Burst's Lawsuit Against Apple May Have Wide Ripple Effect in Streaming Media Industry (AAPL, BRST)

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This Burst.com (BRST) patent infringement suit against Apple Computer (AAPL) may be worth noting for the investment community. This written piece here is not to meant as an endorsement of these patents and it is not meant to support Apple's claims. I have no dogs in the fight so to speak, but shareholders of AAPL and other streaming media companies may want to track this, because it has the earmarks of a case that could affect the whole industry and many other companies.

CURRENT SITUATION
Burst is alleging that Apple's iTunes Music Store, iTunes software, the iPod devices, and Apple's QuickTime Streaming products infringe the following Burst U.S. Patents (Richard Lang is the Chairman & CEO of Burst.com):

4,963,995 (filed on December 27, 1988 by Richard Lang under Explore Technology, Inc. of Scottsdale, AZ)

5,995,705 (filed on July 18, 1997 by Richard Lang under Instant Video Technologies, Inc. of San Francisco, CA)

5,057,932 (filed May 5, 1989 by Richard Lang under Explore Technology, Inc. of Scottsdale, AZ)

5,164,839 (filed October 11, 1991 by Richard Lang under Explore Technology, Inc. of Scottsdale, AZ)

Burst's filing is in RESPONSE to a suit that Apple filed against Burst in January of this year, seeking a declaration that Burst's patents are invalid and that Apple does not infringe them. Burst requests in its counterclaims that Apple pay a reasonable royalty for Apple's infringing products and services, and also seeks an injunction against further infringement.

A copy of the complaint is on the company website at the hyperlink provided here:

http://burst.com/new/home.htm

QUOTES & EXCERPTS FROM THE PRESS RELEASE AFTER MONDAY'S CLOSE:
Burst.com Chairman & CEO Richard Lang indicated that the company would rather not have to resort to litigation, but is committed to enforcing its patent portfolio, which was developed over an 18-year period. In its April 17 filing, Burst alleges that its technology has been essential to Apple's success, providing it with a critical audio and video-on-demand media delivery solution. According to Lang, "We have a responsibility to protect our patents and to seek a fair return for the many years and tremendous investment that we have made in developing Burst technology and patents."

Apple failed to license Burst's technology when it introduced its iPod and iTunes products in 2002. According to Lang, Apple may have assumed that Burst's patents would be invalidated in Microsoft's defense of the then-pending litigation. Instead, Microsoft ultimately licensed Burst's patents. "While we had hoped to avoid litigation and negotiate a reasonable license fee, it is Apple's own actions that have forced our hand. We now look to the courts to reaffirm Burst's rights as innovators and to be paid fairly for our widely acknowledged contributions to the industry."

BRIEF AS OF JAN 5
On January 5, 2006 Burst.com, Inc. (BRST) SAIT IT WAS SUED BY APPLE COMPUTER in U.S. District Court in San Francisco for declaratory relief, alleging patent invalidity or non-infringement. This was after a breakdown in protracted negotiations for issuance of a license of Burst's patents to cover Apple's iPod and iTunes products. Burst anticipated responding to the complaint and filing a counterclaim for patent infringement, which is what this current action is. Burst has stated in the press that it remains committed to the enforcement of its intellectual property and looks forward to successfully resolving this litigation through a license covering Apple's Quicktime, iPod and iTunes products, including Apple's iTunes Music Store.

OLDER BACKGROUNDER
Last year, Burst settled its patent and antitrust suit against Microsoft (MSFT) with Microsoft taking a license to Burst's patents and paying a lump sum of $60 million. Since the Microsoft settlement, the company has been in patent licensing discussions with several companies engaged in the distribution of audio and video content on computer networks.

MY TAKE & CONJECTURE ON THIS
What is important here is that you could make a case that a precedent has sort of been established (pardon the "Legalese" if it has been referred to improperly). With Microsoft (MSFT) already having capitulated and paying a one-time $60M fee instead of fighting this, it does at least establish a quasi-precedent of perceived patent validity and a recognition of the patents. This is likely NOT going to be the same magnitude as a "RIMM/NTP scenario," but it certainly can be a financial issue that AAPL may have to deal with until they settle or until there is a legal resolution (which could take years). That does not mean a court will rule in favor of them automatically, but it could be the basis for the suit and may at least set the tone; and if this continues endlessly and if it looks like it may not be going that well for Apple then could be a thorn in their side for some time to come.

I have not found a list of the "other companies" that Burst is noting, but some companies that instantly come to mind in this arena would be Napster (NAPS), Audible (ADBL), and RealNetworks (RNWK). There are literally dozens of others that could be affected or indicated and it is just too soon to try identify the entire universe since it could go up and down the chain. Please note that the mention of these other companies here is purely hypothetical and is only for conjecture purposes as the types of companies that would fit the bill. I am still waiting on an email response from the company regarding which "other companies" this may be, but I would presume they will choose to not tip their hand on that (would you?...probably not).

Burst is seeking a jury trial on this, so we'll just have to see what unfolds. Some of the basis of this suit seems to be on initial claims and some seems to be based on counterclaims. That being said, it isn't at all clear yet if this is just me making a mountain out of a molehill or if this is going to be a decent threat to AAPL investors.

One thing is probably a safe bet for the immediate future: with AAPL reporting earnings after the close today, this will probably be dwarfed by earnings, guidance, iPod & iTunes sales, and the endless hoard of analyst calls Thursday morning.

Stay tuned.....