Sunday, July 15, 2012

Damages figures like the $147M verdict against RIM could make smartphones unaffordable

The biggest smartphone patent news of the weekend is that a Northern California jury rendered a verdict in favor of a little-known company named Mformation Technologies against BlackBerry maker Research In Motion (RIM) to the tune of $147.2 million, assuming that a "reasonable" per-unit royalty for just one patent would be $8.00 (yes, eight dollars). Here's the relevant part of the verdict form (click on the image to enlarge):

Again, this is based on a finding of infringement of only a single patent: U.S. Patent No. 6,970,917 on a "system and method for remote control and management of wireless devices". At trial time, seven claims of that patent were at issue. All seven were found infringed, but five of them were deemed anticipated. The plaintiff prevailed on independent claim 1 and its dependent claim 6.

As CBC notes, this could hardly come at a worse time for RIM, and the company is "evaluating all legal options". I don't follow litigation by patent trolls and small players anymore (there's too much going on between large operating companies), so I have no idea whether the blame for this crazy verdict is on the judge, the jury or on RIM's legal team. But whatever the reason or combination of factors may be, this verdict must be overturned at the earliest opportunity. Chief Judge Ware should enter a judgment as a matter of law (JMOL), and if he doesn't do it, let's keep our fingers crossed that the Federal Circuit is going to restore sanity.

Let's put the $8 per-unit royalty into perspective. While I don't put much stock into some analysts' speculation as to the amounts of money changing hands in license deals between large players (the actual deal terms are usually not disclosed), the per-unit royalties that are rumored to be paid by Apple to Nokia and by certain Android device makers to Microsoft are comparable to what this California jury, possibly misguided by Mformation's shrewd lawyers and suboptimally-instructed by the court, awarded to Mformation. But a license deal with a company like Microsoft or Nokia involves large numbers of relevant patents. Those kinds of companies have tens of thousands of patents worldwide, and a licensee's products potentially implemented many hundreds (if not more) of them in a device. The verdict, however, relates to a single software patent that I've looked at and can't find anything exceptional about. The patent offices of the world crank out tons of patents of this kind every day.

Just like I don't necessarily rely on analysts' royalty estimates, I also want to be reasonably cautious about Google's claim, made a year ago, that actually cites a Financial Times article that relied on RPX, a patent aggregator. I've never seen a derivation for the 250K estimate. But as a power of ten, the figure is credible. We're talking about a six-digit figure of patentable inventions in a smartphone, not a four- or five-digit figure.

Now let's do the math: even if I take only half of the Google/RPX estimate (i.e., 125,000), the potential licensing cost per smartphone would amount to $1,000,000 -- yes, one million dollars per device -- if the average licensing cost per patent corresponded to this verdict that came down in San Francisco on Friday the 13th.

This is absolutely unsustainable. Even if I wanted to give Mformation the benefit of the doubt that this patent is 100 times (!) as valuable as the average patent, and if I assumed that the Google/RPX estimate is 10 times the accurate number of patents, the per-device license fee would still be $2,000. That's more than I paid in the aggregate for the last three smartphones I bought (Galaxy S, Galaxy S II and Galaxy Note).

The legal standard for overruling a jury verdict is that "no reasonable jury could find" what the jury in question determined. This is a very clear case of a jury verdict that no reasonable jury could have rendered unless it was mis-instructed.

Jury verdicts don't set a precedent in the narrow sense of the word -- only judges can do that. But if this jury verdict was affirmed by a judge as well as by the appeals court, that would be a terrible precedent. With all of the other smartphone-related cases pending, the consequences of this position on a "reasonable royalty" would be catastrophic.

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