Apple's Latest Lawsuit Comes From… Ericsson?

In a report published Friday, JP Morgan analyst Rod Hall discussed Apple Inc.'s (NASDAQ: AAPL) latest lawsuit initiated by Ericsson (NASDAQ: ERIC) for patent infringement.

Ericsson on Friday announced that it will sue Apple in the U.S., claiming Apple infringed 41 of its patents including both standards essential and other non standards essential but critical implementation patents such as the design of semiconductor components, user interface software, location services and applications, as well as the iOS operating system.

Hall noted that Ericsson filed a suit in January to let the court determine if its patents licensing offer to Apple complied with the fair, reasonable and non-discriminatory (FRAND) licensing terms. Apple refused the offer to let the courts decide, resulting in Ericsson now suing Apple and requesting an exclusion order against Apple's products for infringing on its patents.

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Hall further explained that "Apple had also filed a lawsuit in the US to seek judgments that few LTE patents declared essential by Ericsson are, in fact, not essential and not infringed by Apple; and ii) if these LTE patents are infringed by Apple to determine an appropriate royalty base and royalty rate."

What Does This Mean?

Despite the filing of mutual lawsuits, Hall wrote that Ericsson and Apple were negotiating with each other, but talks have broken down.

Hall speculated that Apple's filed suit was intended to invalidate some 4G patents held by Ericsson and that Apple chose the "weakest patents" to get some negotiating leverage over Ericsson. On the other hand, Ericsson used its "strongest patents" to make sure it receives an exclusion order which would force Apple to negotiate.

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"Ericsson has a very strong wireless patent portfolio and we believe it is impossible for Apple to overturn the validity of their key patents," Hall argued. "Apple's strategy would be to seek to reduce the royalty Ericsson is demanding which is likely a difficult task because Ericsson likely does not use Apple innovations which could have resulted in a lower royalty fee if both companies signed a cross licensing agreement."

Hall concluded there is a potential upside to Ericsson's IPR licensing revenue if it prevails in the lawsuit. Under a "worst case" scenario, the analyst stated that Ericsson will get the same royalties from Apple that it got in its expired licensing deal.