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Cisco Wins Round 1 Against HuaweiCisco Wins Round 1 Against Huawei

Huawei yanks router sales in the US, but will Cisco's legal moves hurt its chances in China?

February 7, 2003

4 Min Read
Cisco Wins Round 1 Against Huawei

Cisco Systems Inc. (Nasdaq: CSCO) has won the first round in its lawsuit against Chinese equipment maker Huawei Technologies Co. Ltd. and its U.S. subsidiary FutureWei.

Cisco filed suit against Huawei and FutureWei last month, claiming the company has copied its software and infringed at least five patents in its IP switching and routing portfolio (see Cisco/Huawei Brawl Begins).

Today, according to published reports, Huawei said it has removed the products, mainly Quidway routers, from its Website and stopped their distribution and sale in the U.S. Despite this claim, the Quidway products still appear under FutureWei Products on FutureWei’s Website.

Representatives from FutureWei and Huawei were unavailable for comment by press time. The company said it would continue to defend itself against the Cisco claims, according to published reports.

While it appears that Cisco is winning the battle in the U.S., observers question what the long-term impact will be in China.

“It’s too early to tell if this will actually hurt their opportunity in China,” says Mark Sue, an equities analyst with CE Unterberg Towbin. “But there is potential for a strained relationship with China.”

Sue notes that China is a significant market for Cisco with about a $1 billion per year opportunity for the company. And it is a region that currently shows better than average growth. Huawei is supported by the Chinese government.

Cisco has been battling local equipment providers like Huawei for significant market share in China. According to Richard Webb, an analyst for market research firm Infonetics Research Inc., it does not carry the kind of clout in China that it does in other countries -- such as Australia, Japan, New Zealand, and Singapore -- where Cisco has a dominant presence.

There is a fear that Cisco’s litigation, although limited to the U.S., could stir up bad feelings, which could have a negative impact on the company’s business in China.

Some analysts agree that there is a risk in antagonizing Huawei.

“The government may not have as much involvement in the company as it did before, but it’s hard to tell how that influence will play out," says Tim Trainer, president of the International AntiCounterfeiting Coalition (IACC), a not-for-profit organization that advocates on behalf of U.S. industry. “China is still in a state of transition from government ownership to private ownership."

Cisco is confident that the Chinese government will cooperate in the company's efforts to protect its intellectual property.

"We have communicated and discussed our concerns about Huawei with the Chinese government," says a Cisco spokesperson. "We find the government respectful of intellectual property rights, and we believe that the Chinese government's accession to the WTO is representative of that attitude."

Analysts are also optimistic about Cisco staying in China’s good graces. Stephen Kamman, an analyst with CIBC World Markets, recently traveled to China and says that it is a misconception that the Chinese government or Chinese service providers are looking out for the interests of any particular company.

Lee Bromberg, a founding partner of the Boston law firm Bromberg & Sunstein LLP, has practiced intellectual property law for over 20 years and has litigated many cases in the U.S. similar to Cisco's. He says he has never seen a company in Cisco’s situation lose business or market share in response to a lawsuit.

“I’m not saying it isn’t possible,” Bromberg says. “But for both Cisco and Huawei, the U.S. market is still the most important market for IP routing and switching. I think Huawei is taking these allegations seriously, and I doubt there will be a tit-for-tat with respect to business in China.”

Cisco says it will enforce copyrights throughout the world, inlcuding China. But even if it wins in a Chinese court, the battle is far from over, says Trainer.

Until recently, China didn’t even recognize rights of intellectual property. As a result, the country has gained a reputation as one of the premier regions for counterfeiting.

But China’s legal and regulatory views on intellectual property have changed a great deal in the past few years, according to Trainer. As part of the negotiations to admit China into the World Trade Organization in 2001, the Chinese government agreed to work on improvements for intellectual property protection laws and enforcement. Progress is being made, but there is still much work to be done, says Trainer, particularly in the area of enforcement.

— Marguerite Reardon, Senior Editor, Light Reading

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