Sunday, October 16, 2011

Apple told Samsung it owns a "thicket of patents" and would license only "lower level patents"

On Friday, the decision of the Federal Court of Australia to grant Apple a preliminary injunction against the Galaxy Tab 10.1 was published, with a very few passages redacted out. It's a long document. I pasted the content of that HTML page into a word processor, and it filled 65 pages. But it's definitely one of the most interesting court orders I have read in connection with mobile devices.

In a subsequent post I will explain why that ruling does indeed pose a fundamental threat to Android in Australia, as I said after the technical scope of the ruling became known on Thursday. That particular order relates to the Galaxy Tab 10.1 only, but the reasoning indeed shows that Apple would be very likely -- if not virtually certain -- to succeed with similar motions against other new Android products in Australia, at least as far as the big three Android device makers (Samsung, HTC and Motorola) are concerned. There were a couple of people out there who disagreed with me that there was a clear and present danger for Android at large, but they apparently did so prior to even reading the ruling.

In this post I'll just focus on what the document reveals about Apple's general intentions for how it plans to use its patents against Samsung and, more generally, the Android ecosystem.

Apple's actions and words were clear and consistent

I have always assumed -- based on what Steve Jobs said last year when Apple sued HTC and on Apple's litigation tactics -- that Apple didn't start all of this Android-related litigation just to walk away with a $5-per-unit kind of license deal. Three months ago I already said that $5 buys a company like HTC a few songs from iTunes but not a patent license from Apple. Apple optimizes for product differentiation. Apple isn't Microsoft, which concluded a license deal with Samsung as well as eight other Android device makers. Those two companies have different business models in general and with respect to patents in particular.

I explained in the HTC context as well as in connection with Oracle's lawsuit against Google that patents are, by definition, monopolies. Patent holders may elect to, but don't have to, grant a license. And if they do so, they can't be forced to do so on any particular terms they don't like unless they made a commitment (such as a FRAND licensing commitment vis-à-vis a standard-setting organization) or have obligations under antitrust law (which would be the involuntary equivalent of a FRAND pledge).

A few months ago I wrote in another post (on the BRIC countries possibly becoming a safe haven for Android) that "a deal under which Apple would let Android off the hook" would come with conditions including that "some patents would probably still be kept exclusively". And thanks to the Australian court ruling, I can now say with certainty that this is what Apple communicated to Samsung. Given that Samsung is the only major Android device maker with whom Apple had, at the time of negotiating a patent deal, a close working vendor relationship, it's clear that Samsung was Apple's "most favored nation" among Android device makers, meaning that Apple has no reason to offer sweeter terms to Motorola, HTC, Amazon or you name them than to Samsung.

Relevance of licensing talks to Australian case

The parties had different reasons for raising the issue of licensing talks between Apple and Samsung in the Australian proceedings:

  • Apple pointed to its discussions with Samsung about patent infringement, which apparently began in July 2010 at Steve Jobs's personal initiative, to substantiate its "eyes wide open" allegation, meaning that Samsung knew it had patent infringement actions from Apple coming and nevertheless prepared and released products infringing on Apple's rights.

    The "eyes wide open" argument worked in Apple's favor in Australia (though it only had minimal weight in the overall decision). The judge didn't agree with Apple that the talks held in the second half of 2010 were the point in time subsequently to which Samsung proceeded with its "eyes wide open". The judge determined that the relevant point in time was when Apple filed its first lawsuit against Samsung (in the U.S. in April 2011). But before the judge reached that conclusion, she had already heard witnesses from both sides about those previous talks.

  • Samsung tried to dissuade the court from an injunction on the basis of the argument that Apple's willingness to sell Samsung a license means any infringement, if proven, can still be offset by a damages award. However, Apple denied this, and the court heard witnesses including Apple's former chief patent counsel Richard Lutton, who flew over to Sydney to testify. And this particular controversy revealed Apple's intent to retain exclusivity for its most important patents.

Quotes from the case file

Here's the reference to Apple's patent thicket:

234. Further, given the 'thicket of patents' Apple pointed to in the Negotiations and the considerable volume of Apple patents in existence (Apple is said to own at least 339 Australian patent and patent applications), I do not give any weight to the assertion that Samsung had its 'eyes wide open' in relation to the Interlocutory Patents in a specific sense in the relevant pre-28 July 2011 period.

By "Negotiations", the judge means the talks Apple and Samsung had over patent issues in the second half of 2010. "Interlocutory Patents" refers to the two patents the preliminary injunction is based on. The short version of that paragraph is that the judge doesn't think Samsung was really on notice of any particular infringement during those talks since Apple referred generally to a "thicket of patents". But as I mentioned before, the judge believes Samsung was on notice by the time Apple filed the first lawsuit (even though it involved a different set of patents). Anyway, the term "thicket of patents" is clearly a quote from the evidence record. It may have shown up in an Apple presentation to Samsung, or it was something Apple said.

Now we get to the most important part -- the judge's summary of what Richard Lutton said, and the judge's conclusion that Samsung couldn't just have bought its way out of this infringement controversy with license fees. In the following quotes, all emphasis is mine just to highlight particularly important statements:

"185. Mr Lutton was cross-examined about the the Presentations and the Negotiations. Mr Lutton says that Apple Inc's core message in the Negotiations was that Samsung Electronics Co Limited was copying Apple Inc's products and that this 'had to stop'. The Negotiations concerned Apple’s intellectual property more broadly and was not limited to its patents or the US equivalents of the Interlocutory Patents. Mr Lutton says that, as Samsung Electronics Co Limited was a valued partner of Apple Inc and as coexistence in the consumer electronics market was important to Apple, Apple Inc was willing to discuss the concept of possible licences. However, he emphasises that such discussion was part of the broader discussion of a framework by which Samsung Electronics Co Limited could continue to sell its products with some elements of Apple Inc’s intellectual property, such as some 'lower level patents', available to them but would cease copying the features and functionality of Apple Inc's products, and the iPad in particular.

[redacted passages]

188. The content of the Presentations, relied upon by Samsung, is put into context by Mr Lutton's evidence. In light of Mr Lutton's evidence as a whole, I do not accept that Apple was prepared to, or accepted that, Samsung could pay a licence fee for the Australian Galaxy Tab 10.1 in its present form, and with its present functionalities. Accordingly, I am not prepared to draw an inference from the Negotiations or the Presentations that Apple considers or considered damages to be an adequate remedy for the Apple Harm."

There you have it: Apple is prepared to give Android device makers a license to "some lower level patents" but it wants to reserve various design elements and functionalities exclusively for iOS.

The only way one can get a deal with Apple that relates to all of its patents is a cross-license. However, Samsung is, on the current basis, rather unlikely to win injunctions against Apple. It may not obtain any at all, or just some that don't have enough strategic impact to force Apple into an all-encompassing cross-license agreement.

It's not surprising that Samsung pursues a multi-platform strategy. However, without a backer with a powerful patent portfolio behind them, any other platforms may also draw Apple's ire at some point, though Apple's enforcement activities are exclusively focused on Android so far.

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