Bloomberg News

IPhone Reprieve Seen Aiding Apple Sales, Hurting Samsung

August 05, 2013

Apple Against Samsung Over Smartphones Turns on Who Copied Whom

A person holds a Samsung Electronics Co. Galaxy S4 smartphone, left, next to an Apple Inc. iPhone 5 during an event at Radio City Music Hall in New York. Photographer: Victor J. Blue/Bloomberg

The U.S. decision to overturn an import ban on Apple Inc. (AAPL:US)’s older iPhones and iPads may help short-term sales and hobble Samsung Electronics Co. (005930) in any settlement talks in the companies’ patent fight.

President Barack Obama’s administration, in issuing the reprieve to Apple Aug. 3, lets the company continue selling the iPhone 4, which is priced lower than newer models, said Brian Marshall, an analyst at ISI Group. Less expensive smartphones are selling more quickly than higher-priced models, he said.

“The Obama administration’s decision is a net positive for Apple in the short term,” Marshall said in a phone interview.

The ruling is a setback for Samsung, which had won the import ban against Apple from the U.S. International Trade Commission in June based on a patent widely used in the mobile-device industry for transmitting data. The U.S. drew a line between blocking the sale of products infringing patents that are part of industry standards versus those for unique features.

The decision will probably handicap Samsung’s ability to obtain higher technology licensing fees from Apple in any negotiations, said Susan Kohn Ross, a trade lawyer with Mitchell Silberberg & Knupp in Los Angeles.

“If Samsung had been successful in getting the exclusion order, it would put more pressure on Apple,” she said.

Investor Reaction

More broadly, the decision by U.S. Trade Representative Michael Froman, designated by Obama to review the case, could limit the ability of large patent-holding companies like Qualcomm Inc. (QCOM:US), InterDigital Inc. and Dolby Laboratories Inc. (DLB:US) to rely on royalty revenue from standards patents used in smartphone chips or sound transmission.

Samsung fell 0.9 percent to 1,274,000 as of the close of trade in Seoul, extending this year’s decline to 16 percent. Apple rose 1.5 percent to $469.45 at the close in New York, while Interdigital fell 10 percent to $36.48.

“The problem now for Samsung is not that Apple can continue to sell its products, but whether Samsung’s products will be banned,” said Lee Sun Tae, a Seoul-based analyst at NH Investment & Securities.

The reprieve is not expected to help Apple shares because the company’s patent lawsuits are not an issue investors care most about, said Brian Blair, a principal at Wedge Partners Corp., a boutique research and trading firm in New York.

“The genuine investor concerns are about product growth, margin improvement and Apple moving into new categories,” Blair said.

Industry Standards

Apple, based in Cupertino, California, said disputes over licensing terms shouldn’t result in product import bans.

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

Apple sued Suwon, South Korea-based Samsung first, in April 2011, over patents covering the look and unique features of the iPhone. Samsung, which has made mobile phones for decades, retaliated with infringement claims over the fundamental ways a phone works, in the type of one-upmanship that’s typical of patent dispute. In all, there have been more than three dozen cases across four continents.

Technology companies have split over how courts and regulators should deal with patents that relate to fundamental technology used in every mobile device. Samsung and Google Inc. (GOOG:US) contend they should be able to block use of such standard technology if a company won’t pay what they consider a reasonable royalty.

Patent Companies

“It’s the product-based companies versus the patent-based companies,” said Jorge Contreras, an associate professor at American University in Washington. “The product companies don’t want to be bothered with the threats of having their products stopped because they can’t come to an agreement.”

Groups of companies establish standards so products can work together, like a charger that fits in most electronic devices. Companies whose inventions are included in the standard pledge to license any relevant patents on fair, reasonable and non-discriminatory terms.

South Korea’s Ministry of Trade, Industry and Energy said it’s “concerned” about the overturning of the Apple ban. The decision may hurt Samsung’s patent protection and the government will watch the ITC ruling on Aug. 9, it said in an e-mailed statement.

While Samsung couldn’t get an import ban, it’s entitled to seek cash compensation in federal court, Froman said in his Aug. 3 notice.

In his letter, Froman didn’t provide any specifics as to why he rejected the import ban on some versions of the iPhone 4 and iPad 2 3G. Instead, he outlined the Obama administration’s concern that some patent owners could engage in “hold-up,” meaning they would demand high rates from a competitor under threat of withholding use of industry standard technology.

President Reagan

There are some instances when an import ban is appropriate, such as when the user of a standard technology refuses to negotiate a license or is outside the jurisdiction of U.S. courts, Froman said.

Froman’s decision was the first time the executive branch has overturned an import ban ordered by the ITC since 1987, when President Ronald Reagan did so in a case involving Samsung computer-memory chips.

Samsung said its patent related to a widely used way data is transmitted, though the commission said the record wasn’t clear as to whether it was essential to the standard, said David Long, a patent lawyer with Dow Lohnes in Washington. The commission did find, however, that Samsung had not acted inappropriately in licensing negotiations with Apple.

Samsung Disappointed

“We are disappointed that the U.S. Trade Representative has decided to set aside the exclusion order,” Samsung said in an e-mailed statement today. “The ITC’s decision correctly recognized that Samsung has been negotiating in good faith and that Apple remains unwilling to take a license.”

Froman said the ITC should follow the guidelines set in a policy paper the Justice Department and U.S. Patent and Trademark Office sent in January. 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.

‘Right Message’

The U.S. Federal Trade Commission filed a similar paper with the agency last year.

“The administration’s action sends the right message,” FTC Chairman Edith Ramirez said in a statement. “Firms should not be able to use an ITC exclusion order to do an end-run around” commitment to license a standard patent on fair and reasonable terms.

A federal jury in San Jose, California, last year said that Samsung hadn’t breached its obligation to license other patents on the standard on fair terms. The jury also said that Apple hadn’t infringed those patents, while ruling that Samsung had violated Apple’s patents and awarded more than $1 billion in damages. The judge ordered a new trial on a portion of the damages decision.

Contreras, who said he agreed with Froman’s decision to overturn the import ban, said the battle between Apple and Samsung didn’t belong in the ITC.

“It’s completely redundant,” he said. “These are disputes that should be heard in the court.”

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 reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net; Dawn Kopecki in New York at dkopecki@bloomberg.net; Pui-Wing Tam in San Francisco at ptam13@bloomberg.net

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


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