Apple Dodges iPod and Stock Options Suits

Despite the U.S. holidays, Apple has managed to eke out two important legal victories that remote a couple clouds from the company’s future. First, the company has entered into a settlement with Burst.com over a long-running patent dispute concerning compressed media used in iTunes, Apple’s iLife application suite, and the ever-popular iPod music player. Second, a judge has dismissed a a lawsuit against the company alleging Apple CEO Steve Jobs had lied to shareholders about back-dated stock option grants.

The patent infringement battle with Burst.com has been ticking along since late 2004, but activity rapidly accelerated this month when a judge dismissed 14 of Burst.com’s infringement claims against Apple. Burst’s original claims against Apple were over the delivery of compressed audio and video over a network; Burst had gone after Microsoft over some of the same patents in 2005, and managed to win $60 million in a settlement. Apple, however, stood its ground, claiming it didn’t believe the patents were valid. Burst upped the ante in early 2006 by adding iTunes, QuickTime, and the iPod itself all infringed on Burst’s patents.

Apple’s new settlement with Burst.com entails the Cupertino company paying Burst a one-time $10 million fee, which grants it access to most of Burst’s patent portfolio. (The deal does not include access four current and pending Burst patents covering DVR technology.) Roughly $4.6 million will go into Burst’s pockets, with the remainder going to attorney’s fees and other costs. Even with 14 patent claims thrown out by a judge, the $10 million settlement may have been a smart move for Apple—if the case has moved to trial in February 2008 and Apple had lost, it may have been looking at paying a royalty on iTunes use and iPod sales.

At the same time, a judge has dismissed a shareholder lawsuit brought against Apple by Mark Molumphy that accused Apple CEO Steve Jobs of lying to investors about how the company back-dated stock option grants between 1997 and 2002. Apple—and many other companies—have undergone a period of intense scrutiny about how they gave stock option grants to executives and employees, sometimes backdating the grants to a date with a favorable share price that maximized the value of the grants. Although backdating options is not illegal in and of itself, failing to disclose the financial impact of the backdating violates securities regulations. Apple initiated ann internal investigation—which saw the company restate $84 million in earnings and had CFO Fred Anderson and General Counsel Nancy Heinen leave the company—and the SEC launched its own investigation which resulted in charges against Anderson and Heinen. Anderson settled with the SEC immediate, and laid blame for the scandal at Jobs’ feet. SEC charges against Heinen are still pending.

In dismissing the suit, the U.S. District Judge Jeremy Fogel found the claim against Apple was no sufficiently specific to warrant the application of a longer five-year statute of limitations for fraud. “Plaintiffs’ pleading in its present form is characterized by conclusory, general, and non-individualized assertions as to all of the Defendants,” wrote Fogel in his decision. “The only individualized allegation is that Apple found in the course of its investigation that Jobs was aware of the backdating.” However, Judge Fogel allowed that shareholders could amend the suit of they could present evidence Apple filed false statements about option grants after July 30, 2003.

The shareholder suit is the second against Apple that Judge Fogel has dismissed in recent weeks: earlier, Judge Fogel dismissed a suit brought by the New York City Employees’ Retirement System alleging Apple’s backdating of stock options had diluted the company’s share price, and that its members were thereby injured by the backdating. Fogel ruled that the case failed to show investors had been harmed. Judge Fogel left open the possibility of re-instating the suit if the plaintiff could show Apple had harmed itself as a company with the backdating, but noted it would likely be considered a “derivative complaint” to Molumphy’s suit, which has now been dismissed.

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