Apple Getting Ahead of Legal System to Contain Ban Damage
Samsung Electronics Co. (005930)’s first U.S. patent victory over Apple Inc (AAPL) may prove fleeting if the iPhone maker rolls out new products before the government’s ban on older devices takes effect.
Apple has several avenues to string out, if not eliminate, damage from an import ban ordered by a U.S. trade panel yesterday on devices including the iPhone 4 and iPad 2 3G. It can appeal to President Barack Obama and an appeals court, and lobby Customs officials charged with enforcing import bans.
AT&T Inc. (T), T-Mobile US Inc. (TMUS) and two regional carriers selling the offending devices have been offering the iPhone 5, which isn’t covered by the import ban, since last year and a new model is expected out later this year. When Samsung filed its complaint in June 2011, it targeted the iPhone 3G, iPhone 3GS and iPad 3G -- none of which are sold anymore. Apple usually discontinues older models when it introduces a new one.
“In the high-tech space, product development rolls out so fast that legal losses aren’t necessarily devastating,” said Paul Berghoff, a founding partner at McDonnell Boehnen Hulbert & Berghoff in Chicago who’s been watching the cases.
The iPhone 4 and iPad 2 3G, offered as entry-level products to lure in people that Apple hopes to convert into long-term customers, were found by the U.S. International Trade Commission to infringe a Samsung patent for a way data is transmitted over networks.
In an April 10 filing with the ITC, Samsung estimated an import ban against Apple would impact about 1.4 percent of the smartphones and 2.7 percent of the tablet computers sold in the U.S. While Samsung is the world’s biggest smartphone maker, Apple dominates in the U.S.
T-Mobile said yesterday it “doesn’t anticipate any impact of current and future supply of Apple devices.” AT&T said it expects “minimal, if any, impact for customers wanting an iPhone 4 or iPad 2.”
The Cupertino, California-based Apple has indicated it won’t give up without a fight, even if only a few of the models it currently sells are blocked.
Apple’s first stop will be the White House, where Obama, who was given an iPad by Apple’s late co-founder Steve Jobs, has the power to overturn any import ban on public policy grounds. Historically, presidents haven’t stepped in and instead have allowed them to take effect after the 60-day review period ends.
“If you can get the president to act, the rest would be unnecessary,” said Susan Kohn Ross, a trade lawyer with Mitchell Silberberg & Knupp in Los Angeles. “The question is, why would he get involved?”
Apple’s chief executive officer, Tim Cook, sat next to First Lady Michelle Obama at the president’s State of the Union address in February and contributed $2,300 to Obama’s 2008 presidential campaign.
On the other side, Suwon, South Korea-based Samsung is the pride of a nation forging closer economic ties with the U.S., including a free trade agreement signed in March 2012 and a pledge to stand together against threats from North Korea.
Apple said it will appeal the ITC ruling to the U.S. Court of Appeals for the Federal Circuit in Washington. The court, which handles all patent appeals, is already considering one issue central to yesterday’s ruling -- whether products can be blocked for infringing patents tied to industry standards they must follow -- in a dispute involving Apple and Google Inc.’s Motorola Mobility.
“They’ve got some fairly significant arguments they can make about irreparable harm,” Ross said.
The court may let the ban take effect since there are no public health or safety concerns, Berghoff said. “These are smartphones,” he said. “They are essential to our lives in one respect, but if the older models are cut off from the market, I don’t know that would affect the greater good.”
Even if the import ban goes into effect, enforcing it could be difficult.
Patent and trade lawyers who’ve handled similar cases describe a process in which officials at U.S. Customs and Border Protection trained to keep out terrorists and undocumented immigrants must parse technical details of patents covering complex electronics. Customs has in the past allowed offending products to slip through while blocking products that weren’t part of ban orders.
In this case, Customs would have to distinguish between devices with chips made by Intel Corp. (INTC) that run on an industry standard known as GSM, or global system for mobile communications, from phones with differing Qualcomm Inc. (QCOM) technology that aren’t banned.
The ban also doesn’t cover Apple’s most recent and most popular products -- the iPhone 5, iPad mini and fourth-generation iPad.
“Customs is going to have its hands full looking at documents and looking at cargo,” Ross said. “It is not terribly good in distinguishing different types of technology.”
The ITC is gathering comments on the effectiveness of its orders, and Obama June 4 also called for a review of the process. It was part of a broader policy statement on efforts to curb abusive patent litigation.
Any delay gives Apple a chance to try to get the ruling overturned as it tries to work out a deal with its rival and prepares to start selling its next models.
The ruling adds to challenges Cook has faced since succeeding Jobs as head of the world’s largest technology company. The iPhone maker has faced criticism about its tax and China labor practices. Apple stock has fallen more than 35 percent since a September high as investors await new products, including the new iPhone.
Under a cease and desist order, Apple won’t be able to sell imported phones covered under the ITC order that are already in the U.S. and not yet in the hands of consumers.
Apple asked for a five-month delay in the imposition of any import ban. Though the commission’s full opinion isn’t public, it gave no indication it would grant that request in the notice published yesterday.
“What inevitably happens is the two players are like sumo wrestlers,” Berghoff said. “They just beat each other until they both collapse and fall to the ground and work out a settlement.”