Huawei v. Motorola
By Linh V.
On January 24, 2011, Huawei Technologies Co., Ltd., a Chinese telecommunications giant, filed a lawsuit against its partner, Motorola Solutions, Inc., an American telecommunications giant, in a United States district court to stop Motorola from disclosing Huawei’s intellectual property information and trade secrets to Nokia Siemens Networks in the process of a $1.2 billion deal between Motorola and Nokia. This suit stirred up much discussion due to Huawei’s checkered past and its ties to China’s government.
Huawei is a networking communications equipment supplier headquartered in China with world-wide locations. It began in 1988 as a distributor of small telephone exchange products. After slowly expanding distribution throughout China, in 1997, it released its first GSM (mobile phone) product. In 1999 – 2003, it worked with IBM to undergo product development and was able to expand into the overseas market by 2001. Now, it is the second largest supplier of mobile telecommunications infrastructure equipment in the world, behind Ericsson. It also currently specializes in research and new technology development and holds over 50,000 patents. In 2009, its annual sales were $21.8 billion with a net profit of $2.67 billion.
Motorola is headquartered in Illinois. It started in 1928 as the manufacturer of battery eliminators for car radios. In the 1940s, it mainly sold televisions and radios and produced a hand-held radio used during World War II for communications between U.S. and its allies. It also developed radio equipment for NASA, the world’s first large screen portable television, and the first color television picture tube. After Motorola sold its television business to Panasonic, it started making cellular products in 1988. Between 2007 and 2009, it suffered a $4.3 billion loss, causing the corporation to split up in January 2011 into Motorola Mobility, Inc. and Motorola Solutions, Inc. with the belief that investors will perceive two simple businesses as being more advantageous to one extremely diverse and complicated business.
Huawei and Motorola met in 2000 and came up with a deal in which Huawei would develop and design new technologies for cell phones, sell these products to Motorola, who would then resell them to consumers under the Motorola brand. Since Huawei was relatively new in the telecommunications market at this time and needed to expand and grow its customer base while Motorola wanted to maintain its hold on the cell phone market through new technology development, this deal was seen to be a win-win for both parties. To date, Motorola has sold and re-branded over $878 million worth of Huawei’s equipment.
Shortly after this deal in 2000 closed, suspicion arose that Huawei was committing espionage as a puppet of the Chinese government. As a result, government regulatory agencies in various countries, such as the Indian Telecom Ministry, made Huawei’s ability to bid on large-scale projects in the respective countries difficult by blocking Huawei’s license bid applications.
Problems surrounding Huawei did not end there. In 2003, it was sued by Cisco for copying model numbers and codes that were used in Cisco routers to help consumers switch to Huawei’s cheaper versions of the routers. The suit was settled after Huawei agreed to pull the products off the market and change the design codes. Details of the settlement are unknown.
In 2008, Motorola sued Lemko Corporation, sixteen individuals, and Huawei. The sixteen individuals were previous Motorola employees who Motorola claims were simultaneously employed by Lemko for the purposes of stealing trade secrets. One of the main employees, Hanjuan Jin, was specifically accused of transferring proprietary information from Motorola to her personal e-mail account and then to Lemko. Her husband, Shaowei Pan, was a prior employee of Motorola as well and is also Chief Technology Officer of Lemko. Pan was also alleged to have had met with Huawei officials while employed with Motorola. Basically, Motorola was claiming that there was a secret relationship between Lemko and Huawei for the purposes of stealing Motorola’s trade secrets. Currently, after having been amended numerous times, the suit is still pending.
In 2009, as a result of Motorola’s huge loss, Motorola contacted Huawei to explore the possibility of Huawei purchasing Motorola’s wireless networks infrastructure business in which equipment and services are provided to wireless network carriers and its associated assets. Although Huawei submitted a non-binding bid, Motorola decided to sell its business not to its long-time partner but instead to one of its long-time partner’s direct competitors, Nokia. In July 2010, it announced the $1.2 billion transaction, which has since been approved by the regulatory antitrust bodies in the U.S. and European Union but is still pending with the Chinese Antitrust authorities (“MOFCOM”: Ministry of Commerce of the People’s Republic of China).
As part of the agreements between Motorola and Huawei, Motorola approached Huawei to try to obtain its consent, informing Huawei that the deal would require disclosure of some of Huawei’s confidential information to Nokia because Motorola would be transferring some of its employees to Nokia. Huawei refused to give consent. Motorola then tried to come up with measures to protect the confidential information, such as the “firewall” proposal in which certain employees who had access to commercially available Huawei products would remain the only employees, once transferred to Nokia, with access to that information. Huawei found this proposal insufficient to avoid trade secret misappropriation. Discussions between the two parties continued throughout 2010 until January 24, 2011 when Huawei filed a claim with a U.S. court.
In accordance with its agreements, Huawei and Motorola planned to settle the dispute before the arbitration tribunal in Switzerland. To avoid making the arbitration ineffective before it even began, Huawei requested a temporary restraining order and a preliminary injunction against Motorola and Nokia to stop the transfer of any confidential information to Nokia. Motorola responded to the claim arguing that this action was a pretext for Huawei’s actual intent of preventing the transaction from closing, an effort in retaliation to the Lemko lawsuit that Motorola previously filed. Huawei was granted the temporary restraining order.
The Court heard testimony from several witnesses stating that the transfer of confidential information was not necessary to effectuate the deal and that the “firewall” proposal that Motorola previously suggested would not be effective in preventing the misappropriation of the confidential information. In finding that (1) Huawei had a strong likelihood of success on the merits of trade secret misappropriation claims, (2) Huawei would be irreparably harmed if Nokia obtained its confidential information because it would allow Nokia to gain an unfair advantage at its expense, (3) the balance of hardships weighed in Huawei’s favor because it had a lot to lose in the disclosure of the confidential information and there was no evidence that the deal between Motorola and Nokia would fail to close without the information, and (4) the public interest would be best served by enforcing valid agreements and trade secrets to protect “standards of commercial morality,” the Court awarded Huawei the preliminary injunction and ordered that Motorola cease transfer of confidential information to Nokia.
Since the Court did not ban the deal between Motorola and Nokia, they are still going through with it upon approval by MOFCOM who has been sitting on the application. Some believe the Chinese government was specifically waiting for the outcome of the lawsuit before deciding on the application. Some are concerned that this is all part of a strategy that Huawei and the Chinese government have been working on to improve its weaponry. The more possible theory is that Huawei is in bad faith attempting to monopolize the telecommunications industry by stopping its competitors from consolidating. Huawei has once been quoted that it will use its “rich IP and patent portfolio” to stop the consolidation of equipment vendors around the world. By making it difficult or impossible for these competitors to combine, Huawei can assure its spot at the top of the telecommunications market. The confidential information that Motorola was attempting to transfer to Nokia was not the type of jackpot information that would allow Nokia to dethrone Huawei. Rather, it was mainly information given to consumers in regards to its products. Granted, the information also included future products but the two parties could have easily reached an agreement that would include monetary compensation to Huawei.
Sure enough, in April 2011, Motorola and Huawei issued a joint statement announcing that both parties have agreed to dismiss their claims in courts, including the complaint that Motorola filed against Huawei in conjunction with Lemko. In allowing Motorola to transfer its commercial agreements with Huawei to Nokia, Huawei will be compensated a fee and Nokia will be allowed to receive and use the confidential information that Huawei previously attempted to prevent disclosure of. Financial terms of the deal were not revealed.
