(Bloomberg) -- When three Chinese nationals were jailed in Beijing almost a decade ago and accused of selling fake Hewlett-Packard Co. networking gear, it looked like an example of U.S. companies getting what they’d long demanded: aggressive protection of intellectual property in the world’s most populous nation.
A drawn-out court case heading to trial in Massachusetts paints a much muddier picture. The three, exonerated in China, accuse the former Silicon Valley icon of setting them up. They argue that it was H-P units that conspired to sell counterfeit gear, and then pinned the blame on them.
H-P disputes the claims, and is asking a U.S. federal judge to dismiss the lawsuit, saying the story was concocted by Integrated Communications & Technologies Inc., the Massachusetts-based company that employed the three Chinese nationals, to cover up its own criminal behavior. U.S. District Judge Leo T. Sorokin may rule on the dismissal request at any time. If he lets the case continue, a trial is scheduled for February.
Western companies have been calling on China for years to combat counterfeiting and take action against those that steal their intellectual property. One of the triggers for former U.S. President Donald Trump’s trade war was the technology industry’s lobbying of the American government to help protect their IP. A loss for either side in the lawsuit would tarnish its reputation in the world’s largest market for computers by marking them as an organization that fraudulently sold counterfeit goods.
The Office of the U.S. Trade Representative identified China as the “primary source” of counterfeit goods in a 2020 report. With Hong Kong, the document details, China accounts for 92% of the value of fake goods seized by U.S. Customs and Border Protection in 2019. In this case, the networking gear was made by an affiliate of H-P’s in China, exported to India on lease, then sold back into the Chinese market.
According to court documents, including affidavits, the saga that led to the lawsuit began in 2011, when ICT employees Jade Cheng and Jason Yuyi were informed of a major opportunity: H-P Financial Services India was going to sell them used computer networking equipment for resale to their clients around the world.
Preparing for the deal involved hours of grueling work: “As long as there were potential buyers, Jason and I spent days and nights making phone calls, sending emails and creating online ads just to prepare for the ‘big future,’” Cheng said in court documents.
But once some of the equipment was delivered, it became clear the gear wasn’t as advertised. ICT’s clients complained the equipment was in poor condition and contained defects, which resulted in damages to profits and the company’s reputation, Cheng said. The first installment of gear was purchased for $250,000, with plans in place to sell it for $1.5 million. But ICT’s clients backed out once they realized the equipment was defective.
The fallout with clients after the discovery of the problematic equipment consumed Cheng and Yuyi’s time. Cathy Yu joined ICT in 2012, and she, too, worked during the year on trying to repair client relationships.
Then one day -- Dec. 10, 2012 -- Cheng noticed his two colleagues weren’t logged on to their work computers.
Cheng, the former Asia-Pacific director of ICT, at first thought they’d slept in. They were young and it was Monday morning. After repeated attempts to reach them by phone, including calling their parents, “I started to feel nervous, that kind of feeling when your gut is telling you something’s not right,” Cheng said in an affidavit.
His gut was correct. Cheng’s colleagues had been arrested by the Chinese Public Security Bureau, and placed in the Haidian Detention Center in Beijing, accused of selling fraudulent equipment. Cheng would soon join them as an inmate when he traveled from Rushan City to China’s capital to find out what was going on.
Cheng, in his affidavit, said that following his arrest he lived in various cells in the detention center, slept on the floor and had to share a blanket, missed Christmas and New Year’s with his family, sat on wooden boards for hours at a time, drank filthy water, was forced to take ice cold showers and was threatened by other inmates.
“I felt like I stepped into hell,” Cheng said in the affidavit.
These conditions persisted until Cheng and his colleagues’ release on bail in July 2013. In 2014, Cheng, Yu and Yuyi were issued a no-crime letter from the police, essentially exonerating them. In 2015, they sued H-P’s successor companies: Hewlett-Packard Enterprise Co. and HP Inc.; as well as subsidiary H-P Financial Services India and H3C, a company joint venture in China.
In interviews and affidavits, Cheng and his jailed colleagues and their boss ICT founder and Chief Executive Officer Alex Styller said they believe H-P’s Indian subsidiary sold them fake gear, representing it as authentic, and the Chinese joint venture reported them to the authorities.
“This left them in a bind,” Styller, in an interview with Bloomberg, said of the Hewlett-Packard related companies. “If they admitted they had sold us counterfeit equipment, it would mean a violation of the law in India. It would also hurt their reputation in China, a very important market to them, and would mean their reckless sale of that equipment had caused three innocent people to be imprisoned.”
According to the H-P companies, those accusations are “a remarkable tale of counterfeiting and conspiracy” that isn’t supported by the facts.“Under Styller’s direction, ICT intentionally broke a host of Chinese civil and criminal laws by conducting business without a license; depriving employees of legal protections; smuggling goods past customs officials; evading taxes and selling counterfeit transceivers that didn’t come from HPFS India,” the defendants said in their dismissal request. Representatives of the companies declined further comment.
Sorokin in 2017 tossed a false imprisonment claim made by the ICT employees, saying there was no evidence the H-P related companies intended to have the workers locked up: “The court, drawing on its ‘common sense,’ finds implausible the individual plaintiffs’ bald suggestion that the defendants made insufficient efforts to obtain their release because they intended to keep them confined.”
The ICT group submitted a revised suit to try to get the judge to reconsider that rejection.
ICT said the years of wrangling in court and failed settlement discussions with the H-P related companies represent the defendants’ efforts to use their muscle to wear out a smaller company and cover their tracks. The defendants, whose dismissal petition attacks the legal validity of the suit, said pretrial information-sharing revealed both sides agree there is no evidence H-P supplied the counterfeit gear. That, in turn, shows that ICT’s leaders are the real fraudsters, the H-P related companies say.
Styller started ICT in 1993, three years after fleeing the Soviet Union as a political refugee, to “give old technology a new life” and provide equipment to companies that couldn’t afford full price for new gear. Since then, ICT says on its website that it has processed almost 5.4 million pounds of e-waste and the company’s business dealings are “fully compliant with regulations and standards.”
Still, this isn’t the company’s first legal tangle with a U.S. technology titan. Microsoft Corp. sued ICT in 2015 for selling computers with unauthorized copies of Windows 7, and the lawsuit was settled out of court. That case was resolved “amicably” and “quickly,” allowing ICT to become a registered Microsoft refurbisher, Styller said in the interview.
The case is Integrated Communications & Technologies Inc. v. Hewlett-Packard Financial Services Company, 16-cv-10386 U.S. District Court, District of Massachusetts (Boston).
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