Expert: Apple and Samsung's Battle Is a 'Pointless Tit for Tat'

By Josh Wolonick  AUG 02, 2013 3:18 PM

After an ITC ruling in favor of a Samsung patent, and without the president stepping in today, AT&T will be unable to import iPhone 4s. Will it matter?


Two months ago, the US International Trade Commission ruled that Apple (NASDAQ:AAPL), in two versions of the iPhone and two versions of the iPad, had infringed on a Samsung (OTCMKTS:SSNLF) patent, and began the process of banning the devices in the United States. President Obama and US Trade Representative Michael Froman had a 60-day window after the ruling to overturn the potential ban before the ITC's final ruling. If the president does not overturn the ruling by the end of today, it is likely that AT&T (NYSE:T) versions of the iPhone 4, iPhone 3GS, iPad 3G, and iPad 2 3G will no longer be able to be imported to the US from manufacturers in China.

The patent in question protects an apparatus for encoding and decoding information in a CDMA mobile communication system, meaning the ruling only affects Apple devices whose chipsets were supplied by Infineon (OTCMKTS:IFNNY), and not those supplied by Qualcomm (NASDAQ:QCOM).  

Fortunately for Apple and AT&T, the devices involved in this dispute are fairly old. The iPhone 3GS and the iPad 3G have both been discontinued; it is likely that with the arrival of new models this fall, the iPhone 4 and the iPad 2 3G will be retired as well.

Although the sales of older models at lower price points are still somewhat important in the smartphone market, the potential loss of sales is not seen as the most pressing an issue here.

So what's all the fuss about? In a plea to the ITC, Apple said that the ban would "sweep away an entire segment of Apple's product offerings." Moreover, major tech companies like Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), and Intel (NASDAQ:INTC) have come to the support of Apple and AT&T, urging the US government to overturn the ITC's ban. They believe the problem isn't so much the limiting of sales of a few older devices but that the ruling sets a dangerous precedent. 

Moreover, what makes this particular legal dispute notable is not so much the technology involved, or even the companies involved, but the kind of patent: It's called a standard essential patent (SEP).

Tech companies are required to offer competitors FRAND (fair, reasonable, and non-discriminatory) licensing at reasonable rates. Apple and its strong lineup of supporters fear that the ITC ruling will allow companies like Samsung, which hold SEPs, to take advantage of their competitors by increasing licensing fees. Standards making bodies such as the European Telecommunications Standards Institute (ETSI), which is the one involved in this case, must ensure that different devices from different companies are able to work together. Major tech companies propose engineering solutions and ETSI chooses the best one, though often the approaches are equally well-designed, and so the decision is arbitrary.

Samsung's patent in question is an SEP patent, which means its not very different from Apple's own technology -- yet Apple has to pay a licensing fee and use Samsung's technology, or face having its devices banned. Obviously, the company chose to not honor the SEP with its iPhone 4.

AT&T has said that the ITC ruling completely eliminates a popular entry-level phone from its stock, and that it is "inconsistent with the president's goal of ubiquitous broadband deployment."

So will President Obama speak up? Not likely, Richard Windsor, a former global technology analyst at Nomura Securities, and the founder of the mobile handset and software commentary blog Radio Free Mobile, tells Minyanville. "President Bush didn't put a stop to the ban that was on BlackBerry (NASDAQ:BBRY) back in 2005. In those days, BlackBerry was the enterprise, and it was also running the entirety of the US government, and they still didn't block it."

In the early 2000s, a patent-holding company called NTP sued Research In Motion, the company now known as BlackBerry, for patent infringement. In 2005, the United States District Court for the Eastern District of Virginia decided that RIM had willfully infringed NTP's patents, and Judge James Spencer ordered RIM to pay damages and to cease and desist the infringement of those patents. That would have led to a total shutdown of all BlackBerrys in the US, a great many of which were used by government officials. President Bush did not step in to overturn the injunction, but fortunately for BlackBerry, the companies settled in 2006 for $612.5 million. 

But this precedent is not the only reason why Windsor feels the ban will likely continue. "It's not going to affect iPhone shipments that much, is it?"

The iPhone 5S is expected to arrive sometime this fall, as is the iPad 5. Both devices will make the banned products obsolete, as the iPhone 4S will take its predecessor's place as the entry level Apple phone (unless a much-rumored, cheaper iPhone does that), and the iPad 3 will replace the second iteration of the tablet.

"I don't think it'll be that big of a hit. It's much more, 'Let's make some noise: We got iPhone banned!' without having any actual impact on Apple.

Demonstrating how thickly embroiled in legal dispute these two companies are, there is another lawsuit playing out right now, with the ITC just yesterday announcing it is delaying a decision on whether certain Samsung mobile phones and tablets infringe on Apple patents. That decision will be made a week from today, on August 9.

"This pointless tit for tat is costing them a fortune -- much more than they'll ever pay each other in damages," Windsor says. "I reckon they'll probably end up settling sometime this year."

Several pundits and politicians disagree, including writers at Fortune magazine and CNN, and four Senators (two Republic, two Democrat), who cite the danger of letting the ITC ruling set a precedent for tech companies to abuse FRAND licensing as a major concern. They believe President Obama could help set better legal examples in future cases like this one, where the patent holder (Samsung) is not actually using the patented device and has already agreed to license the patent, and where the offending part of a product is not a crucial part of the overall design or appeal of the offending device (iPhone). 

Ironically, if Obama employed the seldom-invoked power of overturning an ITC order, it would be the first time since 1987, when President Reagan overturned a ban on certain Samsung products.

Disclosure: Minaynville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.

Follow me on Twitter: @JoshWolonick and @Minyanville
No positions in stocks mentioned.