The Patent Wars Rage On: Apple Awarded $1 Billion from Samsung


Apple Inc. won a closely-watched patent infringement battle against Samsung when the U.S. District Court in San Jose, California ruled in favor of the iPhone maker on Friday afternoon. The nine-member jury ruled that Samsung had infringed upon six of Apple’s patents and also rejected all counterclaims by Samsung. Samsung was ordered to pay $1.05 billion to Apple, validating Apple’s claims that Samsung had in fact copied its basic designs and a few of its software features.

The trial was messy, with Apple suing Samsung first for patent infringement on the iPhone, both for design and its iOS software, then Samsung counter-suing Apple for the violation of their own patents for high speed data programming. The jury had a nightmare verdict to decide: the 20-page verdict form asked nearly 700 highly specific questions, and all responses had to be unanimous. This complicated case is regrettably typical for the tech industry, particularly in the realm of mobile devices, which can each contain hundreds of patented components. In recent years, Apple took Motorola to court over similar patent issues and Google subsequently purchased Motorola’s struggling mobile phone unit primarily for patent protection.

Apple has been notoriously vocal about defending its intellectual property from misuse and violations, from its sleek device shapes to its intuitive software, both of which have become the industry standard. The company has also been aggressive in filing lawsuits against other handset makers like HTC and Motorola, also for blatantly copying its iPhone and iPad designs. On the software front, Apple even claims ownership of basic iOS software elements like “bounce-back” scrolling, one finger to scroll and two or more fingers to zoom, and tap-to-zoom, which also appear in Android devices.

Samsung smartphones before the iPhone

Samsung smartphones after the iPhone

According to a 2010 internal memo from JK Shin, Samsung’s head of mobile communication, the company was in the midst of a “crisis of design” when it drastically altered its product line and began to pursue the iPhone head-on [1]. Prior to the iPhone, Samsung had been chasing the former mobile giants Nokia and Blackberry, but with limited success. Shin wrote in the memo, “Influential figures outside the company come across the iPhone, and they point out that ‘Samsung is dozing off’… When our UX is compared to the unexpected competitor Apple’s iPhone, the difference is truly that of Heaven and Earth.” And so Samsung took the best features of the iPhone’s iOS and put them in almost as sleek, almost as user-friendly devices like the Galaxy, which cost hundreds of dollars less than a new iPhone and were instant hits.

In its case against Samsung, Apple presented a new Nokia Lumina smartphone, which runs on Microsoft’s Windows Phone operating system, to demonstrate what mobile phone makers can produce without infringing on Apple’s property rights. Independent smartphone makers like Nokia and RIM are likely to benefit from the court’s decision, while Google will likely have to redesign Android features to avoid similar suits following Apple’s victory over Samsung.


The Debate Over Patents

The particular importance of the patent here lies in the iPhone’s uniqueness and place in Apple’s small but successful product line. Just look at the numbers:

In the fall of 2008, just a year after it released the iPhone, Apple became the most profitable phone maker in the world…

[B]ecause rivals couldn’t match Apple’s average sales price and profit margins, they were falling behind. In the fourth quarter of 2008, Nokia, which had long been the phone industry’s profit leader, sold 113 million devices worldwide, about 15 million of them smartphones. It made about $1.2 billion in profit on all those phones. That same quarter, Apple sold just 4 million iPhones. But that single device earned Apple a profit of $1.3 billion [2].
 

Apple’s business model depends upon highly innovative, exclusive products and high margins. As the jury was repeatedly told in the trial, “it took Apple years to create the iPhone, but that ‘it took Samsung three months to copy it,’ referring to the original Galaxy S” [3]. Apple’s claim is that it spent those many years and millions of dollars of R&D on the iPhone’s innovative features, but Samsung was able to reap the same benefits without the investment in innovation. The jury ultimately found Samsung guilty of “trade dress dilution,” holding that Samsung weakened the iPhone’s exclusivity by intending to associate their devices with the iPhone.

In terms of legal precedent, Judge Richard A. Posner wouldn’t stand for these hairline arguments for brand dilution or subtle mimicry, even if Friday’s jury did:

In a recent case between Apple and Motorola, Judge Richard A. Posner, a prominent federal appeals court judge in Chicago, said in court that the use of patents in the smartphone industry showed a system in “chaos.” In June, Judge Posner dismissed the case, chastising both sides. He heaped scorn on Apple’s broad claims for its user-experience patents and on Motorola’s claim that Apple should pay a rich royalty on its basic communications patents. Both companies have appealed.

The disputes are fueled, legal experts say, by companies rushing to apply for patents as both defensive and offensive weapons, and by overburdened government examiners granting patents too easily [4].
 

Posner sees major flaws in the United States’ current patent system. In a recent opinion piece in The Atlantic, he defended the need for patents in pharmaceuticals, which he called “the poster child for the patent system,” but concluded that, due to the generally low cost of invention, “Most [other] industries could get along fine without patent protection” [5]. He writes,

A patent blocks competition within the patent’s scope and so if a firm has enough patents it may be able to monopolize its market. This prospect gives rise to two wasteful phenomena: defensive patenting and patent trolls. Defensive patenting means getting a patent not because you need it to prevent copycats from making inroads into your market, but because you want to make sure that you’re not accused of infringing when you bring your own product to market. The cost of patenting and the cost of resolving disputes that may arise when competitors have patents are a social waste.

Patent trolls are companies that acquire patents not to protect their market for a product they want to produce — patent trolls are not producers — but to lay traps for producers, for a patentee can sue for infringement even if it doesn’t make the product that it holds a patent on.
 

To Posner, companies like Apple seek property rights mostly to game the system and only occasionally to defend legitimate inventions. On news of the victory over Samsung, Apple’s market value—the price of its stock multiplied by the number of outstanding shares—soared to $633 billion, eclipsing the previous record of $618.9 billion set by Microsoft on Dec. 30, 1999, at the height of the dot-com bubble. Since the unveling of the iPhone by Steve Jobs in January, 2007, Apple’s shares have risen over 700%. Does the world’s most valuable company really need patent protection, or does its near-monopoly on cutting-edge electronics just hurt consumers by limiting competition? One writer notes,

Samsung has collected about $25 billion in handset profits. If the patent trial ends up costing the company $3 billion of that, it would certainly be a hit. But it wouldn’t be catastrophic compared to the money Samsung did make from copying [2].
 

While many claim that patent law is already too cumbersome, an economic analysis actually makes it seem insufficient. In this case, Apple won the bragging rights, but Samsung already made away with its share of profits and boosted its brand value.


Attribution

[1] “iPhone Caused “Crisis of Design” at Samsung (Memo),” AllThingsD

[2] “Copying Works: How Samsung’s Decision to Mimic Apple Paid Off in Spades,” Pandodaily

[3] “Apple vs. Samsung: you be the jury (poll),” The Verge

[4] “Apple-Samsung Case Shows Smartphone as Legal Magnet,” The New York Times

[5] “Why There Are Too Many Patents in America,” The Atlantic

Images via
The Verge


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