Hewlett-Packard, Gateway Settle Patent Litigation

Updated from 4:50 p.m. EST

Gateway ( GTW) has agreed to pay Hewlett-Packard ( HPQ) $47 million to settle patent litigation between the two companies.

The deal, announced by both companies Wednesday, resolves all patent infringement claims between the two companies that span three federal lawsuits, three International Trade Commission investigations and a state court lawsuit against eMachines, which Gateway acquired in 2004.

Under the terms of the deal, Gateway will pay $16.7 million to H-P to resolve the litigation, without admitting fault. The remaining $30.3 million will go toward a new seven-year cross-licensing agreement between the two companies.

Gateway will take a $16.7 million charge for the fourth quarter and year ended Dec. 31, 2005. The Irvine, Calif.-based computer maker will revise its previously announced net income for the full year from $49.5 million to $32.8 million, or 9 cents a share.

The $30.3 million licensing agreement will be amortized over the deal's seven-year time frame, costing Gateway about $4.3 million a year. Gateway said the cost was substantially less than the near-term litigation costs that will now be avoided. For 2006, Gateway said, it will save $12 million in budgeted litigation costs.

Shares of Gateway, which closed down 8 cents at $2.28 Wednesday, were unchanged in extended trading. H-P's stock gained 5 cents in extended trading to $34.10.

"H-P has a long history of innovation in the PC technology, and we will continue to protect our investment in our PC patent portfolio," H-P's intellectual property licensing vice president, Joe Beyers, said in a statement.

H-P sued Gateway and eMachines in 2004 and 2005, alleging that the companies had infringed on 27 H-P patents. Gateway filed counterclaims asserting 13 patents against H-P.H-P has bulked up its legal department's licensing staff in recent years as the company seeks to derive revenue from an intellectual property portfolio that includes some 30,000 patents worldwide.

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