China's new electronics companies, lured by riches in foreign markets, are feeling the bite of well-honed patent protection systems that have become effective weapons of business war for their competitors.
Such lawsuits filed in the U.S. would have been considered little more than a nuisance by Chinese firms just two years ago, carrying little or no clout in China.
Multinationals are reluctant to file patent lawsuits in China, where intellectual property (IP) laws are new and the courts lack experience handling such cases.
But with China's exports of machinery and high tech goods reaching $490 billion last year, up 45 percent from 2003, the threat of being shut out of lucrative western markets has become a potent deterrent against IP theft by Chinese companies, experts say.
"The Chinese companies have to care because if they don't they face several bad scenarios," said Tony Chen, an IP attorney at the law firm of Paul Hastings, Janofsky & Walker. "If you lose a lawsuit, the court ... could issue an injunction to stop your product from entering the U.S. You also face the prospect of very big damages. Also, your customers don't want to be exposed to liabilities."
Market competition
In January, U.S. chip designer SigmaTel Inc. sued Zhuhai, China-based Actions Semiconductor in Texas. Weeks later, SigmaTel announced a settlement with Actions co-defendant U.S.-based Sonic Impact, which was using the Chinese firm's chips in its MP3 players.
But the main complaint with Actions has yet to be resolved, said Mike Wodopian, a senior vice president at SigmaTel. "At the end of the day, from an overall market perspective the U.S. is still a huge consumer of these products," he said, explaining SigmaTel's decision to sue in the United States.
Attorneys said the number of IP lawsuits in the U.S. was relatively small, in the dozens each year. But they added the number was growing quickly as companies try to nip new competition from China in the bud and avoid losing market share the way they did to aggressive competitors from Japan and later South Korea starting in the 1970s.
While it is difficult for an outsider to judge the merits of individual cases, and few lawsuits have made it to trial, foreign companies say Chinese firms routinely copy their technology, down to highly complicated circuitries and production processes.
See them in court
Such cases are not always easily resolved and can drag on for years. Most are eventually settled out of court. One of the earliest, a suit by Japan's Sanyo Electric Co. Ltd. against Chinese battery maker BYD Co. Ltd. filed in California in 2002, was resolved earlier this month when the two companies reached a settlement.
In one of the most high profile cases to date, and one at the head of the recent wave, Cisco Systems Inc. in 2003 sued Chinese rising tech star Huawei Technologies in Texas for alleged IP theft. The two companies settled the case later that year.
More recent cases against Chinese firms, both filed in California, include a suit by a hard drive joint venture between Hitachi Ltd. and IBM and one by Taiwan's TSMC, the world's biggest maker of made-to-order chips, against fast-growing Chinese rival SMIC. TSMC and SMIC announced a settlement to their case late last month.
"Cases in the past often involved Japanese or Taiwanese defendants," said Sebastian Hughes, an attorney at the law firm of Preston Gates. "These days it's more mainland Chinese defendants. In some cases, such as SMIC, you have a Taiwanese or Japanese plaintiff suing in the U.S. It's come full circle."
Foreign companies may have more experience using the U.S. courts, but a growing number of Chinese firms are also finding they can use the system to their advantage in a range of disputes with their overseas business partners.
Two Chinese companies sued a consortium of DVD patent holders, including Philips, Sony, Pioneer and LG Electronics, alleging cartel-like behavior.
China's top TV maker, Sichuan Changhong Electric Appliances Co. Ltd., sued U.S. distributor Apex Digital Inc. in California in December to recover an alleged $484 million in unpaid bills.
"The Chinese firms are drinking from a hydrant, they're learning," said Chen of Paul Hastings. "From the U.S. law firms, the education of Chinese companies about the possibility of filing lawsuits themselves is getting some effect."