Apple Pays $100 Million to Settle Patent Spats With Creative

The payment gives Apple a "paid-up license" to use Creative's patented technology in all Apple products. The payout may be reduced over time if Creative finds other licensees to purchase the rights to use the same technology, the companies said.

Creative, which markets MP3 players under the Zen and Nomad brands, has rolled up significant market share, running a close second to Apple in some markets.

"Creative is very fortunate to have been granted this early patent," said Apple CEO Steve Jobs. "This settlement resolves all of our differences with Creative, including the five lawsuits currently pending between the companies, and removes the uncertainty and distraction of prolonged litigation."

For Apple, avoiding the Creative court cases may be crucial as it tries to keep investor attention focused on its growth prospects rather than distractions such as lawsuits. It also enables the company's legal team to direct its attention to another troublesome issue -- namely, how Apple stock options were granted in the past, and how that question may impact earnings while some options are restated.

A New Friend

The settlement comes less than two months after Creative, which is based in Singapore, asked the International Trade Commission (ITC) to intervene in its disputes with Apple. That move may have sped up what could have been a lengthy legal process, making it more likely Apple would have to deal with the patent issues sooner rather than later.

The agreement also calls for Creative to become a partner in the "Made for iPod" program, which places an Apple stamp of approval on third-party accessories for iPod players.

Creative CEO Sim Wong Hoo said the deal has "opened up significant new opportunities" for his company.

"Apple has built a huge ecosystem for its iPod and with our upcoming participation in the 'Made for iPod' program, we are very excited about this new market opportunity for our speaker systems, our just-introduced line of earphones and headphones, and our future family of X-Fi audio enhancement products," he added.

Creative said it would also get an immediate boost to its bottom line, with the payment tacking on 85 cents per share worth of earnings for the current quarter.

Brighter Days Ahead

Investors in both companies cheered the news, with Creative's U.S.-traded shares soaring more than 20 percent in midday trading Thursday to $7.26, and Apple's shares climbing just under 1 percent to $67.71.

Settling the dispute in a timely manner may have been especially important for Apple because of additional competitive threats looming on the horizon, notably from Microsoft's (Nasdaq: MSFT) own line of portable players, which are still in development.

The patent cases never posed too much of a risk to Apple, which has extensive cash reserves, Yankee Group analyst Mike Goodman said. Settling made sense because it will allow the company to focus on building next-generation devices and give investors confidence Apple can continue to produce iPods, he added.

The devices are important to all aspects of Apple's business, driving traffic to its iTunes Music Store -- which has now become a video download destination as well -- and helping to draw in new customers for its desktop and notebook computers, Goodman continued.

The payout to Creative represents just over 1 percent of Apple's cash on hand, which totaled more than $9 billion at the end of the second quarter, Piper Jaffray analyst Gene Munster wrote in a research note.

"If Creative had been able to win any favorable rulings in the five outstanding lawsuits, Apple could have faced headaches," he said, such as costly appeals and the risk of having courts decide both future and historical royalty payment rates. "We believe the settlement will prove to be the right course of action."

Each company had accused the other of infringing on key patents that make portable music players possible, with Apple countersuing after Creative first claimed the iPod infringed on its patents, which were held both in the U.S. and abroad.