Apple Inc. (APPL) might be wise to settle an infringement dispute over a patent covering smartphone design filed by Shenzhen Baili Marketing Services Co., after a Beijing court handed the struggling Chinese startup an injunction against the American giant’s sales of iPhone 6 and iPhone 6 Plus in China if Apple wants to preserve its good standing in the world’s second biggest economy, patent market observers say.
In China, such injunctions are typically stayed pending an appeal, giving Apple ample time to weigh the costs of an embarrassing loss versus a design around or a settlement. To be sure, Baili, a unit of Shenzhen City 100/100 Digital Technology Co., also known as Digione, are both insolvent, the Wall Street Journal reported, according to the companies’ annual financial reports.
Patent market observers including Erick Robinson, of Rouse International in Beijing, and Don Merino, managing director of Merino IP Consulting in Taipai, Taiwan, say the injunction and dispute may be perilous for Apple and other large multi-national companies that do business in China.
Robinson and Merino say that other Chinese technology companies and some western patent licensing companies are watching the case closely to see if they too can take advantage of the ability to win injunctions against western companies in the patent courts of the second biggest economy in the world.
“Currently patents are a lot more valuable in China than they are in the U.S.” because of injunctive relief, Merino said.
Injunctive relief has been unavailable in the U.S. since the Supreme Court’s ruling in eBay v. MercExchange, which unanimously held that an injunction should not be automatically issued based on a finding of patent infringement, or denied simply on the basis that the plaintiff does not practice the patented invention.
The high court decided that the district courts should continue to weigh the evidence using a four-factor test that requires the covered technology to be first, eligible subject matter for patent protection, second, novel, third, non-obvious and fourth, useful. The four factor test has proved such a high hurdle that injunctions are rarely granted.
“Apple doesn’t want to encourage additional litigation by settling” with Baili, said Mark Gober, a senior director at 3LP Advisors in Silicon Valley. The company will have to weigh the benefit of fighting to discourage litigation against the benefit of settling to curry favor with Chinese authorities, he said.
“Injunctive relief may have changed the calculus for Apple and other multi-national companies in China,” he said. “China is a huge market for companies looking to monetize their patents.”
Injunctive relief also is a big reason why so many people believe the Unified Patent Court in Europe, which is scheduled to open in 2017, will be a good place to bring enforcement actions, he said. “If you get an injunction in all of Europe it may help force settlements.”
Representatives for Cupertino, California-based Apple didn’t return an email and call seeking comment for this story.
“It’s wonderfully ironic that Apple is being sued over a design patent when it previously sued Samsung for a similar design patent,” Robinson said.
The dispute between Apple and Samsung is perhaps instructive in the dispute between Baili and Apple. After Apple won an early injunction against Samsung, the South Korean technology giant was able to overcome the injunction by designing around the patent. Depending on the cost and the timing, Apple may be able to design around the Baili patent and continue to fight the dispute in the Chinese courts.
The good news for Apple is that it’s not making a whole lot of new iPhone 6s and 6 Pluses anymore and the iPhone 7s are scheduled for release in September.
The dispute between Baili and Apple “looks pretty similar to the one between Apple and Samsung,” Robinson said.
While many westerners have criticized Chinese companies for copying western innovations and hiding behind Chinese laws, Robinson cautions that westerners who make the mistake of viewing Chinese companies and China in this way may be in for a comeuppance.
“It’s very clear this is not a joke. This is not a frivolous case. Whether it’s ultimately a winning case is another matter. But the similarities between the Chinese smartphone design patents and Apple’s designs are real. It is as close a comparison as Apple’s design patents were to Samsung’s smartphones. It could go either way.”
Robinson said “this is a perfect case for Apple to settle” because Chinese patent law is well established and protects patent owner rights better than U.S. patent law.
“China has transitioned itself to be a place where you can defend your patent rights,” he said.
Moreover, he said the Chinese courts and government have bent over backwards to create a system that’s fair to everyone involved, including foreigners.
Indeed, he said “foreign plaintiffs do slightly better than Chinese plaintiffs in the Chinese patent courts because foreign plaintiffs typically do more due diligence on patents and patent claims and only pursue the best cases.”
He said the judges “are very fair and bright — unless they get a call from some government authority concerned about Chinese interests. That happens rarely.”
That commitment to fairness “doesn’t mean you don’t have to do things the right way,” he said. “If you come in wearing a cowboy hat and using loud arrogant language you’ll be cut down by the courts despite having a good case. But foreign plaintiffs can get a fair shake.”
In the meantime, Apple has had some success in fighting infringement actions in the past in the Chinese courts, according to Merino.
Last year, a Beijing court invalidated a voice recognition patent owned by Shanghai Zhenzhen Network Technology Co. Ltd. that was at issue in an infringement action Apple filed related to its Siri personal assistant. The invalidation came after a lower court previously found the patent to be valid.
The appellate judge told the official Xinhua news agency that Zhenzhen’s patent claims did not explain all the technologies used in the invention and failed to define the limits of the patent.
Apple’s experience in other intellectual property disputes has been more mixed.
In May, Apple lost a battle for the use of the “iPhone” trademark on leather goods in China after a Beijing court ruled against the world’s biggest technology company in favor of Xintong Tiandi.
The Beijing Municipal High People’s Court ruled Xintong Tiandi could continue to use the phrase “iPhone” on its leather goods, according to the Legal Daily, the official newspaper of China’s Justice Ministry.
Apple has said it was disappointed with the ruling and intends to request a retrial with the Supreme People’s Court.
The company also previously agreed to pay another Chinese company $60 million to settle a trademark infringement dispute over the “iPad” name, according to Merino.
Proview Technology (Shenzhen) previously won an injunction against Apple. After the patent office upheld the validity of the trademark, Apple appealed to the People’s high court in Beijing, which mediated the settlement.
Merino noted that the court mediated settlement with Proview ended in a figure just north of the $50 million in bank debt the company had on its books. Given Baili’s reported insolvent condition this could suggest a model for Apple to settle with Baili for a little more than its indebtedness as well.
Both Robinson and Merino said Apple was being very diplomatic in its disputes with companies in China.
“They’re not making bold predictions or slamming the Chinese courts,” Merino said. “They’ve taken the approach ‘we’re going to exhaust our legal remedies,’” he said.
Both Robinson and Merino said if they were Apple’s in house counsel they would advise the company to settle.
Not settling has it’s risks for Apple, Robinson said. “You don’t want to be the first western company to test the Chinese patent system,” he said.
The question for Apple is “how much is it worth it to you to be able to sell your product in the world in two years, which is the time it will take to exhaust your legal remedies.”
Apple probably can settle with Baili for an amount that would be a rounding error for Apple.
“Absolutely, they should settle,” Merino said. “The Chinese are opposed to a lottery legal system. I’d be surprised if the court awarded hundreds of millions of dollars to a startup. The Chinese government would like to see a system where people respect IP and pay a fair and reasonable royalty.”
Design patents typically are easier to design around than patents governing functionality. As such, Apple ought to be able to get a discount on any future royalty it has to pay.
Even so, Robinson said the quality of patents in China is typically even worse than the quality of patents in the U.S., where 95% of patents are said to be worthless.
“It’s even worse in China,” Robinson said. “There’s a decent chance the patent gets invalidated.”
The survival rate of of patents before the Chinese patent office is about 50%, which is what it used to be in the U.S. before the America Invents Act established the inter partes review (IPR) and covered business method (CBM) review processes.
Indeed, the Patent Trial and Appeal Board, which decides IPR and CBM challenges, has become a death panel for patents, invalidating more than 80% of the patents challenged.
If the Baili patent survives a validity challenge, Robinson said “infringement is a toss up.”
Rather than litigating validity and infringement, Robinson said “the better thing to do might be to partner with Baili. It would get this dispute off their caseload and make them a friend to China.”
He said there “may be a little Newegg to Apple’s strategy,” citing the example of the Los Angeles-based online computer retailer that prides itself on fighting infringement litigation from patent trolls.
“You don’t want to appear weak. But you also don’t want to be the first one to lose. There’s going to be a big U.S. company that takes a big loss against a Chinese company eventually. I know because I’m filing those actions.” He declined to say more about those cases.
Another issue that may inform Apple’s decision on whether to settle is the infamous anti-monopoly investigation by China’s National Development and Reform Commission’s (NDRC) of Qualcomm Inc.
Last year, Qualcomm agreed to pay a fine of $975 million, the largest in China’s corporate history, ending a 14-month government investigation into anti-competitive practices.
Under the deal, Qualcomm also agreed to lower its royalty rates on patents used in China, which will help Chinese smartphone makers.
“There’s tremendous business leverage for Chinese companies because China is so important,” Robinson said.