Smartphone Wars Heat Up in Court
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This could prove to be a particularly interesting week for smartphone behemoths Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and Samsung Electronics. Apple is involved in several patent infringement cases with both Samsung and Motorola Mobility, which was acquired by Google in May of this year.
The cases involve litigation in multiple jurisdictions in front of multiple bodies, including the U.S. International Trade Commission. A key decision is expected by the commission on Aug. 24 that may lend color to each of these cases and has the potential to send shockwaves throughout the investment community. Sifting through the various claims and even more numerous potential outcomes is an important first step for anyone investing in any of these companies.
The Latest Case
Motorola Mobility and Apple have been embroiled in litigation since 2010, with the most recent complaint being filed by Motorola Mobility last week claiming the infringement of seven patents. The case alleges that Apple has infringed in such areas as notifications, location reminders and the Siri voice recognition application. While the specifics of the claims are attention-worthy, of perhaps even greater importance is the relief being sought. Motorola Mobility has asked that the commission ban the import of all infringing devices into the U.S. – recall that Apple’s iPhone and iPad are fabricated in Asia and imported to the U.S. for sale. Should the commission grant the requested relief, it could have a crushing impact on Apple.
In an emailed statement to Bloomberg, Motorola Mobility said, “We would like to settle these patent matters, but Apple’s unwillingness to work out a license leaves us little choice but to defend ourselves and our engineers’ innovations.” There is a general understanding amongst companies that operate in this space and create the standards by which devices communicate that licenses will be granted to one another on a fair and reasonable basis. A central breakdown that has led to the entire series of cases being filed is that the respective players each claim that the other is failing to be reasonable.
The First Case and Decision
Last April, the trial judge concluded that Apple had infringed on one of the four patents over which Motorola Mobility was bringing suit. The decision is under review by the complete commission and the results are scheduled to be released on Friday. The patent in question refers to the way mobile devices transmit signals across Wi-Fi networks.
The relief sought in that case was also a ban on the import of any devices that are guilty of the infringement. This proves to be the most critical issue at play in the case because it relates to both the power of the U.S. ITC and the appropriate remedies that it may impose in cases of infringement. Apple, not surprisingly, argues that remedies should be decided by the federal district court because the ITC does not have the power to award damages. Motorola Mobility and Google clearly see the case differently, as a ban would be a major coup for the company and within the industry.
Regardless of the decision, the resolution of this case will likely have a significant impact on not only the principle players but on other industry participants like Nokia (NYSE: NOK), Ericsson (NASDAQ: ERIC) and Motorola Solutions (NYSE: MSI). Each of these players will be carefully awaiting the outcome because a finding for Motorola Mobility’s ban request will force far greater care by all. If Apple loses the case, it could arguably be forced to negotiate a license agreement that is substantially on Motorola Mobility’s terms; failure to negotiate such an agreement could cause the iPhone and iPad to be pulled from the U.S. market. Moving forward Nokia, Samsung, Ericsson and Motorola Solutions will each take far greater care in their designs and negotiations in order to avoid such a fate.
The Likely Outcome
While it is difficult to fathom a decision that bans the sale of America’s favorite consumer electronic devices, even if the commission decides against Apple, the case is far from over. There does not seem to be a clear case of authority as to what body can impose penalties and what those penalties may be. While a loss by Apple may force it to quickly negotiate a license, the company may be able to quickly appeal the decision and be granted a stay on the enforcement of the ban until that appeal is heard.
One thing that is nearly certain is that the stocks of both Apple and Google are likely to react to the decision. Investors holding positions in either of these names may wish to be particularly vigilant heading into the news release. While options premiums may uptick into the news, neutralizing the outcome would likely be a costly proposition either way. Anyone considering initiating a new position in these names may be better off waiting until the news plays out if he or she wishes to avoid the obvious volatility that is on the horizon.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple, Google, and Nokia. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.