Market Insight

Patent landscape in China will design Apple’s regional sales strategy

June 23, 2016


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Recently, there have been numerous reports on Apple Inc.’s iPhone 6 and 6 Plus receiving an injunction in Beijing last month. The court injunction was given by China's municipal tribunal in response to a design patent infringement compliant filed by a smartphone startup named Shenzhen Baili. Until the news was announced, Shenzhen Baili - and its parent company Digione - were an unknown player in the China’s smartphone space and it seem to fit the profile of a non-practicing entity (NPE) - or colloquially referred to as patent troll. Shortly after the court injunction order, Apple appealed the court order requesting a review of the ruling. Since then, Apple’s appeal to review the ruling has been accepted and Apple will be able to sell its iPhone 6 and 6 plus models in China until the order is reviewed by the Beijing IP court.

The ironic part about this story is that a design patent was used against Apple by Shenzhen Bili in China, while Apple has been working hard to assert its own design patents against Samsung in the United States for the past five years. Design patents are one of the simpler patent filings that typically contain several pages of diagrams which are used to illustrate the external design of a product. Here is a link to one of the Apple’s design patents that were used to accuse Samsung of infringement at the Northern District court of California. For the U.S. patent case involving Apple and Samsung, design patents (combined with utilities patents) contributed to Apple winning the initial damages award of $1billion at the district court.

Before we discuss whether it is fair for a design patent to exercise and enjoy enormous amount of patent rights, the following question could be more important for Apple’s future in China: “If an unknown local startup can use a design patent to get an injunction against Apple, how much leverage do major local smartphone vendors – such as Huawei or Xiaomi that files thousands of patents annually - have on Apple?”

Early last month, there have been several news reports of Apple making royalty payments to Huawei. Because of the confidential nature of the patent licensing agreement, this news did not have credible references. At the time, it was difficult to believe the news at face value since Huawei was not known as a patent licensor in the industry. However, in light of the recent injunction verdict Apple received from the Beijing IP court combined and the news on Samsung being sued by Huawei in the US and China court, it is clear that Huawei has started to actively pursue monetizing its patents.

For Apple, 25% of its total sales came from China during the most recently completed quarter at the end of March, 2016 and this put China as its second biggest sales region only after Americas region. Due to the significant amount of revenue coming from China, it is in Apple’s best interest to mitigate the risk coming from the unfavorable legal risks in China. Being well aware of the importance of its business in China, Apple has been putting efforts to minimize the legal risks in the region and below are some of the examples: make $1billion investment in local company - Didi Chuxing Technology, agreeing to a licensing agreement with Huawei, visit from the CEO Tim Cook and working with the government officials.

Conclusion:
The current patent landscape in China is not limited to impacting Apple’s business only in China, but it has a potential to assist the Chinese smartphone vendors to enter the U.S. market. In the previously posted insight, while reviewing Xiaomi’s to do lists before entering the U.S. smartphone market, signing a licensing deal with Apple Inc. was listed as one of the important items. Apple’s strong interest in the Chinese market could encourage granting license to Chinese smartphone vendors to enter the U.S. market in exchange for a lower risk of patent litigation in China.

Geography
Americas China
Category
Mobile Devices
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