(AAPL) Motorola Mobility Holdings Lawsuit Ruling Goes Against Apple

Apple Inc. (AAPL) recently received an adverse ruling in a patent suit against Motorola Mobility Holdings Inc. (MMI) from the International Trade Commission (ITC). An ITC judge set aside Apple’s allegation that Motorola Mobility had violated three of its patents.

This is Apple’s second defeat against Motorola in successive months, after a German court issued an injunction favoring Motorola in December last year. Although the current ruling will be reviewed by a six-member ITC panel, the full commission doesn’t usually contradict with the judge’s determinations. ITC is expected to issue the final verdict in March this year. ITC has the power of blocking import of products that infringe U.S. patents.

The lawsuit was filed by Apple in October 2010, targeting Motorola Mobility’s Droid, Cliq, BackFlip and other smartphones. Two of the alleged patents are related to touch screen technology, while the third one pertains to the working of operating system. In recent times, Apple has been particularly sensitive about the touch screen technology, which forms the crux of some of its recent international lawsuits against other handset makers such as Samsung and HTC.

Motorola also has a patent litigation against Apple pending at the ITC and its preliminary hearing is due in April this year. In October 2010, Motorola accused Apple’s devices of infringing at least 18 patents including 3G, GPRS, and 802.11 technologies, antenna design, proximity sensing and device synchronization. Motorola also filed patent infringement complaints against Apple in both Northern Illinois and Southern Florida federal district courts.

We believe that the loss at the hands of Motorola will not deter Apple from continuing with its aggressive strategy of suing other handset makers, particularly the ones who use Google Inc.’s (GOOG) Android platform, going forward. Although the results of its lawsuits have been mixed, Apple has succeeded in thwarting Android’s strong growth in recent times, based on robust product sales.

According to recent figures from NPD Group, Apple’s iOS market share in the US surged from 26% in October to 43% in November 2011. At the same time, Android’s market share plummeted from 60% to 47% during the same comparable period, despite being the leading operating system (OS). We believe that the strong holiday season sales arising from the availability of Apple’s iPhone 4S primarily drove this strong growth.

We believe that the entry of Google in the handset manufacturing market (through the acquisition of Motorola Mobility) will intensify competition between the two companies going forward. Moreover, the recently launched smartphones from the collaboration of Microsoft Inc. (MSFT) and Nokia Inc. (NOK) will also spice up the competition in this space over the long term.

As Apple relies heavily on iPhone sales, we believe that the company will undertake every possible measure, including further lawsuits and expansion into emerging markets of China, Brazil, Russia and India, to safeguard its market share over the long term. However, increasing competition and saturation in its major product markets will remain an overhang going forward.

We maintain our Neutral recommendation over the long term (6-12 months). Currently, Apple has a Zacks #2 Rank, which implies a Buy rating in the near term.

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