AAPL Apple Inc

By Eva Dou and Daisuke Wakabayashi 

BEIJING -- Apple Inc.'s once unlimited prospects in China ran headlong into an increasingly perilous landscape for Western companies here as regulators in the world's No. 2 economy handed the tech giant the latest in a series of setbacks.

Shenzhen Baili, a little-known startup, won a surprise injunction against sales of Apple's iPhone 6 and iPhone 6 Plus in Beijing, based on a patent covering smartphone design. Apple said the order had been stayed pending appeal and sales remain unaffected.

The ruling is a hint of the challenges that Western companies are facing here, as Chinese companies mature into stronger competitors and regulators insist 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 immune from the scrutiny focused on makers of more sensitive equipment like servers and routers. Industry watchers mused over Apple's ability 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.

Chinese companies are learning to take advantage of a maturing domestic patent system, laying claim to patents 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. After years of rapid growth, iPhone sales fell in China in the quarter ended March 26, contributing to Apple's first quarterly revenue decline in 13 years. In April, China shut down Apple's iBooks and iTunes Movies services, 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.

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, devices like iPhones are coming 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.

The Chinese company challenging Apple, Shenzhen Baili, is virtually unknown outside China and has no website. 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 determined 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 global handset marketing director for China's Huawei Technologies Co. before founding Digione in 2006, according to online profiles.

In 2013, Chinese internet company Baidu Inc. became the largest investor in Digione, according to two people familiar with the matter.

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.

This isn't the first time Apple has been involved in an intellectual-property dispute in China. 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, said 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 of 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 the injunction, which applies only in Beijing, after ruling that the iPhone 6 and iPhone 6 Plus infringed on its patent, according to a statement on the bureau's 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.

Apple last month asked the national Intellectual Property Court, which holds authority over the smaller municipal tribunal, to overturn the ruling that it had infringed on Shenzhen Baili's patents. "IPhone 6 and iPhone 6 Plus products do not infringe upon the design patents (held by Shenzhen Baili)," Apple's lawyers wrote. The case is expected to be heard in a few months. Mr. Lehman, the patent attorney, said it is common in these cases for an injunction to be suspended throughout the appeal process.

In a note on Friday, UBS analyst Steve Milunovich said concern about the ban is "likely overblown," but it underscores the existential threat facing Apple in the long term, noting 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.

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," it said.

--Lilian Lin contributed to this article.

Write to Eva Dou at eva.dou@wsj.com and Daisuke Wakabayashi at Daisuke.Wakabayashi@wsj.com

(END) Dow Jones Newswires

June 17, 2016 19:07 ET (23:07 GMT)

Apple (NASDAQ:AAPL)
Historical Stock Chart
From Mar 2024 to Apr 2024

Apple (NASDAQ:AAPL)
Historical Stock Chart
From Apr 2023 to Apr 2024