The Patent Wars

By Evan Jensen

Patents protect the lifeblood of tech companies- the technology that powers their products. Large tech companies with complex products need many patents in order to protect their technology. But huge patent accumulation for defensive purposes leads to a nasty impasse where even if there were legitimate infringement, it would be irrational to sue because it is just too difficult and dangerous.

Large companies can use patents as weapons to attack their competitors. And when those companies own a massive stockpile of patents that cover critical technology in consumer products, a patent fight can become a knock-down, drag-out fight where the winner takes home all the marbles. In some respects a large patent stockpile resembles a nuclear weapon stockpile.

The Patent Arms Race

Large tech companies own huge stockpiles of patents necessary to make a high-tech product, such as a smartphone. High tech products like smartphones contain so many components that it can be difficult to determine how many patents might be implicated or are actually in use. In 2013 Apple applied for 647 smartphone patents, and Samsung applied for 2,179 smartphone patents.[1] And one smartphone is actually a simple device compared to something like a large cellular network. In total, about 250,000 active patents apply in some way to smartphones.[2] That’s a staggering number, and the sheer volume of patents involved creates a large amount of uncertainty about infringement.

Tech companies like Google, Apple, and Samsung have so many patents, and so many patents are necessary to make a functioning product, that nobody is sure exactly when someone is infringing upon someone else’s patents. In general, it’s a pretty safe bet that at least one thing in the competitor’s product might infringe on at least one patent in such a large stockpile. A sufficiently large patent stockpile potentially enables a company to sue almost any of its competitors at any time.

A patent infringement lawsuit is a high-stakes battle with unpredictable results. For big, important products the damages could be enormous, and injunctions are possible. A permanent injunction on a key product in a market as large as the United States can be catastrophic. A successful patent lawsuit could give the winner market dominance.

However the obvious response to an aggressive suit is a countersuit. A first strike is likely to provoke full-scale retaliation. So the primary purpose of these companies’ expansive patent stockpiles seems to be to deter other companies from suing them, not to sue to make money. In other words, their nuclear stockpiles are ‘purely for defensive purposes.’ Mutually assured destruction.

The risks and possible harm of the retaliatory countersuit can be so great that the threat of a countersuit make it irrational to sue in the first place. None of these tech companies wants to gamble everything on an expensive and uncertain patent war. On the one hand, the threat of retaliation deters companies from aggressively suing each other to collect damages. But on the other, the same deterrent also discourages legitimate patent suits when one company actually is infringing. Even if one company actually did use another company’s ideas, the threat of the retaliatory countersuit can make it irrational to sue.

Regardless of the outcome such a patent war would be cripplingly expensive. Both sides risk wasting immense amounts of money and time while their competition invests in innovation and marketing. To avoid this outcome, large companies obtain as many patents as possible as a deterrent against other companies filing patent litigation. From the perspectives of tech companies, a patent war is like a nuclear war; the only winning move is not to play.

 

The iPhone and the Galaxy

Apple, notoriously enigmatic about its new products, blindsided the tech industry with its announcement of the iPhone in January of 2007. Apple launched the iPhone in June 2007 into a well-established and highly competitive market for phones, competing against market leaders Nokia and BlackBerry. Because of the competitive phone market, commercial expectations of the iPhone were low.

The iPhone featured a candy bar form factor and its new iOS operating system designed around the phone’s touchscreen, including numerous brand-new design features like its intuitive icon interface, multitouch features such as pinch-to-zoom, as well as inertial scrolling, overscroll bounce, and other software and user interface features. Apple marketed all these features as a revolution in cell phone technology, “Apple reinvents the phone.”

At first iPhone sales were slow. In July of 2008, Apple released an upgraded version, the iPhone 3G, and sales exploded. Apple sold 10 million iPhones in 2008, with sales continuing to increase at an astonishing rate.

Samsung was unprepared for Apple’s iPhone, and hurriedly rushed to build a product that would be competitive. The iPhone’s success was a clear sign that users badly wanted touchscreens and data capabilities, and wanted a “cool” form factor and intuitive user interface. In order to compete, Samsung was going to need to radically change its phone design. In June 2010, Samsung released the Galaxy S, running Google’s Android operating system.

But the final product of Samsung’s Galaxy S allegedly looked very similar to Apple’s iPhone. And, in some ways more importantly, the phone’s Android operating system behaved similarly to Apple’s iOS software.


Cold War

Steve Jobs, then Apple’s CEO, was furious. “I will spend my last dying breath if I need to, and I will spend every penny of Apple’s $40bn in the bank to right this wrong.” Jobs refused to settle, and refused to compromise. Apple offered to let Samsung pay to license some aspects of the iPhone, and Samsung refused. Steve Jobs declared war, “I’m going to destroy Android, because it’s a stolen product. I’m willing to go thermonuclear war on this.”[3]

It is important to note that Jobs’ ire was directed towards Android, not just Samsung. Android is the operating system that Samsung uses on its phones. Although Google is the maker of Android, Android itself is open source. Because Android is open source, anyone may use it for free, making it an economical choice for a cost-competitive smartphone. However Google’s relationship with Samsung as the creator of its open source software put Apple in an unusual position.

Eric Schmidt, then Google’s CEO, was on the Board of Directors at Apple until 2009. Previously, Google was also a key partner with Apple in the creation of the iPhone. However Apple was on the warpath, and wanted Google’s blood for incorporating its ideas into Android. In a meeting in March of 2010, Jobs told Schmidt “I don’t want your money. If you offer me $5 billion, I won’t want it. I’ve got plenty of money. I want you to stop using our ideas in Android, that’s all I want.”[4]

Apple’s furor over the theft of its ideas was not limited to just the physical form of the device- Apple also argued the Android software copied many of the features of Apple’s iOS. But Google doesn’t manufacture phones, and doesn’t sell its open source Android software. A patent suit against Google was doomed to fail. Steve Jobs was enraged at Google, but powerless to do anything about it.

If Apple couldn’t attack Google directly, then at the very least it would cut Android out of the phone market by eliminating Samsung’s phones. A controlling market share of smartphones running iOS would freeze out Google’s ecosystem indirectly.

A proxy war between Apple and Google was brewing, with Samsung as the battleground.

 

The Patent War Goes Thermonuclear

Apple launched a first strike against Samsung. Apple sued primarily for patent infringement, among other claims. Apple’s objective; obtain a permanent injunction to stop Samsung from selling phones in the United States. An injunction would be a fatal blow to Samsung’s business, and would give Apple free rein over the US market with its iPhone. If all the phones are running iOS, then they aren’t running Android.

Samsung’s retaliation was massive; Samsung launched countersuits in the US, as well as South Korea, Japan, Germany, French, Italy, Great Britain, Australia, Holland, and the Netherlands. Among other patent infringement claims, Samsung argued Apple’s products infringed on 3G patents owned by Samsung. Google stepped in on Samsung’s side, supporting Samsung with testimony and even paying some of Samsung’s legal fees.[5] The patent war between the companies escalated to global proportions.

Total war raged between the two companies for years. By August 2011 Apple and Samsung were litigating 19 cases in nine countries. In July 2012 they were locked in over 50 ongoing lawsuits in countries all over the world.[6]

The patent litigation between Apple and Samsung had spiraled out of control. Apple’s initial suit had become just one small puzzle piece in a large and complex global conflict.

 

The Long War

The results of the many trials around the world were highly mixed. Initiative see-sawed back and forth between Apple and Samsung, but never far enough that it didn’t soon swing back the other way.

In the US, Apple initiated its first trial in April of 2011, asking for $2.75 billion and an injunction. The first trial verdict was for Apple, but without an injunction. The Federal Circuit overturned, giving Apple an injunction against the importation of Samsung’s phones, provoking yet more squabbling about damages and the injunction. On August 24, 2012, the court found that Samsung had willfully infringed on Apple’s design and utility patents, and awarded $1.049 billion to Apple, but no injunction.[7] On retrial for the amount of damages the jury reduced the damages to only $290 million.

Samsung wasn’t the only one taking and dodging hits. The International Trade Commission ruled in favor of Samsung, and imposed a ban on iPhones and iPads. However President Obama’s recent appointee as US Trade representative, Michael Froman, directly overturned the ITC injunction against Apple.[8] At the time there hadn’t been a presidential veto of an ITC order in 25 years.[9]

In the second US trial which began in 2012, Apple requested $2.2 billion in damages. In the end, Samsung was instructed to pay $120 million to Apple. Although an impressive dollar amount, from Apple’s perspective it is a small number, and the litigation costs alone make the victory pyrrhic.

Results from cases around the world were mixed, and ultimately there was no real winner. Some courts granted injunctions to Apple, some to Samsung, and others awarded damages to one or both companies.

Ultimately the greatest enemy of both sides turned out to be time. Apple filed its initial suit in April of 2011. By the time the second U.S. lawsuit reached a verdict, over three years had passed. Apple’s 2007 iPhone had become a relic. Apple’s iPhone 6 and Samsung’s plethora of updated phones have left the original contested patents far behind.

The patent war had ground down to a meaningless attrition of legal fees. Steve Jobs may have expected a swift, decisive victory for Apple. But the reality was the patent war had become a never-ending quagmire.

Despite years of litigating many cases around the world, not much actually happened. Neither Apple nor Samsung obtained a clear advantage from all the litigation.

 

Détente

After years of global litigation as well as endless and mostly futile legal expenses, it seems the combatants of the patent war are starting to realize there is little hope of a decisive victory. War-weary, Apple, Google, and Samsung seem to be increasingly prepared to negotiate and to compromise.

Apple and Google have agreed to drop all lawsuits against each other, and work together on patent reform.[10] As of May 16, 2014, the proxy war is over. However Apple still maintains its lawsuits against Samsung.

However Apple’s enthusiasm for its war against Samsung is fading. After Steve Jobs’ death, Tim Cook took the helm of Apple as CEO. Cook has voiced the opinion that he would rather avoid litigation against Samsung. Apple and Samsung have made some important agreements to de-escalate the conflict. They both agreed to a voluntary dismissal of their appeals of the ITC ruling.[11] The two companies have also resumed negotiations out of court, but both seem to think a settlement is unlikely.

 

Armistice Day

The most important lesson from Apple’s “holy war” is that no one can win a nuclear patent war. From Steve Jobs’ perspective in 2010, that initial first strike against Samsung must have looked like a certain victory. He expected a swift, decisive, clean and above all short war that would give Apple a compelling edge. Samsung’s product looked and behaved so similarly to the iPhone, it must have seemed so obvious to him at the time that Apple would prevail.

But that’s not what happened. Samsung’s full-scale retaliation dwarfed the initial suit. Dozens of cases sprang up all over the world implicating more and more patents owned by both Samsung and Apple. The multifaceted global patent war that followed swallowed Apple’s claims about a couple iPhone patents in a federal court in California. The war dragged on for years, even after the products at issue were obsolete. Even a total victory resulting in a permanent injunction would be commercially meaningless if the courts took years to reach that result.

At the end of the day Apple won, but only technically. Apple received a few hundred million dollars for its trouble, a paltry amount compared to Apple’s revenue which quite possibly didn’t even cover Apple’s costs. Because of the scale and expense of the conflict, Apple likely would have been better off spending its litigation fees on its products and users.

The war between Apple and Samsung is not over, but having ground down to a war of attrition spanning years with no advantage for either side, it is unlikely there will be a sudden shift now.

 

Conclusion

In hindsight, it appears Steve Jobs made a mistake by declaring a patent war on Samsung. The global litigation that followed wasted tremendous amounts of money and time, and did not result in the large damage award or the permanent injunction Apple wanted. In fact, it seems like any large patent war will devolve into a quagmire with no winner.

The large patent portfolios that companies accumulate in order to exercise their patents “defensively” are highly effective defensive tools. Even if you have as much capital as Apple, it may simply be impossible to start a patent war you can actually win against a competitor with a large stockpile of patents. Litigation to shut down even a legitimate infringer will be expensive, uncertain, and won’t win your business any friends.

Apple’s mistake in instigating a patent war with Samsung is illustrative of a larger pattern involving large stockpiles of patents. “Never fight a land war in Asia” comes to mind. The cost and logistical demands, unforeseeable future events, and lack of concrete and achievable end conditions together make a massive patent war too dangerous and expensive, with little to no chance of an advantageous outcome decisive enough and speedy enough to be commercially meaningful.

Long story short, acquiring patents defensively works. In fact, defensive patenting works so well that it might actually be too effective at deterring patent lawsuits, even potentially legitimate ones.

 

[1] Zach Epstein, Building an arsenal: Samsung filed 3 times more smartphone patents than Apple in 2013, BGR, Jun. 24, 2014, http://bgr.com/2014/06/24/samsung-patents-2013-apple-smartphone-patents/

[2] Daniel O’Connor, Mobile-Related Patents Are Increasing, One in Four Patents Issued Last Year pertain to the Smartphone, Mar. 28, 2013, http://www.project-disco.org/intellectual-property/032813-mobile-related-patents-are-increasing-one-in-four-patents-issued-last-year-pertain-to-the-smartphone/

[3] Steve jobs vowed to ‘destroy’ Android, BBC, http://www.bbc.com/news/technology-15400984

[4] Ong, Josh, Steve Jobs vowed to ‘destroy’ Google Android, called it a ‘stolen product’, Apple Insider, http://appleinsider.com/articles/11/10/20/steve_jobs_vowed_to_destroy_google_android_called_it_a_stolen_product

[5] Ina Fried, Google agreed to pay some of Samsung’s costs, assume some liability in latest Apple case, http://www.cnbc.com/id/101606307#.

[6] Apple seeks $2.5 billion in damages from Samsung, offers half a cent per standard-essential patent, July 24, 2012, Foss Patents, http://www.fosspatents.com/2012/07/apple-seeks-25-billion-in-damages-from.html

[7] Apple Inc. v Samsung Electronics Co. Ltd. et al, https://www.docketalarm.com/cases/California_Northern_District_Court/5–11-cv-01846/Apple_Inc._v._Samsung_Electronics_Co._Ltd._et_al/1931/

[8] Obama administration overturns ban on some Apple products, August 3, 2013, CNN, http://politicalticker.blogs.cnn.com/2013/08/03/obama-administration-overturns-ban-on-some-apple-products/

[9] Edward Black, In the Trenches of the Smartphone Patent War, Huffington Post, 30 July, 2013, http://www.huffingtonpost.com/edward-j-black/smartphone-patents_b_3677701.html.

[10] Greg Baumann, Google and Apple agree to drop lawsuits against each other and work together on patent reform, http://www.bizjournals.com/sanjose/news/2014/05/16/google-and-apple-agree-to-drop-all-lawsuits.html?page=all

[11] Apple, Samsung Withdraw Their Appeals of Last Year’s Final ITC Ruling, http://www.businesskorea.co.kr/article/5040/samsung-apple-patent-dispute-apple-samsung-withdraw-their-appeals-last-year%E2%80%99s-final-itc

Opinions expressed in this article are those of the author and do not necessarily represent the views of Stein IP.

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