SMARTPHONES: Xiaomi in New Setback with US Lawsuit

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Bottom line: A new patent lawsuit against it in the US highlights one of the biggest challenges Xiaomi and other Chinese tech brands will face in their global expansion, and exposes a major weakness in China’s own patent protection system.

Xiaomi hit with US patent lawsuit

Stumbling smartphone sensation Xiaomi suffered a recent new setback in its global aspirations, after being sued in the US for patent infringement involving technology used in several of its popular models. The new action comes a year after Xiaomi was sued over similar allegations in India, and reflects one of the biggest challenges Chinese high-tech brands face as they try to expand beyond their home market.

Foreign companies often choose to pounce when these Chinese brands venture abroad, because they know that legal systems are more mature and patent enforcement more effective in these countries than in China. Many of these countries take immediate action against suspected patent violators if they believe a case is valid, unlike China where cases can often drag on for months or even a year or more before a verdict is reached.
Beijing should take note of China’s shortcomings and move more aggressively to improve its own legal system, which has become better at protecting trademarks but is far less efficient in the fast-moving world of intellectual property. Such efforts would ultimately not only offer better protection for intellectual property holders, but would also better prepare China’s homegrown high-tech brands for the litigious landscape they will face when they step out onto the global stage.

Some once considered Xiaomi one of China’s most promising high-tech names, as the homegrown brand cultivated a loyal following among young Chinese attracted by its trendy and affordable smartphones. Riding high on that image, Xiaomi embarked on a global expansion last year starting in Southeast Asia. It moved quickly from there to India, but was reportedly reluctant to try more lucrative western markets over concerns about patent lawsuits.

The company sold more than 1 million smartphones in India in just its first few months there, when it was hit by its first major lawsuit brought by global networking equipment giant Ericsson (NYSE: ERIC). (previous post) That action prompted an Indian judge to ban Xiaomi models containing the related technology, dealing the company a major blow in a market that had become its second largest after only China.

Despite its reservations about similar actions in the US, Xiaomi had pressed ahead in the market and won approval from the local telecoms regulator to sell 2 of its upcoming models in the market. But now those plans have been thrown into doubt, following the new lawsuit against the company by Blue Spike, a supplier of digital security technology. (English article; Chinese article)

The lawsuit in the US state of Texas accuses Xiaomi of illegally using Blue Spike’s technology in a wide array of its smartphones, including the upcoming Mi 5 and Mi 5 Plus. Those 2 new models haven’t officially been announced, but are believed to be set for a launch early next year and had been approved for sale by the US Federal Communications Commission (FCC). The new lawsuit could delay any such plans if a US judge determines that patent infringement claims may be valid.

Xiaomi’s latest setback comes as it and many of its peers look overseas to avoid the cutthroat competition in their home market. Developing markets like India have become a favorite stop on the global roadmap for a wide range of Chinese smartphone makers that now includes Meizu, Coolpad (HKEx: 2369) and Huawei, among others. Foreign technology holders often refrain from filing patent lawsuits when such companies initially go abroad, preferring instead to take action after those companies start to notch significant sales.

Others that have faced similar lawsuits abroad include networking equipment makers Huawei and ZTE (HKEx: 763; Shenzhen: 000063), which have been sued overseas by the likes of Ericsson and Cisco, as well as smaller technology companies. By comparison, few companies bother to file similar lawsuits in China, even though the market is the world’s largest for smartphones and telecoms networking equipment. That’s because the legal process in China is relatively slow and penalties are small, with the result that verdicts are often meaningless even if a judge ultimately rules in favor of the plaintiff.

As China tries to go up the value chain and foster more innovation, it should move more aggressively to train a new generation of judges who specialize in patent law, and then give them the judicial tools they need to ensure effective protection of intellectual property. Such actions would benefit not only foreign firms but also homegrown innovators like Huawei, and would prepare up-and-coming names like Xiaomi for the challenges they will face when they choose to go abroad.

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