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InterDigital Falls After Patent Loss to Nokia, Huawei

InterDigital Inc. (IDCC) fell to the lowest since July 2012 after the mobile-phone design company lost a patent-infringement case at a U.S. trade agency against Nokia Oyj (NOK1V), Huawei Technologies Co. and ZTE Corp. (000063)

The U.S. International Trade Commission in Washington upheld findings from June, with modifications. Nokia’s Lumia phones, Huawei’s MediaPad 7 Lite and Fiji, and ZTE’s Flash and Merit models could have been banned from the U.S. market if InterDigital had won. The notice was posted on the ITC’s website yesterday.

The case escalated beyond a patent dispute when InterDigital Chief Executive Officer William Merritt said Chinese regulators threatened to arrest or detain anyone who showed up for a Dec. 18 meeting to discuss Huawei’s antitrust complaints against his company in the U.S., Europe and China. Merritt told China’s National Development and Reform Commission no one would attend.

Huawei and ZTE (763) are China’s two largest makers of phone-network equipment. Both are based in Shenzhen, China.

“We think it is flat wrong and obviously we will appeal,” Merritt said today in a conference call with investors. “While the decision is important, it is by no means a defining moment for the company.”

InterDigital fell $3.23, or 10 percent, to $28.77 at 4:30 p.m. in New York trading of 2.28 million shares, five times the three-month daily average. Nokia American depositary receipts, each representing one ordinary share, rose 8 cents to $7.81. ZTE gained 0.8 percent to close at HK$15.46 in Hong Kong.

Standard Patents

“From the start of this litigation, Huawei has been confident that it would prevail against InterDigital’s baseless claims of infringement,” said William Plummer, a Huawei spokesman. “Huawei is pleased to see the commissioners agree that InterDigital’s claims are without merit.”

The dispute is also part of a broader debate in the technology sector over how to treat patents that relate to fundamental inventions used across platforms. InterDigital, based in Wilmington, Delaware, helped create industrywide standards for mobile-phone technology, so was obligated to license relevant patents on fair and non-discriminatory terms.

InterDigital, which owns more than 1,700 U.S. patents related to wireless technology, said the companies used its inventions that activate idle phones, control power, and transmit and display data.

‘Important Victory’

The handset makers denied infringing the patents and said they were invalid because InterDigital claimed they covered technologies the company didn’t invent.

The ITC cleared the companies of infringement complaints by InterDigital on six patents, and ruled another patent claimed by InterDigital was invalid, removing the basis for possible exclusion or cease and desist orders against ZTE products, the Chinese company said in an e-mailed statement.

“This decision is an important victory in ZTE’s efforts to combat patent misuse,” Guo Xiaoming, vice president and chief legal officer of ZTE, said in the e-mail.

Nokia said in a statement it was pleased with the ruling and had always believed InterDigital’s claims were without merit. “ITC has supported our view,” according to the statement.

Huawei, ZTE and former mobile-industry leader Nokia, based in Espoo, Finland, also said InterDigital was demanding unreasonable licensing fees on its standard-essential patents. InterDigital said it made “offer after offer” and the companies refused to pay anything.

“We think our rate structure is very, very fair,” Merritt said. “There is always a chance to modify the rate structure if it means lowering the transaction costs.”

Under Review

The licensing issue remains under review at the ITC, with part of the case pending. Korean handset maker LG Electronics Inc. (066570) had been part of the original case, though it was sidelined in a dispute over whether it was subject to an arbitration agreement between the two companies.

An appeals court in June said it wasn’t and revived the claims, which will be considered by the agency separately with a target date to complete the investigation by Feb. 17.

President Barack Obama’s administration on Aug. 3 vetoed an ITC-imposed import ban against Apple Inc. (AAPL) phones because it was based on a Samsung Electronics Co. (005930) patent on a data transmission standard. The administration said that, while some import bans can be imposed, it must be done only after a strict analysis of whether the patent owner had fulfilled their obligations to prospective licensees.

Product Use

The handset makers also challenged whether InterDigital met the requirement -- unique to the ITC -- that the patented technology was being used. As a licensing and development company, InterDigital doesn’t make products so had to prove that another company used the technology in their devices, they argued.

InterDigital said that its licensing activity was sufficient proof that it has a domestic industry worth protecting by the agency. The company reported $663.1 million in revenue last year, including $250 million from patent licensing, according to data compiled by Bloomberg. The domestic industry issue also remains under review.

“We are in a very challenging regulatory environment,” Merritt said. “There’s a notion that seems to say patents that are associated with a company that doesn’t make a product are somehow less valuable than patents associated with a company that does make a product.”

A second case against the companies is pending at the agency and is scheduled to be completed next year. Merritt said the case is “technically strong” because some of the patents have already been reviewed by an appeals court. InterDigital’s first case against Nokia, which it lost at the agency, was revived last year by an appeals court.

The case is In the Matter of Certain Wireless Devices with 3G Capabilities and Components Thereof, 337-800, 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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