Are smartphone patent wars in China on the horizon?

For those Kat readers who look favourably at the smartphone wars of the last few years, you may be heartened to know that similar patent wars may erupt as well in the Chinese mobile industry, and more quickly that you would think, if one is to believe the observations made in an article that appeared on February 13, 2015 on reuters.com. Entitled “Qualcomm deal sparks China smartphone skirmishes”, the article focuses on how ZTE Corporation, the giant telecommunications equipment manufacturer, is ramping up to take advantage of the new legal environment that has resulted from the settlement that Qualcomm reached on February 9 with the Chinese National Development and Reform Commission (NDRC) over claims that the company’s licensing practices had violated the country’s Anti-Monopoly Law. This Kat will not review all of the various provisions that comprise this intricate agreement (Kat readers who wish to do so are urged to consider tthis article that appeared on Forbes.com).

Rather, we will focus on one key provision, whereby Qualcomm had to end its practice of cross-licensing agreements that had the effect of giving smaller customers of the company free access of the patent portfolio belonging to more established Qualcomm customers. The upshot is that ZTE and similarly-situated Chinese companies, such as Huawei Technologies, which are reported to hold substantial essential patents for wireless technology, may well began to aggressively seek royalty payments, as well a court enforcement of its patent rights, from other companies engaged in the smartphone space. Of particular interest is the suggestion that ZTE may be targeting upstart handset companies for legal action and, in particular, it may go after Xiaomi, the high-flying Chinese handset manufacturer. What is striking about this possibility is how the Reuters article describes a legal and business environment that sounds more and more like the US and other developed markets. Consider the following:

1. In facing the real possibility that companies such as ZTE will be more aggressive in seeking to monetise and enforce their IP rights, the secretary general of the Mobile China Alliance stated that “[f]or the first time, the settlement is forcing domestic manufacturers to recognize the value of IP and consider how to use it strategically, which companies do in the West.”

2. The president of Xiaomi, while not commenting specifically on a possible dispute with ZTE, observed that increased threats and litigation is typical for a high-flying start-up. He went on: “This is true of any company, not just Chinese companies”. In response, the company is working on boosting its relatively small patent portfolio—“We’ve been focusing on building up our own IP. It’s going to take some time.”

3. For its part, ZTE stated that the Qualcomm settlement “is positive for the development of intellectual property rights in China, and will help promote fair competition for technology innovators.” One possible way to do so was suggested in the article. Thus, ZTE is reported to be exploring how to make royalties a material part of its IP activities (“They’re taking this extremely seriously”.)

4. There is a recognition that this change may drive some smaller mobile phones (heretofore the beneficiary of what the free-licensing regime) from the market in the face of increased costs for research, litigation and licensing. Those that survive cam be expected to engage in increased patenting activity.

While all of this sounds so “Western” in approach, one wonders whether the developing reality may be more nuanced that that. In a word, how will the Chinese government fit in? This Kat has been considering what the emerging contours of Chinese IP policy might look like (here and here); the Qualcomm settlement itself can bee seen in the context of broader Chinese IP policy . Indeed, the article itself offers a tantalizing suggestion that any potential smartphone war may not be free of governmental influence, writing that while

“legal jostling will intensify, … there will not likely be an immediate eruption of high-profile court battles. ‘It would be extremely costly and messy for ZTE to take Xiaomi to court, especially as a Beijing company with ties to power,’“ 

quoting the secretary general of the Mobile China Alliance. Moreover, one wonders how Chinese policy makers will come down on the debate of whether it is good, or bad, to drive out young mobile companies, and whether governmental policy might be brought to bear. Stay tuned.

How to pronounce Xiaomi here