Apple Inc. (AAPL) recently edged out smartphone maker HTC Corp in a patent litigation at the International Trade Commission (ITC). According to Reuters, an ITC judge ruled that the Taiwanese company has infringed two of Apple’s patents.
Apple initially accused HTC of infringing 10 patents but charges for six were dropped for various reasons. The ITC judge ruled that HTC infringed two of the alleged four patents related to data-detection technology used in e-mail and text messages and data transmission.
Although the ruling is preliminary and is subject to approval of the full six-member commission, the result is encouraging for Apple, which has been aggressively defending its patents by suing major competitors such as Samsung, HTC and Motorola Mobility Holdings Inc. (MMI). ITC is scheduled to come out with the final verdict on December 6, 2011.
If approved, the ruling will be a huge blow for HTC, as ITC has the authority to block import of products that infringe U.S patents. HTC, which uses Google Inc.’s (GOOG) android operating system for its smartphones, said that it would continue fighting against patent infringement findings.
Apple versus HTC: A brief history
Apple and HTC have been engaged in a legal tussle for the last 12 to 18 months. Both the companies are facing a number of cases against each other in the ITC as well as in other federal courts. The legal dispute started over the patent infringement claims related to the smartphone technology.
In 2010, Apple alleged that HTC illegally used around 20 iPhone technology patents including, user interface, basic and hardware architecture in a number of products such as the Nexus One, Touch Pro, Touch Diamond, Touch Pro2, Tilt II, Pure, Imagio, Dream / G1, myTouch 3G, Hero, HD2, and Droid Eris – including both Android and Micorsoft Corp.’s (MSFT) Windows Mobile devices.
HTC countersued Apple in the ITC and alleged infringement of five of its patents relating to telephone dialer with easy access memory and power control methods for a portable electronic device. The hearing for this case is scheduled on September 16, 2011.
Most recently, Apple sued HTC accusing the smartphone maker of infringing five of its patents. The patents relate to software architecture and user interfaces in portable electronic devices, hardware for touchscreens and movement sensors. The case was filed with the ITC on July 8, 2011.
Apple is seeking to block U.S. imports of HTC’s new Flyer tablet computers as well as its Droid Incredible, Wildfire, EVO 4G and Desire phones. With the launch of its tablet, Flyer, in the US market, the Taiwanese company became the direct competitor of Apple’s iPad and Samsung’s Galaxy Tab.
Recently, HTC agreed to buy S3 Graphics Co. for $300 million after the maker of video-game graphics chips won an infringement ruling at the ITC against Apple.
Our Take
Apple is facing tremendous competition in the tablet and smartphone markets from a number of companies including Samsung, Motorola, HTC and LG. Android being open source has helped Apple’s competitors create varied devices based on the free source code.
According to ComScore Inc., a Virginia-based researcher, data collected for the three months ended in May revealed that Android-based mobile devices garnered 38% of the market share in the US. On the other hand, Apple’s iOS, used in the iPad and iPhone, had 27% of the market share.
Apple remains heavily dependent on iPhone sales (50% of second quarter sales) and we believe the recent ruling will drive the shares upward. Moreover, Apple is expected to launch a new iPhone in September 2011, which will be a key driver for the stock going forward.
However, Apple remains entangled in a number of lawsuits against Eastman Kodak (EK), Amazon.com Inc. (AMZN) and Microsoft over a number of other issues. As the outcome remains uncertain, we believe the lawsuits will remain an overhang on the stock going forward.
We maintain our Neutral rating over the long term (6-12 months). Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the near term.
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