Netac Sued PNY to Enforce Its Flash Memory Drive Patent

(February 16, 2006. Beijing) The leading Digital Mobile Storage Equipment manufacturer, Netac Technology Co., Ltd. announced in news release today in Beijing that it had, on February 10th 2006, filed a complaint in the United States Federal District Court in the Eastern District of Texas. The complaint alleged that PNY, an American company, infringed Netac’s U.S. patent # 6, 829, 672. This patent provides fundamental patent rights on flash drives, flash based MP3 players, and other flash memory based portable digital devices.

The law firm representing Netac in this lawsuit is Morgan Lewis & Bockius LLP, which has more than 100 years history. The Morgan Lewis litigation team is headed by Mr. Stephen Judlowe and Mr. Scott Stimpson from the New York Office, assisted by Dr. Kevin He and other staff. In the complaint, Netac demands that PNY immediately cease its infringement and compensate Netac for significant financial damages. PNY is one of the market leaders in America’s computer storage retail market.

As one of the China IT pioneer companies to enforce their patents in U.S., Netac has set the milestones in the China IT industry, and will have the significant influences.
 

Netac Was Built from Scratch, and Its Patent Was Infringed by Others
 

Netac is a high-tech company founded by overseas returnees, and is one of China leading mobile storage and digital device companies. In 1999, founders of Netac, using their creativity, diligence and persistence in tough conditions, successfully invented the world’s first mobile flash memory drive that could be used for computer data storage and exchange. The mobile flash memory drive was given the name “You Pan” in Chinese. (“You Pan” and “OnlyDisk” is a registered trademark of Netac technology Co., Ltd in China)

During the development of flash memory drive, they always worked day and night in their small rented office. In order to study the flash memory drive and its stability, they even broke four computers during the experiment and test. They overcame all the hardship and difficulties, and finally successfully developed the new product.

Netac flash memory drive is the first mobile storage device in the world to combine flash memory and USB interface. It has many technical advantages comparing with floppy disks. These advantages include higher speed, larger memory, longer life, plug-and-play, easy to carry, and etc. It is one of the most important breakthroughs in the global computer mobile storage area in more than a decade. Nowadays, flash memory drives have largely replaced the floppy drive market. This is the first time for a China company to start and lead a global industry in computer storage area.

In July 2002, Netac obtained their China patent for the invention. The patent is titled “Flash Memory Methods and Devices for Digital Processing Systems.” (Patent No.: ZL99 1 17225.6). In December 2004, this invention was also granted a patent by United States Patent Office.

In September 2002, Netac had filed similar litigations against Beijing Hua Qi Information Digital Technology Co., Ltd. (Product brand: Aigo) and Shenzhen Fu Guang Hui Electronics Co., Ltd. (OEM factory for Hua Qi) in China, and won the first verdict of the patent litigation against Hua Qi and etc. in middle court on June 1, 2004. Hua Qi was adjudicated to cease the infringement of manufacture and sale flash memory drive immediately and compensate Netac for the financial damages.
 

Netac Seeks Substantial Damages

According to Gartner’s market research report, the US flash related product market was over $1 billion back in 2003. Moreover, in the past several years, the U.S. market of flash memory drive, flash based MP3 Player, and other flash based portable digital products also enjoys tremendous growth, and the current America’s market has well exceeded China market.

If the infringement is confirmed by the US court, PNY will face considerably severe penalty. The financial award to Netac could be among the largest amounts ever in the USB flash storage industry.

Netac CEO Frank Deng indicated that over the life of the patent, potential damages awarded to Netac and royalty could be very significant given the size of the market.

Netac’s action against PNY clearly shows its intent to expand and protect its business in the US flash memory market. This “patent first” way is similar to most international technology companies’ globalization strategy. China companies strive to participate the global competition with new approach, and the intellectual property will be respected worldwide.

Gathering Storm

Chinese tech companies are growing patent savvy, and Shenzhen -based Netac leads the charge. This year the company sued Sony--the first foreign corporation sued for patent violations in China.

By Lisa Lerer

Chinese software engineer Frank Deng never thought of himself as an IP expert. But in September 2002, he found himself teaching the basics of patent law to Chinese reporters.

"They'd ask, 'What is IP patent?' " recalls Deng, who was born in China and polished his English in Singapore, working as an engineer for Royal Phillips Electronics N.V. "In 2002 not many people know IP so we have to do a lot of education."

Deng fell into the teaching role when his fledgling company, Netac Technology Co, Ltd., launched one of China's first patent infringement lawsuits, bringing a popular Western corporate weapon to the East. In September 2002, Netac claimed that its competitor, Beijing Huaqi Information Technology Co., Ltd., infringed the core technology of Netac's best-known product, OnlyDisc, a USB (universal serial bus) flash storage drive. Deng says that Netac invented the USB flash drive in 1999, before any other company. The company received its first Chinese patent on the technology in 2002.

Netac's case made headlines in the local press, and at first, it seemed like a public relations disaster. Commentators accused Netac of being overly litigious, says Deng. More than half of the visitors to a popular Chinese search engine, Sina.com, surveyed in a 2002 poll, said that they believed that Netac's behavior was monopolistic. But three years later, Deng is over the bad press.

"That's OK," he says, "it doesn't matter because we won." In June 2004, the Intermediate People's Court of Shenzhen ruled that Huaqi was infringing Netac's patents, awarded Netac damages, and prohibited Huaqi from selling the infringing product. Huaqi is fighting back--appealing the case and asking the Chinese patent office to reexamine the USB patent. The appeal has been stayed, pending the results of the reexamination.

But while awaiting a final decision, Deng and his generals--cofounder Cheng Xiaohua and legal director Lu Pan--are in the midst of their most ambitious attack yet. Last year, Netac sued Sony Electronics (Wuxi) Ltd. (a subsidiary of Sony (China) Ltd.) for infringing the core patent on OnlyDisc. The case is more than just a simple "ant and elephant battle," as the Chinese press calls it. If Sony loses, Netac will again make history. Either way, the suit is one for Western lawyers to watch. As more Chinese tech companies like Netac get savvy about patents, suits against Westerners are certain to grow. And fighting a Chinese company on its home turf is like scaling the Great Wall--with one hand tied behind your back.

Netac's aggressive patent use--and its win against Huaqi--has made it into a top brand, and has turned the 37-year-old Deng into another millionaire member of China's new tech elite. Deng has become a technology-savvy general, overpowering his competitors with an army of lawyers and an arsenal of patents. Most Chinese companies focus on manufacturing, offering cheap outsourced labor to larger multinationals. "We don't think that's the right way," says Deng. Rather than simply offering the China price--based on cheap labor and goods--Netac develops and patents technology, leveraging those inventions into manufacturing deals with technology giants like IBM Corporation, Dell Inc., Samsung Corporation, and Toshiba Corporation. If competitors aren't agreeable, Netac threatens litigation, a standard Western practice that is relatively new in China.

Even before Netac went to court, the company was ahead of the IP curve. "Most [Chinese] companies have heard about IP and will say that it's is very important," says Tony Chen, a litigation partner in Paul Hastings's Shanghai office, "but they don't actually do anything with it." Netac is different, in part, because of Deng's experiences in Singapore in the mid-1990s. Working outside China teaches sea turtles--the Chinese nickname for Western-educated, or -employed, citizens--how to take full advantage of IP portfolios, says Chen.

At Phillips, Deng and Cheng, who was a hardware engineer at the company, began to design a product based around the new USB 1.1 standard, which allowed USB ports to support more advanced software. That product became OnlyDisc. In 1999 the pair returned to China, and founded Netac with their invention and just $35,000.

At a time when few Chinese companies held patents and even fewer had in-house IP counsel, Netac's first hires were two lawyers, a general counsel and an IP counsel, who immediately filed for a Chinese patent on OnlyDisc's core technology. Two years later--before the patent issued--Huaqi unveiled a new USB flash drive, similar to Netac's. Netac approached, offering licensing and manufacturing deals but, according to Deng, Huaqi refused to work with the company. "They don't think IP is a big deal," says Deng, "but we think our IP will work for us." Huaqi couldn't be reached for comment.

As soon as the State Intellectual Property Office (SIPO) awarded Netac a patent in 2002, the company filed suit in the Intermediate People's Court of Shenzhen against Huaqi, its distributors, and Taiwanese manufacturers Beijing Acer Information Co., Ltd., and Tai Guen Enterprise Co., claiming $490,000 in damages. Acer and TGE soon settled, agreeing to pay an undisclosed amount and cease production of the infringing drive. But Huaqi and its distributors kept fighting, and because of the case's technical complexity, the litigation dragged on significantly longer than the average six months. Finally, after two years, the court ordered the defendants to pay $125,000 and stop the manufacturing and distribution of the infringing flash drive. Huaqi appealed to the Guangdong High People's Court, which heard the case last year. A decision is pending.

Bolstered by victory, Netac was quick to launch its attack against Sony. On August 13, two months after the verdict against Huaqi, Netac filed an almost identical suit in the same court against Sony. This time the company raised the stakes, claiming damages of $1.25 million. In the past, Netac had unsuccessfully tried to negotiate a licensing deal with Sony. "We are very small and Sony is a big guy," says Deng, "so even when we won the other case, Sony doesn't believe we have the technology." Deng decided to show Sony that even though Netac is small, its patents are big.

Sony tried to argue last October that the case should be moved to Wuxi, a city in the northwestern Jiangsu Province, where its manufacturer is located. The Shenzhen Intermediate court and the higher Guangdong provincial court both rejected the plea. According to Chinese law, litigation can take place anywhere the infringed products are sold. Although Sony sells products all over the country, its sales group is based in Shenzen, so the court decided to keep the case local.

Sony's jurisdiction gripes might just be a delay tactic. Soon after Netac filed its first suit in 2002, Huaqi and an Israeli flash drive company, M-Systems, challenged Netac's patent in an administrative action at the Chinese patent office. Huaqi's appeal has been stayed pending the Patent Review Board's verdict. These reexaminations result in reversals about 40-50 percent of the time, according to Benjamin Bai, a partner at Jones Day, who splits his time between Shanghai and Houston. Neither Sony nor its legal counsel, Beijing-based East IP, would comment on the case.

Even with the reexamination hanging over Netac's head, the trial win against Huaqi established the company's brand, says Deng. In a country that counterfeits everything from toothpaste to cars, being officially declared real--with a patent case--can be great for business. Since the win, Netac's raised its prices 10?0 percent, while still winning lucrative government contracts, including one with the army. According to Deng, the suit forced Huaqi to scale back its operations and propelled five multinationals into licensing deals with Netac. The company has also gotten larger government research grants, allowing Netac to invest over $12 million in R&D. Last year the 350-employee company had sales revenue of more than $62.5 million.

With Netac leading the charge, Chinese companies are slowly starting to take on foreigners in Chinese courts. Last year 4 percent of 8,332 civil IP court cases featured foreign parties, an increase from 1.3 percent in 2003. Most of those cases involved a foreign company suing a Chinese manufacturer. But lawyers practicing in China expect those numbers to eventually flip as more Chinese companies receive patents. "I've been telling clients here, 訨ust get ready. Like it or not you are going to get sued in China,' " says Jones Day's Bai. A handful of these cases have already begun. In July 2004 regulators overturned Pfizer Inc.'s Viagra patent after a group a Chinese companies complained to the State Intellectual Property Office, arguing that the patent violated the novelty requirement. (Pfizer has appealed.) In April, Chinese networking company Beijing Donjin Xianda Technology Co. Ltd sued Intel Corporation for violating unfair competition laws.

A growth in patent litigation may be an inevitable result of a rise in Chinese patents. From 1985 to 2000, SIPO handled about one million patent applications. By 2004, that number had doubled. Most of these new applicants work in Netac's Shenzhen neighborhood, a once sleepy fishing village now bursting with gleaming skyscrapers, office parks, multi-story shopping malls, and a young, often-Western educated tech elite. Netac's headquarters are surrounded by IP-savvy compatriots, including the networking company Huawei Technologies Co., Ltd.--well-known for its (now settled) U.S. patent litigation with Cisco Systems, Inc. Huawei holds over 8,000 patent applications worldwide.

At press time, Netac's patent portfolio had ballooned to 200 Chinese patents and 50 international patents. Building an IP portfolio is important for Chinese companies, says Deng, because China won't always be able to offer the cheapest goods. "Someday Vietnam or India or Sri Lanka could get cheaper labor and then a cheaper price," says Deng, "so a lot of companies think IP technology is more and more important."

Last December, Netac was awarded its first U.S. patent, which Pan claims is almost identical to the reexamined Chinese patent. Before the U.S. Patent and Trademark Office granted Netac's patent, Pan says that examiners reviewed all the evidence submitted by M-Systems and Huaqi to the Chinese Patent Reexamination Committee.

With a U.S. patent in its arsenal, Netac is now considering international attacks. According to Pan, other multinationals produce and sell Flash memory drives without Netac's permission. In March, Deng told the English-language newspaper China Daily that Netac was investigating SanDisk Corporation, Dell Inc., Hewlett-Packard Company, and Apple Computer, Inc., claiming that the iPod Shuffle infringed Netac's flash drive patent. But invading the U.S. may not be that easy, warns Bai. Few Chinese lawyers knew how to draft overseas patents three or five years ago. So, says Bai, they wrote claims too narrowly for effective American-style legal warfare. "The patent applications I have seen so far are all a half-assed job," he says. "They're worthless." Rather than enter the U.S. legal system, Bai thinks Chinese companies should capitalize on their home court advantage and countersue American companies in China. "What a great way to level the playing field," he says.

Netac certificated ISO14001

As the inventor and only patent holder for USB Flash Drive, Netac Technology Co., Ltd has been awarded the certification for compliance with standard ISO 14004: 2004 on 16th, Jan. 2006.

Netac Technology Co., Ltd is engaged in developing USB flash storage devices, MP3/MP4 players and wireless communication products and related management activities.

From now on, Netac has abilities to produce the green product for customers.

Netac Makes Computer More Portable

As the inventor and only patent holder for USB Flash Drive, Netac Technology Co., Ltd is leading technology in mobile storage for computer. Five years since its establishment in 1999, Netac were carring out “learning, thinking, creating” tenet, developed independently and harvested 200 plus patents globally. Netac’s success is inspissation of the history for Chinese enterprise’s creating, and was reported in “Creative China” CCTV-1 that introduces the most famous and successful Chinese local enterprises as the title “Netac Make Computer More Portable” on 28th Nov 2005.

It pointed out that UFD replaces for the floppy, which establishes the china leadership in mobile storage filed. Netac Technology Co.,Ltd developed independently technology for combine USB port with flash memory to born the first USB Flashed Drive, which indicates the new generation mobile storage. As the Auto run and AdDisk UFD were presented in November, Netac has reach next stage for making computer more portable.