Apple, Creative Tech Settle Patent Dispute

Apple will pay $100 million.
Publish date:

Updated from 6:48 p.m. EDT

Apple Computer

(AAPL) - Get Report


Creative Technology


have decided to bury the hatchet.

Under a deal announced on Wednesday, Apple will pay Creative $100 million to license its patent on MP3-player-interface software. The deal comes three months after Creative

sued Apple and filed a complaint with the U.S. International Trade Commission, accusing the iPod maker of violating that patent.

"Creative is very fortunate to have been granted this early patent," Apple CEO Steve Jobs said in a statement. "This settlement ... removes the uncertainty and distraction of prolonged litigation."

"We're very pleased to have reached an amicable settlement with Apple and to have opened up significant new opportunities for Creative," said Sim Wong Hoo, the company's CEO, in the statement.

Shares of Creative spiked on the news. In after-hours exchanges, the company's stock was up $1.76, or 29%, to $7.77. Apple's stock was off 9 cents, or about 0.1%, to $67.22 after the bell.

In its complaints, Creative had alleged that before Apple launched the iPod it had talked with Creative about an MP3 player partnership. In those discussions, Creative showed off to Apple the interface it used on its digital music players, which helps users organize and navigate songs. Creative alleged that Apple copied that interface when it launched its iPod line.

While the iPod has gone on to dominate the digital music-player market, Creative's market share and sales have languished.

The settlement ends all outstanding legal disputes between the companies, including five separate lawsuits, the companies said in a statement. It also resolves the trade complaint, said Apple spokesman Steve Dowling. What's more, as part of the settlement, Creative will join the constellation of companies that make iPod-related accessories.

The company plans to offer external speakers, headphones and other products for the iPod beginning later this year.

Despite the move to support the iPod, Creative plans to continue to make its own competing line of Zen digital music players, said company spokesman Phil O'Shaughnessy. That will place the company in the unique position of supporting the iPod while competing directly against it.

However, Creative doesn't see a conflict in the two roles, said O'Shaughnessy. The company's accessory products so far are largely compatible with both the company's own Zen line and Apple's iPods, he said.

"We see

the deal as an opportunity to further implement our products," he said.

Although Apple will be out $100 million for the license, the company may be getting some of that back. As part of the deal, Creative agreed to return some of that money to Apple if it is successful licensing its patent to other companies.

Apple plans to record the license as an asset on its balance sheet, Dowling said. Because the company plans to amortize the license "over many years," Apple doesn't expect the settlement amount to materially affect its current-quarter results, he said.

The settlement amount is equivalent to about 11 cents a share, given Apple's diluted share count for its most recent quarter. But the amount is a pittance compared with the $9.2 billion in cash and short-term investments the company reported having on hand at the beginning of last month.

In contrast, Creative expects the deal to add 85 cents a share to its earnings in the current quarter.

Apple's stock closed regular trading on Wednesday off 31 cents, or 0.5%, to $67.31, while Creative's was off 5 cents, or 0.8%, to $6.01.