By Eva Dou and Daisuke Wakabayashi
BEIJING -- In Dec. 2014, a small Chinese startup posted a letter
online accusing Apple Inc. of infringing its patent for smartphone
exterior design. The response was immediate.
Chinese internet users flooded the account with scorn, calling
the Chinese company shameless and delusional. "If you make crappy,
copycat products, that's bad enough," one wrote. "Then you go and
hype it."
In a sign of an increasingly challenging landscape for Western
companies, the Chinese company -- the little-known Shenzhen Baili,
founded by a former Huawei Technologies Co. executive -- won a
surprise injunction against sales of Apple's iPhone 6 and iPhone 6
Plus in Beijing, although Apple said the order had been stayed
pending appeal and sales remain unaffected.
The patent win is a hint of the growing challenges that Western
companies are likely to face in China in coming years on multiple
fronts. Chinese companies are becoming stronger competitors in
their own right, and Chinese regulators are increasingly insistent
that foreign firms play by Beijing's rules.
As a company geared to consumers and one of China's favorite
brands, Apple has long seemed to get a pass from regulators on the
strict scrutiny that has fallen on makers of more sensitive
equipment like servers and routers. Industry watchers mused over
why Apple was able to sell mobile content while other foreign
companies couldn't. Many chalked it up to Chinese officials' love
for iPhones.
But under President Xi Jinping, China has taken a stricter view
of technologies and content that it previously gave wider
berth.
Apple declined to comment on the state of its relationship with
the Chinese government.
Chinese companies are also learning to take advantage of a
maturing domestic patent system, laying claim to patents first even
if they weren't the first to develop the broader technology, said
Erick Robinson, chief patent counsel for Asia Pacific at the Rouse
China law firm.
"It is still relatively rare for Chinese companies to attack and
be successful against Western companies, but you're going to see
more and more of this," he said.
The patent ruling is the latest challenge for Apple in China,
its largest market outside of the U.S. Falling iPhone sales in
China was a major factor in Apple posting its first quarterly
decline in revenue in 13 years in April. China also shut down
Apple's iBooks and iTunes Movies services that month, with
regulators telling the company it didn't have the necessary
licenses, according to people familiar with the matter.
Apple last month announced a $1 billion investment in Chinese
ride-hailing company Didi Chuxing Technology Co., an unusual
investment for the company. Analysts said it was likely made in
part to curry favor with Beijing.
Apple Chief Executive Tim Cook has said the sales decline
doesn't change his long-term outlook for China, which he has said
will surpass the U.S. eventually as the company's biggest
market.
Mr. Cook has made diplomatic efforts to garner goodwill in
China, traveling there more than any other country in the past
three years. He is on the advisory board of Tsinghua University's
School of Economics and Management. At September's Washington state
dinner for President Xi, Mr. Cook sat at the head table.
Now, as part of a broader skepticism from China toward new
technology and media, consumer electronics like iPhones have come
under tighter scrutiny. China's technology ministry singled out
Apple in May, publishing a statement urging the company to expand
its cooperation in China after a visit from Mr. Cook.
"I think the Chinese government feels that many American
companies are not paying their dues," said Mr. Robinson, the
lawyer.
The Chinese company challenging Apple's patents, Shenzhen Baili,
is virtually unknown outside China and has no website. However,
Shenzhen Baili appears to be another name for Digione, a
better-known smartphone startup similar to Xiaomi Corp, the Chinese
company known for its cheap phones.
The legal relationship between Digione and Shenzhen Baili
couldn't be confirmed Friday, although the same man, Xu Guoxiang,
is listed as the head as both, and both companies' names are
included in legal documents about the case. Mr. Xu was Huawei's
global handset marketing director before founding Digione in 2006,
according to online profiles.
In 2013, Chinese internet giant Baidu Inc. became the largest
investor in Digione, according to two people familiar with the
matter.
Baidu is already on the opposite side of another battle with
Apple as a major investor in Uber Technologies Inc.'s China
business, the rival for Didi, in which Apple just invested $1
billion.
The backing of one of China's most powerful technology companies
may help explain how a little-known firm was able to win an
intellectual property case over one of the world's most
technologically advanced companies. Baidu's founder, Robin Li, is a
delegate of the central government's political-advisory
committee.
To be sure, this isn't the first time Apple has come under
regulatory scrutiny in China. As one of the most successful Western
brands in the country, Apple has often drawn regulatory attention
and opportunistic lawsuits. In 2012, Apple paid $60 million to buy
the iPad trademark in China from a Chinese company. Last month, a
Beijing court ruled in favor of a Chinese company making
"IPHONE"-brand pocketbooks.
Apple faces a tougher battle in the patent case, says Edward
Lehman, a Beijing-based patent attorney, because it already failed
in an effort to invalidate Shenzhen Baili's patent last year.
According to the State Intellectual Property Office, in a decision
issued in December and published in January, Shenzhen Baili applied
for a patent for exterior design of its 100C smartphone in January
2014 and was awarded it in July that year. Apple applied to the
office to rescind the patent in March 2015, and the regulator
upheld the patent in December 2015.
Beijing's municipal intellectual property bureau granted
Shenzhen Baili an injunction in the city after ruling that the
iPhone 6 and iPhone 6 Plus infringed on its patent, according to a
statement on its website dated May 19. It wasn't clear when the
statement was posted online. It was noticed earlier this week by
Chinese media.
A phone operator at the Beijing Intellectual Property Bureau on
Friday evening said no one was available to answer queries.
In note on Friday, UBS analyst Steve Milunovich said the concern
about the ban is "likely overblown," but it underscores the
existential threat facing Apple in the long term that "the
government could decide to favor local suppliers."
Some mobile-phone stores in the city had already stopped selling
the two models months ago, switching to the current iPhone 6s and
6s Plus phones.
Apple has the option of appealing both the ruling of the
patent's validity and the decision that iPhones infringe on the
patent, said Mr. Lehman. Both appeals would take place in the court
system, although the initial judgments were administrative, he
said. It is common in these cases for an injunction to be suspended
throughout the appeal process, he said.
One uncertainty is whether Apple's newer models could also be
ruled as patent-infringing, as their external design is similar to
the iPhone 6 and iPhone 6 Plus. The original case began shortly
after the launch of the iPhone 6.
In its original outreach to Apple in 2014 -- a note titled
"Lawyer's Letter" -- Shenzhen Baili said it hoped to resolve the
patent dispute out of court.
"We believe that a communication with goodwill would contribute
to solving potential legal disputes, achieving benign competition
and providing better products to customers."
Write to Eva Dou at eva.dou@wsj.com and Daisuke Wakabayashi at
Daisuke.Wakabayashi@wsj.com
(END) Dow Jones Newswires
June 17, 2016 16:05 ET (20:05 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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