International Rectifier Corp. has dodged a hostile takeover and weathered an accounting scandal. Now the El Segundo maker of power management chips is going to court with its former chief executive the son of the company’s founder accusing him of stealing trade secrets.
The tension reached a critical point in September, when International Rectifier filed a federal suit accusing Alexander Lidow of engaging in an ongoing criminal enterprise also known as a racketeer influenced and corrupt organization, or Rico by stealing information, intellectual property and technology related to the company’s secret research on a superconducting material that could become the future of semiconductor power management technology. A key hearing in the case is scheduled for Feb. 2.
The suit alleges that Lidow devised a plan to steal IR’s trade secrets, and then recruited six former IR researchers and sales executives to help him launch a competing company, which is currently using the stolen research to develop its own products from the special material, called gallium nitride.
IR’s chips are in consumer products, such as washing machines, laptop computers, automotive systems and Sony’s PlayStation, as well as military satellites.
Robert Sacks, Lidow’s attorney, said his clients are not using IR’s gallium nitride technology, and that Lidow’s new venture is developing a different product in the semiconductor field.
“There is no substance to the claims,” Sacks said. “It’s an effort to retaliate further and to cause him harm.”
Sacks said he didn’t want Lidow to comment because of the litigation; Lidow did not return calls.
In a statement to the Business Journal’s request for an interview about the litigation, IR executives said that the company, which is traded on the New York Stock Exchange and posted annual revenue of $985 million in 2008, has an obligation to protect its intellectual property.
“IR is of course not pleased that the dispute has come to the point of litigation against our former CEO,” executives said in the statement.
The battle between IR and Lidow could become a burgeoning cottage industry of lawsuits for the attorneys involved in the case. Sacks said Lidow is planning to file a wrongful termination lawsuit against the company in the coming months.
The beginnings
The problems began in 2007, when Lidow resigned as chief executive after an investigation by an independent audit committee hired by the company revealed that accounting irregularities cost IR about $117 million, and forced the company to restate two years of earnings. The irregularities included faked sales figures at the company’s Japanese subsidiary. At the time, IR’s announcement did not specify what led to Lidow’s resignation.
IR has restated the earnings, and the independent investigation has been completed, according to a company spokesman.
Meanwhile, management was further challenged last year by a hostile takeover bid by rival semiconductor manufacturer Vishay Intertechnology Inc.
IR fended off the takeover thanks to the credit crunch Vishay couldn’t secure financing and company executives are trying to deliver on promised higher profits by 2011.
In September, IR announced plans to offer customers prototypes of its new gallium nitride technology.
Meanwhile, the company claims Lidow had already started his new company, El Segundo-based Efficient Power Conversion Corp., and was ready to use gallium nitride technology.
The idea behind the use of gallium nitride in chips is that it will increase performance and cut energy consumption in a variety of high-performance environments, including electrical power towers and automotive systems.
More efficient
Analysts said gallium nitride products are likely to lead the power management technology market in the future because the material conducts energy more efficiently than silicon.
Analysts said it’s possible that IR is trying to head off Lidow’s new company from competing with it.
“IR believes it is going to be significant, and they are trying to prevent the former CEO from getting into the market,” said Steve Smigie, an analyst at Raymond James Financial Services Inc. in Florida.
Lidow is the son of International Rectifier founder Eric Lidow, who launched the company in 1947 and served as its chairman until May. Lidow began working at his father’s company in 1977, and he became chief executive in 1995. He served in that position until his 2007 resignation.
Lidow had headed the company’s research and development team, according to court documents, and oversaw IR’s $60 million gallium nitride research program.
IR claims that Lidow stalled the company from making its gallium nitride technology public in 2007. The company claims Lidow began telling IR researchers and senior sales representatives about his plan to steal the gallium nitride research for use at his yet-to-be-established company. He then allegedly recruited members of the company’s research and development group for Efficient Power Conversion, which would be a breach of his duties to act in the best interest of the company.
Legal experts said that he would not have been allowed to take trade secrets and use them in a new venture.
“You can’t steal trade secrets from your current employer, and use them in a different business,” said Russ Glazer, an attorney in the Los Angeles office of TroyGould LLP, who is not involved in the case. “The information derives value from being secret.”
In reams of documents in federal court, IR argues that the company’s gallium nitride research was in fact a trade secret. It was not widely known within the company what the team was working on, and the researchers were part of a group known only as CSC.
IR claims executives kept the technology secret to ensure that the company was one of the first to develop and market gallium nitride products. But, according to court documents, Lidow’s actions have undermined the company’s five years of research and development, and forced the company to lose its competitive advantage.
Lidow and the other former IR employees are asking a federal judge to dismiss the RICO allegations made by IR in its suit. If the request is granted it means that the entire suit could be thrown out of federal court. The judge is expected to rule on the matter in early February.
But the battle between IR and Lidow isn’t likely to end anytime soon.
“There will be significant acrimonious litigation between Lidow and International Rectifier,” said Sacks, Lidow’s attorney.
