Legal Analysis: Implications of Hytera's US Sales Ban on Chinese Vaping Industry

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On April 7, 2024, Hytera (stock code: 002583.SZ) announced on its official website that, according to a court order in the United States, the company is prohibited from selling any products containing walkie-talkie technology anywhere in the world until further notice. Additionally, Hytera has been ordered to pay a daily fine of $1 million until they fully comply with the court's anti-litigation injunction. Subsequently, walkie-talkie products have been removed from Hytera's Tmall and JD.com official flagship stores.

The lawsuit between Hytera and Motorola dates back to 2017 when Motorola claimed that "Hytera stole its two-way radio technology used for public officials, construction workers, and school officials. Customers are able to maintain normal communication even during natural disasters or when wireless transmission towers are not functioning using this technology.

Hainet is a leading company in the field of specialized network communications in China, established in 1993. The company provides specialized communication solutions and services covering industries such as public safety, emergency response, energy, transportation, and commerce. With over 90 branches worldwide, Hainet offers services in more than 120 countries and regions. Although a significant portion of Hainet's revenue comes from overseas markets, the company places a high emphasis on the international market due to the lower gross profit margin in the domestic market.

Motorola previously filed a lawsuit accusing Hytera of infringing on multiple patented technologies, including a core technology for improving communication efficiency and extending battery life. In the first instance, the court ruled that Hytera had to pay Motorola $765 million in compensation, but this amount was later reduced to $543 million, in addition to paying the opposing party's legal fees.

This case is not the only time Motorola and Hytera have clashed in a patent dispute. Over the past few years, Motorola has sued Hytera multiple times, accusing them of patent infringement. Hytera has gradually shifted to a more proactive approach, increasing research and development investment, increasing the number of patent applications, and launching new products to reduce dependence on old technologies in order to counter the challenges posed by Motorola.

For technology companies, the core of competition lies in patent technology. Therefore, Hytera continues to increase research and development investment, enhance the number of patent applications, and launch new products to reduce reliance on old technologies. These measures are expected to bring Hytera better survival space and market competitiveness. Despite multiple attacks by Motorola on Hytera globally, with Hytera's efforts in technological research and development, the competition between the two parties may become more intense.

According to the latest news, Hytera has responded urgently to the "ban" imposed by U.S. courts, stating that the company has withdrawn its lawsuit in the Shenzhen case and has temporarily suspended the sale of dual-way radio technology products as required. The company has also applied to the U.S. court to revoke the above judgment, and a hearing is ongoing in the U.S. court.

The company emphasized that it will take further measures to try to revoke the above judgment in the shortest time possible, but there is still some uncertainty in the progress of the case. In addition, the company's controlling shareholder and actual controller, Chen Qingzhou, voluntarily promised not to reduce the company's shares for the next six months.

The Shenzhen-based Haidada case serves as a lesson for the e-cigarette industry in terms of going global. Motorola can be seen as the JUUL of this industry. Despite a slight market decline, their patent arsenal and research and development are still strong. For the Chinese e-cigarette industry, which holds more than 90% of the overseas market share, the future is filled with ongoing patent battles. It's not an exaggeration to say that the market has been relatively easy for the past decade, but this situation is unlikely to continue.

In any industry, only sufficient profits will stimulate research and development, and capital will enter. Eventually, leading companies will emerge through various competitions, transforming the entire industry into a few key players. Time flies, and IQOS has been on the market for over 10 years. In 2014, its sales figures couldn't compete with e-cigarettes. However, by 2024, IQOS had already dominated a significant portion of the HNB market, surpassing all competition.

The market for e-cigarettes is undergoing a reshuffling, and big tobacco companies are also paying attention. The branding and patent layouts of foreign e-cigarette companies such as JUUL, NJOY, Blu, VUSE, and VEEV can be observed. NJOY, for example, began establishing a presence in China as early as 2010. Their trademarks are highly stable and globally unified. JUUL has initiated several rounds of patent litigation, including a case involving a "leak-proof" atomizer. Nearly all of their patents are globally authorized. Despite current issues surrounding product compliance and financing, leading e-cigarette companies have not focused much on patent litigation. However, as research and development progress and product iterations continue, e-cigarette patent litigation is expected to increase significantly both domestically and internationally starting in 2024.

However, the purpose of any patent litigation is not for small and medium-sized enterprises, but rather to compete among the top ten, or even the top five companies. Weaker companies will ultimately be naturally eliminated.

Taking SMOORE as an example, continuous in-depth research and diversified layout will to a certain extent alleviate the patent risks in global competition. With China's advantage in supply chain industry, competitors will weigh the options of competition and cooperation with domestic leading companies in terms of patent litigation or collaboration. If e-cigarette companies cannot match them in basic research, compliance, and patent issues, they will always view you as inferior. They have various legal weapons at their disposal, not just patents, and any regulatory flaws can be exploited to strike against you.

Therefore, regardless of the size of e-cigarette companies, in the process of compliance and high quality, transitioning from fast-moving consumer goods to branding, all basic management, research and development, and intellectual property layout should be re-examined. The old way of thinking and habits cannot dominate the scene anymore. In simple terms, many e-cigarette companies that do OEM production do not even have proper management of their OEM contracts. There are frequent cases where products are sent out but funds are not recovered.

Upon further examination of Hytera, its research and development capabilities are already very strong, with a high proportion of overseas market receivables. However, facing the blow of the Motorola patent litigation battle could significantly damage its strength.

These are all worth studying for the e-cigarette industry!

Author's Introduction:

Tang Shunliang, a partner at Tianyuan Law Firm, has extensive experience in the legal field of tobacco and e-cigarette. With over ten years of professional experience in patent disputes, legal legislation, and compliance, Tang has a deep understanding of the technology and patent situations in the tobacco and e-cigarette industries. He has successfully handled numerous domestic and international compliance issues for clients, particularly achieving remarkable success in complex patent cross-border disputes. In addition, he has long served as a legal advisor for well-known e-cigarette and tobacco companies in China.