Creative lawsuit could have broad consequences

The chances of Creative Technology winning an injunction to prevent Apple from selling the iPod domestically are slim, legal experts say. But its suit against Apple alleging patent infringement could have broad consequences for both companies and the portable media player market as a whole.

Creative filed suit against Apple last month, claiming its “Zen Patent” covers the interface used by Apple’s iPod. Apple responded by filing a suit of its own, alleging that Creative infringed on four of its patents.

It will be a while before the legal issues get sorted out. The only sure thing at this point, attorneys say, is that the Creative-Apple dispute will be a costly battle that could drag on for years.

“Creative’s chances of getting an injunction against Apple are about the same as being struck by lightning,” said Irv Rappaport, managing director of patent portfolio analyses firm IP Checkups. Rappaport, who is also the former associate general counsel for intellectual property and licensing at Apple, cited the Supreme Court’s recent ruling in favor of eBay in a patent dispute over its “Buy It Now Feature” as well as the publicity over Research In Motion’s patent dispute over its BlackBerry handheld device as indicators that Creative wouldn’t get an injunction against Apple.

“A recent study has shown that success by plaintiffs in patent infringement cases involving software is less than 20 percent going all the way through trial and appeals,” Rappaport said. “My opinion is that if Apple believes there is any possible validity to the patent and that Apple believes it may be found to be infringing, it will settle the case and take a license.”

It’s been a tough year for Creative. Last summer, it shipped 4,000 of its Zen Neon players to Japan with an unintended software bundle, the Wulik.b Worm for Windows.

More recently, the company posted a $114.3 million loss for its fiscal third quarter; analysts are predicting that the company will announce a nine-digit loss on the year when it reports its earning June 30. Though buoyed some after filing the lawsuit against Apple, the company’s stock price is close to a four-year low.

Meanwhile, Creative’s MP3 player market share has fallen far behind rival Apple’s. And that could help explain why Creative filed the suit in the first place.

“Patent lawsuits are very costly—on average for big ones, about $5 million per side in legal fees,” said Mark Lemley, director of Stanford University’s Program in Law, Science and Technology. “They are often filed by companies with declining sales that are looking for additional revenue sources.”

Legal experts gave differing estimates on how exactly much the cost would range up to, but all agreed that they would be in the millions of dollars.

“It’s horrifically expensive to engage in patent disputes, and this is going to be a drag out fight, no question about it," says Peter Zula, a patent attorney with Bell, Boyd, and Lloyd, and former patent examiner with the United States Patent and Trademark Office. “Especially when litigated in California, which tends to be a lot slower and very expensive. I wouldn’t be surprised at all if they each blow $8 to $10 million in legal fees.”

Murder suicide

While a patent suit will be very costly for both companies, Apple is better positioned to absorb the expense. For a struggling company like Creative, a protracted battle could signal the death knell.

“This case will cost Creative millions in legal fees and more importantly could drag on for 5 to 10 years,” Rappaport said. “The chances of [Creative] surviving that long has to be quite slim.”

The suit raises broader issues the industry as a whole as well. Creative’s immediate goal is to prohibit Apple from engaging in sales, marketing or importation of iPods and iPod nanos in the United States. Creative claims that its Zen Patent covers the user interface “used by most portable digital media players.” In the example it posted online, Creative attempts to show that it owns the rights to a user interface that allows for hierarchical navigation of media files, going from menu to artists, to albums, to a list of tracks.

Yet the iPod is far from the only player that allows users to navigate from a top-level menu down to a list of tracks by way of artist, album, genre, and playlist. Media players from Samsung, iRiver, Sony, Philips, and Archos, among others, all use similar navigation systems. Though Apple is the only target Creative has named in a lawsuit, Creative chairman Sim Wong Hoo has already indicated that the company intends to vigorously defend its patent.

“We will pursue all manufacturers that use the same navigation system,” said Sim told the BBC. “This is something we will pursue aggressively.”

This puts some of Apple’s competitors in an odd position. While most would probably like to see the iPod take a tumble, a precedent-setting decision in Creative’s favor could be bad news for their own products, experts say.

“Other potential defendants always cheer for the defendant in the suit because if the defendant loses, their chances of prevailing in a suit against them goes down dramatically,” Rappaport said.

Conversely, if Apple wins, Creative has a much harder time enforcing its patent. So, considering Apple’s deep pockets, it is therefore surprising that Creative went after the iPod first, patent attorney Zula said.

“If you’re a large company, you set an example of a rival company that’s big enough to be noticed, but not big enough to have an enormous war chest,” Zula added. “It becomes a set-up for a show down, in this case Creative would eventually target Apple as a sort of grand prize.”

Creative and Apple are the two biggest players in the portable media player market. The companies’ respective Zen and iPod lines have been battling it out for nearly five years now. In that fight, Apple has overwhelmingly been the dominant player, with a 78 percent market share.

Mathew Honan is a San Francisco-based freelance writer. Check out his Mac and iPod weblog

This story, "Creative lawsuit could have broad consequences" was originally published by PCWorld.

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