For at least the past decade, Apple has been synonymous with innovation in the Consumer Electronics. Industry Every year, tens of millions of members of its devoted customer base shell out hundreds if not thousands of dollars each to buy the latest iPhone Mac or Apple watch. They have demonstrated the ability to roll out new and Innovative products year after year without fail. Investors have rewarded the success by giving the Tech Giant a three trillion doll market cap, making it the most valuable company in the world.

But there's another part of Apple's research and development strategy that they probably don't want you to know about. In 2020, Apple unveiled the Series 6 Apple watch. There were a few improvements over the previous version, Most notably the new watch included a light based pulse oximeter which allows the user to monitor their blood oxygen concentration. Apple Touted this as a huge breakthrough with this: Innovation The Apple watch is not only a cool Gadget but could potentially save your life by alerting you when you're blood oxygen reaches an unsafe level.

This feature has been a huge success with the Apple Watch recently generating about $17 billion of annual sales for the company. But almost as soon as the Apple Watch Series 6 was unveiled, a small company called Masimo filed a lawsuit against Apple accusing the Tech Giant of pursuing a highly sophisticated and predatory campaign to steal Mimos Trade Secrets and infringe on its patents. The technology to read blood oxygen was invented by Mimo, and Apple would have had little to no chance of developing it on their own without stealing Mimos patents tech companies Sue each other all the time, and many patent infringement lawsuits are either ere exaggerated, if not outright frivolous. But after two long years of litigation, Masimo won the US International Trade Commission found that Apple had indeed violated Mimo patents on December 25th, 2023 Apple was forced to Halt all sales of Apple watches containing pulse oximetry.

This would cost the company billions of dollars of lost sales. Before we take a deep dive into the Masimo Apple litigation I Want to take a quick pause to thank the sponsor of today's video? Public Public.com has just launched its new High Yield Cash account offering an industry-leading 5.1% Apy, no fees, no subscription, and no minimums or maximums. That means that you can grow your cash with 5.1% interest with no strings attached. It's as simple as that.

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And now now back to the video. Founded in 1989, Masimo is a medical technology company focused on the development of non-invasive patient monitoring devices. One of the first areas they focused on was light based pulse oxymetry. This is a method that estimates the concentration of oxygen in the blood by Shining Light onto the patient's skin.

It then measures how much of the light was absorbed. Based on how much light is absorbed, you can estimate the concentration of oxygen. Knowing the blood oxygen levels can be extremely important for patients with respiratory or cardia conditions. Before pulse oximetry, doctors would have to draw blood to determine the oxygen level.

This can be painful, expensive, and for some patients it may not even be feasible at all. Clearly, if you can just shine a light onto the patient's skin, this is a far better option. The problem is historically light based pulse o symmetry has been very inaccurate. During the 1990s and early 2000s, Masimo developed something called signal extraction technology or SE SE can differentiate between arterial blood and Venus blood that is blood being pumped out of the heart and blood being pumped back into the Heart by measuring arterial and venous blood separately.

Masimo was able to obtain far higher levels of accuracy than what had ever been achieved before. Masimo created a number of blood oxygen modering devices with their technology. They successfully patented the technology and gained FDA approval for a number of their devices, which they sold mostly to hospitals. In the early 2010s, Apple was developing a new product called the Apple Watch.

They were trying to think Of features they could add to the watch which could make it more attractive to Consumers The problem is that just about anyone who would buy the Apple watch probably already owns an iPhone for features like telling the time, checking your text messages, setting reminders Etc These are all things you can do on your iPhone which you probably carry around with you at all times anyway, So it's not really clear what the value proposition is to spend hundreds of dollars on a smartwatch. Perhaps the only thing that a smartwatch can do that a phone can't do is continuously monitor things like your heart rate and estimate the number of calories you burn during a workout or how many hours you were asleep each night. By this point, there were already a number of products on the market which could do this. Apple wanted to make a premium product consistent with their existing brand positioning that they could sell for a premium price point.

To achieve this, they needed a differentiator something no other Smart Watch up to that point could do inor before 2013. Before the first Apple watch was unveiled, they decided that light based pulse o' symmetry was the perfect candidate. Up until that point, most pulse oximeters were clipped onto the finger, but it should be theoretically possible to put it into a Smartwatch as well. While Apple has significant engineering expertise, they are not a medical device company.

Their existing Engineers knew little if anything about pulse oxymetry. By this time, it was well known that Masimo was a leader in the field of non-invasive physiological monitoring including light based pulse. Lo symmetry in 2013 Apple Contacted Masimo and entered confidential discussion questions about Mimos technology. It was Masimo's belief that Apple was considering licensing Mimos technology to put into their Apple watch.

Apple never entered into any licensing agreement with Masimo. They instead hired at least seven and allegedly up to 20 Masimo employees including two seite. Executives Apple Enticed them by offering as much as double their prior salaries and signing bonuses of up to $1 million if they quit their jobs at Masso to join. Apple.

Over the following years, Apple added things like heart rate monitors and to the Apple watch. According to Massimo, these early versions of the Apple watch were already infringing on Mimo's patents. Even with the help of a couple dozen Masimo employees, recreating the light based pulse oximeter was no easy task in 2020. Apple Felt that they were finally ready to launch the pulse oximeter in the series 6 Apple watch.

The timing was perfect. The Co. pandemic had already brought renewed Focus to respiratory Health which is very relevant to blood oxygen monitoring. In Apple's 2020 launch video, which was viewed by over 10 10 million people, they specifically touted the utility of blood oxygen monitoring in the context of the pandemic.

At this point, Masimo was convinced that Apple had stolen their intellectual property given how similar the Apple Watch's design was to their patented technology. They also thought they had a good chance of proving it in court. So they filed two lawsuits against Apple One in federal court and another complaint to the US International Trade Commission. In addition to alleging patent infringement, Masimo accused Apple of violating Trade Secrets by poaching Masimo employ Emplo Es with the intent of obtaining confidential technical information.

Apple denied all allegations of patent infringements, saying that they had developed all the relevant Technologies themselves independently of Masimo's intellectual property. According to Apple, their 2013 meeting with Masimo was in good faith. They were considering licensing Mimos technology But Ultimately decided it was not suitable for what they were trying to accomplish, so they instead decided to develop the technology themselves. Obviously, to build this technology, they would need to hire new Engineers experienced in P Symmetry.

According to Apple, the fact that they hired a number of people from Mimo was coincidental. They wanted to hire the best people in the industry and it just so happened that they were working for Mimo. During the discovery process, Apple was required to turn over internal documents and Communications to the court. Unfortunately, a lot of these internal records appeared to contradict Apple's defense.

An internal PowerPoint presented to Apple's Senior Management discussed ways for Apple to gain Pulse O Symmetry capabilities. One of the options was labeled acquire Mass Mo people or assets. The key is that acquiring people from Masimo was a stated option that Apple's management was proactively considering. Acquiring Mimo would cost billions of dollars, and they would also be stuck with an unrelated medical device business which they had no interest in owning.

It would be a lot easier to just poach a handful of Masimo employees who would know how to recreate the pulse oxymetry. Apparently, this was a strategy that Apple employed broadly across the entire company in internal emails. Apple CEO Tim Cook Referred to this as Smart Recruiting specifically as it relates to the Masimo case. Internal records showed an Apple HR employee sending an email with the title recruiting from Massimo.

The email was about plans to hire existing Masimo employees. These internal documents make it almost impossible to believe that Apple's hiring a Mimo employees was indeed coincidental. It looks much more like an affirmative and intentional strategy. With that being said, poaching employees from a competitor is not a crime in and of itself in the vast majority of cases is a completely legitimate thing to do When you hire employees, you want people with relevant experience.

One of the best ways a job applicant can have relevant experience is by working at a competitor. Things get problematic when you post a competitor's employee specifically to gain confidential information. You don't really care about the employees skills and experience. You just want access to specific information that he or she was privy to from the previous employer.

In an extreme example, an employe could download a bunch of confidential files on their last day of work and bring the hard drive to you. This would be corporate. Espionage And to be clear, this is not what Masimo accused Apple of doing. Even beyond the legal concerns of patent infringements, reverse engineering a product as complicated as Masimo's pulse oximeter is a technically difficult task.

The Masimo employees Apple poach had intimate knowledge of how the pulse oximeter was developed. They had knowledge far beyond the relatively simple description of the technology publicly disclosed in Masimo's patents. according to Masso, Apple poached these employees specifically for the purpose of infringing on Masimo's patents. It also appears that coaching Mimo employees was not merely a convenience for Apple but a necessity prior to hiring key Masimo employees.

Internal: Communications Within Apple discussed pessimism about the project Executives called the development a mess and admitted internally that they were already well behind other Smart watches already on the market. It stands to reason that without the alleged patent infringements, Apple would have had little chance of developing a pulse oximeter on its own, at least not within the foreseeable future. In May of 2023, after a roughly monthlong trial, a jury was unable to reach a unanimous decision. Of the seven jury members, six sided with Apple and one cided with Mimo.

To reach a conclusion, the jury must be unanimous, so there will be a new trial in 2024. However, the hung jury didn't mean that Apple was completely out of the woods. In addition to the jury trial, Masimo also filed a complaint against Apple to the US International, Trade, Commission or ITC. The ITC is tasked with regulating Imports into the United States to make sure they comply with Us laws.

Because Apple watches are assembled in China and imported into the US, they fall within the Itc's jurisdiction. In October of 2023, the ITC found that Apple had indeed violated a number of Mimos patents. Thus, Apple watches which include pulse oximeters which include the Series 6, 7, and the most recent series 8 are illegal and should not be allowed to be imported into the US. In late December Apple was forced to stop all sales of affected watches in the US.

This includes all the watches they currently sell with the exception of the cheaper SE model which does not include pulse oximetry after the ITC decided on the ban. Apple almost immediately filed an appeal in federal court on December 28th. Just a few days after the ban went into effect, the appeals court temporarily reversed the Itc's import ban until January 10th. By January 10th, the ITC must consider new arguments brought forth by Apple and decide whether or not to reinstate the ban.

Apple is reportedly working on a software update to the Apple watch which would avoid infringing on Masimo's patents. However, it's unclear if this is even possible as Massimos patents cover both software and Hardware plus the pulse oximeters they currently use already suffer from low accuracy. According to a recent study by the National Institutes of Health, the Apple watch can give readings which are off by up to 5.9% Given that the healthy range of blood oxygen is 95 to 100% the Apple watch will often show a reading of below 95% even when the user is completely healthy. For healthy individuals, the psychological distress of frequent false alarms would likely outweigh the extremely unlikely benefit of identifying a real issue.

Even worse, due to the high frequency of false alarms, even if the Apple watch detects a real health issue, the user may disregard it, thinking it's a false alarm. for users with known cardiovascular issues. The utility of the Apple watch is also limited. The Apple watch only takes measurements at infrequent intervals.

Thus, it would likely fail to detect a rapid drop in blood oxygen, which could require immediate medical attention. Thus, the Apple watch is not a substitute for more fisticated pulse oximeters such as the ones made by Mimo. These are more accurate because they can run light through the tip of the finger, something a smart watch can't do. If Apple is forced to make significant changes to the pulse oximeter on their watches, the accuracy issues would likely become even worse assuming the band is reinstated.

Apple has two other options. Firstly, they could just remove the pulse oximeter from the watches altogether. However, despite the limited usefulness to the vast majority of people, Apple has touted the pulse oximeter frequently in its marketing campaign. Many customers May believe this feature is more useful than it actually is, and thus its exclusion may have a significant impact on sales.

The second option is to pay Masimo to license the technology. However, giving Masimo a favorable deal May set a dangerous precedent and catalyze lawsuits from other patent holders. According to Masimo's CEO Apple has thus far shown zero interest in negotiating a licensing deal. With all that being said, Apple as a company will be fine.

The Apple watch represents less than 5% of their revenue and the ban only impact sales in the US. Even a worst case scenario would likely only have a marginal impact on their overall profits. Recently, Masimo launched its own SmartWatch with a pulse oximeter. They claim that it is far more accurate and takes readings far more often than the Apple watch.

And unlike the Apple Watch, the Masimo watch has obtained FDA approval to be sold as a medical device. it's unclear how successful the Mimo watch will be. given Masimo's limited experience and almost non-existent brand recognition in the consumer space. Apple's infringement of Masimo's pulse oxymetry patents may not be an isolated incident.

In fact, there is some evidence to believe that borrowing other companies innovation has been at the core of Apple's DNA from the very beginning in 1970 Xerox which is one of the most Innovative tech companies at the time created the Poo Alto Research Center or Park which developed personal Computing Technologies Around that time, Xerox made a venture capital investment into a small startup culture. Apple In 1979, they invited Steve Jobs to visit Park to show him the Cutting Edge of technology that they were developing. Presumably they thought that they might be able to partner with Apple someday and didn't view the small startup as a competitive threat at Park Jobs saw the experimental Xerox Alo computer Xerox had developed it a few years prior but had neglected it as they were skeptical that personal computers would ever gain market adoption. Steve Jobs copied many of the design elements from Xerox into the first Apple Macintosh computer, which was a huge success.

I mean Picasso had a saying he said good artists copy great artists, steal and we have you know, always been Shameless about stealing great ideas. In recent years, critics have accused Apple of implementing a policy of so-called efficient infringement. They would allegedly intentionally infringe on other people's patents. Due to Apple's massive resources and extensive experience in litigation, many smaller patent holders stand little chance of beating them.

in Cor. For example, Masimo has reportedly spent $6 million on legal fees for its Apple watch litigation over the past 3 years. In some cases, they are forced to settle with the patent holders, but given the fact that they make almost $100 billion of profit per year, they can afford to pay large settlements. These settlements become a cost of doing business.

All right guys. That wraps it up for this video: What do you think about Apple's alleged patent infringement? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one. Wall Street Millennial signing out.