Sunday, August 19, 2012

Why Samsung's great contributions to smartphone innovation don't give it much leverage in court

Apple and Samsung have both rested their cases, and jury deliberations will begin on Wednesday. I've said before that Apple has presented pretty damning evidence. Samsung's best shot is that the jury may be confused or unsure when it comes to technical detail, and its lawyers came up with a number of non-infringement and invalidity contentions, a few of which are pretty good.

Whatever the verdict may be, Samsung will continue to sell highly competitive gadgets in the U.S. market. It may just have to modify its products in different ways if a liability verdict is followed by a permanent injunction.

Samsung may also prevail on some of its own infringement claims against Apple, but I have some doubt about the validity of the non-standard-essential ones it is asserting in this litigation, and the standard-essential ones are FRAND-encumbered and will realistically result neither in a huge damages award nor in an injunction (on this question I predict that Judge Koh will most likely adopt Judge Posner's stance).

Between mid-September and mid-October, there will be four Samsung v. Apple trials in Mannheim, Germany. Once again, Apple won't have to lose sleep over Samsung's assertions. Two of the patents are standard-essential, while two others are not, but they are not going to have much impact. One of them covers a particular method to enter emoticons (smileys) on a mobile phone.

It does seem funny that Samsung hopes to be able to counter Apple's IP enforcement with a smiley input patent. But it would be a mistake to underestimate the enormous innovative power of Samsung Electronics. Samsung is not just a copyist. I want to make a clear distinction between Samsung's legal position vis-à-vis Apple, which is pretty weak, and Samsung's actual contributions to innovation in smartphones and tablet computers, which are impressive and admirable.

That last sentence may appear counterintuitive at first sight. After all, the whole idea of patents is to protect innovation. So how come someone who has made major contributions to innovation in a given industry over many years is on the losing end of a patent dispute with a late entrant? That's because patents are a complex business, and all patents are not made equal, especially with a view to a patent war.

I've mentioned on other occasions that my smartphone is a Galaxy Note (when the new Note II becomes available, I may buy that one), and I previously had a Galaxy S II and, prior to that one, a Galaxy S. Samsung's phones are high-quality products. As a consumer, I don't make purchase decisions based on innovation policy considerations. I don't care who copies whom as long as I get to buy the product that best meets my needs, though I know full well that innovation must be protected to a reasonable degree or else there'll be much less of it in the future.

Samsung's own customers are not the only consumers to benefit. The competitive pressure it exerts on Apple is actually also good for Apple's own customers. This leads me to the first of several contributions Samsung has made to smartphone innovation without getting legal leverage against Apple.

1. Form factor choice

It may not surprise anyone that a Galaxy Note user like me thinks that XXL smartphones, called "phablets" (phone+tablets) by some, are useful. My Note fits into my pockets. It's sizable, but I haven't experienced any practical constraints compared to any other smartphone I've used before except in only one situation: after I had been holding the Note to my ear while walking for about 30 minutes, I felt some pain in my right arm, which went away quickly.

I don't even use the stylus. I tried a few times and preferred the on-screen keyboard. All I want is the form factor, and if it weren't for Samsung, I wouldn't be able to buy that form factor. Apple certainly doesn't offer it yet. Hopefully the Note will become so successful that all device makers will offer a device of that size at some point. But we're not there yet.

Apple is a minimalist when it comes to the number of SKUs (shelf-keeping units). It's hard to argue with success. But what's best for Apple is not necessarily best for consumers. Consumers love choice. Apple loves the opposite.

If the iPhone 5 comes with a larger screen and/or if Apple launches an iPad mini, it's fairly possible that competitive pressure from Samsung played a key role.

But Samsung won't be able to sue Apple for doing devices with 5.2" or 7.0" screens. Neither design patents nor utility (technical) patents can monopolize a form factor.

Indirectly, patents can enable form factors. For example, patents can protect efficient manufacturing methods that enable companies to sell large displays at affordable prices. But Apple most likely won't infringe on any such patents. It will buy those displays from Samsung or another vendor as needed. That takes us to the second item.

2. Components (central processing units, displays, etc.)

In his opening presentation, Samsung's lead counsel Charles Verhoeven reportedly stated that "Samsung products comprise 26% of the component cost of the iPhone, including its flash memory and main memory", and asked: "Who is the real innovator?"

While there is nothing in the law that allows those contributing, by value, 26% of the components of a device to copy parts of the other 74%, Mr. Verhoeven's point is well-taken. There's undoubtedly much more technological innovation in such highly sophisticated components as memory chips or screens than in, for example, a slide-to-unlock mechanism (which is not at issue in this particular trial, just in some other lawsuits).

If Apple buys those components from Samsung at market rates, there's no way Samsung can sue Apple over them. If Apple bought such components from a Samsung competitor, chances are that Samsung has either a cross-license agreement or some kind of non-aggression pact in place with that component maker. In that field, innovation is incremental and Samsung would not be able to shut down all of its competitors.

It also appears that some of the components Samsung builds for Apple were actually designed by Apple itself.

By the way, there are people out there who think Samsung could at some point solve the whole IP problem it has with Apple by threatening to stop supplying. Apple is not that stupid. Apple's agreements with Samsung will ensure that Samsung has no choice but to comply and supply. Also, Samsung's other customers would lose faith if it turned out unreliable. And since Apple already threatened Samsung with litigation two years ago, it has had plenty of time to identify alternatives.

3. Don't overrate the innovation behind SEPs

One part of Samsung's trial strategy was to tell the judge and the jury that Apple could never have made an iPhone without implementing standards to which Samsung owns essential patents.

On online discussion boards, there are frequently comments that SEPs should be more valuable than, to mention that famous example again, slide-to-unlock. But that's just because slide-to-unlock appears easy to understand while a patent on a pseudonoise sequence generator may be more awe-inspiring based on its title and description.

It's not like Samsung singlehandedly created 3G, or made the inventions that are primarily responsible for the higher data throughput it offers.

I've seen numerous SEPs and attended a number of trials over SEPs. I have yet to see a single SEP that really represents a major technological breakthrough over the prior art. In reality, SEPs usually cover only minor improvements over what was already known, and on average they'd be fairly easy to work around if the technique they cover had not been declared essential to a standard. For example, there's any number of ways of encrypting data, or of compressing data, or of packaging data, but if a standard prescribes only one particular encryption or compression or packaging scheme, there's no way to work around and a narrow patent becomes, due to standardization, harder to work around than the broadest non-standard-essential one.

In my analysis of the FRAND part of Judge Posner's ruling, I already explained this. For your convenience, the remainder of this post just consists of a couple of passages quoted from Judge Posner's opinion on Motorola's SEP assertions against Apple, and my commentary below the quoted paragraphs as it already appeared in this post almost two months ago.

"There is another decisive objection to Motorola's damages claim. The proper method of computing a FRAND royalty starts with what the cost to the licensee would have been of obtaining, just before the patented invention was declared essential to compliance with the industry standard, a license for the function performed by the patent. That cost would be a measure of the value of the patent qua patent. But once a patent becomes essential to a standard, the patentee's bargaining power surges because a prospective licensee has no alternative to licensing the patent; he is at the patentee's mercy. The purpose of the FRAND requirements, the validity of which Motorola doesn't question, is to confine the patentee's royalty demand to the value conferred by the patent itself as distinct from the additional value--the hold-up value--conferred by the patent's being designated as standard-essential. Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 313–14 (3d Cir. 2007); Daniel G. Swanson & William J. Baumol, 'Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power,' 73 Antitrust L.J. 1, 7–11 (2005). Motorola has provided no evidence for calculating a reasonable royalty that would be consistent with this point."

The above paragraph is highly important. In debates over FRAND, many people fail to make the necessary distinction between the pre-standard-setting value of a patent and the value of standardization itself. SEP holders obviously like to argue that what they sell is a license to operate in a market: without a license, the phone won't dial into a network. But that value is a separate story from the intrinsic value of the innovation that a patent represents. A patent doesn't have to represent a particularly impressive innovation to be included in a standard. It's all just a bargaining process. The patent becomes powerful because of the collective market share of the companies engaged in standard-setting. That's the power of a cartel, not the power of innovation.

Judge Posner accurately refers to the differential between the value of a standard and the value of a patent contributed to it as "the hold-up value".

In my observation, standard-essential patents are, on average, not more but actually less of an innovative achievement than other patents. Most of those patents would have a commercial value of zero, or next to zero, if they weren't included in a standard. For example, they cover simple countdown algorithms, some of an infinity of encryption algorithms, etc. There are countless workarounds, but those workarounds cease to be available once the patented technique has become a mandatory part of a standard. If the standard prescribes only one way to encrypt data or to count down the number of packets to transmit, the availability of other ways to solve the same technical "problems" becomes irrelevant.

If patent holders were allowed to charge based on the value of standard-setting, they would unduly enrich themselves just because they were part of a standard-setting cartel.

"So damages are out for both parties. But a patentee can also seek injunctive relief for infringement, and both parties seek such relief, as I have already noted with respect to Apple.

Injunctive Relief. To begin with Motorola's injunctive claim, I don't see how, given FRAND, I would be justified in enjoining Apple from infringing the '898 unless Apple refuses to pay a royalty that meets the FRAND requirement. By committing to license its patents on FRAND terms, Motorola committed to license the '898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a royalty is adequate compensation for a license to use that patent. How could it do otherwise? How could it be permitted to enjoin Apple from using an invention that it contends Apple must use if it wants to make a cell phone with UMTS telecommunications capability -- without which it would not be a cell phone."

This is a ringing endorsement of the "no injunction" policy on standard-essential patents that Apple, Cisco, HP, Microsoft and others have recently stated in different submissions to governmental agencies and standard-setting organizations.

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