Patents Wars 2: The Asian Empire Strikes Back - Are The Tables About To Turn On Apple?

Much has been said about Apple's recent victory over its key component supplier, Samsung, in a recent US court decision the direct result of which has been the halt of sales of several Samsung products which are already obsolete in cell phone year terms. The paradox here is that AAPL's victory is quite pyrrhic: if and when Samsung feels sufficiently threatened, it can just pull a Gazprom and halt the supply of mission critical components to the world's biggest publicly traded company. Alternatively the Chinese politburo can one day decide to pull FoxConn's operational license, in the process bankrupting AAPL overnight. But these are of course M.A.D. scenarios which in rational, non-centrally planned market would never take place, and so we have no reason to worry about them. That said, it is increasingly becoming clear that patent warfare fought in partial domestic judicial systems, will be the next form of protectionism as pertains to that most faddy of technology: the ubiqutous smartphone. And while Apple may have won the first battle, the outcome of the war is still very much unclear: in fact, the return salvo after Samsung's big defeat on US soil may come quite soon, this time courtesy of another Chinese Apple "clone", HTC Corp, which if it goes against the Cupertino company, could have a large impact on revenues.

From Bloomberg:

Apple Inc. (AAPL) may face a difficult task invalidating two HTC Corp. (2498) patents for data transmission in wireless devices, a U.S. trade judge said at a trial that could lead to import bans on the newest iPad and next version of the iPhone.


“Clear and convincing means something to me,” U.S. International Trade Commission Judge Thomas Pender said yesterday in Washington, referring to the legal standard in determining that a patent shouldn’t have been issued. “I have to be pretty darn certain a U.S. patent is invalid.”


HTC accuses Apple of infringing two patents it owns for ways to reliably transmit a larger amount of data. Taoyuan, Taiwan-based HTC said the patented methods are critical to the 4G technology known as LTE, or long-term evolution, that allow faster downloads.


A victory could let HTC seek an import ban of the latest iPad and even the newest iPhone, if it uses LTE when it’s unveiled as early as next week. That could give the Taiwanese handset maker leverage to force a settlement with Apple, which has made its own patent-infringement claims against HTC.

Could Apple lose? Who knows, although it is increasingly likely that as the partial distinction of court systems (Samsung won in Korea, lost in the US) becomes clear, we may well see a new form of trade protectionism: one that is won and lost in the courts for makers of the most demanded products. It also means that should China decide to increase it outright aggression with US-based Apple, it could certainly impair the iBlank maker, especially since it is the US consumer who is increasingly tapped out, and the bulk of future growth hopes lie with the rising Chinese middle class and domestic consumer.

Could China get involved to demand its "pound of externalities" in this conflict? Who knows, but China is certainly aware what the market potential of smartphones is, and that it would like to dominate the market as much as possible.

The global smartphone market grew 62 percent last year to $219.1 billion, according to Bloomberg Industries, and consumers are demanding ever-faster downloads of movies, music and websites on what has become more a handheld computer than a simple phone. Carriers such as AT&T Inc. are converting to faster LTE technology, and network-equipment maker Cisco Systems Inc. (CSCO) projects that worldwide mobile-data traffic will soar 18- fold by 2016.

While the prehistory between Apple and Samsung is well-known, this is the story, in a nutshell, behind the looming conflict between Apple and HTC:

Apple and HTC have been embroiled in patent battles over features in smartphones since March 2010, when Cupertino, California-based Apple filed its first infringement claim at the trade agency. The case at trial yesterday, and an earlier case HTC lost at the commission, “were filed in retaliation against Apple,” McKeon said.


Apple contends phones by HTC and other competitors that run on Google Inc. (GOOG)’s Android operating system copy features that make the iPhone unique. The March 2010 complaint against HTC has spread to a global war involving Apple and Android-handset manufacturers that is being contested in courts on four continents.


HTC lawyer Tom Jarvis of Finnegan Henderson said the company was the first to sell Android and 4G devices and one of the first with touch screens.


“HTC is an innovator,” Jarvis told the judge. “It’s no Johnny-come-lately.”


In this case, though, HTC acquired the patents at issue in April 2011, around the same time it began selling its first LTE phone, the Thunderbolt. The patents are part of a portfolio HTC bought for $75 million from ADC Telecommunications Inc.


“I don’t care if they bought these patents to sue you or not,” Pender told McKeon. “They are a property right.”


In a court filing, HTC said it bought the patents, which ADC said were being infringed by Apple, “to protect itself and its customers from these aggressive tactics and to preserve its ability to compete in the United States.”


Yesterday’s testimony, much of which wasn’t open to the public, focused on whether HTC is using the technology, a requirement to win the case under trade law.


“LTE products were particularly important to our strategy in 2011,” when the complaint was filed, said Martin Fichter, HTC America’s vice president of product and operations. “We’re a pioneer in that field.”

How will this play out? It is still too early to know. But in a world in which currency warfare has been going on for three years, and in which conventional trade wars are becoming more prevalent, it would be no surprise if the next round of warfare for limited consumer dollars is not fought in the FX trading room, nor in the antitrust commission, but in various patent law court rooms. Lawyers: take note.