MMI Marcus and Millichap Inc

Apple Inc. (AAPL) received an adverse ruling from the International Trade Commission (ITC) in a patent suit against Eastman Kodak (EK).

An ITC judge set aside Apple’s allegation that Eastman Kodak had violated two of its patents. The ITC also commented that one of the patents was invalid.

Although the judgement is subject to review of the six-member ITC panel, the full commission doesn't usually contradict the judge's determinations. ITC has the power of blocking import of products that infringe U.S. patents.

The lawsuit was filed by Apple in April 2010, targeting the Kodak Z series, M series, C series and Slice cameras, as well as video cameras including the Playsport.

One of the alleged patents allows a camera to process several images at the same time. The other patent relates to handling of multiple processes at once, such as adjustments in balance, color, sharpness and resolution.

The lawsuit was filed as a countersuit after Eastman Kodak accused Apple and Research In Motion Ltd. (RIMM) of infringing the company’s image-previewing patent received in 2001.     

This complaint was overruled by an ITC judge in January 2011. The judge ruled that Apple's iPhone and RIM's BlackBerry did not violate the image-preview patent. However, in March 2011, an ITC judge ruled that the federal agency would review the decision.

The judge’s decision to review the claim revives Kodak's hopes of negotiating royalties worth $1 billion or more. ITC is expected to come out with its final decision this month.

Apple also faces two more lawsuits against Eastman Kodak in a federal court in Rochester. Eastman Kodak had complained that Apple infringed patents related to digital cameras and certain computer processes.

Our Take

Apple remains entangled in other legal battles over its mobile products. The company is fighting half a dozen lawsuits against Nokia Corp. (NOK) regarding two dozen patents and five different jurisdictions in the U.S., Germany and the Netherlands.

Besides Nokia, Apple is engaged in a legal tussle with Taiwanese handset maker HTC, regarding the violation of five patents since March 2010. HTC manufactures mobile phones powered by Google Inc.’s (GOOG) Android mobile operating system.

In April 2011, the ITC ruled in an initial report that Nokia and HTC did not violate Apple’s technology patents on the iPhone. This is a severe blow to Apple, which is seeking to stop HTC and Nokia from selling smartphones that could compete effectively with its iPhone. Apple has said that it believes the devices have been modelled on the iPhone.

We expect Apple to be involved in further lawsuits, as competition heats up in the mobile and tablet space. The company currently competes Motorola Mobility Holdings, Inc. (MMI), Samsung Electronics Co., and Hewlett-Packard Co. (HPQ), besides Research In Motion, Google, Nokia and HTC in the mobile and tablet markets.

We also believe that Nokia’s strategy of using Microsoft Corp.’s (MSFT) Windows operating system in place of its legacy Symbian could drag Microsoft into the legal battlefield.

We believe Apple will definitely target Microsoft as a part of its strategy to defend its market share over the long term. According to the research firm Gartner, Microsoft’s Windows platform is expected to be the second largest mobile operating system (19.5% market share) after Android (48.8%) beating iOS (19.5%) by 2015.

We also believe that increasing legal expenses will hurt Apple’s operating profit going forward.

However, we maintain our Outperform rating on Apple over the long term (6-12 months). We believe Apple is well positioned to achieve strong top-line growth over the long term based on product innovation, strong sales from iPad and iPhone and aided by growth in Macintosh.

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

 
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