Smartwatches herald new legal battles

When executives at Valencell, a North Carolina-based tech company, agreed to meet Apple researchers in 2013 to discuss the heart-rate sensor technology they had developed for mobile fitness trackers, they probably envisioned a potentially lucrative partnership with one of the wealthiest companies in the world.

Apple was, at the time, believed to be creating a watch that would incorporate the technology used in its iPhones and iPads. Any deal incorporating Valencell’s fitness technology could be particularly profitable for the seven-year-old company so Valencell was all too eager to help. But after a series of meetings at which Valencell demonstrated its technology to Apple, no contract was ever offered and the tech giant, Valencell alleges, disappeared.

Yet when the Apple Watch was unveiled, Valencell claims the product contained the exact functions that it had been showing to Apple — and Valencell has filed a lawsuit to that effect. The lawsuit, filed in January at federal court in North Carolina, also alleges that Apple employees who were working on developing the watch used fake names to download publicly available white papers from their website detailing how the sensors worked. Apple had not yet responded to the claims in court at time of writing and declined to comment to the Financial Times.

“Apple is knowingly using Valencell’s patented technology in an effort to achieve a licensing rate that is below a reasonable royalty,” Valencell’s lawyers allege in the lawsuit. Apple had decided “that the benefits of infringing upon Valencell’s patented technology outweigh the risk of being caught and ultimately forced to pay damages”.

While the case may seem a straightforward intellectual property dispute, it is also one of a handful of lawsuits around the technology used in the emerging field of smartwatches. Lawyers are not expecting the same multi-million-dollar litigation boom that was seen in the patent wars stemming from the first smartphones, but they are predicting further claims as the market matures and a wider range of companies seek to create watches with ever-improved technology and design features.

The battles between major tech companies including Apple, Nokia, HTC, Google and Sony over smartphone technology began in late 2009 when Nokia and Apple sued each other for alleged infringement of various patents. In the ensuing years, lawsuits, countersuits and trade complaints have mounted, resulting in verdicts and settlements that have reached and sometimes exceeded $1bn. Some cases are still going on.

Last year, Apple and Ericsson began a dispute over whether the Swedish technology group’s 4G mobile patents are essential for the manufacture of the iPhone and how much Apple should pay if they are. It was settled in December 2015 with a patent licensing deal between the companies.

Alan Fisch, an intellectual property lawyer at Fisch Sigler in Washington DC, says the level of claims will depend on how popular the watches become. “Smartwatch patent battles will increase or decrease as a function of the demand for the product itself,” he says. “Substantial patent disputes often follow a substantial demand for a new product class. This was true for sewing machines in the 1800s, disposable diapers in the 1900s and smartphones in the 2000s.”

Analysts at Gartner, a technology research company, expect the market for smartwatches to soar, with sales projected to rise 6 per cent from 30.32m units in 2015 to 50.4m units this year, generating about $11.5bn in revenues. That figure is projected to increase even further in 2017 to 66.71m units.

Kurt Calia, a litigation partner at Covington & Burling in Silicon Valley, says that, so far, there is not the same demand for smartwatches that there has been for smartphones, but that could change as the technology develops and more companies introduce their own versions. Still, the market is never likely to be as big because smartwatches are not considered as essential as smartphones have become.

“A lot of the foundational technology that formed the basis of the fight in the smartphone wars is still applicable, like touch screens,” says Mr Calia. Many of these disputes have now been resolved through lawsuits. “But there could be a number of other areas that are unique to smartwatches, such as biometric sensors that monitor your pulse. You can’t do that with your smartphone. Or around flexible displays, there’s a whole lot of technology around miniaturisation. If and when there are lawsuits I suspect it’ll be on those sorts of technologies.”

He cited a lawsuit in federal court in the Eastern District of Texas in which a patent that covered security systems, where a smartwatch could be used to turn on or off a car alarm, was in dispute. In that case, last June, Colorado-based Intellectual Capital Consulting sued Apple, Samsung, Lenovo, LG, Sony and car manufacturers including Audi, BMW and General Motors. It claimed they were infringing its patent for remote car start, lock and alarm systems via smartwatch.

“That’s an example where there’ll be a distinct point of function; those are the kinds of things we’ll probably see,” Mr Calia says. “There’s unlikely to be the big titan v titan litigation that we saw in the smartphone wars.”

Mauricio Uribe, a partner in Seattle with the intellectual property law firm Knobbe Martens, says it is unlikely there will be a rash of claims over smartwatches because, in addition to it being a smaller market than smartphones, they do not work in the same way.

“Other than some of the more generic Bluetooth or WiFi standards, the operation of smartwatches to date does not involve standardised technologies,” he says. “This makes patent evaluations more specific to the individual devices and does not lend itself to widespread licensing efforts akin to the smartphones.”

Substantial patent disputes often follow substantial demand for a new product class

In the Valencell lawsuit, the problem began in February 2013 when Liang Hoe, at the time a senior partnership manager at Apple, contacted Valencell to discuss the latter’s heart-rate sensor technology. Talks between the two companies progressed and in June 2013 Dr Steven LeBoeuf, the co-founder of Valencell, met Apple representatives to discuss using some of its features in Apple’s products, the lawsuit says.

In the summer of that year, Valencell demonstrated a watch to about 15 Apple employees that included a heart-rate monitor. Apple was sent some of the products powered by Valencell’s technology, known as PerformTek, the lawsuit alleges, and until March 2014 Apple carried out detailed testing on the products and analysed their circuitry. In December that year, there was another meeting with Dr LeBoeuf. By April 2015, Apple began shipping its watch, without ever negotiating a contract with Valencell, it is alleged. The North Carolina tech company is accusing Apple of infringing four of its patents and of unfair and deceptive trade practices.

While the majority of legal disputes over smartwatches are bound to hinge on intellectual property rights, they are not the only issues engaging lawyers.

In the EU, regulation that takes effect in March gives smartwatch makers an advantage: customs agents now have the right to seize any counterfeit goods that pass through a country in the trade bloc. Previously, if the goods were shipped from China, en route to the US, for example, customs officers did not have the right to seize them, says Daniel Marschollek, a disputes partner at Norton Rose Fulbright in Frankfurt. “For sure there are counterfeit smartwatches out there,” Mr Marschollek says. “We have for a considerable period of time represented the then world-market leader in cell phones and whatever they launched was immediately copied.”

Then there is the long-shot case filed in Los Angeles County Superior Court by a group called Coalition Against Distracted Driving against companies including Apple, Samsung, Microsoft and Google. It asked for at least $1bn annually to fund a public education campaign to explain the risks of using smartwatches while driving.

And in a David v Goliath dispute, a 32-year-old man from Wales won a lawsuit against Apple over a crack in his Apple Watch Sport, which he noticed 10 days after he bought it in July. The tech giant refused to reimburse him because it said the claim was not covered by warranty, but Gareth Cross challenged them in a small claims court in Aberystwyth, Wales, saying the company had claimed it was scratch-resistant. Apple was ordered to refund the watch, plus Mr Cross’s legal costs, and may have to change its marketing claims as a result. Mr Cross told the BBC that despite the dispute, he would be buying another Apple Watch.