Apple vs Samsung – The patent proxy war

28th August 2012

"Apple smashes Samsung in $1bn grudge match." – that's the sports-style headline on Apple's victory over Samsung in a California court patent dispute.

But while the champagne corks are popping at Apple – and more particularly its lawyers – those at the top of what is now the world's biggest company by stock market valuation should remember that this is not a game. It's far more complex and the victory they wished for (and paid heavily for in legal fees) could turn out to be pyrrhic. For the decision has led many to demand a change in patent laws, calling into question the whole "intellectual property" business which can give copyright and other protection to common phrases and features such as curved edges.

In the complex world of patent litigation, it could have been – like those South Korean table tennis players at the Olympics – that this was a match which was better for South Korean Samsung to lose.

Unintended consequences

This Reuters report  details Apple's victory but also the unintended consequences.

Did anyone at Apple calculate that a win would result in public relations and investment victory for Microsoft which was not part of the case? 

Did anyone at Apple think about its continuing relationship with Samsung from which it buys some $4bn of electronics?

And did anyone consider the public relations kickback against the world's most dominant computer company appearing even more monopolistic?

Apple's $1.05bn win – half of what it demanded – was good for the firm ahead of the iPhone 5 launch and could lead to a ban on certain Samsung products in some markets. At the very least, it will delay Samsung and the Android (from Google) operating system until at least the next patent dispute.

EU safe for Samsung

But if this knocks some of Samsung out of the US market – the European Union does not recognise software patent protection in the same way as the US – then it frees the field for Google's planned low cost Nexus 7 tablet and, given its split between software and hardware, for Microsoft Windows 8, planned for October, which will come in a tablet friendly form. The Microsoft model of licensing software to hardware makers has resulted in consumer-friendly competition on features and cost on laptops.

Removing Samsung, even for a short time, could result in a renaissance at seemingly all but dead Nokia and equally moribund Blackberry maker Research in Motion. 

Rival Microsoft is a winner because the Windows Phone operating system is very much a minority product although well received. It had too few manufacturers signed up – unlike the free to use Android system. It hit the vicious circle of too few makers, too few users, too few app developers. The Apple win is far from a knock-out but it brings down the number of active players – it's like playing against ten men.

Back to the drawing board

Almost certainly, Samsung and Google/Android will go back to the drawing board to see how they can do better next time – and that could be a phone that knocks Apple back to the ground.

According to an article on Slate.com, "the patent system operates as a kind of tax on today's innovators, and the jury's verdict confirms that the tax is not a small one. Optimists will say this kind of strong protection for first movers creates big financial incentives to innovate. But a more realistic view is that technology companies are generally trying their best to innovate and it's simply difficult. In that view, jury rulings in favor of incumbents will simply reduce competition and raise prices for consumers."

It continues: " A growing chorus of voices-now including prominent judges such as Richard Posner-have reached the conclusion that America's patent system has veered far off track. They're right, and Samsung's best hope may now be that this broader critique of the patent system will lead some judge or other to bail them out."

The Los Angeles Times also takes up the "something must be done about patent law" chorus.

Patent system patently wrong

It writes: "Apple v. Samsung is just a proxy for everything else that's wrong with the patent system right now," says Julie Samuels, an attorney with the Electronic Frontier Foundation, which is campaigning to reform the system.

"The system's biggest problem is with software patents of the sort that underlie Apple's lawsuit against Samsung. Apple charged that Samsung infringed its patents on such software-based iPhone features as its tap-to-zoom function, while copying its devices' appearances to "confuse" shoppers."

It adds: "In the information technology field the patent process has ceased to become a way to encourage and reward innovation. Instead, it's a competitive weapon, which was not the original idea at all."

Apple either failed to consider the backlash or factored it into calculations, deciding it was worthwhile. 

You win some, you lose some

The LA Times quotes Chicago federal appeals judge Richard Posner in June. He said: "The patent system has become a means of providing "a windfall to the [patent owner] and a form of punitive rather than compensatory damages imposed on the infringer," making the point when he tossed out an Apple patent lawsuit against Motorola that was virtually a clone of the Samsung case.  Great business for intellectual property lawyers, though.

Until about 1980, software was thought to be unpatentable because it didn't seem to fit into patentable categories such as "machines" or "processes." But following a series of ambiguous federal court decisions, the ground shifted. By the 1990s software patents were common. But US law is still ambiguous.

Michael Baxter writes on the The Share Centre blog that "once again the US, with the tacit consent of its citizens, is erecting walls of protectionism."

He says: "When you look at the story of patents, you often discover that scientists working in isolation stumble upon very similar ideas at about the same time. So, you have an idea for a touch screen computer/tablet. Does that not mean make it inevitable, that certain functions will appear: you zoom in by tapping on the screen, for example?"

Samsung released a statement saying: "It is unfortunate that patent law can be manipulated to give one company a monopoly over rectangles with rounded corners."

Samsung continued: "Today's verdict should be viewed as a win for Apple, but a loss for the American consumer."

Baxter points out the cross-border implications. " If the US court decided so strongly in favour of Samsung, how is it that a UK court said the Samsung product was not cool enough for it to be said that Samsung had copied Apple?"

Equally a court in South Korea awarded damages to Samsung, saying Apple was in breach of its patents.

Baxter -and many others – conclude &quot
;Looking at a broader point, global patent laws are one of the biggest threats to future innovation. They need to be radically overhauled."

Investors should put less faith in intellectual property law – decisions can often go either way on a whim.

Fund Manager Ian Warmerdam from Henderson points out that this win creates short term gains for Apple but for them changes little in the long term:

"This is a clear positive for Apple, a clear negative for those in the Android camp (including Google, Samsung, HTC and others) and potentially a positive for those more aligned with Microsoft (including Nokia). However, given the material consequences are small in the meantime and remain unknown longer term, we are currently making no changes to fund positioning. Apple is our largest position and we remain overweight Samsung, Google and Microsoft. The current headlines do not detract from our longer term thesis of both Samsung and Apple taking share from weaker players in the consumer electronics market."

 

More on Mindful Money

The Apple dilemma: Innovation or longevity

The Zeitgeist Investor – Keeping cool amid the storm

Apple – Is the world’s tech darling ready for the backlash?

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