Apple, Ericsson settle patent fight, agree to collaborate on 5G, video management and optimization

Ericsson (NASDAQ: ERIC) and Apple (NASDAQ: AAPL) said they have settled a high-profile patent dispute, bringing an end to pending lawsuits in three European countries and two U.S. courts. Shares of Ericsson were up 5 percent following the announcement, while Apple shares were essentially flat.

The dispute dates back to 2012, when a prior licensing agreement allowing Apple to use Ericsson's technology in iPhones and iPads expired. The companies headed to court in January, with Apple arguing that the royalties it pays to Ericsson should be based on the value of the chips inside the devices, and Ericsson claiming that the "end prices of entire LTE devices" should determine the royalty amounts.

The conflict escalated in February, when Ericsson filed seven lawsuits in U.S. District Court for the Eastern District of Texas and made two complaints with the International Trade Commission seeking to block Apple products from the U.S. market. Ericsson then filed suits in Germany, the Netherlands and the U.K.

The agreement covers LTE technology as well as 2G and 3G technologies.

Terms of the seven-year agreement were not disclosed, but Reuters reported that the investment bank ABG Sundal Collier published a note to clients saying it believed Apple would pay roughly 0.5 percent of its revenue on iPads and iPhones to Ericsson. Ericsson said Apple would pay an initial payment then pay ongoing royalties.

"The key question is whether the ongoing royalty is greater than, equal to, or lower than the amount being accrued," the analysts at Wells Fargo said in a note following the announcement of the deal between Apple and Ericsson. "We believe the likelihood of a higher accrual is low as we believe Apple likely would not settle in this case (particularly given our view that there has been little incremental leverage on Ericsson's side). We believe it is wholly possible the ongoing payments could be lower, which, if true, could help gross margins. This strategy would be consistent with Apple's more recent moves to improve gross margins (adding $5-$10 per hardware unit by reducing the amount it amortizes for its operating system). We believe this would allow Apple to be more strategic to drive units in certain countries."

The companies also agreed to collaborate "in multiple technology areas," according to Ericsson's press release, including the development of 5G, video network traffic management, and wireless network optimization. Ericsson agreed to patent-licensing deal with Samsung in January 2014.

The agreement ends investigations by the U.S. International Trade Commission as well as pending suits in the U.S., and the three European markets. Analysts had estimated that had Ericsson won the case, Apple would have been required to pay the Swedish company between $240 million and $725 million based on estimated handset sales and per-phone royalties.

"We are pleased with this new agreement with Apple, which clears the way for both companies to continue to focus on bringing new technology to the global market, and opens up for more joint business opportunities in the future," Kasim Alfalahi, Ericsson's chief intellectual property officer, said in a prepared statement.

For more:
- see this Ericsson press release

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