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Nokia Corporation’s (NOK - Analyst Report) patent licensing agreement with Research in Motion is in disarray as the struggling Finnish handset manufacturer has sued the Blackberry maker for breach of contract in Britain, US and Canada. If Nokia manages to win, then Research in Motion will become the second closest rival after Apple Inc. (AAPL - Analyst Report) to loose a legal battle with the company in the last 15 months.

Back in 2003, Nokia entered into a patent licensing agreement with Research in Motion which allows the later to use some of the industry standard technologies for mobile devices. As per the agreement, Nokia will receive a royalty payment from the maker of Blackberry. However, Nokia claimed that Research in Motion has sell products compatible with its Wi-Fi technology without agreeing on the royalty payment details and has filed a patent-infringement suit against research in Motion in Germany.

Research in Motion has argued that it does not need to pay additional royalty as the patent agreement with Nokia provides it the right to use the Wi-Fi technology. In that context, the Canadian company has filed an arbitration process in the Stockholm Chamber of Commerce in March 2011.

Earlier in the month the Stockholm chamber of commerce declared a ruling against Research in Motion. To make matters worse, Nokia filed an enforcement suit that will impose the tribunal’s ruling to stop research in Motion from selling Wi-Fi enabled products without first agreeing on the terms of royalty payment.

If Research in Motion loses it will have to pay an additional royalty of $2-$5 per phone to Nokia. Losing the legal tussle could be a major blow for the Blackberry maker on the wake of its much anticipated launch of BB10-based smartphones. A smartphone without Wi-Fi will significantly reduce the value of its BB10-based devices.

Nokia’s impressive patent portfolio is the only jewel left in its crown. The company has the strongest patent portfolio in the wireless industry and has spent almost $62 billion in research and development in the last two decades. Furthermore, the company has patent licensing agreements with around 41 mobile handset manufacturers, who use its patents. The company receives a healthy royalty from this licensing agreement.

We believe this patent dispute provides Nokia a win-win situation. If Nokia allows Research in Motion to sell Wi-Fi enabled products then it will provide a steady cash flow stream to them. On the flip side, if Research in Motion losses it will provide an opportunity for Nokia to win some of the Blackberry customers as a smartphone without Wi-Fi will be less attractive to the data hungry customers.

We retain our long-term Neutral recommendation on Nokia Corp. However, it holds a Zacks #2 Rank, implying a short-term Buy rating.

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