SEOUL—The International Trade Commission’s ruling to ban the import and sale of some Samsung Electronics Co. products into the U.S. will sap growth momentum for the South Korean behemoth just as it has overtaken Apple Inc. as the U.S.’s biggest smartphone maker.
Samsung said that its products would continue to be available in the U.S. despite the ruling, indicating it has already made some changes to models to avoid infringing on Apple’s patents.
But the ruling could lead to Samsung losing market share in the near term, according to analysts, even though the impact on its earnings won’t be significant because the company will make modifications to existing models or launch newer versions of its mobile phones so it can continue to sell its devices in the U.S.
Although Samsung doesn’t disclose sales from the U.S., the Americas region is the largest market for the South Korean company, followed by Europe and Asia.
“Upon a thorough review of the order, we will decide which measures to take,” a spokesman for Samsung said, without elaborating.
Specific Samsung products affected by the ITC order weren’t spelled out in the order Friday, though an earlier ruling by an agency judge pointed to older products that include the Galaxy S II smartphone and Galaxy Tab 10.1 tablet computer.
The ITC found that Samsung infringed on parts of one Apple patent that covers elements of swiping a finger across the display of a device, a key feature of nearly all smartphones and tablets. It also cited parts of another patent related to headphone jacks.
The ITC decision isn’t a complete victory for Apple. The trade body rejected some claims made by Apple and absolved Samsung from infringing on patents associated with the most basic design of the iPhone.
In trying to persuade the ITC not to impose a ban, Samsung and partner Google Inc.—whose Android software is used by Samsung—warned of potential dire consequences for consumers and competition in the mobile market. Samsung, for example, argued that the ruling could cause widespread shortages of mobile phones, particularly among smaller U.S. carriers, “that would take many months to rectify.”
But Samsung also has been working on adapting products so they would no longer infringe on Apple patents, a process known as designing or working around an order. The ITC said Friday that its ban doesn’t apply to the “adjudicated design around products” found not to infringe on claims of the two patents.
The big question now is whether Samsung’s newer smartphones could be affected by future rulings. Apple has filed another complaint with the courts in the U.S. that seeks to ban newer versions of Samsung’s Galaxy smartphones. That case isn’t set to go to trial until 2014.
The Obama administration will have 60 days to decide whether to let the Samsung ban take effect. The only way the ITC ban can be overturned is if the administration vetoes it.
“Apple may catch up with Samsung in terms of market share in the U.S. or even surpass Samsung in the third quarter or fourth quarter when new Apple products are expected to come to market,” said Doh Hyun-woo, an analyst with Mirae Asset Securities in Seoul.
In the second quarter, Samsung overtook Apple in the U.S. with its smartphone market share rising to 34.9% from 22.6% a year earlier, data from researcher Strategy Analytics showed. Meanwhile, Apple’s smartphone market share fell to 32.3% from 33.2%. Globally, Samsung is the world’s biggest smartphone maker with a market share of 30.4%, ahead of Apple’s 13.1%, based on IDC data.
But the ruling comes as investors have been losing faith in Samsung. The company’s market value has fallen by more than $30 billion since late April because of concerns that its Galaxy S4 smartphones aren’t selling well and growth at its core mobile unit is slowing. Friday’s defeat doesn’t bode well for Samsung shares.
“I think the shares will edge a bit lower (Monday)…the ITC announcement was the big thing to watch out for,” said Kim Hyoung-sik, a fund manager with Heungkuk Asset Management, who noted that the ban wasn’t a surprise and the order covers old models, which are rarely sold in the U.S. now.
Samsung has been spending billions of dollars on marketing and brand-building globally, including in the U.S. In March, it launched a lavish event to showcase its latest flagship smartphone, the Galaxy S4, at Radio City Music Hall in New York before launching the device at home or in Europe. It has also been spending heavily on clever ads poking fun at Apple in the U.S. since hiring a former Nike Inc. executive to run marketing.
“It remains to be seen whether Samsung can comply with today’s limited exclusion order in the ways that don’t make its Android-based smartphone and tablet less attractive,” wrote Florian Mueller, an intellectual property analyst at Florian Mueller Consulting, in a blog post. “The commercial significance of the exclusion order depends on the viabilities of the workaround.”
The ruling could put pressure on the Obama administration, which only a few days earlier took the unusual step of vetoing an ITC ruling in favor of Samsung. The ITC ruling would have barred the sale of some older Apple iPhones and iPads.
The veto by the Obama administration of an ITC order to ban some Apple products earlier this month was the first in more than 25 years. U.S. Trade Representative Michael Froman made the decision based on policy concerns about companies obtaining product bans based on patents that cover technology used in industrywide standards.
Lawyers said Samsung could argue through the courts and lobby for a veto that banning Galaxy products would limit consumer choice in the market. But they note that obtaining a veto won’t be easy.
Apple was able to receive a veto by the Obama administration because the patents that Samsung hold are “standard essential patents”—those that must be licensed under fair and reasonable terms to other companies.
“The patents that are being asserted by Apple against Samsung are in a different category and therefore not apparent that there will be the same opportunity for Samsung,” said Mark Summerfield, a patent attorney at Watermark in Melbourne.
While Apple is arguing that Samsung copied the design and the feel of the iPhone and the iPad, Samsung alleges that Apple violated Samsung’s wireless-technology patents.
Such standard patents may be more difficult for Samsung in arguing its case, said Ronald Yu, who teaches patent law at Hong Kong University.
Matthew Woods, a partner at Robins, Kaplan, Miller & Ciresi, said it would be harder to get a ban for a standard essential patent.
“Litigants such as Samsung would have to now start to look and say, can we build more of our strategy around non-standard essential patents,” that would not be subject to the debate of fair and reasonable licensing issues, Mr. Woods said.
While Samsung reported a record second-quarter net profit in July, its operating margin from its mobile unit shrank from the first quarter, pressured by high expenditures on marketing and distribution. Samsung’s operating profit for its mobile business was 6.28 trillion won ($5.6 billion) in the second quarter, a 52% increase from a year earlier. But the pace of growth slowed from 56% in the first quarter.
Mr. Yu said meanwhile Apple and Samsung will continue to fight it out in courts to try to design around each others’ intellectual-property rights.
“Hopefully at some point, rational heads will prevail and they will sit down and discuss some mutually acceptable licensing scheme.”
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