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For years, Chinese companies dared their competitors to sue them by flooding the United States with counterfeit goods and then failing to show up in court to defend themselves. The result usually was default judgments, hard feelings, and little effect on the marketplace. That hasn’t stopped the lawsuits. As China bids to be a major player in the global market, litigation against the Asian behemoth is growing in due course. The rise in claims stems from skyrocketing Chinese imports to the United States, which have gone up nearly 200 percent since China entered the World Trade Organization almost four years ago. The flood of cheaper, largely manufactured goods has led to a legal backlash among both U.S. and foreign companies seeking to protect their market share on American soil. But the Chinese lassitude toward the U.S. legal system is fading. In many instances, losing a suit could block a company from the U.S. market — the world’s largest — entirely, something no aspiring international business can afford. So Chinese companies are hiring prominent American law firms to play ball in the U.S. courts, and in doing so, they are trying to recast their country’s image from one of the world’s biggest counterfeiters to a global powerhouse. “Now the U.S. markets are important enough, so the Chinese companies are showing up and fighting these cases,” says Cecilia Gonzalez, intellectual property practice co-chair at Howrey. “What we’re seeing now is that the Chinese are becoming much more educated about the IP system and what they can and cannot do.” The suits are opening up new opportunities for U.S. law firms. Though firms are still busily launching offices in China to grab work from U.S. and Chinese companies abroad, they are also courting Chinese business leaders in hopes of winning work from them in the United States. It’s a niche that is only likely to grow, and although Chinese companies have yet to initiate patent claims against their competitors in this country, lawyers say that day is not far off. The wave of lawsuits against Chinese companies is reminiscent of other Asian giants that faced a spike in litigation as they entered the U.S. market: first Japan, in the 1980s; then Korea; and, by the mid-1990s, Taiwan. And the transformation of companies such as Samsung Corp. and Hitachi, which bring claims in U.S. courts against their competitors, serves as a guide for what lies ahead for China. What makes China different are both the pace and size of its entry into the U.S. market. At the International Trade Commission alone, Chinese companies have seen 28 cases in the past five years — that’s 180 percent more than they did during the entire decade of the 1990s, according to a tabulation by White & Case counsel D.R. Terrill, a former ITC judge. The Chinese government is watching. It has encouraged its companies to learn about U.S. trade law, American lawyers say. U.S. attorneys have gone to China to educate government officials, trade associations, lawyers, and business leaders about American patent law. And firms such as Steptoe & Johnson and Morrison & Foerster have hosted Chinese lawyers seeking experience in the U.S. legal system. (A Chinese Embassy official declined to comment for this story.) “As Chinese companies get more and more active in the global economy, part of the price of admission is lawsuits,” says Mark Davis, a D.C.-based trade partner at McDermott, Will & Emery. BATTERY ACID The Chinese Battery Association is paying that price. In May 2003, Energizer Holdings slapped nine association members with a patent lawsuit at the ITC. To Energizer, the case seemed like a promising action in defense of its signature product, long-lasting alkaline batteries. After all, the suit named 17 other battery makers, and Energizer had already won settlements on the same patent from two of the top U.S. battery producers, Duracell and Rayovac. In China the case rocked the business community. Many members of the association — a consortium of Chinese battery makers — had deals with U.S. wholesalers, and if they ignored the suit, they could lose that revenue. The alkaline-battery market worldwide is worth $6 billion annually, about half of which is attributed to the United States. And China is one of the leaders in the world battery market, exporting an estimated 80 percent of its production. Failure to defend a patent claim at the ITC can lead to an exclusion order, which bars an entire product from the market if any part violates a U.S. patent — potentially worth far more than any monetary damages. (ITC cases have no damage awards.) But defending the suit would also be a costly endeavor, so the Chinese Battery Association called together some of the world’s top lawyers for advice. Through contacts in the Chinese Ministry of Commerce, Roy Zou, a Beijing-based Hogan & Hartson counsel, got word of the suit and was invited to the port city of Ningbo to pitch the association on hiring his firm for the case. His firm had represented a handful of Chinese companies since opening its Beijing office in 2002, but hadn’t handled many cases for them in the United States. Zou knew that Hogan faced stiff competition from more than a half-dozen other major firms, including Morrison & Foerster and Sidley Austin Brown & Wood. Zou turned to his Los Angeles-based partner, Wei-Ning Yang, who planned to accompany Zou for the pitch. The timing couldn’t have been worse. China was in the grip of severe acute respiratory syndrome (SARS), making Yang’s arrival impossible. To top it off, Zou, who had been out of Beijing at the outbreak of the epidemic, was cautioned against returning to his office because of a quarantine on the city. “Beijing was like a forbidden city,” Zou recalled in a telephone interview from China. But he knew he couldn’t make the presentation without his files, so he snuck back into the city to retrieve his documents. The presentation was more intimidating than most Zou had given. Instead of a conference room with a few executives, Zou found himself in front of an audience of more than 80 Chinese business leaders, including battery makers who weren’t targets of the Energizer litigation. “It was very intensive,” he said. But he made his hour-long pitch, and within days, Zou said, he and partners Yang and Washington-based international trade lawyer Steven Hollman were offered the case. Although Zou declined to disclose the fee, he said it’s an unusual billing arrangement that includes a flat fee and some variables for further payment. Whatever the deal, the decision to fight “represented a turning point in Chinese companies’ understanding that it was important to hire sophisticated, major-league firms and vigorously defend themselves,” says Brian Busey, a patent attorney and managing partner of Morrison & Foerster’s D.C. office. Indeed, other Chinese companies facing lawsuits have followed that lead. The litigation quickly turned rocky. Not every respondent wanted to put up a fight. Ten U.S., Japanese, and Hong Kong-based companies entered into confidential settlements. And one Chinese company, Chung Pak Battery Works, opted for separate counsel with Venable. The battery association tried to negotiate a settlement as well, but talks fell through. “I think they all were coming from different places,” says James Adduci, counsel to Energizer Holdings and a partner at Adduci, Mastriani & Schaumberg. “It was time-consuming and difficult for them to achieve some consensus on the various issues.” In spring 2004 the ITC trial began in Washington. Accusations flew. The Chinese companies alleged that Energizer had engaged in “inequitable conduct” in filing its patent. The administrative law judge was not persuaded and upheld Energizer’s claims in a June 2004 opinion. Three companies — including Hong Kong battery giant Gold Peak, represented by Finnegan, Henderson, Farabow, Garrett & Dunner — promptly settled. But the Chinese Battery Association stood its ground. The kind of stout defense shown by the association is key to China’s long-term business interests in this country, says Hollman, the D.C.-based Hogan partner. Domestic companies often assume Asian competitors will roll over, he says, but they will think twice about suing “if Asian companies demonstrate over time that they are not behaving that way.” So far, the Chinese resistance has paid off. In October the ITC returned a different ruling on appeal: that Energizer’s patent was invalid. Energizer appealed to the U.S. Court of Appeals for the Federal Circuit, and the parties are awaiting a decision on the case, which was argued in August. Whether the battery battle will have a dramatic impact on the U.S. battery market is unclear. Chinese battery makers face a tough fight against U.S. competitors Energizer, Duracell and Rayovac, which together produce nearly 80 percent of the U.S. market, says Bill Schmitz, an analyst with Deutsche Bank. And even though Chinese products cost less, American companies now own significant stakes in two major battery-manufacturing plants in China, Ningbo Baowang Battery Co. and Fujian Nanping Nanfu Battery Co., both of which are respondents in the ITC litigation. For now, though, they’re causing a bit of a headache at Energizer. “I’m very frustrated. We actually expected the ITC to be much more expedient,” says Michael Pophal, senior patent counsel for Energizer. TAKING THE OFFENSIVE The battery case is emblematic of many suits Chinese companies face. They’re predominantly patent cases over low-end consumer products, from floor panels to magnets, which comprise the largest bloc of Chinese imports to the United States. Yet as Chinese companies move up the production food chain to higher-tech commodities, those businesses are seeing lawsuits as well, both at the ITC and in federal court. For instance, Taiwan Semiconductor Manufacturing Corp. filed a series of lawsuits against Shanghai-based Semiconductor Manufacturing International Corp. beginning in December 2003, alleging claims including patent infringement, theft of trade secrets, and espionage. The case settled for an undisclosed amount last year. The lawsuits are already making a dent in how Chinese companies do business in the United States. Huawei Technology, which settled a patent infringement suit by Cisco Systems in 2003, has brought in outside consultants to examine its business and is amassing a larger patent portfolio to keep in its legal arsenal, says Lucas Chang, a Wilson Sonsini Goodrich & Rosati partner who represented Huawei. Though Japanese companies still dwarf the Chinese in the number of patent applications filed each year, Chinese companies are arming themselves with the tools to sue in the future. They filed for 2,043 patents this year, nearly triple the amount in 2001, according to the U.S. Patent & Trademark Office. “They now see lawsuits as one tactic in an overall commercial value for competitive positioning in the market,” says Carmen Chang, a partner at Wilson Sonsini who has a number of Chinese clients. Yet even as the Chinese begin to fight in court, they are struggling with an unfamiliar system. The American courts may be fairer, but the cost and litigious culture are forcing companies to rethink their business strategies. Many Chinese companies put caps on their legal fees, which means that the more high-end firms are unwilling to take on their representation. For companies with little financial stake, the court battles are still not always worth the cost. “There is a great deal of concern in the Chinese industry about the high cost and occasional cost overruns involved in U.S. litigation,” says Thomas Jarvis, a Finnegan partner who represented Gold Peak. But even as Chinese companies put up a fight in the United States, they’re not likely to transform China’s image overnight. The country remains the world’s greatest counterfeiter, with nearly 70 percent of pirated goods seized by U.S. customs this year originating from China, according to the Bureau of Customs and Border Protection. Yang, the L.A.-based Hogan partner, believes the Chinese are off to a good start. “It’s a very important part of Chinese business to really be able to exploit the market here. A lot of this patent litigation is part of corporate life,” she says. “But it’s still at the very early stage, and quite a few companies are going to learn this the hard way.”

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