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Apple: Patent Ruling A Potential Setback

 December 20, 2012 10:35 AM

(By Mani) After re-examining Apple's "pinch and zoom" patent (No. 7,844,915), the US Patent and Trademark Office (USPTO) rejected all 21 claims of the patent, a positive for Samsung.

Apple, Inc. (NASDAQ: AAPL) can contest the ruling as part of the proceedings and defend its patent, but for the moment the '915 claims are at risk and tentatively invalid. This is a setback for Apple, especially in its intellectual property (IP) battle with Korea's Samsung.

Earlier this year, a US federal court jury found Samsung to have infringed five Apple patents involving scrolling, pinching and zoom functionality, the home screen GUI and design aspects. The infringement of the ‘915 patent was in part used by the jury in deciding to award Apple $1.05 billion in damages from Samsung.

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However, Samsung is appealing that decision, and if a key patent used in the case is no longer valid, Samsung's case for overturning the decision, and the amount of damages, is much stronger.

"Having the ‘915 patent (and any others) invalidated also likely impacts Samsung's (and other companies') willingness to pursue a licensing agreement with Apple," Oppenheimer analyst Ittai Kidron said in a client note.

Apple has been involved in several patent infringement cases with Android vendors such as HTC, Motorola. While the results are mixed, it did use the courts to push HTC to come to terms on a licensing agreement.

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"We believe Samsung is unlikely to pursue a licensing agreement in the near term given Apple's recent setbacks with the USPTO," Kidron noted.

In April 2011, Apple slapped its first patent infringement suit against Samsung while Apple and Motorola Mobility were already engaged in a patent war on several fronts. By August 2011, Apple and Samsung were litigating 19 ongoing cases in nine countries, and it expanded to 10 countries in October by involving various mobile devices.

By July 2012, the two companies were fighting in more than 50 lawsuits around the globe, with billions of dollars in damages claimed between them. While Apple won a ruling in its favor in the U.S., Samsung won rulings in South Korea and Japan, and the UK.

Clearly, this IP battle isn't over, but unlike the earlier positive court decision against Samsung, the latest one is a setback for Apple. The legal uncertainty could put some pressure on Apple's shares. That said, we still believe the shares are overextended to the downside and embed too much pessimism regarding headwinds and execution.



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