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For a company that makes little industrial magnets, Magnequench International Inc. has a lot of pull. Over the past year, Singapore-based Magnequench, which grossed just $85 million last year, has strong-armed some of the biggest technology companies into changing their supply patterns. In March 2004 Magnequench sued 18 major electronic and computer companies for patent infringement in Delaware district court. The complaint looks like a Best Buy catalogue, listing Sony Corp., Dell Corp., LG Electronic Group, Eastman Kodak, and Memorex Products among the defendants. Four months later, Magnequench, represented by Jones Day and Pillsbury Winthrop, filed a second suit in Indiana adding Microsoft Corp., Philips Electronics North America Corp. and Wal-Mart Stores Inc. The lawsuits drew in more than 20 law firms: Foley & Lardner IP practice group chair Sharon Barner is representing long-standing client Hewlett-Packard Co., Microsoft has hired Portland, Oregon’s Klarquist Sparkman, and Fish & Richardson is acting for seven smaller computer peripherals manufacturers. Ten defendants have settled so far, including HP, Dell, and Phillips, three cases were dismissed by the court, and three more are in negotiations, says Greg Kroll, Magnequench’s business development manager. It’s a long journey from Singapore’s technology corridor to the computer aisle of Wal-Mart. The magnets start as a metal-based powder, produced by Magnequench in Tianjin, China. Other manufacturers turn the powder into neodymium-iron-boron magnets, used to power motors in DVD, CD and Zip drives. Computing companies put the drives in computers, DVD players and video game consoles, like Microsoft’s Xbox, and ship those devices to retail stores. This supply system worked fine until Asian manufacturers started knocking off Magnequench’s product, infringing the company’s patents for the powder. Eventually counterfeit powder infiltrated about 20 percent of the market. Magnequench estimates that infringers cost it 25 percent of its profits. Because Magnequench only holds U.S. patents, it couldn’t sue the foreign infringers in their home countries. Instead, the company filed suit in American jurisdictions, going after manufacturers that bring the allegedly infringing product into the United States. In its claim, Magnequench asks for an injunction and a recall of infringing products, treble damages, and legal fees. But Kroll says the company does not really want monetary compensation. “We aren’t looking for cash payouts,” he says. “We simply want to find a way to get our business back.” In settlement talks, Magnequench asked the defendants to implement a compliance program, requiring them to send magnets to Magnequench for testing and, if they infringe, to find a new supplier. A “couple” of defendants, says Kroll, paid $25,000 to offset future testing costs and legal fees. “It doesn’t make any sense to try this case,” says Magnequench lawyer Brian Poissant of Jones Day. “Most of these companies don’t even realize that their products contain infringing magnets.” But for six of the companies this is actually a repeat offense. In 2001 Magnequench sued eight computer and electronic companies for the same problem. Magnequench voluntarily dismissed the suit, filed in the Southern District of New York, when the defendants promised to hold settlement negotiations. But the talks, says Kroll, went nowhere. “We’re asking them to disrupt their purchasing program and production,” he says. “That gives them more work than they want to do.” Magnequench didn’t have time to waste on a dead-end solution: The company’s basic patents expire in 2007 and its process patents in 2009. In hopes of restarting a substantive dialogue before it was too late, Magnequench reinstated the lawsuit. Some companies, like LG, argue that Magnequench has unfair expectations. Six years ago, the company started marking magnets made from their powder with a unique tag. The marker, says LG’s lawyer Morgan, Lewis and Bockius partner Victor Balancia, is propriety to Magnequench. “There’s no way for LG or anyone else to even check” for infringement, he says. Currently, LG is in settlement talks with the company. Even the toughest American compliance programs may not be able to fix what is essentially an Asian counterfeiting problem. Most of the damage, says Kroll, has already been done. Although 20 percent of the company is owned by a Chinese shareholder group with high government contacts, counterfeiters dealt the company an expensive blow. “I think if we had to do it over again, I don’t know if we’d set up a facility in China,” he says. “It’s been a major challenge.”

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