KT&G sues its top contract manufacturer over patents

KT&G Corp., the world’s fifth-largest tobacco company, has sued its largest e-cigarette outsourcing firm EM-Tech. Co., claiming the co-developer of its flagship brand Lil illegitimately registered KT&G’s intellectual property (IP) rights, the company and industry sources said on Tuesday.

The sole tobacco maker in South Korea is demanding that Kosdaq-listed EM-Tech transfer the IP rights back to KT&G, while excluding the e-cigarette original design manufacturer (ODM) from the list of its contract manufacturers, according to the industry sources.

An ODM designs and manufactures a product as specified by another company. The company that created the specification typically retains the ownership of the design.

News about the unprecedented legal battle between KT&G and its ODM pulled the stock of EM-Tech 17.65% lower Tuesday to hit its lowest closing level of 30,800 won ($24.5) so far this year. At one point in the day, it tumbled to as low as 26,850 won.

“We found out EM-Tech, with which we had been in a cooperative relationship to develop electronic cigarettes for five years, has registered the relevant patents belonging to our company without our permission,” KT&G told The Korea Economic Daily.

“We had continuously discussed maintaining our cooperative relationship, but failed to reach a settlement. We cannot help but take legal action.”

It recently filed a lawsuit against EM-Tech with the Seoul Central District Court.

During their contract period, EM-Tech allegedly had handed over the IP rights related to the e-cigarette device Lil to its subsidiary INNO IT. Then the wholly owned unit recently signed an outsourcing agreement with KT&G’s rival British American Tobacco plc (BAT).

"This litigation is aimed at (EM-Tech) transferring the relevant patents back to KT&G," a legal industry source said.

KT&G first developed Lil in late 2017, which competes with BAT’s glo. Since starting to export its e-cigarette lineup from 2020, the Korean tobacco firm has been widening the global reach of its e-cigarette products.

EM-Tech was the key beneficiary of KT&G’s growing e-cigarette exports. Its operating profit skyrocketed nearly 20 times to 37.1 billion won in 2021 from the year previous, with sales up 41% on-year to 400.2 billion won.

RIPPLE EFFECT

KT&G recently switched over to three other Kosdaq-listed ODM companies – Elentec Co., Partron Co. and ITM Semiconductor Co. – for its e-cigarette devices and relevant components.

“EM-Tech was not assigned an order for (KT&G’s) new models and was eliminated from KT&G’s supplier list,” an e-cigarette industry official said.

“Now the three suppliers led by Elentec have become KT&G’s new ODMs.”

In line with its heavy focus on technology, KT&G had earned a total of 4,761 IP rights globally in the e-cigarette segment as of 2020.

The e-cigarette market is forecast to grow to 37 trillion won in sales this year and then 50 trillion won in 2024, compared with 30 trillion won in 2021, according to Euromonitor, a research firm.

Shares of ITM Semiconductor gained 1.56% to end at 35,700 won, against a 1.99% drop in the Kosdaq index.

Partron edged down 0.45% at 11,100 won, while Elentec lost 2.81% to finish at 22,450 won.

Write to Byung-Keun Kim at bk11@hankyung.com
Yeonhee Kim edited this article.