Actions Integrated Circuit Co Ltd, one of China's major chip makers for MP3 players, was recently named in a lawsuit filed by a US counterpart, SigmaTel, which accuses the Chinese firm of patent infringement.

Currently, both parties are collecting materials to submit to court as proof. The court's ruling is expected sometime next year.

"We are quite determined to end the squabble, despite the cost," says Ye Nanhong, Actions' chairman.

"We have hired US law firm Finnegan Henderson as our attorney with a budget of US$7 million by the end of this year. And the total budget is US$15 million."

SigmaTel says its goal is to prevent further sales of products, based on its technologies, offered by Actions in the United States, so it can protect its intellectual property rights (IPRs).

Moreover, SigmaTel is also seeking compensation from Actions, for alleged losses that have resulted from Actions' patent infringement.

SigmaTel on January 4 filed the lawsuit in US Federal Court in Austin, Texas.

On March 14, the US-based company filed a suit against Actions with the International Trade Centre (ITC), a certification-issuing institution affiliated with both the World Trade Organization and the United Nations Council of Trade and Development.

In the lawsuit, SigmaTel alleges Actions infringed upon two of its patents, which SigmaTel had applied for the rights to some time before.

One of the patents is for the power-protection technology for the SOC (system-on-chip) controller used in portable MP3 players; the other, the launching array for SOC.

SigmaTel also said it had conducted "detailed investigations and examinations into Actions' relevant technologies," from which "it discovered the copyright fees Actions paid the third parties involved did not include the functions of semiconductors."

On April 13, ITC issued a statement that it had accepted SigmaTel's request, and ITC asked Actions to respond within 20 days.

SigmaTel's lawsuit will strike a heavy blow to Actions if ITC rules the Chinese firm infringed upon the US-based company's patents. ITC would then be authorized to ban Actions' exports to the United States.

Xue Wei, spokesman for the Chinese company based in Zhuhai, a city in South China's Guangdong Province, says SigmaTel has taken the move "intentionally" at a crucial moment.

He says the suits were filed when the world's two most-influential consumer electronics exhibitions Consumer Electronics Show, in the United States, and CeBIT, in Hannover, Germany were being held.

For companies such as SigmaTel and Actions, most of the orders they receive each year are generated from the two events.

"Twice, SigmaTel filed a lawsuit a few days before an event kicked off, and, as a result, some of our international clients withdrew their orders, over concerns rising from the lawsuits," Xue says.

"It is hard to calculate the direct impact on our business, but definitely we are losing our key international clients this year."

SigmaTel, however, says it filed the suits at those times because it had finally collected sufficient data to back up its complaint.

Ye insists the alleged infrigements are "not true."

"We have never touched upon SigmaTel's patents, and we will prove ourselves innocent by using relevant technologies," Ye says.

As a partner of some leading IT (information technology) firms, including Microsoft, the company pays for any patent it adopts in its products, Ye adds.

Insiders believe it will take about one year to resolve the issue.

Behind the dispute

"If Actions did not take such a considerable market share, for example, commanding only 5-10 per cent of the market, SigmaTel would probably not take the trouble," says Chen Lipeng, director of the Fair Trade Bureau of the Foreign Economic Co-operation and Trade Department, Guangdong Province.

Actions' business has grown rapidly since it was founded in late 2001. The firm's annual sales revenues increased from 1.08 million yuan (US$130,100) in 2002 to 460 million yuan (US$55.4 million) last year. Actions' growth is attributed to China's booming MP3 player market.

Statistics released by world-leading market research house iSuppli indicate shipments of MP3 players worldwide will increase at a compound rate of 28.8 per cent annually between 2004 and 2009.

SigmaTel commands about 70 per cent of the world's MP3 player chip market. It supplies chips to eading IT firms including Samsung, Dell, Sony, Toshiba, Gateway and Fujitsu.

Yet, it is far from being a leader in the China market.

The top five MP3 player makers in China last year, in terms of shipments, were Aigo, Chaohua and Lenovo, according to a report by Chinese leading market research house Analysys International.

Domestic-made chips are installed in these products, nearly half of which have adopted Actions' chips.

Fierce competition in the MP3 player market has triggered wars among major chip makers. SigmaTel once cut its prices on certain chips to counter the challenge from Actions.

"We have acquired the certification for quite a few patents," says Xue.

Some of the company's patents can be found on the official website of China's Bureau of Intellectual Property Rights. Xue delined to elaborate on the patent issues.

Chen says it takes time, at least one year in China, to obtain certification for a patent. Currently Actions has received certification for some of its patent applications, he says.

Chen notes the process could take even longer, as some patent applications must filed in the United States. Also, IPR agencies abroad will examine the patents a couple of times before issuing certificates.

"We are making efforts, through industrial associations, to accelerate the certification process," he says.

Liu Jiasheng, SigmaTel's vice-president for Asia, says "we are not willing to waste time on the lawsuits."

The most-effective approach to prevent being copied by competitors is constant innovation, he says.

China Business Weekly news

(China Daily 06/27/2005 page9)