A New Patent Problem For Smartphone Makers

By Stephen D. Simpson, CFA | July 15, 2010 AAA

It looks like we have at least a momentary interruption in the battle royale between smartphone designers Apple (Nasdaq:AAPL), Google (Nasdaq:GOOG), Microsoft (Nasdaq:MSFT), Motorola (NYSE:MOT), HTC and LG Electronics. In the midst of the scramble to the top of the consumer electronics mountain, these companies now have to deal with an outsider throwing rocks from the outside.

IN PICTURES: How To Make Your First $1 Million

A Blast From The Past
NTP, a patent holding company, has filed suit against all of these companies alleging that they violated NTP's patents concerning wireless email technology. (Learn more about the importance of patents, see Patents Are Assets, So Learn How To Value Them.) Patent litigation is nothing new in the technology space, but there is a little different twist in this case. NTP rose to prominence (or infamy, depending upon your point of view) about five years ago when it aggressively pursued a case against Research In Motion (Nasdaq:RIMM) that threatened to shutdown down Blackberries everywhere. Ultimately, NTP obtained a $600 million settlement from RIM - no trivial amount of money.

There seems to be more than just a casual similarity between that earlier case and these new lawsuits, for it seems that NTP is alleging that the same ten patents they named in the original RIM suit are at issue here. In the original suit, seven of the ten claims were thrown out, but the three that remained were good enough to secure a $600M+ payday for the company and it appears that the USPTO has since ruled that claims pertaining to a fourth patent were valid.

In short, NTP claims an extremely broad reading of patents that pertain to email; in essence, if it involves wireless email, they think they are entitled to a cut.

Deep Pockets Vs. A Tenacious Litigator
NTP is unquestionably controversial in the tech sector. Since the company does not even attempt to develop products based upon the patents its holds, it has been labeled a "patent troll" by many commentators - a company that simply tries to interpret its patents in the broadest possible way and secure rich licensing deals or legal settlements. Whether that is true or not, it is beside the point. Anyone who owns a patent has the right to defend that patent and the attempt to interpret patents broadly is hardly a new phenomenon (one could argue that Thomas Edison was just as aggressive in his day).

What is questionable, however, is whether NTP will succeed. In the wake of its success against RIM, NTP then took on some major telecom companies. NTP sued AT&T (NYSE:T), Deutsche Telecom, Sprint (NYSE:S), Verizon (NYSE:VZ) and Vodafone as well, but this suit has not been so successful yet - the companies have thus far refused to settle, and the suit is stayed pending a full review of the patents that NTP cited.

The companies that NTP is now targeting are all veterans of tech IP wars and all have deep pockets. That is what you could call a good news/bad news situation - the big paydays that NTP seems to want are only available from these giant firms, but giant firms tend to have giant legal budgets and a stable full of experienced patent attorneys.

The Bottom Line
Time will tell whether or not Nokia (NYSE:NOK) made the correct decision a little while back when it elected to license these patents from NTP. After all, it is unlikely that the fees and royalties that Nokia is paying amount to much. On the other hand, a quick look at RIMM's chart since the settlement in 2006 suggests that even a sizable payout did little to stop the company (and its stock) from performing well in the aftermath.

It is almost unthinkable that any of these companies named in NTP's suits will be knocked out of the market. Even if the smartphone makers somehow lose every step of the legal battle, NTP is looking for money, not market exclusivity. So it is fair to assume that the downside risk is a sizable cash payment - something that any of these companies (except, perhaps, Motorola) could easily afford. Consequently, this is an interesting sideshow for those of us who watch the market, but it is not a real threat to shareholders.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. Tepid Market Waters Across the Globe - Ahead of Wall Street
    Stock Analysis

    Tepid Market Waters Across the Globe - Ahead of Wall Street

  2. In Telecom, Wireless Still the Key - Industry Outlook
    Stock Analysis

    In Telecom, Wireless Still the Key - Industry Outlook

  3. Fed to Play 'Kick the Can'? - Ahead of Wall Street
    Stock Analysis

    Fed to Play 'Kick the Can'? - Ahead of Wall Street

  4. All Eyes on Apple (AAPL) - Ahead of Wall Street
    Stock Analysis

    All Eyes on Apple (AAPL) - Ahead of Wall Street

  5. The $1,382 Per Month Dividend Strategy

    The $1,382 Per Month Dividend Strategy

Trading Center