Nokia Wins An Arbitration Ruling Against RIM, What Now?

| About: BlackBerry Ltd. (BBRY)

Nokia (NYSE:NOK) is known for its friendly attitude towards other companies including the direct competition. The company usually uses the legal action as a last resort when everything else fails. Even after a legal action, the company usually settles for royalty payments. This is different from companies like Apple (NASDAQ:AAPL) who won't even settle for royalty payments in most cases. On Wednesday, I was surprised to read that Nokia was actually pursuing to get Blackberry phones (RIMM) banned in the USA, UK and Canada because of a patent dispute.

There are 40 companies, including Apple, that pay Nokia royalty fees to be able to use patented technologies that belong to the company. Nokia has spent more than $40 billion in the last decade in order to create a massive patent portfolio consisting of 30,000 patents, many of which are very important to build tools such as wireless phones and tablets. It turns out that all Blackberry models use WiFi technology known as WLAN, which Nokia has patented. Nokia was able to receive an arbitration ruling in Sweden against Research in Motion and the company is basing its latest legal action based on this ruling.

The arbitration ruling states that Research in Motion has to pay Nokia a royalty fee for every phone it sells, while the company has failed to do this. Without paying Nokia's royalty fees, Research in Motion is not entitled to produce devices that use WLAN technology, which exists in all smart phones using WiFi. Once the company agrees to pay royalties to Nokia, it would be entitled to keep using this technology in its devices. In 2003, Nokia and Research in Motion signed a contract for the latter to be able to use this technology, but now the contract has to be renewed because Nokia states that the scope of the contract was very limited and that it didn't actually cover the use of WiFi technology. The fact that Research in Motion signed such contract in 2003 shows that the company actually recognizes that this technology is owned by Nokia. This will obviously not help Research in Motion in case things end up in the court.

Currently, Research in Motion is fighting for its very survival, which is similar to Nokia's condition. Both companies are hoping that their new phones will save them from going bankrupt and mark their turnaround story. Nokia's partnership with Microsoft (NASDAQ:MSFT) resulted in a number of Windows 8 phones to be released recently. Research in Motion's latest Blackberry phone is expected to hit the markets in a few months.

While Research in Motion is fighting hard for survival and every penny counts for the company, this will hit it hard if its phones are banned from any of the major markets. The company will have to find a way to reach settlement with Nokia before things get out of control for them.

Upon the news, Research in Motion's shares plunged from $10.75 to $10.22 in early trading Wednesday. In the afternoon, the share price recovered and passed $11.00 mark. It looks like investors of Research in Motion are not too worried about Nokia's threat at the moment. Of course this could be also related to the fact that Research in Motion has already lost 91% of its market value since 2008 and many of the troubles in front of the company were already baked in the share price. This could also mean that many RIM investors don't actually believe that Nokia can get Blackberry phones banned in many markets, even though the threat is very real. if Blackberry phones get banned in US, UK and Canada, this might be the end of RIM as we know it.

If a settlement is not reached between the two companies, a court ruling might take a long time. Research in Motion might wait for this in order to buy itself some time. However, a Nokia win would result in a lot of large fees and damages in addition to the royalty fees. If Nokia can get the arbitration ruling in Sweden recognized in a US court, it will be very close to a victory in this case.

Currently Nokia earns nearly $1 billion annually from royalty payments. The company is going after other companies that are using Nokia's technology without permission. If Nokia can get everyone using its technologies to pay royalty fees, the company can increase its revenues significantly. Nokia is not as aggressive about Apple when it comes to pursing legal action, because the company doesn't want to hurt its relationships with other companies such as some of its suppliers and partners who may be using Nokia's technology. On the other hand, Nokia currently needs revenues more than anything. I believe that the company will continue to be on the case for companies that may infringe its patents.

As an investor, I am long Nokia but I don't have any shares of RIM. I believe that Nokia is in a better position to turn itself around than RIM. The company has a strong partnership with Microsoft, it was able to deliver the new generation of phones on time, it has profitable business units outside of mobile devices and the company has been very aggressive about cutting costs and restructuring itself. Of course, I am not saying to short RIM either. I just believe that Nokia is in a better position to survive than RIM is.

Disclosure: I am long NOK, MSFT, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.