Bloomberg News

Apple Can Continue Selling IPhone 4 After U.S. Reprieve

August 04, 2013

Apple Seeks Obama Reprieve on IPhone Import Ban From Trade Panel

The import ban applies to the iPhone 4 and iPad 2 3G models designed for networks run by AT&T, T-Mobile US Inc. and two regional carriers in Texas and Alaska. Photographer: Chris Goodney/Bloomberg

Samsung Electronics Co. (005930)’s patent-infringement victory over Apple Inc. (AAPL:US) turned hollow after President Barack Obama’s administration overturned an order barring shipments of some older iPhone models into the U.S.

U.S. Trade Representative Michael Froman, designated by Obama to review the case, yesterday said a ban on versions of the iPhone 4 and iPad 2 3G was unwarranted, based on his consideration of public-policy issues regarding patents on fundamental technology for mobile devices.

It was the first time the executive branch has overturned an import ban ordered by the U.S. International Trade Commission since 1987, when President Ronald Reagan did so in a case involving Samsung computer-memory chips. The dispute is the latest in a series of spats between the world’s two biggest smartphone vendors, underscoring their battle for dominance of a market that was worth $293.9 billion last year

“Ultimately, this may lead to easing of patent laws and bring the lose-lose and meaningless patent war between Samsung and Apple to an end,” Lee Sun Tae, a Seoul-based analyst at NH Investment & Securities Co., said by phone today.

Apple had been ordered to stop importing versions of the Chinese-made iPhone 4 and iPad 2 3G designed for networks run by AT&T Inc. (T:US), T-Mobile US Inc. (TMUS:US) and two regional carriers in Texas and Alaska. Cupertino, California-based Apple was counting on the Obama administration’s increased interest in patent disputes to sway the president.

“We applaud the administration for standing up for innovation in this landmark case,” Apple spokeswoman Kristin Huguet said in an interview. “Samsung was wrong to abuse the patent system in this way.”

Standards Patents

Samsung is “disappointed” the ITC decision was overturned, Nam Ki Yung, a spokesman at the company’s headquarters in Seoul, said today in a mobile-phone text message. “The ITC’s decision correctly recognized that Samsung has been negotiating a license in good faith and that Apple remains unwilling to take a license.”

Apple sold $78.7 billion worth of iPhones last fiscal year, making up half of the company’s revenue. It doesn’t break out sales by model.

It counts on older iPhone models, often given away with a two-year contract, to entice new customers. Sales of older iPhones helped Apple top analysts’ earnings projections in the fiscal third quarter.

IPhone 4 models sold for other networks wouldn’t have been covered by a ban, nor would newer devices including the iPad mini and iPhone 5. The company is expected to release new iPhone and iPad models later this year.

‘Patent Hold-Up’

In a four-page ruling, Froman said that Obama assigned to him the task of evaluating the ITC’s exclusion order on the Apple devices. Froman said he based his decision on the fact that standards patents were at the core of Samsung’s case and the Obama administration has expressed concerns that “potential harms” can result if patent holders use those as leverage against competitors.

The Samsung patent covers a way data are transmitted over communications networks. It’s a feature in a widely used technological standard agreed on by the mobile-device industry.

Companies that work to establish standards have the advantage of knowing their inventions have to be used in all products in an industry. In turn, they pledge to license any relevant patents on fair and reasonable terms.

Economic Role

There’s a risk standard-patent holders could be gaining “undue leverage and engaging in ‘patent hold-up,’ i.e. asserting the patent to exclude an implementer of the standard from a market to obtain a higher price for use of the patent than would have been possible before the standard was set,” Froman said.

“The administration is committed to promoting innovation and economic progress, including through providing adequate and effective protection and enforcement of intellectual property rights,” Froman said.

At the same time, he said standards now play an important role in the economy.

“Important policy considerations arise in the enforcement of those patents incorporated into technical standards without which such standards cannot be implemented as designed, when the patent holder has made a voluntary commitment” to offer licensing on fair and reasonable terms, he said.

The Obama administration in January sent the ITC proposed guidelines to consider before ordering import bans based on infringement of standards patents.

Public Benefit

It said that while patent owners have the right to exclude others from using their inventions, the public benefit of allowing that is limited when it comes to standards patents. The U.S. Federal Trade Commission filed a similar paper with the agency last year.

The decision is “good for the consumer in the short term but if society doesn’t protect intellectual property then innovation may not continue and they eventually suffer,” Benjamin Bai, a Shanghai-based partner and head of the China Intellectual Property practice at Allen & Overy LLP, said by phone today. “Not enforcing essential patents in this way is a nice balance.”

Apple and Microsoft Corp. (MSFT:US) have promised not to use any industry-standard patents they have to block competing products. Samsung and Google Inc. (GOOG:US), which owns Motorola Mobility and the Android operating system that’s the most popular platform for mobile phones, reserved the right to use them if the other side is an “unwilling licensee.”

Revenue Demand

Four U.S. senators wrote to Froman on July 30, asking him to “assess the substantial public interest considerations” of using standards patents at the ITC. The senators were Democrats Amy Klobuchar of Minnesota and Barbara Boxer of California, and Republicans Mike Lee of Utah and James Risch of Idaho.

Samsung demanded 2.4 percent of Apple’s iPhone and iPad revenue, which would come to about $18 per phone, Apple argued in its filing with the trade representative. It accused Samsung of being unreasonable.

Samsung, which is under investigation by European regulators on allegations of patent misuse, agreed to not seek sales bans based on its standard-essential patents on that continent. It made no such promise in the U.S. and defended its position, saying Apple refused to pay on any terms.

“There will be some ripple effects on the stock market,” said Florian Mueller, an intellectual property consultant based in Germering, southern Germany with clients including Microsoft and Oracle Corp. Shares of companies such as InterDigital Inc. and Qualcomm Inc., which own other so-called standard-essential patents, are likely to be affected, he said.

‘Unwilling Licensee’

“By any definition, Apple is an unwilling licensee of Samsung’s declared essential patents,” Samsung wrote in the filing.

Two federal judges have said Google’s Motorola unit can’t use standards patents to seek court bans of competitors’ products. One of those rulings, against Apple, is scheduled for arguments before the U.S. Court of Appeals for the Federal Circuit on Sept. 11. The other involves a Microsoft breach-of-contract complaint against Google scheduled for trial in Seattle later this month.

Apple is also seeking to block imports of some Samsung phones. It filed the first salvo in April 2011, a month after the company unveiled the iPad 2 in what co-founder Steve Jobs dubbed the “Year of Copycats” after those who sought to emulate the success of the iPhone and iPad.

That case resulted in a San Jose, California jury deciding in August 2012 that more than two dozen models of Samsung devices infringed Apple features like the look of the iPhone, use of a pinching gesture and double taps to zoom into images.

Still Allowed

Despite the verdict, the trial judge allowed Samsung to continue selling the products, saying there was no direct link between those features and the reasons people buy smartphones.

“Both companies face the same issue in multiple lawsuits so while today you may be up, tomorrow you may be down,” Bai of Allen & Overy said. “Allowing intellectual-property rights to go too far harms the consumer and kills innovations.”

The Apple case against Samsung is In the Matter of Electronic Digital Media Devices, 337-796, and Samsung’s case is In the Matter of Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, 337-794, 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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