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Google Faces Setback in Smartphone Push as Android Patent Rulings Roll In

Google Inc. (GOOG) is facing potential setbacks in its efforts to get smartphone makers to stick with the Android operating system as legal rulings begin to roll in on patent-infringement claims by Apple Inc. (AAPL) and Microsoft Corp. (MSFT)

A U.S. International Trade Commission ruling yesterday determined that Android phones made by HTC Corp. (2498) violate an Apple patent, and a judge at the agency is scheduled to release findings today on whether Motorola Mobility Holdings Inc.’s devices infringe Microsoft’s technology.

A loss for Motorola Mobility -- which Google agreed to acquire for $12.5 billion in August -- combined with yesterday’s ruling against HTC, would bolster criticisms that the operating system Google began licensing to handset makers three years ago is vulnerable to lawsuits, said Will Stofega, an analyst at IDC in Framingham, Massachusetts. Cases also target Barnes & Noble (BKS) Inc.’s Nook reader and Samsung Electronics Co.’s Galaxy tablet.

“Death by a thousand cuts can lead to some bad things,” Stofega said of the possibility for additional adverse rulings.

A judge is scheduled to release findings Jan. 13 in an Apple case against Motorola Mobility, and a hearing in a Microsoft case against Barnes & Noble is set for February. Apple also has a second case against Taoyuan, Taiwan-based HTC and and a complaint targeting Samsung scheduled for trial next year. All of the cases single out devices that run Google’s Android.

The rulings are among the first in dozens of patent- infringement complaints that proliferated in 2010 as smartphone makers began battling over a market that Strategy Analytics Inc. said increased 44 percent last quarter from a year earlier to 117 million phones worldwide.

Shutting Down Choice

Android, which Google licenses for free to further its mobile-advertising business, has become the more frequent target as it became the most popular smartphone system, accounting for almost 70 percent of the U.S. market last quarter, Palo Alto, California-based researcher Canalys reported Oct. 31.

Google Chairman Eric Schmidt said the ITC is “being used by some companies to try to shut down choice.”

“It’s bad,” Schmidt said in a Dec. 12 interview in Washington. “From a consumer perspective, you want choice and the consequence of this ITC mechanism is that it appears, if it does find against Android, it could limit your choice.”

The trade commission is a quasi-judicial arbiter that can block imports of products found to infringe U.S. patents. The agency has become a venue of choice for patent grievances since it typically completes investigations faster that U.S. courts.

Stronger Position

The HTC ruling yesterday, which didn’t go as far as Apple sought, should give the iPhone maker “a stronger position” in its intellectual-property cases against other Android-device makers, Brian Marshall, an analyst at ISI Group in San Francisco, said in a note to clients.

“With about $80 billion in net cash, we believe Apple is not interested in a financial settlement with HTC or other Android vendors but wants to stop the shipment/sale of products that infringe on their vast IP portfolio,” Marshall said.

HTC won on three of the four patents that were being considered by the six-member commission. In response to the one patent it lost, HTC said it will remove a feature that lets smartphones recognize telephone numbers. Phones that have that technology face an import ban beginning April 19.

“While elimination of this feature slightly widens iPhone’s differentiation versus HTC’s Android smartphones, it is a relatively small prize for Apple and a small dent against Android in the grand scheme of the smartphone patent wars,” Mike Abramsky, an analyst with RBC Capital Markets in Toronto, said in a note to clients.

Cost to Build

Microsoft contends it owns technology that is used in Android. The Redmond, Washington-based software maker has licensing agreements with HTC, which also sells phones that use Microsoft’s Windows Phone operating system, and with Samsung. (005930)

While Android is licensed for free, the royalty demands by Microsoft create costs for handset makers. Apple’s claims that Android copies features of the iPhone may make using the Google system an even more expensive bet.

“The whole idea is not to have to rebuild things from an Android or any other perspective,” Stofega said.

Google, which hasn’t been named in any Apple cases, denies copying the iPhone and said in an Oct. 6 filing that Apple is trying to control the U.S. smartphone market through litigation.

Barnes & Noble, the New York-based bookstore company, has asked the U.S. Justice Department to investigate Microsoft’s royalty demands, accusing that company of “embarking on a campaign of asserting trivial and outmoded patents” in order to increase the cost of Android and “drive out competition.”

Fighting Back

Motorola Mobility is targeting Microsoft’s Xbox video gaming system, seeking to block imports of the signature product in Microsoft’s entertainment division. Xbox and PC games generated about $8.9 billion in sales in the fiscal year ended in June, or about 13 percent of Microsoft’s total revenue.

HTC has two cases pending against Apple at the U.S. trade agency, and the two have a half-dozen civil suits pending against each other in the U.S. S3 Graphics Co., a company HTC agreed to buy in July, lost one case against Apple at the trade agency and has another case pending, as does one filed by VIA (2388) Technologies Inc. Cher Wang, the chairwoman of HTC, also heads VIA.

Samsung has gone a step further and engaged in an escalating legal battle with Apple that now spans courts in four continents. In all, at least 30 cases are pending in 10 nations between the two companies.

“The battle between Apple and Android is going to continue,” said Peter Toren, a patent lawyer with Shulman Rogers in Potomac, Maryland, who has been watching the cases. “It’s likely to continue in various forums and among various manufacturers.”

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net

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