Quick Thoughts: Apple and Samsung’s Nuclear Spring

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–          As AAPL’s $930M verdict from round 1 inches into the appeals process, round 2 has hit the court room, with AAPL looking for $2B from Samsung for alleged infringement of 5 patents.

–          AAPL’s estimated damages are unreasonable. An estimated 250,000 patents apply to every smartphone – if all IPR holders followed AAPL’s lead, each phone would carry $200K in royalties.

–          Whatever the outcome, this trial will have little impact on competition – injunctions are very unlikely, the products affected are obsolete, and damages will be held up by years of appeals.

–          US patent law is under fire – the Supreme Court heard arguments in a case that could weaken software patentability and Congress is debating tighter patent eligibility.

Apple and Samsung are back in U.S. District Court in San Jose this week as their second patent trial commenced on Tuesday after a jury of six women and four men was selected. The trial is the latest in a legal battle with Google’s Android partners that goes back over four years, when Apple sued Android handset maker HTC for patent infringement in March 2010. While it has since settled with the now financially troubled HTC, Samsung has been in Apple’s crosshairs since April 2011. In its latest dispute with Samsung, Apple is seeking some $33-$40 in damages per phone as well as a sales ban over 5 patents, which could amount to an aggregate $2 billion. The lawsuit covers Samsung models released in 2011-2012, most of which have been retired. As hundreds of thousands of patents make up the IP of a modern smartphone or tablet, Samsung is countersuing for a relatively miniscule $7 million, a contrast intended to make Apple’s demands look outrageous. Though the verdict of the 2012 case stands at $930 million award for Apple, Samsung is still appealing that decision and has yet to pay Apple anything, while the US Patent Office is also reviewing the validity of a key patent in the case. A negative outcome on appeal or an invalidation of the patent could greatly reduce or even eliminate Apple’s claims for damages.  Despite numerous meetings between CEOs of both companies to negotiate a settlement outside of court, the patent war rages on.

The latest trial essentially began last week with Samsung raising objections to an updated jury instructional video on patent law that features video of some iconic and easily recognizable Apple products such as the MacBook, iPad, and iPhone as a narration about protecting innovation is voiced. Over the weekend, presiding Judge Lucy Koh overruled the objection and jury selection was finalized on Monday after a difficult juror screening process weeded out persons with ties to either company. Among jurors selected are a former IBM manager, county government employee, accountant, store clerk, plumber, secretary, police department community service officer and retired teacher. The former IBM manager is likely to be the most knowledgeable and influential on other members of the jury as he previously managed software developers developing IP at IBM and gave a deposition in an IBM case against Compuware. A juror with a similar profile served as foreman in the last case, where the jury was accused of rushing the verdict and ignoring prior art. That juror owned a video patent and later admitted his decision was based on his feelings if his patent was at stake rather than law. While the former IBM manager is likely to serve as foreman given his background, the direction of his influence remains unclear.

With jury section done, Tuesday saw opening arguments by Apple restating points that worked in winning the 2012 trial: focusing on the products look and feel and how similar Samsung’s devices were to Apple’s iPhone and iPad despite the scope of patents covering software utility. This time around, Apple alleges infringement on 5 software patents covering features like quick links, universal search on a device, data syncing, slide-to-unlock, and “auto-correct” and seeks damages of between $33 to $40 per device for a total near $2 Billion. The trial seems like a replay of 2012, with similar arguments and witnesses. Apple’s Phil Schiller took the stand as the first witness reiterating his 2012 testimony that the iPhone was a “bet the company” product that involved a lot of risk and Samsung’s copying of Apple features hurt the company by leading consumers to question Apple’s role as an innovator. Apple is again trying to present the case as an infringement of an entire idea, rather than specific feature.

Samsung focused its opening arguments on distinguishing the software features as proprietary to Google and the goal of a sales ban is to recover share in a market Apple has been losing. It asserted that similar functionality could be delivered without applying the narrowly defined ideas contained in Apple’s patents, and that Apple itself was not even using 3 of the 5 patents in its own products. As such, Samsung painted Apple as abusing the court system to try to thwart market competition, invoking an old email from Steve Jobs pointing to Apple’s “Holy War” with Google and arguing that Apple was using Samsung as a convenient target for trying to damage Android. Moreover, Samsung is countersuing for about $7M over two patents related to camera and folder organization ($159K) as well as a video transmission function and compression technology used in Apple’s FaceTime app ($6.8M). The smaller amount is significant in the case as it illustrates Apple’s claims represent a disproportionate amount relative to the IP that goes into a smartphone.

Considering the bill of materials for a typical flagship phone is a little north of $200 and comparable software patent licenses max out around $15 per device as Microsoft collects royalties for thousands of patents on Android devices, it’s difficult to imagine the IP of an obvious software feature like quick links and or swipe gesture are worth anything more than a few pennies per device versus the $40 being asked by Apple. During a previous case with Motorola, Apple was asking for $0.60 per device for the quick links patent, while it’s now demanding $12.49 from Samsung. Apple also ended its litigation against HTC back in November 2012, two and a half years after its first lawsuit against the company and submitted a highly redacted version of its agreement to Judge Koh in the previous case. HTC, which now has patent agreements with each platform owner, is likely paying Apple somewhere under $10 per device for a full suite of IPR, including the patents subject to this trial.

Still, a jury trial can go either way and the clock is ticking as changes to the definition of software patents loom. On Monday, The US Supreme Court heard arguments related to a software patent case that could set a precedent for litigation around what constitutes a software patent. Google, Microsoft, and Facebook and a host of other technology companies excluding Apple, filed Amici Curiae with the court giving their definitions of patentable ideas. Apple’s primary goal in the case seems to be hampering Samsung’s mobile device business. While it showed it can play ball with smaller players like HTC, the unreasonable royalty expectations placed on Samsung will continue to keep both sides from coming to a negotiated settlement.

For our full research notes, please visit our published research site.

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