Bloomberg News

Apple’s Claim of Android Rip-Off Awaits Trade Agency Ruling

December 12, 2011

(Updates with closing share price in seventh paragraph.)

Dec. 5 (Bloomberg) -- For two years, Apple Inc. has told the world that phones running on Google Inc.’s Android operating system are iPhone rip-offs. Now Apple is about to learn whether a U.S. trade agency thinks its claims have merit.

The International Trade Commission is set to rule Dec. 14 in a patent complaint lodged by Apple against rival smartphone maker HTC Corp. The decision, postponed from the original date of tomorrow, would mark the first final verdict from any judicial entity in Apple’s global patent war against HTC and fellow Android-phone makers Samsung Electronics Co. and Motorola Mobility Holdings Inc.

A ruling for Apple may lead to a ban on U.S. imports of HTC devices, derailing the Taoyuan, Taiwan-based company’s trajectory from a small contract manufacturer founded in 1997 to the biggest U.S. smartphone seller in the third quarter. A victory for HTC may help it secure favorable terms in any settlement with Apple.

“In the past two years, HTC has emerged essentially from obscurity by promoting their own brand and high-end phones, and they’ve largely been able to do this by leveraging Android,” said Alex Spektor, an analyst with Strategy Analytics Inc.

HTC generated about $5 billion in U.S. sales last year, according to a separate patent complaint it filed at the trade agency against Cupertino, California-based Apple. That’s more than half of HTC’s $9.1 billion (NT$275 billion) in global 2010 sales.

HTC Shares Fall

HTC sold 24 percent of the smartphones in the U.S. during the third quarter, ahead of Samsung’s 21 percent and Apple’s 20 percent, Canalys reported Oct. 31. The Android platform accounts for almost 70 percent of the U.S. smartphone market, the Palo Alto, California-based researcher said. There were 120.4 million smartphones worldwide in the third quarter, a 49 percent jump from the year-ago period, Canalys said.

Investors, speculating that HTC might lose the case, sent HTC to a 17-month low ahead of the ruling. HTC declined by its 7 percent daily limit to close at NT$448.50 on the Taiwan Stock Exchange, the lowest since July 2010. Apple rose $3.31 to $393.01 at 4:30 p.m. in Nasdaq Stock Market trading.

HTC’s Android phones, introduced in 2008, infuriated Steve Jobs, according to Walter Isaacson’s biography of the late Apple founder. Jobs made it his mission “to destroy Android,” which he said “ripped off the iPhone, wholesale,” according to the book.

Apple Claims

Apple contends that HTC’s Android phones infringe four Apple patents, including one for a system to detect telephone numbers in e-mails so they can be stored in directories or called without dialing the numbers. The commission is reviewing an agency judge’s findings that HTC infringed that patent and one covering the transmission of multiple types of data, along with two other Apple patents that the judge said weren’t infringed.

The case is one of about a dozen before the commission related to the dispute over Android devices. Microsoft is fighting with Motorola Mobility and Barnes & Noble Inc., while Apple has legal disputes with HTC, Samsung and Motorola Mobility around the world.

A federal judge in San Francisco denied Apple’s request to halt sales of Samsung’s Infuse 4 and Galaxy S 4G phones and its Galaxy 10.1 tablet while a patent case is pending. The judge found that Apple was likely to win on some infringement claims, while Samsung had raised “substantial questions” of invalidity of two of the four patents in the case. The judge still said Apple didn’t show it would be irreparably harmed by Samsung remaining on the market until the July trial.

HTC Setback

Apple also has patent-infringement suits pending against HTC in district court, though the trade agency tends to move more quickly.

An Apple victory would mark the second setback for HTC in two weeks at the agency. On Nov. 21, the commission rejected an agency judge’s findings that Apple was violating the patent rights of HTC’s S3 Graphics unit. HTC agreed to buy S3 Graphics for $300 million in July after the judge said Apple was infringing two S3 Graphics patents for video compression.

The commission is an independent agency set up to protect U.S. markets from unfair trade practices. It has the power to block imports of products found to infringe intellectual property rights.

HTC has said it has “alternative solutions in place” to work around the patents if a violation is found.

T-Mobile USA Inc., the fourth-largest U.S. wireless provider, said in an Oct. 6 filing with the trade agency that it has much to lose should there be any limit on HTC phones.

‘Locking In Consumers’

“An ever-increasing majority of T-Mobile’s U.S. customers prefer the Android platform and would be unable to purchase adequate substitutes in the near-term if HTC’s Android smartphones were excluded,” T-Mobile, a unit of Deutsche Telekom AG, said in the filing.

T-Mobile teamed with Google and HTC to sell the first Android phone in the U.S. in September 2008, and a majority of its current smartphone sales are devices made by HTC.

Google, which denies copying the iPhone and hasn’t been named in any of the trade agency complaints, argued in a filing that Apple is trying to control the U.S. smartphone market through litigation. HTC’s Android devices “are helping prevent Apple’s iOS from becoming the sole viable mobile platform and thus ‘locking in’ consumers and software developers to that platform,” Google said in the filing.

4G Phones

Apple has argued that it’s not trying to exclude all rival smartphones, only those using Apple inventions without permission.

“Apple is an American company that has poured billions of dollars in research and development and other investments into the U.S. economy,” Apple wrote in an Oct. 17 filing with the agency. “HTC is a foreign company that is free-riding on Apple’s research and development expenditures and resulting patents rather than creating its own innovations.”

There’s no guarantee that the commission will ban the HTC phones should it find that HTC violated Apple’s patents.

Neither T-Mobile nor Google took a position on the infringement issue, focusing instead on the possible import ban. T-Mobile said an exclusion order may undermine efforts to spread the newest generation of phones, known as 4G, even as the Obama administration favors expanding wireless high-speed Internet service into rural areas.

The Bellevue, Washington-based company, which doesn’t sell the iPhone, said it operates “America’s largest 4G network.”

‘Last Thing’

The trade agency’s staff, which acts as a third party on behalf of the public in certain cases, has said that an exclusion order is “unlikely to have any significant impact on the public interest” and demand for smartphones could be met by other companies, including Apple.

It does recommend a limited exception for 4G phones. HTC accounts for more than half of all 4G sales in the U.S., so the company should be allowed to continue to bring in those phones for six months until additional competitors enter the market, the staff recommended.

HTC isn’t expected to retain its top spot in smartphone sales this quarter. On Nov. 23, the company cut its fourth- quarter revenue forecast, citing the weak global economy and competition from Apple and Samsung.

Apple has begun selling the iPhone 4, and Samsung’s newest Galaxy has become its best-selling phone ever, said Spektor of Strategy Analytics. At the same time, Sprint Nextel Corp., one of HTC’s customers, has begun selling the iPhone. Another loss at the trade agency would further undermine HTC’s position, Spektor said.

“The last thing they need is for a non-competitive factor to come into play,” said Spektor, who is based in Newton, Massachusetts. “HTC’s competitors in the Android space would be happy because the Android slice of the pie is less crowded.”

The case is In the Matter of Certain Personal Data and Mobile Communications Devices and Related Software, 337-710, U.S. International Trade Commission (Washington).

--With assistance from Adam Satariano and Peter Burrows in San Francisco and Tim Culpan in Taipei. Editors: Michael Shepard, Steve Walsh

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net;

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net


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