Apple Goes "Island-Hopping" in its War Against Google

Apple Inc. (NASDAQ: AAPL) on Tuesday took aim at rival Google Inc. (NASDAQ: GOOG) and its Android operating system by filing a patent-infringement complaint with the International Trade Commission (ITC) against smartphone manufacturer HTC Corp.

Taiwan-based HTC is the largest maker of phones that use Google's Android operating system, such as the Nexus One. Apple involved the ITC in hopes of banning U.S. imports of HTC devices made with the technology in question. However, that filing was paired with a suit filed in federal court in Delaware that claimed infringement on 20 patents.

"We can sit by and watch competitors steal our patented inventions, or we can do something about it. We've decided to do something about it," said Apple Chief Executive Officer Steve Jobs. "We think competition is healthy, but competitors should create their own original technology, not steal ours."

The iPhone brought in $13 billion in sales last year, accounting for 30% of Apple's total revenue. With those numbers, protection of its star player is at the top of Apple's priorities.

HTC yesterday (Wednesday) responded in a filing with the Taiwan Stock Exchange, saying it develops its own technology, has its own patents, and will work with the U.S. Justice System to defend its innovations.

Google also commented: "We are not a party to this lawsuit. However, we stand behind our Android operating system and the partners who have helped us to develop it."

Apple Uses HTC to Send a Message

Apple owned 14.4% of the global smartphone shipment market last year, in third place behind leader Nokia Corp. (NYSE ADR: NOK) and runner-up Research in Motion Ltd. (NASDAQ: RIMM), according to market research firm IDC. Coming in fourth was HTC with 4.6%.

But the real - albeit unnamed - target of Apple's lawsuit is Google. Its Android operating system doubled its U.S. market share from September 2009 to December 2009, jumping from 2.5% to 5.2%, according to a comScore report. Apple had boasted 25% of the market, but Google's growth rate outpaced Apple's 4.9% increase in the same period. That Google took a bigger bite out of Apple's market share last quarter means customers are intrigued by the iPhone's competition.

Since the iPhone's 2007 introduction, touchscreen capabilities have become increasingly popular to phone users, and Google's introduction of the Android system changed the iPhone from "THE smartphone" to simply another smartphone option. Some analysts and patent lawyers suggest these filings are Apple's attempt to deter manufacturers from using the Android system while slowing HTC's market growth.

"It's a very good timing for Apple, as HTC's new Android phones about to launch are already receiving good reviews and orders from European operators," Lu Chia-lin, a Taipei- based analyst at Macquarie Group Ltd. told Bloomberg. "Operators are trying really hard to find alternative products to the iPhone."

Samsung Electronics Co. and Motorola (NYSE: MOT) came out with Android smartphone options last year, making them targets as Apple swipes at competition.

"Apple is island-hopping, attacking first the Asian companies. Then it can go after Motorola, gradually whittling away at Google's base. They want to break the Android tsunami," patent lawyer and former IBM executive Kevin Rivette told the New York Times.

Why Fight Patent Wars at the ITC

The ITC is an attractive battleground for patent disputes in the technology world for two reasons: It offers the ability to ban imports, and it moves through cases much faster than the federal court system.

The ITC can't order monetary awards like the federal court system, but can issue exclusion orders, which prevent the imports of contested products. Recent patent infringement cases involving tech companies and resulting in exclusion orders include Broadcom Corp. (Nasdaq: BRCM) against Qualcomm Inc. (Nasdaq: QCOM) regarding a battery-saving feature, and Samsung and Sharp Corp. (OTC ADR: SHCAY) against each other's LCD products.

"The ITC is becoming a mainstream second track for patent litigation that allows companies to take a second bite of the apple with their patent cases," Colleen Chien, an assistant professor of law at Santa Clara University told Business Week. Chien found that in ITC rulings from 1995-2007, exclusion orders were issued every time the ITC found proof of patent infringement.

Apple has been granted hundreds of patents in the past couple years, and previous cases have shown the ITC is not afraid to block trade, no matter how disrputive to a company. If the ITC remains consistent with its import-blocking this could mean a profit-losing demise for HTC products in the U.S. market. The fear of meeting a similar fate could affect how much further Google can push the expansion of Android to smartphone manufacturers.

"It's like nuclear war. If you really want to have an effective remedy to protect your rights, you go to the ITC. Once you're there, there's no going back," said Lyle Vander Schaaf, a patent lawyer with Bryan Cave LLP in Washington.

News and Related Story Links:

• Apple:
  Apple Sues HTC For Patent Infringement
• New York Times:
  Apple Sues Nexus One Maker HTC
• Bloomberg:
  HTC Falls After Apple Sues to Block Imports of Phones
• Business Week:
  Apple's Smartphone Battle Plan
• Money Morning:
  Price Wars Likely to Spur Smartphone Explosion in 2010
• Money Morning:
  Hot Stocks: Apple's Acquisition of Quattro Puts It on a Collision Course with Google