Samsung Losses to Apple Give IPhone Maker Edge in Talks

Aug. 9 (Bloomberg) -- Christopher Carani, a partner at McAndrews, Held & Malloy, talks about Apple Inc.'s victory over Samsung Electronics in a patent dispute. Apple won an order against Samsung that prevents U.S. imports of devices that infringe two Apple patents. The U.S. International Trade Commission's decision is subject to review by the Obama administration. Carani speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

Apple Inc. (AAPL)’s patent-infringement victory over Samsung Electronics Co. could go far in bolstering its claim of copying and providing an advantage in any settlement between the world’s two top smartphone manufacturers.

The U.S. International Trade Commission on Aug. 9 said Samsung infringed two Apple patents and issued an order banning imports of products using the iPhone maker’s multitouch features and headphone jack detection. President Barack Obama’s administration could overturn the import ban on public policy grounds, as it did Aug. 3 in an order against older iPhones.

“These results give Apple a bit of an edge in the settlement negotiations that are going on,” said Susan Kohn Ross, a lawyer with Mitchell Silberberg & Knupp in Los Angeles. “Assuming this order becomes final, the question that arises is how important are these models of phones and other electronic gadgets to the overall portfolio of Samsung products.”

The companies are spending hundreds of millions of dollars in legal fees for some sort of victory that gives them the upper hand in a final, negotiated solution. Apple, which initiated the legal fight in 2011, is seeking to limit the Galaxy maker’s increasing share of the U.S. smartphone market, where Apple is No. 1 and Samsung No. 2.

Photographer: Tomohiro Ohsumi/Bloomberg

A member of the media uses an Apple Inc. iPhone 5 as the presentation for the Samsung Electronics Co. Galaxy S III smartphone for KDDI Corp. is held at the unveiling of KDDI's new smartphone line-up in Tokyo. Close

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Photographer: Tomohiro Ohsumi/Bloomberg

A member of the media uses an Apple Inc. iPhone 5 as the presentation for the Samsung Electronics Co. Galaxy S III smartphone for KDDI Corp. is held at the unveiling of KDDI's new smartphone line-up in Tokyo.

“We now have enough court decisions that pretty soon the parties are going to understand their relative strengths against each other and their weaknesses against each other,” said Jeff Lewis of Patterson Belknap Webb & Tyler in New York.

Four Continents

Apple filed its first patent-infringement case against Samsung in April 2011, saying the Korean company “has chosen to slavishly copy Apple’s innovative technology.” Samsung responded a week later with its own patent claims, and the fight has escalated into a legal battle on four continents with no clear winner and no end in sight, despite negotiations that have included direct talks between chief executives of both companies.

At stake is an increased share of a smartphone market that rose 34 percent to $293.9 billion last year, according to data compiled by Bloomberg. At the same time, the average price of a smartphone has plunged to $375 from $450 since the beginning of 2012, IDC estimates.

Samsung rose 0.2 percent to 1,232,000 in Seoul, paring this year’s decline to 19 percent. Apple rose 1.3 percent to $460.26 at 9:44 a.m. in New York, and had dropped 15 percent this year before today.

“Investors are turning away from legal issues because it hardly has any impact on their businesses any more,” said Marcello Ahn, a Seoul-based analyst at Quad Investment Management. “What they really want to find out is where Samsung and Apple will make cash over the next two years or so.”

Innovation Fatigue

Cupertino, California-based Apple has claimed that many of the phones running on Google Inc. (GOOG)’s Android operating system copied unique features of the iPhone, introduced in 2007. Its first suit, in March 2010 against Taiwan’s HTC Corp. (2498), resulted in a settlement that included a pledge by HTC that it wouldn’t make “cloned” copies of Apple products.

In the global marketplace, Android has grown to become the most popular operating system, running 80 percent of the almost 230 million smartphones sold worldwide in the second quarter, compared with Apple’s 14 percent, according to an Aug. 1 report by Boston-based researcher Strategy Analytics.

Samsung and Apple both disappointed analysts in their most recent earnings. Samsung missed estimates as market saturation curbed sales growth for its flagship Galaxy S4, and Apple had to rely on sales of its iPhone 4 -- including versions that were almost blocked last week -- to top estimates.

Finding new, exciting things to add to the phones is getting harder, said Will Stofega, program director at researcher IDC in Framingham, Massachusetts.

New Measures

“The designs and capabilities of some of these premium devices -- you’re really scratching your head to find something new,” Stofega said.

Samsung, Asia’s biggest technology company, sells about one of every three smartphones in the world. The Suwon, South Korea-based company applauded the decision clearing it of infringing Apple’s design patents, which would have been harder to work around.

“Apple has been stopped from trying to use its overbroad design patents to achieve a monopoly on rectangles and rounded corners,” said Adam Yates, a spokesman for Samsung. “We have already taken measures to ensure that all of our products will continue to be available in the United States.”

Samsung’s three biggest markets are China, North America and Europe, Kim Young Chan, a Seoul-based analyst at Shinhan Investment Corp., said in a telephone interview.

U.S. Verdict

“Samsung’s market share in the U.S. was the lowest among those markets, but it has been on the rise because there were no new products released by Apple during the first half,” Kim said. “When the new models come out in late third quarter or in the fourth quarter, the market rivalry will again intensify, and it won’t be as easy as before for Samsung to extend its market share.”

Apple won a $1 billion jury verdict last year in California, though a new trial was ordered to determine damages on about half of the award. Samsung won an ITC import ban against Apple, only to have it vetoed by the Obama administration on public policy grounds regarding patents on fundamental technology that’s used throughout the industry.

That veto and Aug. 9 verdict lowered Samsung’s bargaining power and made it even harder to bring Apple back to the negotiation table, SU Intellectual Property patent lawyer Jung Dong Joon said.

“The latest two results have pushed Samsung into a far corner despite the more than two-year-long legal fight,” Jung said. “After seeing Samsung being smacked on the face two times straight, it will only help Apple keep its high-handed posture in any negotiation talks.”

Apple Bullets

For both reputation purposes and settlement negotiations, hindering the other company’s sales is often more important than money. The $1 billion California verdict equals one-seventh of Samsung’s second-quarter profit and less than two weeks’ worth of iPhone sales.

Even though Samsung “has successfully convinced consumers that all this business about copying is vastly overdone,” that may not help it in the legal arena considering how the two types of patents are treated, said Carl Howe, an analyst with Boston-based market researcher Yankee Group.

“My guess is Apple will amass a lot more bullets before it’s over,” Howe said. “Samsung’s bet is that at the end they’ll have to pay, but, in the meantime, they’ll have amassed a lot of money and mindshare and market share. And that’s why Apple is insisting on import bans.”

The Apple ITC case against Samsung is In the Matter of Electronic Digital Media Devices, 337-796, and Samsung’s case is In the Matter of Electronic Devices, Including Wireless Communication Devices, Portable Music and Data Processing Devices, and Tablet Computers, 337-794, both U.S. International Trade Commission (Washington).

The Apple appeal is Apple Inc. v. Samsung Electronics Co. (005930), 13-1129, U.S. Court of Appeals for the Federal Circuit (Washington). The lower court case is Apple Inc. v. Samsung Electronics Co. Ltd., 11-cv-01846, U.S. District Court, Northern District of California (San Jose).

To contact the reporters on this story: Jungah Lee in Seoul at jlee1361@bloomberg.net; Dina Bass in Seattle at dbass2@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net; Michael Tighe at mtighe4@bloomberg.net

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