27 July 2012

Apple v Samsung – Trial Commences, But Will It Matter?

Tablet smartphone stackThis week marked the first five days, in Sydney, of a trial scheduled to run for a total of 34 days between now and October, with Apple and Samsung before Justice Annabelle Bennett in the Federal Court of Australia.  This country has not seen a more extensive set of bookings in any major venue since US pop star P!NK played 58 dates here on her Funhouse tour in 2009!

Some good coverage of the week’s events has been provided by ZDNet reporter Josh Taylor: Australian Apple v. Samsung patent hearing begins; Samsung sacrificed Qualcomm truce for Apple war; Apple: our 3G isn't Samsung's 3G; and Samsung accuses Apple of ‘ambush litigation’.  Rather than simply rehash these stories, in this article we will review some of the issues that have arisen in recent days – both at the trial and more widely – and look at what this might all mean for the longer-term outcome of the ongoing dispute.

DOES APPLE INFRINGE STANDARDS-ESSENTIAL PATENTS?

The major part of the first week’s proceedings in the Federal Court have been focussed on whether Apple’s iPhone products infringe one of Samsung’s patents (Australian Patent number 2006241621) which allegedly relates to standardised transmission of packet data – particularly VoIP traffic.

Samsung argues that the Apple devices must implement the claimed invention, because it forms part of a standard to which they are required to conform.  Apple has essentially argued that they don’t know whether their own products infringe, because the relevant technology is embedded within a chip that it sources from Qualcomm.  Apple has also reportedly argued that some of the patented techniques are 'optional' features of the standard, and need not be implemented in the claimed manner.

Apple's lawyers seem to be trying to muddy the waters here.  Normally a patentee is required to prove infringement by showing that the accused product actually practices the claimed invention.  Samsung’s argument is therefore somewhat indirect – it is asking Justice Bennett to find infringement by inference from the standards, but without direct proof.  If she adopts a strict approach to evidence of infringement, this may be all the defence that Apple needs.  The onus is on Samsung to prove infringement to the satisfaction of the court.

DOES APPLE HAVE A LICENSE VIA ITS SUPPLIERS?

Many of the standardised features are implemented in chips which Apple sources from suppliers such as Qualcomm.  Thus – the theory goes – if Qualcomm has a license to Samsung's patents, Apple should be covered.  Patent rights are generally exhausted on the first sale.

However, it has emerged that Samsung and Qualcomm do not have a 'formal' IP cross-license arrangement.  Instead, they simply had an agreement not to sue each other, or one another's customers, for infringement of standard-essential patents – of which they both have large portfolios. 

Samsung has claimed that it terminated the agreement with Qualcomm after Apple commenced legal proceedings.  On this basis, Samsung may be entitled to pursue Apple for the royalties to which it is entitled.

RELATIVE VALUES OF APPLE AND SAMSUNG PATENTS

As a condition of acceptance of its patented technology into the 3G standards, Samsung agreed to make its patents available to all comers on 'fair, reasonable and non-discriminatory' (FRAND) terms.  The fact that it cannot deny a license to a good-faith requestor may mean that the court will not grant an injunction, instead making orders regarding the terms of a suitable license.  If Samsung has no power to block sales of infringing products, its negotiating position is necessarily weakened.

Apple claims that the license fees Samsung is requesting are excessive.  At the same time, reports this week suggest that Apple believes it is entitled to $2.5 billion in compensation for Samsung's infringements of Apple’s rights!

Apple's belief that its patents are worth far more than Samsung's appears presently to be preventing the companies from reaching a settlement.  Presumably, any such agreement would have global effect.  There would appear to be no benefit to either company in reaching a settlement which applies only to Australia, which is, in the scheme of things, a relative small market.

In particular, Apple seems to hold the view that standards-essential patents are inherently less valuable than its touchscreen user-experience (UX) patents, perhaps because of the FRAND obligations, and the fact that they cannot be used to exclude competition.  For our part, we are not persuaded that this is a valid argument.  Samsung has invested huge sums of money over two decades in its contributions to mobile communications technology, and to suggest that a license covering the large number of patents (probably numbering in the hundreds) which it owns in this area should be much cheaper than a license to a handful of Apple UX patents fails to recognise this reality.

Probably Apple is of the view that there is a much larger ‘market’ for Samsung's patented technologies, which are required by any device wishing to communicate wirelessly using 3G (or subsequent) protocols. 

This might be so, but there is also a huge potential market for Apple's own IP, as evidenced by the fact that many UX concepts pioneered in Apple’s touchscreen devices have been embraced by consumers, and adopted by other manufacturers.  Apple could choose to operate its own licensing programs for these technologies, but the fact is that it does not currently wish to license its ‘best’ IP to its competitors.  Samsung, on the other hand, is subject to a FRAND obligation to do so!

SETTLEMENT PROSPECTS

If Apple and Samsung cannot sort all these issues out between themselves, then the court will have to do it for them.  In this context, it is not too surprising that Justice Bennett suggested on Monday that she did not understand why this case is before her, and asked the parties to explain why she should not send them into mediation.  It is worth noting, however, that Judge Lucy Koh in California has already tried this, without success.  So while Justice Bennett today appeared still to be considering the mediation option, it appears that Apple and are still too far apart in their positions for there to be any real prospect of settlement at this stage.

The gulf between Apple and Samsung is over what constitutes a fair and reasonable royalty rate.  From a commercial (rather than legal) perspective, if Samsung can establish a high value on its mobile technology patents, this leaves Apple with a choice, either:
  1. pay the asking price in cash, which would result in either reduced profit margins, or the need to raise the prices of its products; or
  2. cover some or all of the cost with a cross-licensing deal, which would enable it to maintain existing pricing and margins, but assist Samsung in producing more competitive products.
It seems implausible that Apple will ultimately be able to stem the tide of genuine competition from companies such as Samsung simply by enforcement of IP rights.  Every week sees new products brought to market, from a range of manufacturers, and little by little these are eroding Apple’s dominant market position.  The pace of litigation is too slow to halt this process – in the time it takes to obtain an injunction against one product, countless others have sprung up in its place.

Once Apple accepts this reality, its best course of action will be to license its patents, and collect a royalty every time a competing device is sold.  Microsoft has already adopted this strategy, claiming that its most recent deals mean that it now has 70% of the US Android market covered by licenses.

However, this strategy was really a no-brainer for Microsoft.  With no dominant position in the market to defend, licensing its patents to nominal competitors enables Microsoft to earn far more from the sale of Android products than it does from sales of Windows Phone devices.

Apple’s position is different.  As the market leader, it has strong revenues from its own products to defend.  In these circumstances, it probably makes commercial sense to fight for a period, if this slows the erosion of Apple’s market share.  However, while Apple’s iPad products continue to dominate the tablet market, the latest International Data Corporation (IDC) Worldwide Quarterly Mobile Phone Tracker report shows Samsung extending its lead over Apple in the smartphone market.

TIMING

At some point in the not-too-distant future it will be better business for Apple to collect on its patents, rather than continue to spend time, money and energy on enforcing them.

What is less clear is whether Apple is actually capable of being this coldly pragmatic.  It is plainly a strong element of their corporate culture (fostered by Steve Jobs) to feel highly proprietorial towards their technology.  For example, Tim Cook has insisted that Apple is not ‘the developer for the world’, though Patentology has previously asked the question ‘why not?’. 

Being a developer on behalf of all end users, in exchange for the opportunity to collect FRAND royalties, is precisely the deal that companies like Samsung do when they choose to contribute to standardisation efforts.  Why could Apple not feel pride in having developed ideas that are so good that everybody wants to use them, while at the same time collecting a royalty on its contributions?

Not only would this benefit Apple financially, but it would be good for us as consumers, since we would all generally prefer that comparable devices work in similar and familiar ways, so that every new product does not come with a steep learning curve.

Google seems to be thinking along these very lines.  As reported this week, its General Counsel Kent Walker wrote in a letter to the US Senate Judiciary Committee:

While collaborative [Standards Setting Organizations (SSOs)] play an important part in the overall standard setting system, and are particularly prominent in industries such as telecommunications, they are not the only source of standards. Indeed, many of the same interoperability benefits that the FTC and others have touted in the SSO context also occur when one firm publishes information about an otherwise proprietary standard and other firms then independently decide (whether by choice or of necessity) to make complementary investments to support that standard in their products. … Because proprietary or de facto standards can have just as important effects on consumer welfare, the Committee’s concern regarding the abuse of SEPs should encompass them as well.

Currently these concepts of ‘consumer welfare’ and ‘de facto standards’ are not well-defined, and Google is clearly pushing its own self-interest here.  But for consumers, the idea is compelling – many of us would be happy to see the ongoing patent ‘wars’ subside in favour of licensing deals which would allow core features to be implemented by any manufacturer who wishes to do so.

WHERE TO FROM HERE?

As noted at the start of this article, the trial is scheduled to continue, on and off, until mid-October.  Given the scope of the case, and the complexity of the issues, a judgement is unlikely from Justice Bennet until at least early in 2013. 

Regardless of the outcome, an appeal seems certain – indeed, it is likely that there will be different aspects of the judgement with which each side disagrees, such that both Apple and Samsung will appeal.  An appeal decision could take another year to issue (taking us into 2014), followed by the inevitable application for Special Leave to appeal to the High Court – and if that succeeds, add another year!

How many generations of smartphones and tablets does this timespan represent?  How many new patent filings, and new patent grants?  With the technology moving so quickly, and litigation so slowly, it seems almost inconceivable that there could be no truce between Apple and Samsung within this period.

So is it really going to matter what Justice Bennett decides – assuming she even gets to issue a decision?  Perhaps insofar as it may influence the balance of any agreement, but beyond that it remains to be seem.  We must confess to some doubt.

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