A Twist in Apple, Samsung Tale

The patent litigation between Apple Inc. (AAPL) and Samsung Electronic Co. took a new turn when the US-based company asked the U.S. District Court in San Jose, California to issue a preliminary injunction against Samsung for infringing three Apple design patents and one utility patent, according to a recent report by news agency Reuters.

Apple also petitioned for a faster trial schedule to resolve all of its intellectual property claims against Samsung. The company is looking for a trial date in February 2012.

The legal tussle between Apple and Samsung initiated over Samsung’s Galaxy line of tablet and smartphone products, which Apple claimed to have been copied from its popular iPad tablet and iPhone 3 smartphone.

According to Apple’s court filing, the preliminary injunction, if granted, will cover Samsung products including the Galaxy S 4G smartphone and the Galaxy Tab 10.1 tablet computer.

Earlier in April 2011, Apple filed lawsuits against Samsung claiming infringement of seven patents related to the Galaxy devices’ mechanism of interpreting user gestures, including selecting, scrolling, pinching and zooming in the California court. Apple also alleged that Samsung copied three design patents, including the flat black face of the iPhone and iPad. The suit also covers the Epic 4G, and the Nexus S products from Samsung.

Samsung then countersued Apple in the California court in late April. However, news agency Bloomberg reported that Samsung withdrew the case on June 30, 2011 to focus on its other pending cases against Apple.

Apple and Samsung are fighting lawsuits in at least five countries including South Korea, Japan, Germany and the United Kingdom. Although Apple was Samsung’s biggest customer at the end of the March quarter, their relationship has deteriorated in the recent past, due to increasing competition.

Samsung is one of the fastest growing smartphone makers based on strong growth of Google Inc.’s (GOOG) android operating system and has emerged as Apple’s strongest competitor in the tablet market.

Apple recently filed a lawsuit in South Korea against Samsung alleging infringement of several patents. The lawsuit countered Samsung’s patent infringement claims against Apple.

In late June, Samsung lodged a patent infringement complaint against Apple at the International Trade Council (ITC) claiming that Apple had infringed patents related to technology used in iPhone and iPad devices. The company seeks a ban on imports of the devices containing the allegedly infringed technology.

Samsung also filed a law suit against Apple at the district court of Delaware, alleging violation of its intellectual property. However, the suit will be delayed if the ITC agrees to investigate Samsung’s allegations. The ITC typically completes its reviews in 15 to 18 months.

Earlier, Samsung had asked a federal judge in the U.S. to order Apple to showcase samples of its forthcoming iPads and iPhones. However, Samsung’s bid was rejected on June 22.

Our Take

Apple remains heavily dependent on iPhone sales (50% of second quarter sales) and we believe the company will undertake every possible step to safeguard its dominant position in the smartphone and tablet market, including further lawsuits against major competitors and also allies such as Samsung.

Although Samsung’s withdrawal of the California case could be a breather for Apple, we believe Apple’s legal worries are far from over. Apart from the Samsung cases, the company continues to face a number of lawsuits against HTC and Eastman Kodak (EK). Apple is also battling Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT) over the use of the name “app store.”

We believe an unfavourable verdict in any of these lawsuits could dent Apple’s very sizeable cash balance. It may have to pay a hefty fine or a recurring license fee, which will hurt its profitability going forward.

We maintain our Hold rating over the long term (6-12 months). Currently, Apple has a Rank #3, which implies a Hold rating in the near term.

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