Apple (AAPL) is rallying on new iPhone orders and the perception that it has won patent disputes once and for all. Fortunately for patent lawyers, this is simply not true. There is an intellectual property war being waged in many different legal systems between many companies in the mobile device space. Apple has won a major battle, but the intellectual property war rages on.
Given the seemingly endless iterations of legal disputes, investors may want to consider buying Nokia (NOK) and Research In Motion (RIMM) for the strategic value of their intellectual property. Other companies have and will buy intellectual property from these firms or take them over outright. Owners of NOK and RIMM shares will benefit from these transactions as they occur.
Apple's Major Patent Battle Win
A jury found that Samsung infringed six out of seven Apple patents, and awarded Apple over $1 billion in damages. Samsung even lost a bid requesting a lift on the preliminary ban on U.S. sales of its new Galaxy Tab 10.1 tablet which was imposed after losing a patent trial to Apple. A hearing is scheduled for December 6th to consider Apple's request for a permanent sales ban in the U.S. on eight of Samsung's Smartphone models and the Galaxy tablet. But Apple may not stop there: Apple may include more Samsung products in its requested ban.
Clearly, this engagement was a win for Apple.
Apple's Second Legal Front
Apple's legal battles continue on different fronts. Patent infringement complaints by Google (GOOG) against Apple devices, including those that are equipped with Siri, the interactive voice application, are scheduled to be investigated by a U.S. trade agency. This complaint was filed by Google's Motorola Mobility unit, and a notice of the investigation was posted on the U.S. International Trade Commission's website. Motorola Mobility and Apple have been fighting for at least the last two years when licensing negotiations failed. Motorola Mobility may be pressing this issue to push Apple into negotiating a cross-licensing deal.
This case is seeking a ban on U.S. imports of devices including Mac computers, the iPhone, and the iPad. The complaint however, didn't name the iPhone 5 but the International Trade Commission could allow Motorola to add the iPhone 5 to the list of devices that infringe on the patents at a later date. Apple has stated that Motorola Mobility's demands for royalties of a little over 2% of the retail price of every device are unreasonable, and is appealing a previous case that it lost claiming that Motorola's Android phones infringe on Apple's patents.
Apple's Third Legal Front
Apple is also involved in a legal showdown with HTC, which claims Apple is infringing on two of its patents. These patents relate to the reliable transmission of large amounts of data. HTC has stated that the patented methods are imperative for 4G LTE technology. If HTC wins the trial, it could seek an import ban of the latest iPad that uses LTE and the newest iPhone if it also uses LTE technology. This could give leverage to the Taiwanese handset maker to force Apple to agree to a settlement. Apple has countered with its own patent infringement suit against HTC.
HTC and Apple have been battling patents over different Smartphone features since March 2010, when Apple filed its first claim against HTC. The latest case brought by HTC and an earlier case are conceptualized as a legal retaliation against Apple's first case. Apple states that phones made by HTC and other companies that run Google's Android OS infringe on patented features that make the Apple iPhone unique. The original complaint against HTC has now spread to a global litigation war that involves Apple and all other Android handset manufacturers and spans four continents.
In Litigation Legal Arms Dealers Win
If there is a war, it doesn't pay to get shot at. It doesn't even pay well to do the shooting. Instead, the most profitable position is that of an arms dealer.
There is a clear analogy for investors in Apple's intellectual property world war. Mobile device makers, in aggregate, only lose by paying legal fees. Worse yet, attorneys are not good predictors of legal outcomes. Without any insight to bet on, the best way to play this litigious environment is to sell intellectual property weapons.
This may sound far-fetched, but legal arms dealing is commonplace in the tech sector. For example, HTC's current conflict with Apple relies on patents that it purchased from ADC Telecommunications in April 2011. More recently, Google purchased Motorola Mobility in May 2012 for almost $13 billion in order to gain access to its many patents. Strategically, these patents may serve as a safeguard against Apple's claims that all devices running on the Android OS are copying unique iPhone features. This purchase has allowed Google to claim that Apple has infringed on seven of its patents including interactive voice commands, email notifications, location reminders, and video/phone players.
Stocking Up on Patent Weapons
Investors can buy shares of Nokia and Research In Motion at discounts to their book values. This is a steal in war time since their internally-developed patents and other intellectual property is not capitalized on the balance sheet, and is essentially free after net assets.
Research In Motion's intellectual property is estimated to be worth near $1.3 billion, which is substantial relative to RIMM stock's $3.7 billion market capitalization. The validity of this intellectual property portfolio was recently market-tested when Microsoft (MSFT) agreed to license Extended File Application Table technology from Research in Motion.
Nokia's patents are estimated to be worth $7.5 billion, which is the majority of its $10.7 billion market capitalization.
These purchases would anticipate that Google, Samsung, Apple, or other firms seeking some armaments for this war could acquire either firm or pay them for their patents. In doing so they would acquire patent rights and have credible threats to take legal action. Such power could be used in negotiation and settlement, or in a worst case scenario, to build a court case. Buying NOK and RIMM shares in anticipation of a takeover is a cheap way to benefit from the rivalry of dominant mobile device firms.
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