Patents pending

Now in litigation mode

The expression lanluhu, means literally ‘the tiger that stands in the way’, and is often associated with robbery. That connotation was likely inspired by Moon Prayer Pavilion, one of the major dramas of the early Ming Dynasty, in which a group of bandits are called by this name. But over the years lanluhu has become synonymous with any kind of stumbling block and in China’s tech space the term has recently been applied to the activities of Coolpad Group, the once prominent Shenzhen-based phone handset manufacturer.

Why so? Because Coolpad has been putting up barricades to its Beijing-based peer Xiaomi’s route to a listing in Hong Kong (see WiC408) by lodging a lawsuit.

On May 11, nine days after Xiaomi announced its blockbuster flotation, Coolpad’s chief intellectual property officer Zhang Na told the press that Xiaomi had been infringing Coolpad’s patent rights for an invention known as “multi-mode mobile communication terminal interface”.

Zhang said the technology allows click-to-call and click-to-access functions within text message services (sometimes called SMS), split-screen multi-tasking, and dual-SIM operations (the ability to switch between two SIM cards on the same phone)

“[Such capability] is widely adopted, and we’re not picking on any specific company”, Zhang conttinued, “but other manufacturers we reached out to previously had responded.” Zhang claimed that Xiaomi had not acknowledged requests for negotiation despite a series of warning letters delivered since 2014. Thus Coolpad has decided to take the case to court.

Professor Li Yang at Sun Yat-sen University School of Law said lawsuits like these follow two procedures. First, the State Intellectual Property Office decides whether the patent in question is valid. Should that be the case, the court then judges whether there is infringement of the claimant’s rights. The litigation takes three to five years on average, and the longest case on record lasted 11 years.

Xiaomi said it would deal with the challenge “proactively”, having filed patent invalidation requests in the face of Coolpad’s demands to withdraw its handsets from sale. “The stability of patented technology claimed by Coolpad is negotiable,” it said in a statement.

The main question: will Coolpad’s allegations delay Xiaomi’s $10 billion initial public offering? And will they drag down the valuation of the eight-year-old electronic devices maker?

“The legal dispute will necessitate an additional supply of information and court hearings, which could set Xiaomi’s IPO back,” Xu Bo, vice president of Zhongtai International Research, predicted to local media site tech163.com. “Xiaomi’s valuation will be affected by market conditions – a deferral of its listing is just not beneficial.”

The Wall Street Journal reported in early May that Xiaomi had already slashed its target valuation for the IPO by at least $20 billion – a response to the reality that global tech companies are trading 10% or more below their peaks this year.

Others view Coolpad’s move against the world’s fourth largest smartphone maker as more of a publicity stunt. Timing-wise Xiaomi’s pending IPO gives Coolpad more leverage in extracting compensation, said Sohu.com.

According to Coolpad’s own financial results for 2016, reported in April after a lengthy trading halt, its cash and cash equivalents had dwindled over 48% from the previous year to HK$1.31 billion ($166.9 million). Its problems have been exacerbated by its association with LeEco (see WiC296), a tech conglomerate laid low by a liquidity crunch of its own shortly after buying 29% stake of Coolpad. As a consequence Coolpad was pressed by three banks to repay more of its debts last August. Its share price is down 76% from its peak in 2015. The company’s coffers were slightly replenished this month when property company Kingkey Group, an affiliate of its largest shareholder Power Sun Ventures, extended a loan of Rmb500 million ($78.2 million).

Coolpad now claims to own more than 10,000 patents and alleges that many companies are using them improperly. “Our next step is to sue some of them,” promised company CEO Jiang Chao. To do so he appointed Zhang as chief IP officer, a newly created role, in March.

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