Unoptimistic Future for USB Patent Case – Both Parties Fall in the Mud Puddle

June 21, 2004

Unoptimistic Future for USB Patent Case – Both Parties Fall in the Mud Puddle
A decision on “China’s first intellectual property case” for the USB flashboard patent right was taken at first-instance trial, but troubles have not ceased yet.

The case lingered on for 21 months until today it was finally solved. Netac, the patent owner, has won causing the famous Chinese digital products manufacturer Huaqi cease infringement and pay compensation. However, the mist surrounding the “Only Disk TM” patent has not been completely dispersed.

Up to our knowledge, Huaqi’s memory storage products are still in free circulation and Netac’s industry isolation remains unaltered. Something more: another seesaw game is awaiting it in legal procedures, and the patent right obviously remains deeply fixed in the mud puddle.

1. The continuing seesaw game

The core of the Netac case is whether Netac’s patent is still in effect. The decision of Shenzhen Intermediate People’s Court though in flavor of Netac, cannot be deemed final.

According to Prof Shou Bu of Shanghai Jiao Tong University, China’s Patent Law provides the courts with a certain degree of freedom. That is, if the court deems the application invalid, the patent does not come into existence, and it is thus possible to avoid waiting for patent reexamination and directly pronounce on the case.

However, the Intellectual Property Office (IPO) can also decide on “invalidity”.

And, regardless of the opinion of IPO, both Netac and Huaqi are entitled to require a second similar examination from IPO, upon which the unsatisfied party may also file an administrative lawsuit. This back-and-forth movement places the parties in the middle of a seesaw game.

Prof Shou Bu also says that, no matter if he has any arguments at disposal or not, the defendant can always apply for patent voidance, which is a sort of litigation strategy. The defendant can completely rely on the law seesaw to first make lots of money, and only afterwards settle the compensations with the earned profit.

According to the Center for Information Industry Development, Huaqi holds the leading position in Only Disk sales. Huaqi emerged in Zhongguancun 10 years ago as one of the biggest producers of digital products in China. The company has gone through a number of hardships, and its experience and powerful resources stand for Netac’s weaknesses. Netac’s most powerful weapon is patent itself.

As a matter of fact, to accelerate the litigation procedure, Netac has largely reduced the compensation amount applied for. Huaqi vice president Hou Xun admitted they would gain advantage with the protraction of the case.

2. The industry after the decision

Huaqi vice president complained, Netac’s patent application is rid of any originality, the product may be easily made by people with basic knowledge in the field, and is therefore to be regarded as common art. “Netac has to a great extent turned public interests into interests of its own.”

Hou Xun said, nowadays a huge amount of digital products apply flash memory for storage through USB. If Netac wins the case, it will be entitled to collecting patent tax for digital recording pens, MP3 players, laptop PCs etc.

However, Netac intends to do just the opposite. Its vice president Deng Guoshun said, if Netac’s patent is pronounced invalid, all domestic digital producers will face a calamity. According to him, the biggest obstacle for foreign companies like Magnate, Sandisk, M-System etc entering Chinese Only Disk market is Netac’s patent. If it is pronounced invalid, foreign products will overflow the domestic market, so long as none of the domestic producers can win the product quality competition.

The two parties’ opinions differ dramatically, which thoroughly shows the delicacy of the case. There is also something equally delicate:

Huaqi’s attorney pointed out, there was a foreign producer who expected to share with Huaqi its arguments on Netac’s patent invalidity, but got refused. Huaqi is really worried about any possible “foreign powers“ coming as mediators or striking the domestic market.

3. The patent and its existence

Netac vice president said, if they win the case, they will not levy a high patent fee. “There exist numerous possibilities for cooperation.”

According to Deng Guoshun, although the company has made many attempts to negotiate cooperation, it has almost always been denied one.

Asked whether the price offered by Netac is too high, Deng Guoshun replied: “They all show disrespect for our patent, and want to do it themselves.”

In its capacity of the patent user, Netac has never acquired any protection from it. Deng Guoshun does not deny this, and also adds that the patent has brought fame to Netac.

However, fame is not necessarily influential. Because Only Disk is not technically sophisticated and got into the lawsuit mud puddle shortly after it was authorized, Netac hasn’t used the patent to build a protection wall or attract a partner. On the contrary, namely for its patent, Netac ended up in industry isolation. Apart from Netac, famous producers on the Only Disk market, like Huaqi, Legend, China Sciences group and Luwen, are all members of the Agreement in the movable memory industry. The latter is the very force ridding Netac of its patent validity. Therefore, it is not clear whether Netac’s isolation is to be regarded as the triumph of “public interests” or the defeat of patent.

As revealed, Netac is currently reshuffling, waiting to see if momentum will gradually cause it break loose of the Only Disk patent, and then follow the way of developing in the communication equipment industry. It is still not clear whether this is Netac’s misinterpretation of patent.