(AAPL) Apple Gets International Trade Commission to Investigate Patent Charges Against HTC

Apple Inc. (AAPL) recently won an important victory against smartphone maker HTC Corp., after International Trade Commission (ITC) agreed to review its patent infringement complaint against the Taiwan based company.

According to a latest report from Bloomberg, ITC will investigate Apple’s five patent violation charges against HTC related to software architecture and user interfaces in portable electronic devices, hardware for touch screens and movement sensors. The case was filed with the ITC on July 8, 2011.

Through the patent violation lawsuit, Apple seeks to prevent HTC from rolling out the new Flyer tablet computers as well as its Droid Credible, Wildfire, EVO 4G and Desire phones in the U.S. With the launch of its tablet, Flyer, in the US market, HTC became the direct competitor of Apple’s iPad and Samsung’s Galaxy Tab.

Last month, in a separate case, HTC was found guilty of infringing at least two of Apple’s patents related to data-detection technology used in e-mail and text messages and data transmission. However, the ruling is preliminary and is subject to approval of the full six-member commission.

If found guilty, the ITC has the authority to block import of HTC’s products into the US market. HTC, which uses Google Inc.’s (GOOG) Android operating system for its smartphones, said that it would continue fighting against patent infringement findings.

Apple and HTC have been engaged in a legal tussle for the last 12 to 18 months. Both the companies are facing a number of cases against each other before the the ITC as well as in other federal courts. The legal dispute started over patent infringement claims related to smartphone technology.

In 2010, Apple alleged that HTC infringed around 20 iPhone technology patents, including user interface, basic and hardware architecture in a number of products such as the Nexus One, Touch Pro, Touch Diamond, Touch Pro2, Tilt II, Pure, Imagio, Dream / G1, myTouch 3G, Hero, HD2 and Droid Eris – including both Android and Micorsoft Corp.’s (MSFT) Windows Mobile devices.

HTC countersued Apple before the the ITC alleging violation of five of its patents relating to telephone dialer with easy access memory and power control methods for a portable electronic device. The hearing for this case is scheduled for September 16, 2011.

Recommendation

Apple is facing tremendous competition in the tablet and smartphone markets from a number of companies including Samsung, Motorola, HTC and LG. Android being open source has helped Apple’s competitors create varied devices based on the free source code.

Apple continues to face tough competition in the smartphone and tablet market from Research In Motion Ltd. (RIMM), Hewlett-Packard Co. (HPQ), Dell Inc. (DELL), Samsung, Cisco Systems Inc. (CSCO), Toshiba and Acer.

As Apple remains heavily dependent on iPhone and iPad sales (68.8% of the third quarter revenue), the company is taking every possible step to safeguard its dominant position in the smartphone and tablet market.

Apple remains entangled in a number of lawsuits against Eastman Kodak (EK), Samsung, Amazon.com (AMZN) and Microsoft over a number of issues. As the outcome remains uncertain, we believe the lawsuits will remain an overhang on the stock going forward.

However, in a recent report published by research firm Strategy Analytics, Apple outsold Nokia Corp. (NOK) and Samsung to become the largest smartphone maker in the second quarter of 2011 in terms of global shipments. Apple’s iPhone grabbed an estimated 18.5% market share, compared with 13.5% a year earlier.

Moreover, we also believe that Apple’s ability to spur the popularity of its smartphones in developing nations will help dictate the company’s smartphone fortunes going forward.

We maintain our Neutral rating over the long term (6-12 months). Currently, Apple has a Zacks #1 Rank, which implies a Strong Buy rating in the near term.

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