Apple’s Victory Over S3 in Court Gives It More Leverage Over HTC, Android

In Washington D.C. court on Monday, the U.S. International Trade Commission struck down [PDF] a ruling by an administrative law judge, which found Apple, Inc. (AAPL) to have infringed on a pair of patents owned by S3 Graphics, a wholly owned subsidiary of Taiwan’s HTC Corp. (TPE:2498).  

I. An Early Victory is Erased

The case began back in May 2010, and had previously culminated with a July 1 ruling by an administrative law judge (ALJ) who ruled that Apple was indeed in infringement of section 337 of the Tariff Act of 1930.  Summarizes the court in the recent ruling:

On July 1, 2011, the ALJ issued a final ID in this investigation finding that Apple violated section 337.  Specifically, the ALJ found that Apple computers utilizing an image compression format called DXT infringe claim 11 of the ’978 patent and claims 4 and 16 of the ’146 patent.  The ALJ recommended that the Commission issue a limited exclusion order and a cease and 2 desist order.  The ALJ found no violation with respect to the other asserted claims, which are claim 13 of the ’146 patent, claims 14 and 16 of the ’978 patent, claims 7, 12, 15, and 23 of the ’417 patent, and claims 1 and 6 of the ’087 patent.  On September 2, 2011, the Commission determined to review the ID in its entirety.
(“ID”==”initial determination”)

In other words, Apple reportedly had infringed on two patents (U.S. Patents 6,683,978 and 6,658,146) covering the DXT file format — an image/texture compression method — but not the other two asserted patents.  The ruling cleared the way for S3 to seek an import ban on certain Apple computers under the Tariff Act.

The lawsuit was dealt a setback when Advanced Micro Devices, Inc. (AMD), a supplier of Apple graphics cards, claimed to own the intellectual property in question.  AMD filed a series of image compression patents in 2009 (e.g. U.S. Patent 7,505,624).  In September, at least one of S3 Graphics’ asserted patents was marked invalid, according to Ian Romanick, an Intel Corp. (INTC) executive.  

It is unclear whether this is correct, and if so what patents were invalidated and why.

It is equally unclear why precisely the ITC panel overturned the ALJ’s ruling.  They merely write:

Having examined the record of this investigation, including the ALJ’s final ID and the submissions of the parties and non-parties, the Commission has determined to reverse the ALJ’s finding of a violation of section 337 and find no violation.  Additionally, the Commission has determined to deny AMD’s motion to file public interest comments out of time, to grant AMD’s motion to file a reply in connection with its motion to intervene and terminate, to deny AMD’s motion to intervene and terminate, and to deny Apple’s motion to terminate. 
About the only thing that’s clear from this is that the commission did not dismiss directly due to AMD’s ownership claims (it denied AMD’s motion to intervene and terminate).  The ruling does indicate, though that either the claims have been found to be invalid or Apple and/or its suppliers were found to have properly licensed the patents.

II. Lawsuit Advances Apple’s Quest to Block HTC’s Smartphones

So what does all this mean?  Well, it’s primarily a major setback for HTC.

Taiwan’s HTC Corp., the second largest maker of Android smartphones and currently the top U.S. smartphone maker, surprised some when it decided to acquire S3 Graphics this last July.  The purchase can be viewed in a few lights.  In one sense it may be the company’s bid to dabble in differentiating itself with unique graphics chips, must as competitor Samsung Electronics Comp., Ltd. (KS:005930) does with CPUs.  While S3 long struggled to compete in the graphics market during its time as a VIA Technologies, Inc. (TPE:2388) subsidiary, the American unit carries a rich graphical legacy that dates back the early 1990s.

A “Savage4” 3D graphics card from S3 Graphics, released in 1999.
[Image Source: Wikimedia Commons]
On the other hand, most believe that the purchase was primarily motivated by HTC wanting legal leverage over Apple.  At the time when HTC agreed to pay $300M USD to acquire the VIA subsidiary, S3 Graphics had just clinched its ALJ victory.

HTC is currently embroiled in a global legal war, which was initiated last year when Apple attacked in U.S. court.  HTC filed a counter complaint to the ITC in May and Apple filed a second complaint in June.  

Apple seeks to ban HTC’s shipments into the U.S., much as S3 Graphics was trying to do to Apple.

Late Apple CEO and co-founder Steven P. Jobs in his authorized biography is quoted as stating that he would spend all of his company’s fortune, if needed, to destroy the Android smartphone makers in court.  He said his burning hatred arose from the fact that he felt that Android is a “stolen product”.