http://online.wsj.com/public/article/SB114973190819574520-fTmZ2yipP_itCvAiiUNV8KgT68s_20060614.html?mod=regionallinks

MOSCOW -- Faced with a Kremlin crackdown on smuggling and customs fraud, Motorola Inc. didn't take any chances when it brought a batch of 167,500 mobile phones into Russia in March. They were flown in on a specially chartered cargo jet with the Motorola logo on it.

So company officials were shocked when Russian police impounded the whole consignment as smuggled goods. They then looked on helplessly as 50,000 of the phones were declared "harmful" and destroyed. The fate of the rest remains unclear.

Motorola's recent Russia troubles highlight the risks for Western companies chasing profits in emerging markets where legal protections aren't nearly as robust as in more mature economies.

With its oil-fueled consumer boom and rapidly expanding middle class, Russia is now the biggest mobile phone market in Europe, with sales more than doubling since 2003 to top 33 million handsets last year.

That has made it a huge draw for companies like Motorola, which along with Nokia Corp. and Samsung Electronics dominates mobile sales in Russia. One of Motorola's models, the hip, ultra-thin RAZR, was a must-have item for Russia's super-rich. Motorola even produced a special edition pink RAZR, autographed by Russian tennis star Maria Sharapova, exclusively for the Russian market.

But the U.S. company's problems have only grown since its phones were seized. Motorola has also been accused by a small Russian high-tech company of violating its patent, and risks getting sucked into a costly legal battle to clear its name. Pavel Panov, managing director of RussGPS, said seven Motorola models contained designs he patented with the Russian authorities in 2003. He demanded a licensing agreement that would guarantee RussGPS a slice of the proceeds from Russian sales of the offending models.

Motorola dismisses the claim as "totally without merit," saying Mr. Panov's patent is a so-called utility model that contains no novel feature. "I'm told we could obtain a utility model patent for a bicycle," says Scott Offer, the company's senior legal counsel.

Motorola's market position in Russia has already been affected by the controversies. "Retail sales are falling, as are orders from wholesalers," says Eldar Murtazin, an industry analyst and head of Mobile Research Group. Motorola was forecast to be the second-biggest seller after Samsung in the second quarter of this year, but was nudged into third place by Nokia, he says. One of Motorola's biggest Russian retailers has suspended imports of its phones, pending a resolution of the legal issues. Motorola declined to comment on any sales impact.

Market analysts say Motorola could in fact be an innocent casualty of another, unrelated fight. These analysts say the authorities' main target was Euroset, currently Russia's biggest cellphone retailer, which had imported the phones that were later seized. Analysts say Euroset had angered competitors and state officials with its aggressive behavior on the market and rapid growth.

For Motorola, though, the more immediate concern is to stop the Russian police from selling off its confiscated phones. "We made a request that [they] be returned for evidence and not destroyed, nor sold to any third party," said Greg Estell, a company vice president. The company says the remaining phones, valued at around $15 million, are now sitting in a government warehouse near Moscow. Senior Motorola executives have been holding back-to-back meetings with Russian officials to try to return them.

In most parts of the world, goods seized as suspected contraband are impounded until a court ruling. But under a quirk in Russian law, authorities here can dispose of such assets at any stage of an investigation, even before anyone has been convicted.

That was the case with thousands of phones confiscated by police last August during a crackdown on illegal imports. Business groups say they were then sold off through little-known trading firms who many suspect of links to the security services. A police spokesman declined to comment.

The government acknowledges the current system is open to abuse. "We have to ... remove the material interest of law-enforcement agencies [from this process]," Economics Minister German Gref said last month.

Motorola's troubles began in late March when police confiscated a shipment of phones as it was leaving customs clearance at Moscow's Sheremetyevo international airport. At first the police claimed the phones were counterfeit. Later, they said they were real but had been imported illegally. A customs official and a customs broker were charged with smuggling.

Within days, police tested the phones and found that electromagnetic radiation from one model, the C115, "endangered users' health."

On April 25, before a crowd of invited journalists, police destroyed 50,000 units of the offending model at a military firing range outside Moscow.

Motorola argued that the phone met all World Health Organization and Russian standards. It also criticized the circumstances of the test: Company officials claim it was carried out by an unaccredited lab that tested for phone power rather than radiation. Motorola says it wasn't allowed to take part or even see the results.

A spokesman for the Russian Interior Ministry's high-tech crimes department, which is handling the investigation, declined a request to comment.

Motorola is also contesting RussGPS's claims of patent infringement. RussGPS's Mr. Panov, whose company makes satellite navigation systems for the Russian military, rejects Motorola's defense. "These patents weren't cooked up by a couple of halfwits," he said in an interview.

But instead of going to a commercial court to protect his rights -- the usual procedure in patent disputes -- Mr. Panov turned to the police, who included his complaint in its criminal investigation into smuggling.

Motorola officials were stunned: They say they know of no other case where a patent dispute has been handled by police and prosecutors rather than the civil courts.

"[This] is an abusive attempt to use the criminal law to extort license fees from Motorola and its customers," says Mr. Offer. On Tuesday, the company sued both RussGPS and Mr. Panov for defamation in Moscow City's Court of Arbitration, demanding $18 million to cover "financial and reputational damage" caused by what it called a "knowingly false accusation of patent infringement."

Mr. Panov says he is unperturbed. "We have adequate protection," he says.