The late-night email to Tim Cook that started the Apple Watch saga

An Apple smartwatch is shown as customers visit the Apple Store in New York, U.S., December 26, 2023 (REUTERS/Eduardo Muñoz)

Around 1 a.m. California time in 2013, a scientist emailed Apple Inc. CEO Tim Cook with an irresistible proposition.

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“I firmly believe that we can develop the next wave of technology that will make Apple the number one brand in the medical, fitness and wellness market,” he wrote in the email, which was later included in the legal documents. About 10 hours after the message was sent, an Apple recruiter got in touch. And just a few weeks later, the engineer was working at the tech company on a smartwatch with health sensors.

A flurry of activity began. Within a few months at Apple, an employee asked the company to file a dozen patents related to sensors and algorithms to determine a person’s blood oxygen level from a wearable device. But it wasn’t just any engineer. He had been the technical director of Cercacor Laboratories Inc., the sister company of Masimo Corp., which came to the United States to ban the Apple Watch.

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Apple’s decision to hire this technical genius: a Stanford engineering PhD named Marcelo Lamego is seen as the spark that pushed Masimo’s lawyers to go after Apple. Although the iPhone maker denies doing anything wrong, Masimo has cited employee poaching as part of its allegations that the iPhone maker infringed on its patents. The controversy culminated this month, when Apple had to remove its latest watches from the company’s U.S. stores, hampering a business that generates about $17 billion in annual sales. A US appeals court on Wednesday temporarily suspended a ban on the sale of Apple Watches.

Masimo, a relatively unknown medical device maker based in Irvine, California, claims that Lamego has taken its prized asset (the ability to noninvasively and accurately capture the oxygen level in a person’s blood) and made it brought to Apple. Ultimately, the feature helped transform the watch into a healthcare device, cementing its status as the best-selling product in the wearables industry.

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Lamego joined Masimo in 2003 as a researcher before becoming chief technology officer of Cercacor around 2006. Cercacor was a spin-off of Masimo and both companies are led by CEO Joe Kiani, who helped invent much of their technology principal.

Masimo’s lawyers say Lamego had no prior knowledge of how to develop the blood oxygen function (its previous studies involved neural interfaces rather than healthcare sensors). He learned to develop the technology at Kiani’s companies and gave it to Apple, he says.

Lamego then resigned from Apple in July 2014, a few months after joining. Masimo claims he left the company after Apple got what he needed. The reality, according to longtime Apple executive Steve Hotelling, is that Lamego wasn’t a good fit for the company. He clashed with managers, demanded multimillion-dollar budgets and wanted to be able to hire his own engineers without approval, Hotelling said in a statement that was part of a court battle between the companies. After weeks of discussions, Lamego left Apple.

The first Apple Watch was announced three months later, in September 2014. It didn’t have a blood oxygen sensor and instead relied on more basic technologies, like a pulse reader.

Apple first contacted Lamego about a year before emailing Cook. The proposal came about when Apple and Masimo executives met in 2013, a moment that became another flashpoint in the dispute between the two companies. Lamego refused to join Apple at the time, but his tone changed after Kiani also refused to make him Masimo’s CTO, the medical company’s lawyers say.

Tim Cook (Brooks Kraft/Apple Inc./Handout via REUTERS)

When Apple met Masimo, it was looking for technology and talent that could strengthen its work on the Watch. At the time, Masimo believed that Apple was interested in reaching a deal. The company said in a 2020 lawsuit that Apple used the meeting to learn about its technology and lay the groundwork for hiring its staff. In addition to hiring Lamego, Apple has hired Masimo’s former chief medical officer and about 20 other employees, the medical device company said. This year Masimo failed to convince the jury of his claims.

Although Lamego’s email was key evidence for Masimo’s lawyers, the effort didn’t make much headway with the judge after a senior Apple engineer testified that development of the blood oxygen feature eventually began in 2014, after Lamego had already left. Additionally, the judge threw out portions of the case related to Apple’s practice of hiring Masimo employees, saying that “recruiting or hiring employees of another company, even a competitor, does not in itself constitute improper means.” The judge also rejected the idea that Apple had stolen trade secrets, with the jury siding with Apple 6-1.

After his time at Apple, Lamego ended up starting his own company, True Wearables. In 2016, he launched a device called Oxxiom, which he called the world’s first continuous, disposable blood oxygen sensor. Masimo sued the startup and obtained a court order preventing it from selling the product. Lamego did not respond to requests for comment.

When Masimo filed the initial lawsuit, Apple had not yet brought a blood oxygen sensor to market. But eight months later, the Apple Watch Series 6 was introduced with the feature, known in the industry as pulse oximetry, as a key new feature. This led Masimo to file a separate complaint with the U.S. International Trade Commission in 2021, claiming the feature infringed on its patents.

The ITC agreed in October and ordered Apple to remove the offending models from the US, including the current Series 9 and Ultra 2. That ban went into effect this week after the White House refused to intervene. Apple said it strongly disagrees with the ITC’s decision and is “taking every step to return the Apple Watch Series 9 and Apple Watch Ultra 2 to U.S. customers as soon as possible.” A Masimo representative declined to comment.

Blood oxygen is often called the fifth vital sign. An adequate level of oxygen saturation (the percentage of oxygen fluctuating in the bloodstream compared to the maximum it could be) is a requirement for functions such as breathing, movement and thinking. It has long been one of the first diagnoses when a patient arrives at the hospital or doctor’s office. And the measurement became crucial at the height of the Covid pandemic, when doctors said a reading below 95% could suggest a person was having difficulty breathing due to the virus.

Apple claims Masimo sued it to clear the way for its own consumer-focused wearables. Masimo recently launched the W1, a square smartwatch with a variety of health sensors. And it plans to launch the Freedom watch soon, which has more health features and a more modern-looking round design. In an effort to reach more consumers, it acquired Sound United, owner of speaker maker Bowers & Wilkins, for more than $1 billion last year.

Apple countered Masimo in 2022, saying the W1 took its design from the Apple Watch. “Masimo copied the Apple Watch and benefits from Apple’s hard work,” the company said.

In an interview with Bloomberg earlier this month, Kiani said Apple should have done things differently.

Blood oxygen is often called the fifth vital sign (Apple Insider)

“They didn’t have to steal our people; “We could have worked with them,” she said. “These guys got caught red-handed and instead of being ashamed and doing the right thing, they blame everyone and fight with everyone.”

Kiani said Apple executives once called him the “Steve Jobs of healthcare.”

“Maybe it’s time for them to think differently,” he said.

Masimo is a fixture in hospitals. Its equipment for blood oxygen monitoring, blood monitoring and other measurements is used on more than 200 million patients a year, the company says.

But some of its revenue over the past two decades has come from lawsuits against medical device competitors, including Royal Philips NV, that have turned into settlement or licensing deals.

Kiani emigrated from Iran when he was 9 years old and founded Masimo in 1989, five years after the original Mac went on sale. Although his company now has thousands of employees worldwide, a market valuation of $6 billion and annual revenue of about $2 billion, Kiani says Masimo started out as an underdog, just like Apple. He says he took out a second mortgage when he was 20 to finance the development of the startup in his garage. While medical equipment already existed to monitor blood oxygen, Kiani’s breakthrough was to monitor it during movement or in people with weak pulses, key features for mass-market wearables.

He is also a friend of President Joe Biden, a person who could have stopped the ban on Apple Watch sales. The White House has the power to veto import bans in the United States, a power he has rarely used. One case occurred in 2013, when President Barack Obama reversed an iPhone ban prompted by a patent dispute with Samsung Electronics Co. But it was a politically simpler move: It involved choosing an American company local compared to a South Korean competitor. The headquarters of Apple and Masimo are both in California.

Masimo’s goal, people familiar with the matter say, was for the ITC to impose the ban in the summer. This would have likely led Apple to delay the launch of its new models, which are normally introduced in September, and put an end to the holiday season. Instead, the ban only affected about one week of sales in Apple’s December quarter. Additionally, it only applies to Apple stores; Third-party retailers like Best Buy Co. can still sell the watches, at least until their inventory runs out.

And Apple believes it’s on its way to fixing it. The company instructed engineers to change the software algorithms and presentation of its blood oxygen app to circumvent Kiani’s claims. It is now up to the US Customs Agency to determine whether these adjustments are sufficient to allow smartwatches to return to the market. The decision is expected on January 12th.

The company is also trying to convince the U.S. Court of Appeals for the Federal Circuit to overturn the ITC’s order. For his part, Kiani doesn’t believe a software solution will resolve a dispute involving hardware patents. “I don’t think it can work,” he said.

In any case, Kiani and Masimo have come further than anyone before them. Many companies claim that Apple stole their technology and people, putting them out of business or bankrupting them. But they rarely gained much traction.

Another sign of success for Kiani would be a deal that would mean a payday but also a revenge. Masimo’s website advertises all the companies that license its technology, and adding Apple to that list would be a win. It would also give Masimo the marketing muscle to promote its products. Apple says it has had mediation talks with Masimo and expects to have more.

In its previous lawsuit, which ended in a deadlocked jury, Masimo wanted Apple to pay more than $3 billion in damages. Kiani won’t say how much money it would take to reach a licensing deal now. But he intends to insist on a concession: “We need an apology.”

If that doesn’t happen, the two companies will return to court – again over patent issues – at the end of October.

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2023-12-28 04:18:00
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