China: Assertion of Huawei's IP Rights: A lesson for China-outbound Investors

Last Updated: 1 March 2011
Article by Ariel Ye, James Rowland and Richard Wigley

Introduction

By asserting rights which Motorola and Nokia Siemens Networks undoubtedly consider legitimate, and relevant to the protection of their interests in the wireless infrastructure market, Huawei has taken a meaningful step towards the successful resolution of its differences with Motorola over the sale of its wireless network assets to one of Huawei's competitors. If Huawei had not taken this step before the US Federal District Court, then Huawei and Motorola may have spent years in private commercial arbitration of this issue, achieving no meaningful outcome.

The role of the US Federal District Court

Huawei Technologies Co., Ltd. (Huawei) is a PRC company based in Shenzhen which employs approximately 45,000 personnel around the world, including roughly 560 in the United States. Motorola Inc. (Motorola) is a US company based in Illinois and operating on a similar global scale. Both companies are among the leading global players in the telecommunications infrastructure market. Under a series of cooperation agreements since 2006, Huawei has manufactured wireless network equipment on an OEM basis for Motorola, which has resold the equipment world-wide under the Motorola brand. In July 2010, NSN announced that it had agreed to purchase Motorola's wireless network infrastructure assets, including Motorola's subsidiary, Motorola Solutions Inc. (Motorola Solutions). If this deal should close, it would mean that confidential information which Huawei had disclosed to Motorola and to the employees of Motorola Solutions under their cooperation agreements over the years would be transferred to Nokia Siemens Networks (NSN), one of Huawei's biggest competitors in the wireless infrastructure business. The cooperation agreements between Huawei and Motorola, which are governed by Swiss law, provide for the resolution of disputes before an International Chamber of Commerce arbitral tribunal in Geneva, Switzerland. As Huawei did not consent to an assignment of those agreements to NSN (Huawei could not agree to the terms of the assignment which Motorola and NSN proposed because it believed the proposal provided insufficient protection for Huawei's intellectual property), it appears that NSN did not become a party to the agreements and is not otherwise bound by their arbitration provisions.

Moreover, Huawei felt it could not agree to the assignment because a cooperative agreement with NSN (a technology innovator like Huawei) would have lacked the synergy underlying Huawei's successful technology innovator/technology distributor collaboration with Motorola, and would not have provided Huawei with any commercial advantages.

This led to an impasse among Huawei, Motorola and NSN in which Huawei sensed a threat to its confidential information which would strike at the heart of its wireless network infrastructure business if the sale of Motorola Solutions went through on the terms agreed between Motorola and NSN. Meanwhile, closure of the deal was awaiting clearance by the anti-monopoly bureau of the PRC Ministry of Commerce. Thus, Huawei's goal was to modify the terms of the sale between Motorola and NSN before the deal closed, in order to gain protection against disclosure of its IP. While it could not achieve this immediate goal through arbitration, Huawei planned to submit to arbitration its claims against Motorola, that the pending sale of Motorola Solutions would result in the disclosure of Huawei's valuable proprietary information to NSN in breach of contract.

In order to protect its proprietary information from disclosure in the interim, Huawei had to consider not only those principles of law which the other two parties must have considered legitimate and relevant, but also found that it needed to argue its case before an authority with the jurisdiction and the power to bind all of the parties to a solution – a judge of the US Federal District Court in the Northern District of Illinois. This was a timely and insightful manoeuvre by Huawei, given its concerns about the negative impact which a potential disclosure may have had.

The IP rights at issue

In its Complaint to the US Federal District Court dated 24 January 2011, Huawei stated that "Huawei has a firm respect for the intellectual property rights of others" directing the attention of the Court to the need for consistency and fairness among the parties in their approach to Huawei's intellectual property rights.

Huawei then highlighted the fact that its intellectual property rights were established under the law in each of the potentially relevant legal regimes (ie. the laws of the forum, Illinois State Law and US Federal Law, the law of the cooperation agreements between Huawei and Motorola, Swiss Law, and the law of the place where much of the intellectual property was created, PRC Law).

In this respect, Huawei cited applicable PRC laws which it asserted would define requirements for the establishment of the rights it claimed against infringement or threatened infringement, the scope of those rights, and the avenues for recourse against actual or potential infringement. Huawei pleaded as follows:

Article 10 of the Law of the PRC Against Unfair Competition ("UCL") imposes a duty on Motorola to prevent the disclosure of Huawei's trade secrets. Furthermore, Article 10 defines what constitutes a trade secret under PRC law and Huawei, in the Complaint, attempted to show that the information at issue constitutes trade secrets under PRC law; Article 25 of the of the UCL entitles Huawei to claim relief from Motorola in the event of an infringement;

Articles 9 and 11 of the PRC Copyright Law (Copyright Law) and Article 13 of the PRC Regulations for the Protection of Computer Software (Software Regulations) were cited by Huawei to prove that the works at issue were Huawei's protected works;

Articles 3 of the Copyright Law defines eligible works for copyright protection under PRC law, which Huawei cited to establish that its works are copyright-protected classes of works. Huawei also cited Article 10 of the Copyright Law and Article 8 of the Software Regulations which provide Huawei with an exclusive right to copy, distribute and prepare derivative works of its copyrighted works;

Articles 10 and 47-48 of the Copyright Law and Articles 8 and 23 to 24 of the Software Regulations were cited so as to show that unauthorized copying, distribution, or creation of copyright works, including derivative works, of Huawei's copyrighted intellectual property by Motorola, including providing copies to NSN, would be an infringement of Huawei's copyright; and

Article 50 of the Copyright Law and Article 26 of the Software Regulations was cited to show that Huawei was entitled to injunctive relief preventing such infringements or threatened infringements.

Huawei cited these rights and protections under PRC Law in addition to asserting equivalent rights and protections under relevant Illinois State Law, US Federal Law and Swiss Law, as appropriate, and stated in its filing that "The parties have been intensely conferring to try to avoid this dispute, but it now appears that an arbitration will be necessary. In compliance with the dispute resolution provisions of the agreements, Huawei seeks interim relief to preserve the status quo pending the arbitration". Following a hearing on 24 January 2011, Huawei was indeed successful in obtaining interim relief from a judge of the US Federal District Court, which ordered Motorola "not to disclose any of plaintiff [Huawei]'s confidential information to defendants Nokia Siemens Networks" and ordered both Motorola and NSN to notify the Court (and Huawei) of any action taken by the PRC Ministry of Commerce pursuant to its pending anti-monopoly review of the proposed sale.

Comment

In this case, Huawei successfully positioned itself on the winning side of an argument about the importance of IP protection. The principle – that one business which collaborates with another should not hand over the other's proprietary information to its competitors - is one of shared importance to Huawei, Motorola and NSN. The US Federal District Court's status quo order is therefore one which may assist the parties in settling any differences of opinion which they may have regarding the need to protect Huawei's confidential information.

It is also interesting to note that this injunction was granted to a Chinese company by a US Federal District Court against the background of what appear to be essentially amicable, albeit intense negotiations between commercial parties trying to avoid a potentially futile dispute. There are several messages which Chinese companies venturing overseas can take away from the case which are as follows.

Firstly, when PRC companies have established IP rights under PRC law and contract with parties in the US or elsewhere, it is important for them to understand the scope of their IP rights under all of the potentially relevant legal regimes. In this case, the parties merely placing a contract term specifying that the agreement is governed by Swiss law has not taken away the power of a US Federal District Court to consider the proper law applicable to claims of potential trade secret and copyright infringement. The proper law, as determined appropriate by the Court, could have been Swiss law, Illinois law, US Federal law and / or PRC law. PRC companies need to recognize the potential applicability of various legal regimes in contractual dealings in their overseas markets and/or with overseas parties and seek appropriate legal counsel, as was done in this case by Huawei.

Secondly, claims for preliminary injunctive relief before national courts can be critical to the outcome of a dispute, even where a contract provides for private arbitration. Huawei made the point to the US Federal District Court in relation to requirements for the Court to grant preliminary injunctive relief that it would be futile to wait for an arbitral tribunal to form because the potential infringements may have already done irreversible harm before the tribunal was appointed. Huawei recognized that it might help resolve in its favor a costly and potentially futile private arbitration by seeking urgent interim relief before a US Federal Court. PRC companies need to recognize that overseas courts, such as the US Federal Court in this case, can be their allies in protecting their legitimate rights in their overseas dealings.

Lastly, the sale of Motorola Solutions to NSN is still pending, except that Huawei has taken steps which now require Motorola and NSN to provide protection for Huawei's IP rights more on Huawei's terms. As with any commercial negotiation, a party should seek out points of advantage to provide leverage to its position. Huawei has likely helped its position in this negotiation by bringing what it believes to be a reasonable claim within the framework of the US Federal court system and by abiding by its civil procedures and judicial practices. Chinese companies seeking to do business in the US or in other foreign jurisdictions would be well-served if they were to approach their overseas legal dealings in a similar manner and, as such, develop sound, comprehensive legal strategies in conjunction with support from relevant domestic and foreign legal counsel.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Sources: Civil Complaint in the matter of Huawei Technologies Co. Ltd (Plaintiff) v. Motorola, Inc., Motorola Solutions , Inc., Motorola Mobility Holdings Inc., Nokia Siemens Networks US, LLC and Nokia Siemens Networks B.V. (Defendants) in the United States District Court For the Northern District of Illinois Eastern Division, Case 1:11-cv-00497 Document #1, filed 24 January 2011; "Huawei sues over Motorola unit sale", Financial Times online edition, 24 January 2011, by Kathrin Hille and Paul Taylor; "Huawei Wins block on Motorola-NSN deal", Financial Times online edition, 25 January 2011, by Kathryn Hille; "Huawei seeks IP assurances", China Daily online edition, 26 January 2011, by Don Jeffrey (Bloomberg News); Bargaining for Advantage, Negotiation Strategies for Reasonable People by G. Richard Shell, Penguin Books 1999, Chapter 3, Authoritative Standards and Norms.

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