Telecom

Apple's Smartphone Battle Plan


(This story was corrected to reflect the actual percentage of cases brought before the ITC that are resolved by a settlement)

Apple's attempt to block the import of smartphones made by HTC Corp. underscores the growing prominence of the International Trade Commission in settling patent disputes over smartphones, one of the fastest-growing areas in technology.

On Mar. 2, Apple (AAPL) filed a patent-infringement complaint with the ITC in Washington, alleging that HTC (2498:TT) is using Apple technology without permission. A decision in favor of Cupertino (Calif.)-based Apple may bar HTC from importing its devices into the U.S. Apple is embroiled in other scuffles at the ITC, including one with wireless handset maker Nokia (NOK).

Device manufacturers view the ITC as a more efficient and aggressive arbiter of patent disputes than overstretched federal courts, which can sometimes take years to bring conflicts to resolution. Turning to a government agency with a background in global trade issues underscores the infiltration by non-U.S. companies into the market for smartphones, shipments of which are expected by Gartner (IT) to rise 46% this year. "The ITC is becoming a mainstream second track for patent litigation that allows companies to take a second bite of the apple with their patent cases," says Colleen Chien, an assistant professor of law at Santa Clara University.

In its complaint at the ITC, Apple says Taoyuan (Taiwan)-based HTC infringes 10 patents mainly related to the software that runs smartphones. HTC was the first electronics maker to sell a phone based on the Android operating system, developed by a Google (GOOG)-led group of companies. "We can sit by and watch competitors steal our patented inventions, or we can do something about it," Apple Chief Executive Steve Jobs said in a statement. Apple spokesman Steve Dowling declined to elaborate.

"Expedited Proceedings"

Created in 1916 to regulate international trade, the ITC has in recent years emerged as a potent force in patent law, especially in the area of technology products like semiconductors and wireless phones. Companies often file patent lawsuits in U.S. district courts around the same time they file complaints at the ITC. On Mar. 2, Apple also filed a lawsuit alleging infringement of 10 other patents in U.S. District Court in Wilmington, Del. "The ITC is well-known for its expedited proceedings," says Thomas Jarvis, a partner at Finnegan, Henderson, Farabow, Garrett & Dunner, a Washington-based law firm that often represents clients before the ITC.

Jarvis says it takes on average about 7 to 10 months to get a hearing at the ITC, and about two years to get to trial in district courts. ITC spokeswoman Peg O'Laughlin declined to comment on the increase in cases relating to smartphones, saying related questions "are better asked of the parties involved."

The ITC issues so-called "exclusion orders," instructions to U.S. Customs & Border Protection to prevent the import of products that infringe patents. The ITC cannot order an infringing company to pay monetary damages. Chien studied ITC rulings from 1995 to 2007 and found that in cases where it found infringement, it issued exclusion orders 100% of the time.

In 2009, the ITC ordered a ban on chips made by Qualcomm (QCOM), STMicroelectronics (STM), Advanced Micro Devices (AMD), and Motorola (MOT), among others. The commission said the companies were selling chips with packaging that violated patents held by Tessera (TSRA), a San Jose-based semiconductor material company. Qualcomm and the other companies have appealed the decision.

Though the ITC was conceived in part to protect U.S. manufacturers from the import of cheaper, inferior products, foreign companies are increasingly willing to use it to wage patent disputes against U.S. companies, Chien says. Espoo (Finland)-based Nokia in December complained against Apple at the ITC, alleging patent infringement. The ITC agreed to investigate the claims on Feb. 25. Apple filed a countercomplaint on Jan. 15.

Settlement Likely

Apple's complaints are the latest in a string of cases before the ITC involving smartphones. On Feb. 19, the same day the commission agreed to investigate Apple's complaint against Nokia, it also agreed to investigate a complaint against BlackBerry maker Research In Motion (RIMM) brought by Motorola, the Schaumburg (Ill.)-based maker of mobile phones. RIM and Apple have also been sued at the ITC by camera giant Eastman Kodak (EK), which alleged that both make phones with built-in cameras that infringe some Kodak patents.

About 90% of patent cases brought before district courts are settled, while 55% of cases brought before the ITC are resolved by a settlement or disposed on other grounds, Chien says. Apple may genuinely be looking to win an import ban against HTC, she says. Still, even where an import ban is issued, cases often end in a settlement, says Ezra Gottheil, analyst at Technology Business Research in Hampton, N.H. "No one will be prevented from importing their phones into the country," he says. "It's just a matter of how much money flows to which party for the rights they end up swapping."

In other cases, ITC decisions may be overturned. In 2007, the ITC ordered a ban on the import of chips made by Qualcomm found to have infringed patents owned by Broadcom (BRCM). Qualcomm appealed, and a U.S. court of appeals vacated the ruling on procedural grounds in October 2008. Qualcomm ultimately resolved the dispute with an $891 million global settlement in April 2009.

Arik_hesseldahl
Hesseldahl is a reporter for BusinessWeek.com
With Carlos Bergfeld in Silicon Valley

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