Bloomberg News

Apple Import Ban on Old IPhones Stokes Samsung Patent War

June 05, 2013

Apple Import Ban Stokes Smartphone Patent War With Samsung

A man uses a Samsung Electronics Co. Galaxy S III smartphone to record a video outside the Apple Inc. store in Sydney, Australia. Photographer: Ian Waldie/Bloomberg

Apple Inc. (AAPL:US)’s first loss against Samsung Electronics Co. (005930) in a U.S. patent case could mean a ban on imports of some older devices including the iPhone 4 while lessening prospects of the largest smartphone makers ending their legal battles.

The U.S. International Trade Commission’s decision, posted in a notice on its website yesterday, covers the iPhone 4 and iPad 2 3G sold for use on networks operated by AT&T Inc. (T:US), T-Mobile US Inc. (TMUS:US) and two regional carriers, General Communication Inc. (GNCMA:US) in Alaska and CT Cube LP in Texas.

With dozens of lawsuits spread across four continents in their battle for a greater share of the $293.9 billion market for smartphones, each side can now claim a victory in the U.S. With plenty of litigation remaining, Samsung’s victory probably won’t bring the two sides closer to settling, said Will Stofega, a program director at Framingham, Massachusetts-based researcher IDC.

“There’s too much skin in the game now,” he said. “It’s almost so ugly I don’t think they’ll come to any agreement. Both companies have a lot of cash and are generating a lot of money. It’s not like they have to worry about paying the legal bills.”

Obama Review

The ITC’s import-ban order is subject to review by President Barack Obama. The president can overturn it on public-policy grounds, though that rarely happens. Apple can keep selling the devices during the 60-day review period.

“Historically, the president does not interfere in these sorts of things,” said Lyle Vander Schaaf, a patent lawyer with Brinks Hofer in Washington. “It shows the commission is a very bold agency that they are willing to take these steps despite the popularity of the Apple products.”

Apple won a $1 billion verdict last year in California that has since been cut to about $600 million. It was based on a jury finding that Samsung devices copied the look and unique features of the iPhone and iPad. The commission is scheduled to release a final decision in Apple’s trade case against Samsung in August.

Apple shares slipped 1.1 percent to 342.35 euros in German trading. The stock is down 16 percent in New York trading this year.

Samsung shares declined 1.2 percent to 1,521,000 won in Seoul today as South Korea’s currency rose the most in more than six weeks. Samsung shares are little changed this year, compared with a 1.9 percent decline in the benchmark Kospi index.

Hot Seller

A new trial on some of the damages in the California case must be held and a second lawsuit, involving newer models by both companies, is scheduled for next year. An appeals court could hear arguments later this year on Apple’s request to halt sales of Samsung products found by the jury to infringe its patents.

“We believe the ITC’s final determination has confirmed Apple’s history of free-riding on Samsung’s technological innovations,” Adam Yates, a Samsung spokesman, said yesterday. “Our decades of research and development in mobile technologies will continue, and we will continue to offer innovative products to consumers in the United States.”

Apple pledged to appeal the ITC decision. The underlying findings will be reviewed by a U.S. appeals court specializing in patent cases.

“We are disappointed that the commission has overturned an earlier ruling and we plan to appeal,” said Kristin Huguet, an Apple spokeswoman. “Today’s decision has no impact on the availability of Apple products in the United States.”

‘Copycat’ Reputation

Park Hyun, a Seoul-based analyst with TongYang Securities Inc., said the ITC ruling may help remove the “copycat label” from Samsung.

“It seems inevitable that the latest ruling will have a negative impact on Apple,” Park said. “Combined with rising branding power in the U.S., the ITC ruling may give Samsung a chance to narrow its market-share gap with Apple in the U.S.”

The decision could mean fewer choices for AT&T and T-Mobile customers who want to get an iPhone without paying for the more expensive iPhone 5. Samsung told the commission that Cupertino, California-based Apple could drop the price of the iPhone 5 if it was worried about losing potential customers. All iPhones are made in Asia.

The three-year-old iPhone 4 is still a hot-selling product, said Marcelo Claure, chief executive officer of Brightstar Corp., a mobile-phone distributor with operations in 50 countries.

“Anytime you can’t sell your entire portfolio, it’s a big deal,” he said. Unlike Samsung, which sells dozens of models, Apple sells only the iPhone 4, 4S and 5.

Mutual Destruction

Together, Apple and Samsung make about half the smartphones sold in the world. Samsung is the biggest, while Apple dominates in the U.S.

“It’s like Ford and GM -- they should approach some rapprochement or they’ll end up weakening each other’s market share,” said Scott Daniels, a patent lawyer with Westerman Hattori in Washington. “At some point they just need to resolve it because they just hurt themselves commercially if they don’t.”

Samsung had been Apple’s biggest components supplier, though Apple has been trying to diversify its supply chain.

It may take new innovations in devices to bring them back together, Stofega said.

“There’s a big push into display technology, like flexible screens,” he said. “Samsung has proven it can do things no one else can, and that might bring them together. Apple would be a good partner, given their emphasis on display. It can be: ‘We hate each other, but we need each other.’”

Patent Trolls

In the ITC case, Apple was found to infringe a patent for a widely used way that phones transmit data. Apple argued that Samsung was obligated to license the patent on fair terms because it was part of an industry standard and, instead, the company demanded an unreasonable royalty.

Obama’s administration and the U.S. Patent and Trademark Office in January urged the ITC to closely look at patents that relate to industry standards before issuing any import bans.

“Samsung is using a strategy which has been rejected by courts and regulators around the world,” Huguet said. “They’ve admitted that it’s against the interests of consumers in Europe and elsewhere, yet here in the United States Samsung continues to try to block the sale of Apple products by using patents they agreed to license to anyone for a reasonable fee.”

Samsung, based in Suwon, South Korea, contended Apple infringes four patents, including two covering data transmission. U.S. trade Judge James Gildea sided with Apple in September, saying Apple didn’t infringe any of the patents and that one, for a way to detect movement on a touch screen, was invalid.

Fair Licensing

The fourth patent in the case is for a way to detect phone numbers in e-mails so they can be dialed or stored in the phone’s contact list.

The commission agreed with the judge on the other three patents.

Apple contends Samsung never made a fair offer and demanded that Apple pay 2.4 percent of the average sales price of every iPhone and cellular-enabled iPad, according to filings with the agency.

The iPhone generated $78.7 billion in sales (AAPL:US) for the fiscal year ended Sept. 29, or about 50 percent of Apple’s revenue, according to data compiled by Bloomberg. Its iPad brought in $30.9 billion, and the iPod generated $5.6 billion.

In its filings, Samsung said it’s been offering Apple a license since November 2010 and “Apple has never been willing to take a license on any terms.”

Samsung’s case against Apple is In the Matter of Electronic Devices, Including Wireless Communication Devices, 337-794, and Apple’s case against Samsung is In the Matter of Electronic Digital Media Devices, 337-796, both U.S. International Trade Commission (Washington).

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

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net


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