With their California trial approaching fast, Apple and Samsung made filings during the last few hours that shed light on what's at stake and on why the parties haven't been able to settle their dispute so far.
Let's start with Apple's damages claim as it is summarized in the public redacted version of its initial trial brief (click on the image to enlarge or read the text below the image):
"Samsung adopted as its number one goal to [redacted]' in the smartphone and tablet markets, and it chose to compete by copying Apple. Samsung's infringing sales have enabled Samsung to overtake Apple as the largest manufacturer of smartphones in the world. Samsung has reaped billions of dollars in profits and caused Apple to lose hundreds of millions of dollars through its violation of Apple's intellectual property. Apple conservatively estimates that as of March 31, 2012, Samsung has been unjustly enriched by about [redacted; presumably $2 billion] and has additionally cost Apple about $500 million in lost profits. Apple also conservatively estimates that it is entitled to over $25 million in reasonable royalty damages on the proportionately small set of remaining sales for which it cannot obtain an award of Samsung's profits or Apple's own lost profits, for a combined total of $2.525 billion."
In connection with Oracle v. Google, some malicious individuals as well as some gullible people (who parrot lies without fact-checking) later claimed that my purely factual reporting on what a public Google filing said Oracle demanded (which Oracle later corrected anyway) was a prediction of the outcome. Based on that experience, I'll clarify, out of an abundance of caution, that a party's claims are one thing and the court's decision are another. There's almost always a difference, and it can be huge. But a defendant that goes into a trial and faces a certain claim from the other party knows what worst-case exposure is.
The largest part of Apple's $2.525 billion claim, an amount of $2 billion, is related to Apple's demand for a disgorgement of Samsung's total profits with products that infringed its design patents. A disgorgement of profits is not available with respect to technical patents. But once Apple collects all of Samsung's profits on an allegedly infringing device, it can't claim a "reasonable royalty" on those devices. That's why Apple's "reasonable royalty" demand of $25 million relates only to a few products. Samsung's best-selling products are the ones that look most similar to the iPhone and the iPad.
The $2.525 billion amount could still increase. Apple argues that Samsung infringed willfully. As a result, some components of that overall figure could be tripled.
This damages claim relates to past infringement. If the court granted Apple's request for a permanent injunction against Samsung, infringement would end. If there are any infringements that the court identifies, but the court doesn't grant Apple injunctive relief to stop those infringements, then the court will have to award Apple a reasonable royalty going forward -- which has the effect of a compulsory license.
These are the per-unit royalties that Apple calculated for its different intellectual property rights-in-suit:
$2.02 for the "overscroll bounce" (or "rubber-banding") '318 patent
$3.10 for the "scrolling API" '915 patent
$2.02 for the "tap to zoom and navigate" '163 patent
$24 for use of any of Apple's design patents or trade dress rights
Apple bases these demands on studies according to which the features and techniques covered by those patents drive demand. For example, a "conjoint survey" conducted by one of Apple's experts "shows that Samsung's customers are willing to pay between $90 and $100 above the base price of a $199 smartphone and a $499 tablet, respectively, to obtain the patented features covered by Apple's utility patents".
Indeed, we are talking about features that make an iPhone an iPhone and set it apart from a feature phone or from what today's Android phones would be like if Google had not decided at some point to abandon its original plans for a more BlackBerry-style device and copy the iPhone operating software. And as high as those royalty rates may seem at first sight, Apple would much prefer an injunction over that per-unit royalty. Product differentiation is more valuable to Apple than compulsory licensing.
Apple's patents-in-suit are not standard-essential. Samsung doesn't have to pay future royalties or pull products as a result of an injunction if it simply works around them. That's precisely what Apple proposes as the preferred solution at the end of its trial brief (click on the image to enlarge or read the text below the image):
"In an interview a few weeks ago [the one at AllThingsD's D10 conference], Apple's Chief Executive Officer Tim Cook explained the significance of this case for Apple. '[I]t is important for Apple not to be the developer for the world,' Mr. Cook said. 'We just want other people to invent their own stuff.'
Apple looks forward to a trial that will vindicate its intellectual property rights. Samsung must play by the rules. It must invent its own stuff. Its flagrant copying and massive infringement must stop."
Samsung's counterclaims in this case involve, after the latest narrowing, two standard-essential patents (SEPs) and three non-SEPs. Its non-SEPs are anything but frightening. Its SEPs, however, raise antitrust issues.
Samsung has an obligation to license its SEPs on FRAND terms. It cannot withhold a license; a workaround would not be an option. And its license fee demands must be based on the value those patents had before the techniques they cover were incorporated into industry standards.
Samsung is known to have demanded 2.4% of Apple's sales as a royalty for its wireless SEPs. That figure showed up in an Italian court ruling and was mentioned in open court in The Hague, Netherlands, by Apple's Dutch counsel. I'm not aware of any reduction of that figure.
Here's Apple's perspective on the royalties that Samsung would be entitled to should it prevail on any of its SEP claims (click on the image to enlarge or read the text below the image):
"A. To The Extent That Samsung Is Entitled To Any Remedy, its FRAND Damages Cannot Exceed $0.0049 Per Unit for Each Infringed Patent"
That's half a cent per unit per SEP. At first sight, this may appear very low, but Apple explains that it arrived at this figure by comparing it to other license deals involving SEPs that it has done. 3G/UMTS is just one of many standards Apple's products implement, and "Samsung's declared-essential patents represent only a small portion of the total set of declared essential UMTS patents--around 5.45%". Apple argues that the proper royalty base for Samsung is not the entire market value of Apple's products, "which contain computer and application functionality far beyond simple UMTS wireless technology". Instead, "the royalty should be applied to a base equal to the price of the baseband processor, the smallest priceable unit containing the accused functionality".
In a letter to the Senate Judiciary Committee's leadership (a letter that rebutted attempts by Google to blur the distinction between SEPs and non-SEPs), Apple used an analogy and said that all car drivers pay the same highway toll, whether they own a jalopy or a new sports car.
Seen in that light, Samsung's SEPs cover a part of the functionality of the baseband chip. And such baseband chips sell in the $10-per-unit range. That's a completely different value proposition than the entire market value of an iPhone or iPad, but that's the way it is.
Yesterday, Reuters reported, citing unnamed sources, that Apple CEO Tim Cook and Samsung vice chairman Choi Gee-sung met again last week to discuss a possible settlement but couldn't reach an agreement on the value of their respective patents. Looking at the numbers revealed by Apple's trial brief, and comparing Apple's half-cent-per-patent offer to Samsung's 2.4% demand, there can be no doubt that they are worlds apart. Even though parties obviously take extreme positions when they go to court, there are too many indications that Samsung hopes to be able to command outlandish royalties for its FRAND-pledged SEPs in order to gain leverage in a cross-license deal with Apple.
At first sight, Apple's demands and what it thinks Samsung is entitled to may give the impression of double standards, but let's look at this analytically.
First of all, the $2.525 billion figure can't be compared to the half-cent thing. Space constraints required me to mention those two key figures in the same headline, but that doesn't mean that they're comparable. They are not. The $2.525 billion claim is largely about unjust enrichment and lost profits.
If we want to compare Apple's position on the value of SEPs to its position on the value of non-SEPs, we have to compare Apple's positions on reasonable royalties. Even on that basis, I'm sure many people's first reaction is going to be disbelief that the "overscroll bounce" patent (or the "tap to zoom and navigate" patent) should be worth more than 400 wireless SEPs. And I'm not going to subscribe to a particular factor such as 400 -- that factor would be contracted if one adjusted the numbers on both ends of the spectrum. But I do agree with Apple that the difference between the commercial value of its multi-touch non-SEPs and that of Samsung's wireless SEPs is huge, not small -- and fundamental, not just gradual.
Apple is absolutely correct that the proper royalty base for wireless SEPs is the market value of baseband chips. The cost of manufacturing such chips is not important. What's important is that those chips typically come with many, if not all, of the required patent licenses.
By contrast, features like "rubber-banding" are signature aspects of the iPhone and the iPad. They allow an iPhone to sell at several times the price of a feature phone. They played a certain role in making the iPad the world's first commercially-successful tablet computer.
As I wrote further above, Samsung could simply "invent its own stuff" (as the concluding paragraph of Apple's trial brief proposes) and steer clear of infringement of Apple's non-SEPs. With respect to "rubber-banding", Samsung has already implemented a workaround that I'm convinced doesn't infringe anymore. But if Samsung absolutely wanted to copy Apple's creations, and if the court denied an injunction to stop such infringement, the price might be significant on a per-unit per-patent basis.
At some point, Apple and Samsung will settle. The price for Samsung to pay will be a significant per-unit royalty rate, and it will have to accept restrictions in terms of which Apple patents it's allowed to use and in which ways. Samsung will ultimately get paid for its SEPs, but the amount will be tiny compared to what Samsung owes Apple if it chooses to license its non-SEPs. That's because Apple's patents make the difference between a $50 phone and a $500 device, while Samsung's patents cover a small part of what a $10 component of such products provides. If Samsung's SEPs could be worked around without becoming non-compliant with an industry standard, Apple could work around each of them at a fairly low cost. Samsung is not entitled to compensation based on the value of standard-setting itself: that would mean to reward companies for participation in a cartel rather than for its actual contribution to innovation.
Its trial brief makes clear that Apple considers Samsung an illegitimate market leader, a leader who owes his success to infringement, and it's absolutely determined to defend its intellectual property rights in order to regain market share. This California trial will be a major event, but it's only one of more than 50 lawsuits around the globe. Even in California, there's a second case pending that is currently scheduled to go to trial in 2014 (the preliminary injunction against the Galaxy Nexus smartphone is a first offspring of that litigation), and Apple has the right to reassert in subsequent litigation any or all of the intellectual property rights it withdrew from this lawsuit. This is going to be a marathon, not a sprint, but Apple could score a major breakthrough this summer -- and in an ideal scenario for Cupertino, Samsung will then realize that it can't win, and back down.
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