Nokia: Apple iPhone Violates Our Patents

Apple's iPhone has been giving Nokia smartphones a hard time in the marketplace. Now Nokia is giving Apple a hard time in the courtroom.

The Finnish handset giant said Oct. 22 it has filed suit against Apple (AAPL) in U.S. District Court in Delaware, accusing its California-based rival of infringing patents for core technology that allows the iPhone to make calls and connect to the mobile Internet. Although Nokia (NOK) has sued rivals such as Qualcomm (QCOM) over patents in the past, the latest lawsuit came as a surprise—and represents an escalation of increasingly contentious competition with Apple.

In a statement, Nokia said Apple has refused to pay for use of intellectual property developed by Nokia that lets handsets connect to third-generation, or 3G, wireless networks, as well as to wireless local area networks. "Apple is attempting to get a free ride on the back of Nokia's innovation," Ilkka Rahnasto, Nokia vice-president for legal and intellectual property, said in the statement. An Apple representative declined to comment.

Nokia dominates the global handset market with a 38% share. But since 2007 Apple's iPhone has grabbed the initiative in the lucrative smartphone market. Nokia's share of the segment, which it refers to as "converged devices," slipped to 35% worldwide in the third quarter of 2009 from 41% the previous quarter, the company said on Oct. 15. Unit sales of Nokia smartphones fell to 8.9 million in the quarter from 9.3 million in the second quarter of 2009.

The loss of smartphone share is doubly frustrating to Nokia because it sold phones with computer-like features years before Apple. During the last two years Nokia has launched a series of handsets with iPhone-like touchscreen interfaces, but none has generated quite the same buzz as Apple's devices.

A Way to Tap Into Apple Tech? The specific allegations raised in the lawsuit concern 10 Nokia patents in three broad areas of wireless technology. The most basic is so-called GSM—the dominant global standard for second-generation mobile networks used by most European and Asian carriers, as well as by AT&T (T) and T-Mobile (DT) in the U.S. Nokia also says Apple has violated its patents for 3G mobile telephony (also known as UMTS or W-CDMA), and for unnamed wireless local area network (LAN) technologies—likely relating to the popular Wi-Fi standard.

Apple, like all mobile-phone makers, relies on such standards to make its devices compatible with carrier networks. Nokia says it has contributed its intellectual property to global standards bodies, but demands to be compensated for the use of its patents in commercial products. "Apple is expected to follow this principle," Nokia's Rahnasto said in the company's statement.

While the suit is presumably intended to force Apple to cough up royalty payments, it could also be a negotiating tactic by Nokia to gain access to Apple technologies via a settlement. But Richard Windsor of brokerage Nomura International in London says the suit isn't "as big as it looks." Nokia is pursuing claims, he says, for "essential patents" that it is required to share at reasonable cost—not more rarefied intellectual property for which it could charge what it likes. That likely gives Nokia less leverage at the bargaining table.

Another analyst speculated that Nokia may be trying to head off a potential infringement lawsuit from Apple. Nokia is planning to release handsets with multi-touch features for which Apple may own intellectual property rights, UBS Investment Research analyst Maynard Um wrote in an Oct. 22 research note. "We believe Nokia's suit could be a pre-emptive move," Um wrote. He expects Apple to countersue Nokia, and that the two will eventually reach a settlement that includes agreements to license each other's technology. Nokia spokesman Mark Durrant declined to comment directly on assertions that the company has other motives for filing the suit, but said, "This case is about Apple's failure to make acceptable payments for our patents."

Even if Apple were to agree to pay a 1% royalty, or about $6 a handset, Um says he would be disinclined to change his forecasts for Apple's financial performance. He expects the average selling price of an iPhone to decline to $525 by the end of Sept. 2010, from about $600 now. He also expects Apple stock to climb to $280 over time. On Oct. 22, Apple shares rose 0.15% to $205.50. Apple spokesman Steve Dowling declined to comment on the UBS report.

Nokia also had a long-running legal battle with chipmaker Qualcomm, with each company accusing the other of infringing patents for technology that is essential for wireless devices to function. But in July 2008 the two companies negotiated a settlement that ended all the suits.

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