Jacob Schindler

Qualcomm on Friday announced that it has taken the momentous step of filing its first patent lawsuit in China. The US company has accused Guangdong-based Meizu of being “unwilling to negotiate in good faith” over a licence for technologies related to 3G and 4G wireless standards. The San Diego-based plaintiff told the Beijing IP Court that the terms offered to Meizu comply with China’s Anti-Monopoly Law and the settlement it reached with the country’s National Development and Reform Commission (NDRC) in 2015. Whichever way it goes, this case could have a huge impact on Qualcomm’s business in China and investors’ confidence in the company. But it also will be seen by many as a litmus test for how far China’s patent system has come in terms of fairness and impartiality.

Meizu says it sold over 20 million smartphones in 2015, a big jump over the previous year’s figure of 4.4 million. That probably means it is one of Qualcomm's biggest licensing holdouts in China, given that the company has reached terms with the likes of Huawei, Xiaomi, ZTE, TCL and the owners of Oppo, Vivo, Oneplus and Coolpad. A $590 million investment by Alibaba Group last year is likely to have fuelled some of Meizu’s sales growth. But while analysts have praised the company’s R&D, its patent holdings appear to be miniscule even by the standards of second-tier Chinese smartphone makers. A search of the State IP Office (SIPO) database turned up about 212 Chinese patents applied for or assigned to Meizu, including 138 invention patents.

IAM today caught up with Erick Robinson, who until 2015 served as Qualcomm’s director of patents, Asia. Based in Beijing, he is now chief patent counsel, Asia for Rouse. Robinson says that the NDRC investigation of Qualcomm provides the essential background for its decision to go after Meizu. The terms imposed by the regulator, he says, have effectively given Chinese companies a “huge” discount compared with their global peers, which has put significant pressure on the US company’s margins in China. So while the last thing Qualcomm wants right now is to take an action that could be seen as overly aggressive, it really has little alternative. Robinson’s full comments are below; he neither represents Qualcomm nor speaks for the company:

Although Qualcomm has a majority of the mobile chip market, because of the NDRC investigation, it lost a lot of leverage in licensing negotiations.  Qualcomm now had a black eye in China, and was arguably seen as having acted unfairly to Chinese companies. While I personally disagree with this, the fact remains that to succeed in China, foreign companies must be considered to be friends of China, and Qualcomm is not now a great friend.

When Meizu held out and refused to pay royalties, it presented Qualcomm with a dilemma.  Should it sue Meizu and risk being seen as a problem again to the Chinese government, or should it wait and continue to negotiate? Given that the margins in China had gone down so much, and because Qualcomm has tried to make amends with China, Qualcomm felt like it had no choice but to try to leverage payment via litigation.

This is very important to Qualcomm’s future in China, and to the company at large. If it cannot force a company to pay it royalties, Qualcomm’s licensing model is destroyed – at least in China.

Further, this case is important to the entire Chinese patent system. Qualcomm is well-known to have an extremely strong patent portfolio – the best patent portfolio in the mobile industry – and if it cannot secure a litigation win or force a settlement based on the newly improved Chinese patent enforcement system, it will be a setback for the Chinese courts and ultimately, China itself. This is because foreign companies will lose some faith in a court system that has increasingly proven itself very efficient, effective, and fair in adjudicating patent disputes in China. Since Qualcomm is ‘supposed to win’ this case, if it does not, the entire patent litigation system in China is called into doubt.

I suspect that Meizu will settle the case either before or after trial, but before appeal. But I have no crystal ball. What I do know is that if Qualcomm does not win, its success in China will be severely impinged.

There you have it – it doesn’t seem like the stakes could be any higher. Robinson tells me he’s a great believer in China’s IP enforcement system, and he’s optimistic that the result will be a positive one for the US company. One thing Qualcomm has going for it is the number of major Chinese licensees it has signed up in the past year. The company can show that by refusing to pay royalties, Meizu is gaining an unfair advantage over competitors like Huawei, ZTE and Lenovo. Seen from that angle, a win for the US firm can also be seen as a win for China’s mobile industry overall.

Whatever happens, you can bet there are a whole lot more potential plaintiffs waiting in the wings, watching this case very carefully. And most are probably glad that it’s Qualcomm, not them, whose neck is on the line.