Wednesday, December 19, 2012

The most important Apple-Samsung decision left for Judge Koh: running royalties, not past damages

On Monday, Judge Koh denied Apple a permanent injunction against Samsung over the patents the jury had found infringed, but that does not mean that Samsung is free to infringe. Apart from the fact that I believe Apple will ultimately win some injunction on appeal (because patents are exclusionary rights under the Constitution and if Apple doesn't win one in this case, no patent holder in this industry ever will), there's an important consequence of the denial that I haven't seen addressed elsewhere, so I want to talk about it now.

Contrary to popular misbelief, the strategically most important issue now is not the one of whatever adjustments Judge Koh may make to the jury's billion-dollar damages award. Whether it goes up to $1.5 billion (Apple would love that) or down to $800 million is not going to change the situation between these two companies. In a way, even Samsung's withdrawal of its European SEP-based injunction requests is more important than the entire billion-dollar award because it wouldn't have taken Samsung too many months of blocking Apple's sales in a market like Germany to cause damage well in excess of a billion dollars. (There are steps Apple could have taken to avoid this, but those measures could also have been quite costly and, in the long run, might have resulted in licensing costs exceeding a true FRAND rate by far more than a billion dollars.)

The key issue remaining in Judge Koh's court now is about damages, but not about past damages. It's about future damages, more commonly referred to in legal documents and write-ups as "post-judgment royalties".

The denial of an injunction is not a determination that the future value of a patent is zero. Instead, the legal consequence is that the court must determine what the infringer needs to pay for future use of those patents. The court won't stop the infringement, but the infringement, if any still occurs going forward, must be compensated. The patent holder is always entitled to monetary compensation, which is a legal remedy (available under the law) as opposed to an equitable one (injunctions are in the discretion of the court).

Back in July I already reported on (among other things) the per-unit amounts that Apple wants to receive on an ongoing basis:

  • $2.02 for the "overscroll bounce" (or "rubber-banding") '381 patent

  • $3.10 for the "pinch-to-zoom 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

From a practical point of view, we can forget about the last item ($24 for design patent or trade dress infringement). Samsung is not going to do that, not even if the cost was one tenth of that amount. Samsung benefited in the past from building iPhone/iPad lookalikes -- it no longer needs to do that.

For the three software patents, Samsung claims to have workarounds. I analyzed them in October and subsequently reported on Apple's claim that Samsung's purported workaround for the '915 patent isn't truly a workaround but just another act of infringement.

I believe the rubber-banding workaround is legally fine but it's just a throw-out (of a feature that's not just a visual effect but key to usability) and not a non-infringing implementation of comparable functionality. If it were just about this patent (and not about countless other patents Apple might assert over time, resulting in a huge aggregate cost), I actually believe that the $2.02 price would be worth paying because rubber-banding would palpably enhance the user experience of Samsung's phones. (Samsung hasn't implemented it for about a year because of various lawsuits around the world, but I'm sure it would love to re-implement it.) The cost to Samsung would, however, not be limited to whatever the court determines it has to pay Apple on a per-unit basis. There would also be the cost of having to maintain two different code trees (one for the U.S. and one for countries in which Apple has won or may win injunctions) for different jurisdictions. Also, the rubber-banding patent is under invalidation pressure in the U.S., so Samsung may ultimately get it for free anyway.

For tap-to-zoom, Samsung's workaround appears to solve the legal problem without any significant degradation of the user experience. The difference between the original implementation and the workaround is just what happens as a result of the next tap after the first tap-to-zoom operation. I'm not even sure Samsung would pay a few cents per unit to get to use that patent (unless Apple can really convince a court that the workaround isn't legally safe, but Samsung's non-infringement theory looks plausible to me).

The tricky part is the pinch-to-zoom API patent. There's a dispute (and to the extent that information was disclosed at all, it appears to be genuine) over whether or not the workaround still infringes. Apple believes this should be the most expensive one of the three software patents. If the court sets a low per-unit fee (instead of the $3.10 Apple asks for), Samsung might actually prefer to just pay it rather than fight with Apple over whether the workaround is a workaround, but since Apple will appeal the denial of the injunction, Samsung cannot know whether at some point it may really want to defend the workaround, so it might just have to fight over this.

Compared to the billion-dollar award for past infringement, these amounts of a couple of dollars per patent per unit (sold in the U.S. market) don't look huge. But strategically they are, because they have a relevance to long-term competitiveness and possible per-unit royalty rates for a license to Apple's entire portfolio. By contrast, the billion-dollar award is of a non-reoccurring nature. Apple might get other billion-dollar awards, but as long as Samsung doesn't infringe any design patents or trade dresses (or trademarks, which are not presently at issue), the likelihood of another billion-dollar award is very, very low. It's not that expensive to infringe utility patents. It's really the design and trademark stuff that gets costly, and Samsung will most probably avoid that one in the future.

Let's assume Judge Koh awards Apple a per-unit royalty for actual future use (Samsung won't pay if it just works around) of about $1 on average for each of these patents. And Samsung may decide to pay this for only one or two patents but probably not all three of them. But it may feel forced (or be forced, if its purported workaround doesn't withstand scrutiny) to pay $1 or $2 per unit. Big deal? Not big, but scalable.

It would be scalable because Apple has many more patents in stock. It would take time, but Apple might enforce more and more patents, and then reach a point at which Samsung would pay $10 or $15 for its use of only a dozen Apple patents. The alternative would be a license deal with a reasonable per-unit royalty and the anti-cloning provision that matters such a great deal to Apple in these kinds of deals.

The billion-dollar award, even if affirmed more or less, would just be like a sunk cost to Samsung. Water under the bridge. They would pay it mostly for the design and trademark stuff. It would have little bearing on a settlement involving technical patents. Sure, there could be a deal where Samsung pays more up front and a lower royalty going forward, or where Apple says "we'll drop or reduce the damages claim for past infringement if you pay more on a per-unit basis", but it would merely be a bargaining chip.

There are different ways in which Judge Koh could determine the post-judgment royalties. Theoretically, the parties could agree (as part of a wider settlement or just as a stipulation covering this specific issue). Most likely, they won't. Apple will want what it asked for in the summer, and Samsung will offer a few cents per unit. So the court will have to decide. Most patent cases get settled long before this point, and especially before any of this gets decided on appeal, which is why the law isn't completely settled in this area. There are three distinct possibilities:

  1. For the first one it's too late in this case: Judge Koh could have asked the jury to determine post-judgment per-unit royalties for the event that an infringement is identified but an injunction denied. This jury wasn't asked to decide this, and it won't reconvene in court.

  2. Judge Koh could put the issue before a new jury. This would require a jury trial at which the parties would present and defend their positions on the appropriate royalty rates. It would be a significant (but not huge) drain on court resources (also on the parties' resources, but those are vast).

  3. Judge Koh could make the determination herself. In this effort, she could attach more or less weight to the per-unit past damages amounts set by the jury. Samsung reverse-engineered the jury's per-product damages figures, but only to the extent that it's clear what the jury award for design patents (in total) and for software patents (in total). It's not clear how much value the jury attached to, for example, rubber-banding relative to pinch-to-zoom. The jury award was, on a per-unit basis, much less than what Apple asked for, but still a huge multiple of whatever Samsung would consider reasonable.

For post-judgment royalties, Apple might ask for an enhancement (such as a tripling) based on willfulness. While there are legal scholars who believe there is no basis for willfulness enhancements of running royalties, there are courts who have done this. If Apple could actually get triple post-judgment damages, then we'd be talking about several dollars per unit per patent. It would take Apple only a handful of successfully-enforced, willfully-infringed patents that Samsung would continue to infringe in order to get something on the order of a $15 per-unit royalty.

Scalable revenue streams are the primary business objective of companies like Apple. Apple would certainly prefer a deal with Samsung over protracted litigation, and if litigation continued, it would prefer (and will at some point win) injunctions over post-judgment royalties. But even in this worst-case scenario for Apple (worst case after a finding of liability; obviously, when a lawsuit starts, the worst case is that no infringement of any valid rights is identified in the first place), with an injunction being denied, there's still plenty of upside in it for Apple, and considerable risk to Samsung's competitiveness.

Now that Judge Koh has denied Apple's motion for a permanent injunction, one of the next steps for Apple is to file a motion for an award of post-judgment royalties. Apple's September 21 motion was only about damages enhancements for past infringement (also including the time between the jury trial and the final judgment). Apple may now await the outcome of the other post-trial rulings (the jury might still be overruled on some counts), but at that point it's going to demand post-judgment royalties, and it's entitled to them (except that the amount is yet to be determined).

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