By Eva Dou and Daisuke Wakabayashi
BEIJING -- Apple Inc.'s once unlimited prospects in China ran
headlong into an increasingly perilous landscape for Western
companies here as regulators in the world's No. 2 economy handed
the tech giant the latest in a series of setbacks.
Shenzhen Baili, a little-known startup, won a surprise
injunction against sales of Apple's iPhone 6 and iPhone 6 Plus in
Beijing, based on a patent covering smartphone design. Apple said
the order had been stayed pending appeal and sales remain
unaffected.
The ruling is a hint of the growing challenges that Western
companies are facing here, as Chinese companies mature into
stronger competitors and regulators increasingly insist that
foreign firms play by Beijing's rules.
As a company geared to consumers and one of China's favorite
brands, Apple has long seemed immune from the scrutiny focused on
makers of more sensitive equipment like servers and routers.
Industry watchers mused over Apple's ability to sell mobile content
while other foreign companies couldn't. Many chalked it up to
Chinese officials' love for iPhones.
But under President Xi Jinping, China has taken a stricter view
of technologies and content that it previously gave wider
berth.
Chinese companies are learning to take advantage of a maturing
domestic patent system, laying claim to patents even if they
weren't the first to develop the broader technology, said Erick
Robinson, chief patent counsel for Asia Pacific at the Rouse China
law firm. "It is still relatively rare for Chinese companies to
attack and be successful against Western companies, but you're
going to see more and more of this, " he said.
The patent ruling is the latest challenge for Apple in China,
its largest market outside of the U.S. After years of rapid growth,
iPhone sales fell in China in the quarter ended March 26,
contributing to Apple's first quarterly revenue decline in 13
years. In April, China shut down Apple's iBooks and iTunes Movies
services, with regulators telling the company it didn't have the
necessary licenses, according to people familiar with the
matter.
Apple last month announced a $1 billion investment in Chinese
ride-hailing company Didi Chuxing Technology Co., an unusual
investment for the company. Analysts said it was likely made in
part to curry favor with Beijing.
Apple Chief Executive Tim Cook has said the sales decline
doesn't change his long-term outlook for China, which he has said
will surpass the U.S. eventually as the company's biggest
market.
Mr. Cook has made diplomatic efforts to garner goodwill in
China, traveling there more than any other country in the past
three years. He is on the advisory board of Tsinghua University's
School of Economics and Management. At September's Washington state
dinner for President Xi, Mr. Cook sat at the head table.
Now, devices like iPhones are coming under tighter scrutiny.
China's technology ministry singled out Apple in May, publishing a
statement urging the company to expand its cooperation in China
after a visit from Mr. Cook.
The Chinese company challenging Apple, Shenzhen Baili, is
virtually unknown outside China and has no website. Shenzhen Baili
appears to be another name for Digione, a better-known smartphone
startup similar to Xiaomi Corp, the Chinese company known for its
cheap phones.
The legal relationship between Digione and Shenzhen Baili
couldn't be determined Friday, although the same man, Xu Guoxiang,
is listed as the head as both, and both companies' names are
included in legal documents about the case. Mr. Xu was global
handset marketing director for China's Huawei Technologies Co.
before founding Digione in 2006, according to online profiles.
In 2013, Chinese internet company Baidu Inc. became the largest
investor in Digione, according to two people familiar with the
matter.
The backing of one of China's most powerful technology companies
may help explain how a little-known firm was able to win an
intellectual property case over one of the world's most
technologically advanced companies. Baidu's founder, Robin Li, is a
delegate of the central government's political-advisory
committee.
This isn't the first time Apple has been involved in an
intellectual-property dispute in China. In 2012, Apple paid $60
million to buy the iPad trademark in China from a Chinese company.
Last month, a Beijing court ruled in favor of a Chinese company
making "IPHONE"-brand pocketbooks.
Apple faces a tougher battle in the patent case, said Edward
Lehman, a Beijing-based patent attorney, because it already failed
in an effort to invalidate Shenzhen Baili's patent last year.
According to the State Intellectual Property Office, in a decision
issued in December and published in January, Shenzhen Baili applied
for a patent for exterior design of its 100C smartphone in January
2014 and was awarded it in July of that year. Apple applied to the
office to rescind the patent in March 2015, and the regulator
upheld the patent in December 2015.
Beijing's municipal intellectual property bureau granted
Shenzhen Baili the injunction, which applies only in Beijing, after
ruling that the iPhone 6 and iPhone 6 Plus infringed on its patent,
according to a statement on the bureau's website dated May 19. It
wasn't clear when the statement was posted online. It was noticed
earlier this week by Chinese media.
A phone operator at the Beijing Intellectual Property Bureau on
Friday evening said no one was available to answer queries.
Apple last month asked the national Intellectual Property Court,
which holds authority over the smaller municipal tribunal, to
overturn the ruling that it had infringed on Shenzhen Baili's
patents. "IPhone 6 and iPhone 6 Plus products do not infringe upon
the design patents (held by Shenzhen Baili)," Apple's lawyers
wrote. The case is expected to be heard in a few months. Mr.
Lehman, the patent attorney, said it is common in these cases for
an injunction to be suspended throughout the appeal process.
In a note on Friday, UBS analyst Steve Milunovich said concern
about the ban is "likely overblown," but it underscores the
existential threat facing Apple in the long term, noting that "the
government could decide to favor local suppliers."
Some mobile-phone stores in the city had already stopped selling
the two models months ago, switching to the current iPhone 6s and
6s Plus phones.
In its original outreach to Apple in 2014 -- a note titled
"Lawyer's Letter" -- Shenzhen Baili said it hoped to resolve the
patent dispute out of court.
"We believe that a communication with goodwill would contribute
to solving potential legal disputes, achieving benign competition
and providing better products to customers," it said.
--Lilian Lin contributed to this article.
Write to Eva Dou at eva.dou@wsj.com and Daisuke Wakabayashi at
Daisuke.Wakabayashi@wsj.com
(END) Dow Jones Newswires
June 17, 2016 19:10 ET (23:10 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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