Story originally published in the Oct. 6 print edition of Orange County Business Journal
Joe Kiani has once again proven that the products built by his company, Masimo Corp., can withstand scrutiny from lawyers at the world’s largest companies.
The U.S. International Trade Commission on Oct. 26 ruled in favor of Masimo (Nasdaq: MASI) against Apple Inc., the world’s most valuable publicly traded company (Nasdaq: AAPL) with a $2.7 trillion market cap. The ruling may halt the importation of Apple’s newest watches by Dec. 26, the day after Christmas.
“Wow—it feels really good,” Kiani, Masimo’s CEO and co-founder, told the Business Journal a day after the ruling. “You’re going against the biggest company in the world. They have so much clout.”
A multibillion-dollar question remains, one that could shape the financial future of Masimo: Will the ITC ruling withstand numerous expected challenges from Apple, induce the tech giant to negotiate a settlement with Masimo, or perhaps force Apple to change its products to remove functionality that infringes on the Irvine company’s patents?
Wall Street thus far appears to be siding with Apple. Neither firms’ shares moved too much after the ruling, and Apple wasn’t quizzed about the impact of the ITC ruling during its latest quarterly earnings call with analysts last week.
“We’re giving people even more tools to stay safe and live healthy, active lives,” Apple CEO Tim Cook said during the earnings call last week, when discussing his firm’s newest line of watches.
Some legal watchers tell the Business Journal that the ITC decision could be more decisive than the marketplace believes, giving Masimo some leverage in terms of negotiating a settlement.
However, given Apple’s numerous legal and other options for dealing with the ruling, most aren’t expecting the company’s products to be taken off the market any time soon.
History of Wins
The win is another notch in the careers of Kiani and his longtime attorneys, Joseph Re and Steve Jensen of Irvine-based Knobbe Martens.
Masimo has won several big cases in the past two decades, collecting hundreds of millions of dollars in settlements from giant medtech companies Royal Philips Electronics NV and Nellcor, now a unit of Medtronic PLC.
Kiani, who immigrated from Iran when he was 9 years old when he knew three words of English, thought he could invent a better way to measure blood oxygen levels and in 1989 started his company in his garage in Aliso Viejo.
The company’s products, primarily sold to hospitals, leapt in popularity during the pandemic because of their ability to remotely monitor patients.
Masimo, which went public in 2007, is expected to generate $2.1 billion in revenue this year, according to the average estimate of analysts.
The ITC Ruling
Masimo in 2019 discovered Apple may have stolen its pulse oximetry technology for its watches when the latter, which has an office presence in Irvine, filed its own patents.
Masimo in 2021 took its case to the U.S. government where an ITC judge in January ruled in Masimo’s favor. The ruling was then upheld by the full commission, which also expanded Masimo’s claims.
What was the key to winning?
“Our patents are valid,” Kiani said. “The inventions are real.”
Apple can try to obtain a stay of the exclusion order either with ITC Commission or the Federal Circuit Court of Appeals if it chooses. Such a stay would be highly unusual, according to a variety of recent media reports. The first appeal is “as of right,” meaning Apple doesn’t need approval from a court to appeal.
“Masimo has wrongly attempted to use the ITC to keep a potentially lifesaving product from millions of U.S. consumers while making way for their own watch that copies Apple,” Apple said in a statement after the ruling.
Masimo is expanding into consumers devices by using its hospital grade technology for products like its own watch, the W1, which it unveiled earlier this year.
Masimo likes to say it’s a medical device maker using hospital level technology in a consumer device, while rivals are tech companies trying to enter this field with medical data that can be flawed.
Kiani said there was no way that Masimo could trick the ITC and mocked the idea that he would copy Apple for pulse oximetry.
“The full commission reviewed it with hundreds of documents on both sides,” Kiani said.
“Somehow, we copied them? Somehow, by taking their faulty pulse oximetry watch out of the market, we hurt people? Their pulse oximetry has only 6% accuracy when we get 100%.”
In the trading session after the ruling was announced, Masimo shares climbed 2.1%. At press time, the company’s shares traded around $80 and a $4.2 billion market cap.
60 Days
After the ITC ruling, President Joe Biden’s administration has 60 days to overturn it. Kiani has been a longtime supporter of Biden, and has hosted fundraisers for the president at his home.
Biden previously declined to veto an ITC ruling that found the Apple Watch violated electrocardiogram sensor-related patents of a different company, AliveCor.
However, Apple won the revocation of three AliveCor patents under a new system to prevent patent abuse called the Patent Trial and Appeal Board (PTAB) at the U.S. Patent and Trademark Office. AliveCor, which also accused Apple of poaching its employees, is currently appealing the revocation.
Apple tried to revoke Masimo’s patents before the same panel, which usually invalidates 90% of the patents before it, Kiani said.
“They lost PTAB, which also said the patents are valid,” Kiani said.
Exactly which Apple watches are banned wasn’t made clear by the ruling, Kiani said.
Apple reported its wearables division, which includes its watches, generated $41.2 billion in 2022, or about 10% of its total revenue. Analysts are expecting Apple to sell about 59 million watches this year.
Deep-pocketed Apple might try to tie the case up in court until it can develop technology to bypass Masimo’s patents, Piper Sandler analyst Jason Bednar wrote in a note to investors.
“A lengthy appeals process would allow the company time to do so with its current or next generation set of watches,” Bednar wrote. “It’s fair to conclude that this victory for MASI over Apple could give the former some negotiating leverage in the District Court cases regarding stolen trade secrets and patent infringement.”
In prior years, Kiani said he didn’t want a negotiated settlement. He appears to have softened his stance.
“I’m not opposed to it if we can help them instead of giving people a bad pulse oximetry reading,” he said.
Apple Feud
The feud dates to 2013 when Apple sought Masimo’s technology to install pulse oximetry on its watch.
Apple ended the arrangement within a few months and instead decided to recruit Masimo employees, including hiring Marcelo Lamego, who was slated to be Masimo’s chief technology officer, and Michael O’Reilly, who was Masimo’s chief medical officer.
“They took 25 of my engineers and three scientists,” Kiani noted.
Last November, Masimo won a case against Lamego when a federal court ordered him to abandon at least 12 patent applications. O’Reilly still works at Apple.
Masimo filed a civil case against Apple, seeking $1.85 billion in damages. After a four-week trial at the Ronald Reagan Federal Building and U.S. Courthouse in Santa Ana, the jury was hung and a mistrial declared in May. Kiani said it intends to retry that case, which is scheduled to begin next November.
Apple has countersued Masimo in Delaware, a case that is expected to begin next Spring.
Masimo, which Kiani estimates has spent $60 million in its legal cases against Apple, is scheduled to report third-quarter results after the close of markets on Nov. 7.
Masimo Lawyer: Right Beats Might
Masimo Corp.’s longtime lawyers are Steve Jensen and Joseph Re who are both partners at Irvine-based Knobbe Martens, the largest law firm operating in Orange County with about 140 local attorneys.
They’ve won several big cases in the past two decades for Masimo, collecting hundreds of millions of dollars in settlements from giant medtech companies Royal Philips Electronics NV and Nellcor, now a unit of Medtronic PLC.
On Oct. 26, the pair notched their latest victory with the U.S. International Trade Commission case against Apple Inc.
The Business Journal caught up last week with Jensen, who emailed his responses:
Q: Is the ITC ruling just a skirmish where the ban won’t take effect for a few more years as it winds its way through courts or is it the “winning the war” type of ruling?
A: This ban goes into effect on Dec. 26, unless Apple succeeds in a motion to stay or through its lobbying machine pushing for intervention by the president/USTR.
Q: You and Joseph Re have won major cases against Philips and Nellcor. Is this ITC win against Apple the biggest in your careers?
A: It’s hard to compare wins like that because each has its own significant consequences. The very existence of Masimo was riding on the Nellcor litigation, so that is an inflection point of success for patients worldwide having access to Masimo’s life-saving technology.
I would argue that our win there has saved many thousands of lives, prevented blindness in many thousands of babies, and saved billions of healthcare dollars and led to further innovations from Masimo that no other company has matched. So, that is pretty hard to beat.
This win against Apple, however, is against the biggest company in the world with an army of law firms. So, it really depends on the perspective of “biggest.” It certainly ranks high.
Q: How does it feel to beat the best lawyers hired by the world’s most valuable publicly traded company?
A: It is rewarding to be part of right overcoming might.
