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Trade war

Foxconn lashes out at Microsoft over royalties

Terry Gou says US tech giant's latest lawsuit seeks to gain from US-China trade talks

NEW TAIPEI CITY, Taiwan -- Foxconn founder Terry Gou accused Microsoft of bullying on Tuesday, in response to the U.S. software giant suing his company over a patent-licensing agreement.

Gou suggested that the timing of Microsoft's lawsuit was suspect, coming as Washington and Beijing near agreement on their protracted trade dispute.

Microsoft filed the suit on Friday in the U.S. District Court for the Northern District of California, accusing Foxconn, formally trading as Hon Hai Precision Industry, of failing to abide by a 2013 patent license agreement to pay royalties, and to let Deloitte conduct an audit every two years. It did not specify the details of the agreement and patents involved in the Microsoft court document that the Nikkei obtained.

"The patent issues between Microsoft and our clients have been going on for eight years since 2011. Why all of the sudden has Microsoft sued Foxconn at this moment? I suspect it wants to gain from the US-China negotiations, as... it wants to be part of the intellectual property protection deal," Gou said.

Gou, speaking at a hastily convened news conference at the company’s headquarters in New Taipei City, said he intended to fight the claims. 

At issue is a dispute over royalty payments on the Android software used by Foxconn's Chinese clients Huawei Technologies, Xiaomi, Vivo, as well as Nokia.

Gou said the real targets of Microsoft's suit were the Chinese manufacturers who used the software for their operating systems. Instead of challenging Chinese giants such as Huawei, Microsoft was trying to make Foxconn a "scapegoat" in the trade war, he said.

"If you [Microsoft] have the courage, you should sue Huawei. Why bully a Taiwanese assembler? Microsoft is a coward," Gou said.

Foxconn’s manufacturing arm, the Hong Kong-listed FIH Mobile, is responsible for all of the group's contract production of Android smartphones. The parent company Foxconn assembles Apple’s iconic iPhone.

Contract manufacturers often agree to pay royalties on patent licenses on behalf of their smartphone clients, expecting to be paid back. However if a dispute emerges between the smartphone company and the patent holder, the case can end up in court as with Qualcomm's dispute with Apple.

Microsoft did not comment on Gou's claims, but said that it took "its own contractual commitments seriously and we expect other companies to do the same." It stressed the importance of its relationship with Foxconn. "We are working to resolve our disagreement," the company said in a statement. 

When asked if his company had ever paid royalties to Microsoft following the agreement in 2013, Gou dodged the question: "Foxconn has never paid [royalties] to Microsoft. As for FIH, I cannot let it answer the question now, because it is going to speak in the court later as evidence." 

Gou said the patent issues between Microsoft and FIH’s clients dated back to 2011, when Microsoft went after Google’s Android partners such as Motorola for alleged patent infringements.

FIH Acting Chairman Chih Yu-yang said in the past eight years FIH had received multiple formal notices from its Android smartphone-making customers, asking FIH not to negotiate patent issues, share its shipment data with Microsoft or pay the royalties on behalf of the clients.

"It is stated in our contracts with the clients that the responsibility of all the intellectual property rights and assertions fall on our clients, not on FIH," Chih said. "So either FIH or Foxconn will not suffer any loss because of Microsoft’s lawsuit." 

Huawei, a major FIH Android smartphone client, refused to comment on the case. Google could not reached for comment.

Some analysts agreed with Gou's position. 

"If it’s a patent infringement with the Android operation system, it’s kind of strange for Microsoft to ask a contract manufacturer such as Foxconn to pay for such royalties only," said Eddie Han, a veteran smartphone analyst at Market Intelligence & Consulting Institute. 

"To my understanding, it would be more reasonable and justifiable for Microsoft to also reach out to smartphone makers or those device makers who are Foxconn Technology Group’s clients who are really using these patents for royalties if Microsoft thinks there are infringements," the analyst added.

However, Ross Darrell Feingold, a lawyer who advises clients on trade and political risks between the U.S. and China, said it is still early to tell who has the advantage in this legal battle. 

"Until Foxconn files its response and if any, counterclaims, we only have Microsoft's initial complaint as an insight into the factual background," Feingold told the Nikkei Asian Review. 

Feingold said Microsoft, like other U.S. technology companies, hopes that a trade agreement addresses these concerns so that U.S. companies can compete fairly in the future. "However, the royalty dispute between Microsoft and Foxconn is more about past royalties that might have been underpaid, thus, the lawsuit is as much about the past as it is about the future."

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