Friday, May 9, 2014

The good, the bad and the ugly: three basic options for Apple after lackluster verdict in Samsung case

As I mentioned in my two previous posts, I'm now going to write far fewer blog posts than in the past. My goal is not to blog more than once per week. I need to focus on my app (in connection with which my first patent application got filed on Wednesday).

I just have a few high-level thoughts to share about Apple v. Samsung. Apple's PR department jumped the gun by issuing a comment after the original verdict, three days before deliberations formally ended. Samsung commented only after the final, corrected verdict:

"We agree with the jury's decision to reject Apple's grossly exaggerated damages claim. Although we are disappointed by the finding of infringement, we are vindicated that for the second time in the U.S., Apple has been found to infringe Samsung's patents. It is our long history of innovation and commitment to consumer choice that has driven us to become the leader in the mobile industry today."

After the final, corrected verdict, Samsung's lead counsel in the recent trial, John Quinn, gave interviews to different media. The San Jose Mercury News quoted him as follows: "It's become Apple's Vietnam. This whole "holy war" has been an embarrassment to Apple. They've accomplished nothing."

CNET and other media quoted Mr. Quinn on the post-verdict proceedings:

"Of course we're pleased that the jury awarded Apple 6% of what they were asking for. But even that can't stand, because Apple kept out all the real world evidence and didn't produce anything to substitute for it, so you have a verdict that's unsupported by evidence - and that's just one of its problems. In post-trial motions and on appeal, we will ask the judge and the federal circuit to cut the 6% verdict to 0, which is where it should end."

The real-world evidence included, among other things, license deals such as the Apple-HTC settlement and Apple's own 60-cents-per-unit damages claim in the "Posner case" (Apple v. Motorola) over the '647 "quick links" patent, which accounted for most of the damages in the recent California trial because the jury awarded Apple several times more than 60 cents per unit, though it was clear before jury deliberations began that the Federal Circuit's affirmance of Judge Posner's claim construction would also govern the California case.

The jury also wasn't told various key facts that would have made findings of invalidity much more likely.

Basically, the jury rendered its verdict based on a very selective portrayal of the facts -- a parallel universe. And even in that parallel universe, Samsung was able to reduce the credibility of Apple's story to the extent that the jury awared Apple only about 5.5% of what it demanded. That shows just how weak Apple's case was. With all the facts on the table, the outcome for Apple would indeed have been much closer to zero, or simply zero.

CNET has published another article with quotes from Mr. Quinn:

"Up to this point, I think Apple really hadn't given up hope [it] could cripple Android somehow. This has got to be the last straw. They've got to realize they're not going to slow Android down by suing people."

"Years into Apple's holy war on Android, they haven't collected a nickel."

"It's kind of hard to talk settlement with a jihadist."

While Mr. Quinn's comparison of Apple's "holy war" on Android to the Vietnam War is almost flattering to Apple (the U.S. actually had way more impact in Vietnam than Apple's patents have had on Android), the "jihadist" part goes too far. It's about business interests, not religious matters, and even in the holy-war context, "crusader" would have been a better analogy here. The primary obstacle to a settlement on reasonable terms (I outlined a set of terms last month but now feel this is increasingly likely to end in a zero-zero cross-license with some one-time payment for past design patent infringement) is not that Apple is obsessed with patent litigation. It's a strategic dilemma coupled with Apple's apparent inability to understand just how weak its patents -- at least the ones it has asserted in courts around the globe so far -- really are.

The strategic dilemma is that Apple's pricing and product strategy (including the way it restricts end users' freedom) is a great one if you want to occupy a lucrative niche, but it's not a strategy for having the market-leading platform -- in that regard I agree with BGC analyst Colin Gibbs, who expressed doubts about the sustainability of Apple's market capitalization. In network effects-driven markets, market leaders often build so much momentum behind their platforms that the collective innovative capacity of an ecosystem makes the most popular platform also the best one from an end user's perspective -- in which case even a premium-priced niche is in danger in the long run. Apple has, however, become used to having everything: high prices, high margins, huge profits, huge sales, and rapid growth (at least until not so long ago). This was possible because it revolutionized more than one market and virtually created a whole new market. It's just not possible when commoditization occurs. This is a law of nature, like gravity.

So Apple would like intellectual property to be an entrance barrier, at least to the extent that its products are truly different. You can't be different in functional -- only visual -- terms if everyone else is able to deliver the same functionality. On the design patent side, it's pretty much "mission accomplished": as a result of Apple's relentless enforcement, competitors don't dare to build iPhone or iPad lookalikes. But in functional terms, many hundreds of millions of dollars had to be wasted by Apple and the companies it sued on legal fees only to find out that, so far, Apple owns nothing besides rubberbanding. The discrepancy between the immense costs of litigating these cases and the valid intellectual property identified so far -- hundreds of millions of dollars for a nice but small feature -- is probably the strongest argument anyone could ever have made for claims that the patent system is broken and for abolishing all patents in this industry.

I'm not advocating abolition here or saying the system is broken; I'm just saying that there could hardly be a stronger argument for the system being broken and for its abolition than the track record of Apple's high-profile, earth-spanning patent infringement lawsuits. There are all those, partly questionable, statistics of how much patent trolls cost the real economy. There is a presumption that the claims brought by those entities are generally illegitimate and weak. Apple is not a troll. Apple's business model is not to settle cases for a license fee below the costs of a proper defense. But the cost-impact ratio of Apple's cases is troubling nonetheless.

This is a game that Apple apparently can't win. It keeps playing anyway. And it has recently decided to become more actively involved with lobbying -- lobbying for a game it apparently can't win anyway.

There's an infinite number of strategic choices for Apple in the aftermath of the California verdict. From the outside I see three basic approaches:

  1. The good. Ideally, Apple will now perform a realistic assessment. Its problem is not leadership. I think highly of Apple's litigation department and outside counsel. I don't think the problem is higher up either. At least there's no reason whatsoever to believe so. Apple should focus on the essence of patent law: the name of the game is the claim. There's no point in suing Android device makers over claims that are so narrow they can be worked around; there's also no point in suing over broad claims that can be easily invalidated. Apple must ask itself whether it has patent claims in stock that really ensure technological differentiation. It probably doesn't because I believe its very capable internal and external lawyers would have identified them already. Should it find that there are some really promising claims, then no one can blame Apple for asserting them in court. With all that's at stake, it would be understandable to give it another try. But if it doesn't identify some previously undiscovered or underestimated "gems", then it should accept the harsh reality that you don't own a technology only because you make it popular. You own the technologies you create, not the markets you create. So if Apple doesn't own technology on an exclusive basis that is central to Android, then it should seriously consider entering into a zero-zero cross-license agreement (with some one-time payment for past design patent infringement). There's a high risk of the outcome being zero-zero even if Apple kept suing for several more years, in which case it would be better to take a shortcut. Same in the Motorola case, where design patents are, however, not an issue.

    I was more optimistic about Apple's enforcement efforts last summer, but after the summer things fell apart. The enforcement of the ITC import ban against Samsung (over the "Steve Jobs patent" and a hardware patent) had no impact. A permanent injunction was denied again. Additional patents were invalidated in Europe. And, most recently, that verdict.

  2. The bad. It would be disappointing if Apple decided to keep on suing without having identified really strong claims and without having an endgame strategy. This wouldn't be illegal, but the vast majority of patent troll lawsuits are also legal. Not everything that is legal is also acceptable.

    Should Apple choose this bad option, it might do so only because it overestimates the leverage it can gain. But if it actually knew that it can't win but kept on suing anyway, then this would be related either to a lack of leadership or (which it hopefully wouldn't be) the third option, which is the ugly one.

  3. The ugly. In this scenario Apple would consciously pursue litigation without having strong claims and an endgame strategy just because it can (it has patents, it has money, it has lawyers) and in order to besmirch the reputation of the Android ecosystem: Google, Samsung, others.

    I hope Apple's PR department was not behind this Vanity Fair piece that amounts to mudslinging against Samsung. It's just unlikely that Samsung told Vanity Fair how its first patent infringement talk with Apple went.

    The "copying" allegation is not going to help Apple with broader audiences. Google and Samsung are recognized as legitimate innovators except by some die-hard Apple fanbois. Repeating the "copying" story just means more preaching to the converted, without persuading neutral audiences.

    The worst development would be if Apple actively lobbied against the interests of its own app developers.

Let's all hope that Apple choose the good and rational approach. If the only reason it hasn't had serious impact on Android yet is that it chose suboptimal patent claims, then I wouldn't blame Apple for further enforcement efforts. Otherwise it should settle. Suing just for the sake of suing would be a bad idea, especially if this meant that litigation basically became a PR tool (of limited effectiveness).

By the way, and widely unnoticed by the general public, Apple and Samsung met again in court on Wednesday (two days after the final verdict) -- in the United States Court of Appeals for the Federal Circuit -- to discuss Samsung's appeal of the ITC's decision on one standard-essential patent (not the one the ITC found infringed but which gave rise to a Presidential veto). I have listened to the official recording but haven't looked at this patent in sufficient detail to predict the outcome. I guess the ITC ruling will be affirmed. But Samsung doesn't have to prevail on more patents as long as Apple doesn't have strategic leverage.

[Update] Shortly after this blog post, the Korea Times published an interview with me on the Apple-Samsung dispute and a possible settlement. [/Update]

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