Some licensing rates are roughly 20-fold what Apple is charging others

The bad news for Apple, Inc. (AAPL) is that the U.S. federal court system appears increasingly opposed to outright denying the American gadgetmaker's largest rival -- Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) -- the right to compete in the American market.

I. Battle of the Bans

Samsung is the world's top smartphone-maker, accounting for 28.8 percent of global smartphone ships in Q4 2013, according to the Interactive Data Corp. (IDC).  Apple is in second place and leads Samsung narrowly in profitability, despite its smaller 17.9 percent of sales.

Apple contends that Samsung has "stolen" its designs, including software features and even in case designs.  The latter claim has quieted as Samsung's designs have diverged more sharply in looks from Apple's, but the former -- software patent infringement -- is perhaps unavoidable due to Apple's large mobile patent portfolio.

Lucy Koh
Lucy Koh is prepping for a second Apple v. Samsung case, which will start on March 31 with a jury trial. [Image Source: Vicki Beringer]

Last week at the U.S. District Court for the Northern District of CaliforniaApple's team saw their request to ban a plethora of devices -- including the Galaxy S3 and Galaxy Note -- struck down for a second time.  Judge Lucy Koh had similar struck down a ban request in January, standing her ground despite pressure from some of her colleagues at the Federal Circuit Court of Appeals, which ranks a step higher than her Federal District Court.

But the good news for Apple is that its chances of a major payday increased when Judge Koh sided with it late last month, throwing out expert testimony of a Samsung witness, while allowing the jury in the upcoming case to hear the testimony of an Apple witness.

II. $40 per Device?  Say it Ain't So!

The eye-popping figure is Apple's targeted per-device royalty -- $40 USD.

Apple's expert witness arrived at that figure by incoprorating "lost profits" into the valuation estimate, and also by arguing that Samsung's strong position makes it reasonable to seek larger damages.

40 dollars
[Image Source: Mevvy]

Rachel Krevans, J.D., a top lawyer at one of Apple's law firms -- Morrison Foerster (which goes by the humorous abreviation "MoFo") -- argues that while her client agreed to a relatively small licensing settlement with a battered HTC Corp (TPE:2498), that the Samsung case was an entirely different monster.  HTC's CEO Peter Chou indicated his company pays Apple around $5 USD per device, although the precise figure has not been made public.

Ms. Krevans argued:

HTC is not one of the horses in the two-horse race.  There is no showing that has been made that any of these terms would have been terms that would have been acceptable in a hypothetical negotiation.

One of Samsung's lawyers -- Scott Watson of the law firm Quinn Emanuel Urquhart & Sullivan, LLP -- complained that Apple was looking to charge his client $12.49 USD/device for a patent that was priced at $0.60 USD/device in its stalled legal war with Motorola Mobility (who was formerly owned by Google Inc. (GOOG)).  He argued that 20-fold markup was information the jury needed to know, arguing that such information had never been excluded before in such a case.  Apple disagreed, saying that giving the jury more information might confuse them about Samsung's guilt.

Mr. Watson complained:

The only reason Apple is bringing this motion is because the licensing data is completely inconsistent with the idea that anyone would pay $40 for five smartphone patents per unit.  Apple shouldn't be permitted to just throw up a huge number and then sit down and we've got our hands tied and we can't even show the jury that it's totally disproportionate to what actually happens in the marketplace.  In this case, they're asking for $12.49 [per device] for [a patent licensed to Motorola for 60 cents per device].

And I submit there's simply no Federal Circuit case, or even a district court case, where a court has excluded a license on the exact patents at issue... and the jury is not permitted to see that, and the defendant has to go to trial with no licensing evidence to show the jury at all.

But Judge Koh decided that it's time for a first, and she denied Samsung the ability to present licensing rate comparison to the jury and struck down its expert witness's opposing valuation as inaccurate.  Meanwhile she gave Apple nearly unchecked ability to present its expert witness's claims.

II. Samsung Appears at a Modest Disadvantage for Round II

Samsung's lawyers suffered a blow to their reputation in court last year when they appeared to unethically leak documents of Apple's payment agreement to Nokia to Samsung executives, a disclosure that may have helped Samsung to squeeze a more favorable licensing settlement from Nokia.

The case goes on trial on March 31, and after losing $929.7M USD in the first round Samsung looks to start the second trial with the back against the wall.

Samsung Galaxy S4
[Image Source: Getty Images]

Depsite turning their backs on a second set of mediation talks in January, the second trial is believed to largely be a battle over settlement leverage and public image.  Apple wants to damage Samsung's American brand image by portraying it as a copycat.  And a second large verdict could do precisely that, plus elevate pressure for a higher settlement.  On the flip side, an Apple loss could let Samsung off the hook.

But given the distraction the case is posing to both companies and the snail-slow pace of court proceedings, most believe that the pair will settle when the dusts drops after the second round.

While Apple's $40 USD valuation may indeed be some unfair or "ludicrous", it is not without precedent, to some extent.  Microsoft Corp. (MSFT) is believed to charge Apple and most Android device makers between $5-10 USD per device.  But it charges Samsung a significantly higher rate -- reportedly around $15 USD per device.

Sources: ArsTechnica, Bloomberg

"Folks that want porn can buy an Android phone." -- Steve Jobs

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