The dispute between Apple (NASDAQ: AAPL ) and Samsung is reaching into the highest office of the land. The decision will enter a 60-day review process that includes President Obama. Bloomberg reports that the U.S. International Trade Commission ruled early this week that Apple would be banned from importing the iPhone 4 and the iPad 2 3G because the devices infringe a Samsung patent. While rarely used, part of the review process that accompanies this type of decision includes the power of the president to overturn the ruling on public policy grounds. The ruling is the first big loss for Apple in its ongoing patent war with Samsung and could cost the company significantly, depending how various other issues unfold.
The nature of the case
There are several elements to understanding the nature of the case, including the patent itself, the general legal framework, and the review process. The patent deals with a protocol for detecting phone numbers in the body of text and allowing them to be dialed directly or stored into the phone's contact list. Where the issue gets more complicated is that the patent covers a feature generally held to be part of industry standard communications. There are special legal implications of this last feature.
Under the federal standard, the holder of a patent that is part of an industry standard must license the underlying technology on "fair, reasonable, and non-discriminatory" terms to anyone that asks. Central to the dispute between Apple and Samsung is that Samsung claims it offered such terms to Apple. The terms offered, according to Apple, were for 2.4% of the average sale price of every iPhone and offending iPad that used the technology. Apple contends that this offer doesn't meet the standard of "fair" or "reasonable."
The ITC's ruling would place an import ban of the offending products -- both of which are manufactured primarily in China -- and will take effect after a 60-day review process. During that period, the commission can consider the evidence to alter its ruling, and the White House has the power to intervene. Historically, there has been very little interference from any president on these matters, but Obama is known to be generally opposed to import bans. On Tuesday, the White House issued a recommendation that Congress limited the ability of the ITC to impose such bans in cases of this kind. Presidential interference could have a long-term impact on the administration of patent protection, and I would be disappointed if this case becomes a test balloon.
Who is affected?
While Apple and Samsung are obviously the most directly affected by the decision, AT&T (NYSE: T ) and T-Mobile (NYSE: TMUS ) will also feel the impact. While other carriers sell versions of the iPhone 4 and iPad 2 3G, only the models specific to these two carriers were subjects of the case. The ban, therefore, will limit each of these carriers ability to sell these devices and could limit choices, specifically of lower-priced options, for each. The offending devices carried on other networks were not specifically addressed, although Samsung reserved the right to seek action against these in the future.
The impact on the smartphone side is more severe, but if Apple releases a cheaper version of the iPhone this fall, it would probably become a preferred choice of consumers seeking a less costly option. If so, it will go a long way to mitigating any damages that Apple might have felt. The iPhone 4 continues to be a strong seller for Apple, so developments in the case could have an impact of both the company and the stock over the next two months. While it's too soon to been deeply concerned, shareholders should keep track of the situation moving forward.
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