(AAPL) Apple Takes HTC to Court

In a latest development, Apple Inc. (AAPL) has sued HTC Corp. accusing the Taiwanese smartphone maker of infringing five of its patents. The patents relate to software architecture and user interfaces in portable electronic devices, hardware for touchscreens and movement sensors. The case was filed on July 8, 2011 with the U.S. International Trade Commission (ITC) in Washington.

This marks Apple’s second lawsuit against HTC, and the hearing of the first lawsuit is scheduled for August 5, 2011. The first lawsuit pertained to certain personal data and mobile communications devices and related software.

Apple has been aggressively defending its intellectual property, and the latest legal patent lawsuit against HTC may halt U.S. imports of its new Flyer tablet computers, Bloomberg opined.

Incidentally, HTC had sued Apple last year, which awaits its hearing on September 16, 2011. HTC had sued Apple on five patent infringements relating to telephone dialer with easy access memory and power control methods for a portable electronic device that are used in the Apple devices.

Very recently, in yet another patent infringement suit, Apple was ordered by a federal jury in Eastern Texas to pay $8 million in damages to Personal Audio LLC. Personal Audio, a Texas based patent licensing company, had claimed $84 million in damages forthe patent infringement.

Apple is facing tremendous competition in tablets and smartphones powered by the android operating system from a number of companies including Samsung, Motorola Mobility Holdings Inc. (MMI), HTC and LG. Android being open source has helped Apple’s competitors create varied devices based on the free source code.

According to ComScore Inc., a Virginia-based researcher, data collected for the three months ended in May revealed that android based mobile devices dominated 38% of the market share in the US. On the other hand, Apple’s iOS, used in the iPad and iPhone, had 27% of the market share.

Recommendation

With a loyal customer base, international expansion, competitive pricing strategy and a solid cash position, we remain positive on Apple’s long-term growth.

However, increasing competition in most of its major product segments, possible delays in product launches, higher operating expenses and increasing legal complexities compel us to maintain our Neutral rating over the long term (6-12 months).

Moreover, Apple remains entangled in a number of lawsuits against HTC and Eastman Kodak (EK). Apple is also battling with Amazon.com Inc. (AMZN) and Microsoft Corp. (MSFT) over the use of the name “app store”.

Additionally, in recent months, Apple has received unfavorable verdicts in a couple of cases from the ITC. As ITC has the authority to block import of products that infringe U.S patents, the lawsuits could dent Apple’s very sizeable cash balance and affect its margins. The company in such a case might have to pay a hefty fine or a recurring license fee, which will act as a headwind going forward.

Currently, Apple has a Zacks #3 Rank, which implies a Hold rating in the near term.

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