Apple Victory Over Samsung Seen Leading to Customs Fight

For Apple Inc. (AAPL), winning a U.S. import ban against some Samsung Electronics Co. (005930) smartphones and tablets may prove easier than getting it enforced.

The U.S. International Trade Commission’s order, upheld by President Barack Obama’s administration yesterday, blocks Samsung from importing or selling certain devices found to infringe Apple patents for multitouch features and a headphone jack sensor.

Deciding which products are banned, and which were successfully designed around the patents, falls to U.S. Customs and Border Protection. Apple, Microsoft Corp. and other technology companies have criticized the security agency for lacking the know-how to enforce these types of rulings -- and that was before the U.S. government’s partial shutdown.

“They are focusing on their truly primary missions of national security and public safety -- like weapons and drugs,” said Jim Altman, a lawyer with Foster, Murphy, Altman & Nickel in Washington who specializes in trade cases. “My guess is intellectual property would not get the attention it would normally.”

Both sides will lobby Customs for favorable interpretations. Samsung has presented two arguments: only a small number of models are covered by the ban, and the order will reduce U.S. competition and limit consumer choice.

Photographer: David Paul Morris/Bloomberg

Samsung, which denies infringing any Apple patents, can ask a U.S. appeals court to put the import ban on hold until the underlying patent case can be considered. Close

Samsung, which denies infringing any Apple patents, can ask a U.S. appeals court to put... Read More

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Photographer: David Paul Morris/Bloomberg

Samsung, which denies infringing any Apple patents, can ask a U.S. appeals court to put the import ban on hold until the underlying patent case can be considered.

Apple, which will push for a larger number of models to be included, has argued that Samsung gives old devices new names without making the necessary changes to avoid using patented technology.

Federal Furloughs

“There has been a growing and worrisome trend among complainants to broadly define the scope of the investigation, but attempt to prove a violation based on a narrow category of products,” Samsung wrote in an Aug. 28 filing with the U.S. Trade Representative to ask that the ban be overturned.

The result, it said, can be an import ban that covers devices the trade commission never considered.

The Department of Homeland Security, which includes Customs, has declared border security part of essential government services. The department’s contingency plan called for more than 31,000 of its 231,000 employees to be furloughed. Officials with Customs didn’t return messages seeking comment.

“Customs could say ‘Gee, we’d like to enforce the import ban, but we don’t have anyone,’” said Carl Howe, an analyst with Boston-based researcher Yankee Group. “Things are going to get interesting.”

The South Korean government said it regrets the U.S. ban, according to an e-mailed statement from the Ministry of Trade, Industry and Energy.

Microsoft Lawsuit

Apple, of Cupertino, California, has said Customs isn’t strict enough in enforcing the bans. It claimed the agency improperly let HTC Corp. (2498) ship in some of its smartphones that infringed an Apple patent for data-tapping. The two companies later settled their dispute.

Microsoft sued Customs and Homeland Security in July, claiming an import ban it won against smartphones made by Google Inc.’s Motorola Mobility isn’t being enforced. The trade agency last month said Microsoft should have first filed its complaints with the ITC, and backed an effort to have the case dismissed.

Enforcement Review

In declining to veto the ban imposed against Samsung, U.S. Trade Representative Michael Froman said Obama in June ordered a review of the Customs enforcement process.

“If questions should arise about the scope of the exclusion order, I would urge close coordination between CBP and the USITC in addressing such enforcement issues,” Froman said in his statement.

The U.S. market tends to focus on higher-end models that are probably going to be cleared by Customs, said Will Stofega, program director at researcher IDC, based in Framingham, Massachusetts.

“It’s about getting the new model,” Stofega said. “People tend to not want the old devices -- they want the latest and greatest thing. If it were a more worldwide ban, that would be a different story.”

To Apple, forcing Samsung to alter the designs of its phones is as, if not more, important than the $1 billion jury verdict it won in federal court against its Korean competitor in California a year ago. The damages, part of which must be retried, equal about 10 days’ worth of the third-quarter operating profit that Suwon, South Korea-based Samsung announced last week.

‘Anti-Competitive Tool’

“The legal redress is not sufficient to change the behavior, at least not yet,” Howe said. “When the courts dig into these things, and look into the merits of the cases, they’re saying, ‘It looks like Samsung does tend to copy the stuff that Apple has patented and that’s a problem.’”

The smartphone disputes reflect issues with the patent system, said Edward Black, president of the Computer & Communications Industry Association, a Washington trade group with members including Samsung and Google, whose Android operating system runs Samsung phones.

“All the companies involved are innovative companies and they are not copying or stealing from each other,” Black said. “The use of patents as anti-competitive tools are problematic for consumers in general.”

Apple has argued that it needs to differentiate its iPhone and iPad tablet computer from the competition to entice and retain customers.

Negligible Impact

Samsung, which denies infringing any Apple patents, can ask a U.S. appeals court to put the import ban on hold until the underlying patent case can be considered.

A ban focused on older devices may have limited impact on Samsung as it would still be able to ship its newest handsets, said Mark Newman, a Hong Kong-based analyst at Sanford C. Bernstein. Samsung got 29 percent of last year’s sales from U.S., according to data compiled by Bloomberg.

“This ban is restricted to older Samsung products and the impact on Samsung should therefore be negligible,” Newman said.

Even with the government shutdown, Altman said Samsung will be careful not to be seen as thumbing its nose at the import ban. The company also makes washing machines, televisions and computer chips.

“They don’t want to be known as someone who’s going to do that,” he said. “They want the U.S. government to think of them as someone who doesn’t cheat.”

The Apple 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).

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

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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