow down SMIC's IPO process even if TSMC lost. But interestingly, I have a feeling this case will also slow down other Chinese fabs from being listed in the foreign markets,' Ms Lai said.

SMIC, as a more 'foreign' Chinese fab, is considered to be at the forefront of intellectual property protection on the mainland. But if it is found to have violated others' patents, what about the rest of the mainland industry?

'If TSMC wins this case, investors may think twice about the whole Chinese semiconductor manufacturing and design industries,' Ms Lai said.

SMIC would not comment directly on allegations contained in the suit, instead issuing a statement on Christmas Day that reiterated its respect for intellectual property rights and quoting Agnes Pharo: 'It is a fervent wish that every cup may overflow with blessings rich and eternal, and that every path may lead to peace.'

Clearly, SMIC does not find the lawsuit from its cross-strait rival in keeping with the Christmas spirit.