Xiaomi
Xiaomi Mi 5 will reportedly come with a 5.7-inch display, instead of the rumored 5.2-inch and 5.5-inch screens. Pictured: Lei Jun, Xiaomi founder and chief executive officer, speaks at a company event last year. Reuters/Jason Lee

Xiaomi, a top Chinese phone maker that is currently one of the tech world’s most buzzworthy companies, is cautiously eyeing the U.S. market. But any plans it may have to bring products such as the Mi 4 or Mi Note stateside could be derailed by its weak portfolio of intellectual property. In hyperlitigious Silicon Valley, where lawyers can be as important to a product’s success as engineers, Xiaomi’s lack of patent protection for its smartphones means it would be bringing a knife to a gunfight.

Xiaomi has just two patents to its name in the U.S., according to SmartUp, a legal startup that specializes in helping clients connect with lawyers. If Xiaomi ever wants to sell a smartphone in America, it will have to grow that number significantly.

“The smartphone market is a highly, highly litigious market. I mean, it’s so lucrative that every tech company is suing every other company,” Aditya Awasthi, director of client services at patent and litigation consulting firm LexInnova, said. If Xiaomi “were to enter this market, they’d be sued left and right by almost everyone -- Apple, Samsung, Ericsson, Nokia -- and all these guys will just have a field day.”

A strong patent portfolio protects a company in two ways. In the event it’s sued by a competitor, it can produce a patent to show there’s more than one way to build a certain product or function. It can also wield patents as a deterrent by threatening retaliatory action against any rival that hauls it into court.

Behind The IP Curve

Beijing-based Xiaomi has become one of the most hyped tech startups after drawing a valuation of $45 billion and becoming a top-five smartphone vendor in 2014, due to its passionate fan base and low-cost devices. But what it has in buzz it lacks in patents. Lenovo, Huawei and ZTE -- three other Chinese phone makers who already sell devices in the U.S. -- each have more than 900 patents in their U.S. portfolios, according to SmartUp.

To be clear, intellectual property (IP) is not the only reason for Xiaomi’s slow move to the U.S. Both the company and several experts point out that it has to build its brand and secure distribution partnerships before it can successfully compete against the likes of Apple and Samsung for American consumers. “You can build a sexy phone, but if no one knows who you are or if no carrier promotes your product, it's hard to gain traction in a nearly saturated market,” Maribel Lopez, founder of San Francisco market research and consulting company Lopez Research LLC, said.

But Xiaomi’s puny patent portfolio does play a major factor. Unlike some of its competitors that have been around for decades, Xiaomi is just five years old, so it’s no surprise it has a much smaller portfolio. This has already caused headaches for the company in other parts of the world. In India, Xiaomi saw its sales briefly disrupted when it was hit with a lawsuit by Telefonaktiebolaget LM Ericsson.

If Xiaomi were to launch in the U.S. before significantly bolstering its intellectual property, it would be a surprise if the Chinese startup weren’t hit with numerous lawsuits. Since the smartphone market broke out in 2007, Apple, Samsung, Microsoft and the rest of the tech industry have shown they have no qualms about using the American court system as a way to stifle competition. Apple and Samsung, for example, have been locked in patent infringement litigation since 2012 while Taiwanese HTC was forced to sign licensing agreements with both Apple and Nokia after being sued by both companies for patent infringement.

“In the U.S., if you prevail in a patent case against a competitor, typically the patent holder will seek an injunction to block the entry of those phones from coming in at the border,” Bijal V. Vakil, a lawyer who specializes in high-tech law and is the managing partner of White & Case’s Silicon Valley office, said. “That’s a very significant bargaining chip. You don’t have those same type of intellectual property enforcement systems in other places in the world.”

Xiaomi's Patent Options

Fortunately for Xiaomi, there are a few options at its disposal. If the company is serious about waiting and building its brand before launching, Xiaomi can go the traditional route and apply for patents -- already, the U.S. Patent and Trademark Office has published more than 65 Xiaomi patent applications, which is the step before the office grants a patent. This would be a lengthy process, however, that would likely delay Xiaomi’s U.S. entrance by years.

A faster option would be for Xiaomi to either purchase or license a third-party patent portfolio. There are numerous patent holding companies with which it could work, but an interesting option would be Nokia. When the Finnish company sold its phone business to Microsoft in 2013, one thing it kept was its enormous patent portfolio. If Xiaomi were to acquire that portfolio, it would solve its dilemma. “Nokia is out of that market. Nokia is no longer building cell phones,” Awasthi of LexInnova said. “Nokia would be more than happy to offload their patents to Xiaomi.”

Another interesting option would tie back to Xiaomi’s more extensive Chinese portfolio. As China gets more serious about patent law, foreign companies have been working to expand their portfolios there. Xiaomi could grant one of these players license to its Chinese patents in exchange for the same with the company’s American portfolio, Yuri Eliezer, one of the founders of SmartUp, said.

“China is becoming a country in which intellectual property gets taken more and more seriously every year,” Eliezer said. If Xiaomi “has established a good portfolio in China, they could leverage that to bargain for licenses in the U.S.”

Whatever Xiaomi decides to do, increasing its patent portfolio is crucial if it ever wants to make a splash in the U.S.

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