Monday, April 19, 2010

Three Lessons from Google’s China Fiasco

Note: A version of this article has been published by IP, Corporate Finance, International Trade and Technology Law360 on April 16. Click here for a copy.

Three Lessons from Google’s China Fiasco

Lei Mei, Partner, Mei & Mark LLP
Reece Nienstadt, Partner, Mei & Mark LLP

Google’s announcement on March 23, 2010, to pull out of China’s online search business brought its high-profile dispute with the Chinese government to a sad conclusion. Without commenting on the political and ethical nature of Google’s decision to quit censoring searches, the authors analyze Google’s fiasco from a business perspective and provide three lessons for American companies doing business in China.

According to some observers, Google’s dispute with the Chinese government might have been motivated largely by its business desire to gain market shares rather than by political and ethical concerns. From a business perspective, however, Google could not have done worse.

Undeniably, Google’s decision crippled its entire business operations in China. For example, China Mobile and China Unicom, the two largest cellular communications companies in China, were reported to have canceled cell-phone-related deals with Google under government pressure. It may take years, if not decades, for Google to reestablish itself in the lucrative Chinese market.

For many other American companies, Google’s exit from China provides three valuable lessons regarding doing business in China.

Lesson 1: Be Patient with Social Progress in China.

Keep in mind that China is still a “socialist” country with one governing party. Although China has embraced free-market economics since the early 1980s and its economy has improved beyond anyone’s imagination, China’s social progress has not kept pace with its economic growth.

Critics are frustrated with China’s political regime. No one can deny, however, that China has made significant social progress. For example, under the “one country, two systems” framework proposed by late President Deng Xiaoping, the Chinese government has allowed regions like Hong Kong and Macau to keep, to a large extent, their capitalist economic and political systems.

We all hope that the economic growth will spur more social progress. Nonetheless, one must be patient. Certainly, the priority for most American companies doing business in China is to make profit for their shareholders and gradually help Chinese society improve economically and socially; it is not to change China’s political landscape overnight.

Lesson 2: Avoid Getting Caught in Political Cross Fires.

We advise our American clients to avoid politics in China as much as possible. Unfortunately, to do business in China, one cannot totally avoid dealing with central, provincial, and/or local Chinese governments.

The solution is simple: be politically neutral and keep a low profile in China. Keeping a low profile does not mean that the company cannot be visible business-wise. Rather, if a dispute with a state-owned enterprise or the Chinese government arises, keep the dispute at a low profile.

Keeping a low profile allows a solution to be worked out quietly behind the scenes. In Google’s case, its dispute with the Chinese government became a high-profile case watched by the entire world. Under these circumstances, many otherwise workable solutions became non-options, because the Chinese government was concerned that it could lose “face” in front of its people and the world if it gave in to Google’s demand.

Had the dispute been kept at a low profile, the Chinese government could have entertained options to ease some of the restrictions. It would not be a complete victory for Google, but it could have allowed Google to continue its operations in China while simultaneously improving Chinese people’s access to more information.

Lesson 3: Be Aware of Unspoken Chinese Rules.

Not surprisingly, doing business in China carries many risks. For American companies, these risks include trade secret theft, technology leaks, and IP infringement. Although many American companies can implement sophisticated legal, organizational, and technical procedures and strategies to minimize such risks, some risks may nevertheless remain.

The test of an American company doing business in China, therefore, is not how well it minimizes the risks beforehand, but how well it deals with crisis afterward. Without a well-planned crisis management strategy, many American companies will mistakenly take a short-sighted approach and jeopardize their long-term business interests.

The key component of any well-planned crisis management strategy is to be aware of unspoken Chinese rules. One such rule is to not lose “face” with respect to yourself or other parties that may provide you strategic value.

In Google’s case, it became apparent in the months leading to Google’s exit announcement that either Google or the Chinese government would lose “face” after the highly publicized dispute between the two. And it was inevitable that Google would end up quitting its Chinese online search business.

In comparison, General Motors handled its predicament very well after Chery Automobile, a Chinese automaker, allegedly copied the design of the Chevrolet Spark developed by GM’s Daewoo subsidiary in 2004. At the time, GM was producing a similar model with its two Chinese joint venture partners when the alleged technology leak took place. And interestingly, Chery was partially owned by a key Chinese joint venture partner of GM. After much silence, GM eventually proceeded to sue Chery in a Chinese court and the case was settled.

Initially, the industry observers were puzzled that GM seemingly took a very low-profile approach, and appeared to be reluctant to enforce its legal rights. GM’s subsequent commercial success in China, however, proves that GM’s crisis management strategy, counter-intuitive at the time, paid off handsomely. In 2005, the year after the alleged incident, GM’s Chinese market share grew 35.2%. In 2009, GM’s sales in China surged 67%, selling more than 1.8 million cars and trucks.

As a latecomer to the Chinese automobile industry, without the support of its key joint venture partners and the Chinese government at all levels, GM would not have achieved its success today if it had enforced its legal rights against Chery aggressively.

Therefore, one must be aware of unspoken Chinese rules and implement a holistic crisis management plan. While American companies have a tendency to exercise legal options when dealing with technology leak and IP infringement, it may not always be the best way to do business in China. Sometimes, a loss today can turn into a big win tomorrow in China!

About the Authors:

Reece Nienstadt is a partner at Mei & Mark LLP, an Intellectual Property and Litigation law firm based in Washington, DC. Lei Mei is a founding partner at Mei & Mark LLP and the author of the forthcoming book “How to Conduct Business in China: An Intellectual Property Perspective,” to be published by Oxford University Press.

Friday, April 16, 2010

Wednesday, April 14, 2010

Tuesday, April 13, 2010

One Challenging Patent Assignment Has the Burden to Rebut the Validity of Assignment

SiRF Tech., Inc. v. Int'l Trade Comm'n, No. 2009-1262 (Fed. Cir. Apr. 12, 2010).


One challenging the patent assignment has the burden to rebut the validity of assignment. Slip op. at 12.

Relevant Facts:

Global Locate owns several patents related to GPS technology. The International Trade Commission found that SiRF infringes Global Locate’s patents. Among several issues, SiRF challenges Global Locate’s standing to sue. Specifically, one inventor worked at a third party company Magellan and under his employee inventions agreement, he had the obligation to assign Magellan “all inventions . . . which are related to or useful in the business of the Employer . . . and which were . . . conceived . . . during the period of the Employee’s employment, whether or not in the course of the Employee’s employment.” Slip op. at 9. The Commission found that the invention was not “related to or useful in the business of the Employer.” The Federal Circuit affirmed the Commission’s decision.


The question of standing to assert a patent claim is jurisdictional, and the Federal Circuit reviews this question de novo. Because the patents were assigned to Global Locate, however, the burden of proof on this issue rested with the challengers. The Federal Circuit affirmed the Commission’s factual determination under the “substantial evidence” standard, finding that the challengers have not sustained their burden is supported by substantial evidence. Slip op. at 13.

New Federal Circuit Opinions - April 13, 2010

Anascape, Ltd. v. Nintendo of Am., Inc., No. 2008-1500 (Fed. Cir. Apr. 13, 2010).

In re Mighty Tea Leaf, No. 2009-1497 (Fed. Cir. Apr. 13, 2010).

New Federal Circuit Opinions - April 12, 2010

SiRF Tech., Inc. v. Int'l Trade Comm'n, No. 2009-1262 (Fed. Cir. Apr. 12, 2010).

Friday, April 9, 2010

IP Law360 Article: IP Enforcement In China Still A Work In Progress

On April 9, 2010, IP Law360 published an article "IP Enforcement In China Still A Work In Progress," which contains an interview with Lei Mei, a founding partner at Mei & Mark LLP.

Please click here to view the article.

Lexis Nexis Published Case Study on the Trimone Case

On March 26, 2010, Lexis Nexis published a case study by Lei Mei, a founding partner at Mei & Mark LLP, in its China Legal Review in English and Chinese. Click here for a copy of the article. The English version is reproduced below.

The Trimone Case: The First Ever Win for a Chinese Company in an ITC-Related U.S. Customs Proceeding

Lei Mei, Managing Partner, Mei & Mark LLP

On May 12, 2009, U.S. Customs issued a ruling that Zhejiang Trimone’s re-designed TGM ground fault circuit interrupters (GFCIs) fall outside the scope of the exclusion orders issued by the United States International Trade Commission (ITC) in Investigation No. 337-TA-615. This case was reported by national media in China to be the first ever win for a Chinese company to obtain a favorable ruling from the U.S. Customs after it had lost at the ITC.

This article describes the background of the Trimone case, and offers practical advice regarding post-ITC U.S. Customs proceedings. For many Chinese companies, the U.S. Customs proceedings may be a cost effective option to overcome the trade barriers created by ITC exclusion orders.

I. Background

The ITC instituted an investigation of certain GFCIs and products containing same on September 18, 2007, based on a complaint filed by Pass & Seymour, Inc. (“P&S”). The complaint alleged that Trimone and other respondents violated Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, by selling for importation certain GFCIs that infringed P&S’ patents.

Trimone is a privately held company based in Zhejiang. The company develops its own GFCI technologies and owns several Chinese and U.S. patents related to GFCI. In previous cases, many Chinese companies chose not to respond to ITC investigations. Trimone, however, aggressively defended its claim that it did not infringe P&S’ patents, retaining one of the largest international law firms to represent it before the ITC. On March 9, 2009, the ITC found that Trimone infringed U.S. Patent No. 7,283,340 (“the ’340 patent”), but not other P&S patents. As a result, the ITC issued a limited exclusion order, excluding entry of Trimone’s infringing GFCI products.

On March 18, 2009, Trimone retained our firm, Mei & Mark LLP, to find a resolution to allow it to continue to sell products in the U.S. notwithstanding the limited exclusion order. The traditional option, of course, was to appeal to the United States Court of Appeals for the Federal Circuit (“the Federal Circuit”), which could take over a year to resolve. In addition to the appeal, we proposed a little known legal option to bring a design-around product before the U.S. Customs for a quick ruling on whether the re-designed product is subject to the limited exclusion order.

The U.S. Customs option is more cost-effective, because a U.S. Customs proceeding typically takes about three to four months to complete, much faster than the Federal Circuit appeal or an advisory opinion proceeding before the ITC.
We contacted the IPR branch of the U.S. Customs’ headquarters in Washington, D.C., and submitted legal briefs and supporting documents to demonstrate that Trimone’s new GFCI products do not infringe the ’340 patent. On April 3, 2009, we had an in-person, meeting with an U.S. Customs official, who is also an attorney, at the IPR branch. Subsequently, we communicated with the U.S. Customs, providing additional supporting documents.

On May 12, 2009, the U.S. Customs ruled that Trimone’s re-designed TGM series of its GFCI products do not infringe the ’340 patent and fall outside the scope of the limited exclusion order. Therefore, unlike other Chinese respondents in this case, Trimone is the only Chinese company that can sell its GFCI products to the U.S.
As a result, not only has Trimone’s business recovered from its loss at the ITC, Trimone has also received more orders now from U.S. customers than it did before the ITC investigation because of this favorable ruling from the U.S. Customs.

II. Legal Basis

According to the U.S. Federal Regulations 19 C.F.R. Part 177, the U.S. Customs has discretion to issue legal opinions related to imported goods. Because the ITC does not enforce the exclusion orders, the U.S. Customs has the responsibilities for enforcement.

ITC exclusion orders are typically very general and vague. Therefore, the U.S. Customs also has the flexibility in implementing the enforcement mechanism and interpreting ITC exclusion orders.

For example, in the Trimone case, the ITC issued a limited exclusion order, paragraph 3 of which prohibits import of any GFIC products that infringe the ’340 patent, without naming specific products:

3. Ground fault circuit interrupters and products containing the same covered by one or more of claims 14 and 18 of the ‘340 patent, and that are manufactured abroad by or on behalf of, or imported by or on behalf of, Trimone or any of its affiliated companies, parents, subsidiaries, or other related business entities, or its successors or assigns are excluded from entry for consumption, entry for consumption from a foreign-trade zone, or withdrawal from a warehouse for consumption, for the remaining term of the patents, except under license of the patent owner or as provided by law.

As a result, the U.S. Customs must decide what products would infringe the patents in dispute. Obviously, for the specific products named in the ITC investigation, the ITC has already made the ruling, so the U.S. Customs cannot change that. For new or re-designed products, however, the ITC has not ruled on them before. Therefore, the U.S. Customs has the discretion under 19 C.F.R. Part 177 to issue a ruling.

Typically, an ITC exclusion order specifically allows the U.S. Customs to have discretion in the enforcement. For example, in the Trimone case, paragraph 6 of the limited exclusion order describes the U.S. Customs’ role in enforcing the limited exclusion order:

6. At the discretion of U.S. Customs and Border Protection (“CBP”) and pursuant to procedures it establishes, persons seeking to import ground fault circuit interrupters and products containing the same that are potentially subject to this Order may be required to certify that they are familiar with the terns of this Order, that they have made appropriate inquiry, and thereupon state that, to the best of their knowledge and belief, the products being imported are not excluded from entry under paragraphs 1 through 10 of this Order. At its discretion, Customs may require persons who have provided the certification described in this paragraph to furnish such records or analyses as are necessary to substantiate the certification.

Unfortunately, most Chinese companies are unfamiliar with post-ITC U.S. Customs proceedings. Indeed, even American companies have rarely used this legal option until recently, and many U.S. lawyers are not aware of this area of law. Therefore, we hope that more Chinese companies can learn from Trimone’s experience.

III. Conclusion

IP-related trade barriers are not insurmountable. When facing a patent lawsuit in the United States, whether it is an ITC investigation or a federal district court litigation, Chinese companies must consult with competent U.S. patent lawyers and consider all options. It is not necessary to always spend millions of dollars in attorneys’ fees to defend a patent infringement lawsuit. Other legal options, such as U.S. Customs proceedings, could be cost-effective alternatives. If advised properly, more and more Chinese companies can learn from Trimone’s success and become much stronger coming out of IP disputes.

About the Author:

Lei Mei is a partner at Mei & Mark LLP, an Intellectual Property and Litigation law firm based in Washington, DC.

Wednesday, April 7, 2010

New Federal Circuit Opinions - April 7, 2010

Bid for Position, LLC v. AOL, LLC, No. 09-1068 (Fed. Cir. Apr. 7, 2010).
Yorkey v. Diab, No. 08-1577 (Fed. Cir. Apr. 7, 2010).
Yorkey v. Diab, No. 08-1578 (Fed. Cir. Apr. 7, 2010).
Vanderbilt Univ. v. Icos Corp., No. 09-1258 (Fed. Cir. Apr. 7, 2010).

Thursday, April 1, 2010