Apple (AAPL), like many other multinational technology corporations, engages in patent lawsuits for a number of reasons. Apple treats all its patents as business assets and therefore it engages in lawsuits to protect its earnings and sales. Apple also litigates as a defendant in many patent infringement and civil claims made against it. Apple won an ITC importation ban on handsets against HTC (OTC:HTCXF) and it recently won another court order issued by the US Court of Appeals for the Federal Circuit directing the trial judge of the District Court, Lucy Koh, to hear Apple's preliminary injunction to block the sales of Samsung's (OTC:SSNLF) Galaxy Tab 10.1 tablet computer in the United States while a patent infringement lawsuit is pending.
This lawsuit is Apple's latest effort to restrict the sale of smartphones that use Google's (GOOG) Android operating software, in part, and clearly copy elements on Apple's design and utility patents. Investors should note that design patents do not have the same functionality requirement of process or method patents (i.e., utility patents), which endure for 20 years, compared to a design patent's 14 years.
Google's Android software is being used by a number of smartphone device-makers which includes Samsung, Motorola Mobility Holdings and HTC. Thus, Google's acquisition of Motorola could make Google an immediate party to any related lawsuits. Apple claims that some makers of Android phones have infringed on its design patents that make iPhone and iPad brands unique. Specifically, Apple claims that Samsung has copied the features, look and feel of the iPhone and iPad to create unfair market competition and lure customers away from its brands.
However, in another action instituted recently in the course of Apple's bitter patent litigation against Samsung, the U.S. District Court in San Jose directed the two companies (specifically, the CEOs Tim Cook and Choi Gee-Sun) to talk directly on terms that will end (or at least reduce the number of disputes stemming from) the patent infringement lawsuit. Unfortunately, after two days of settlement talks between the chief executives of Apple and Samsung, the two companies have failed to reach an agreement in the court-ordered talks that would end the extensive patent infringement lawsuit. Why should investors not be surprised?
Apple is already reaping benefits from some of its patent lawsuits. Apple controls almost 75% of the profits of the global mobile industry. Just recently, the company won court injunctions against Samsung in Australia and the Netherlands where it sought a ban on the sale of Samsung's Galaxy devices, specifically, Galaxy Nexus phones and Galaxy Nexus 10.1 tablets. Also, Apple is presently seeking injunctions against Samsung to ban the sales of Galaxy Tab 10.1 in the United States and Germany.
In the United States, Customs Officials are helping Apple to enforce a court order on HTC by delaying the shipment of HTC One X and HTC EVO 4G LTE pending inspection results. HTC must certify that these products do not infringe the claims of Apple's patents or they will be denied entry. This may be a pyrrhic victory even if it is an important one because HTC will likely be able to design away from the infringing elements in its devices. But this measure might have begun to take its toll on HTC as its profits have dropped by 70 percent according to a published report. HTC's sales also dropped by a third in the first quarter of 2012 due to product miss in 2011 according to a report in the Financial Times.
Compared to Apple, Nokia (NOK) seems to have just realized the need to protect its business assets, maybe after the company had come to terms with its losses. Nokia lost its enviable number one position as a smartphone maker to Apple last year and it also trailed Samsung.
Apple and Samsung now dominate the top end of the global smartphone market but while Samsung leads in market share, Apple beats Samsung on margins. In the first quarter of 2012, Nokia sold 11.9 million smartphones which is far less than the 24.9 million it sold in the first quarter of 2011. In the corresponding period, Apple sold 33.1 million and Samsung sold 38 million units of smartphones.
It is reported that Nokia is also having serious financial issues - Its earnings, profits, and sales are dropping. Thus, in one single swoop on May 2, Nokia announced it has filed a total of 11 lawsuits covering about 45 patents in the United States and Germany against HTC, Research In Motion (RIMM) and Viewsonic. These patents cover power management, multimode radios, application stores, multitasking, navigation, conversational message display, dynamic menus, data encryption, and retrieval of email attachments on a mobile device. Nokia claims that these patents are fundamental to its branded products.
Apple is also dealing with patent lawsuits filed against it by Samsung on "home turf" in South Korea. Samsung claims that Apple infringed on three of its patents in Apple's newest models of iPhone 4S and the iPad 2. Specifically, Samsung cited the three infringed patents as: methods of displaying data, the user interface, and short text messages. Interestingly, Samsung filed these lawsuits against Apple just a few hours before Apple's iPhone 4S and iPad 2 were unveiled on March 7. It is also interesting to know that while Apple and Samsung are at loggerheads on patent lawsuits, Apple is Samsung's largest customer with the latest full-year planned purchases amounting to almost $7.8 billion. In fact, Samsung is Apple's main supplier of the custom chips used in Apple's iPhone and iPad among other devices and supplies. There are a few other lawsuits in which Apple is a defendant, but the total effects on Apple's sales and profits should be minimal. So far, the best way to satisfy consumers is to innovate on the basis of quality and functionality for Apple's next iPad and next iPhone.
Evaluation & Outlook
Apple's financial position is solid compared to its peers and competitors like Dell (DELL) and Hewlett-Packard (HPQ). Dell reported a decline in quarter one sales to $14.422 billion and earnings per share of $0.36. Apple continues to excite investors with the report of its bullish iPhone sales in addition to the production expansion by Apple's manufacturing partner, FoxConn. FoxConn's production expansion amounts to $210 million and the new production line will be sited at its facilities in the Huai'an city, China. As part of Apple's business strategy, FoxConn will build a production line where it will manufacture Apple devices worth $1.1 billion with 35,800 employees. The report in the China Daily was not specific on the type of Apple devices that would be manufactured at the new plant, but we can be sure that Apple will be readying its attorney-cavalry at the first sign of infringement.