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Samsung Electronics Co Ltd
LG Electronics Inc
Johnson & Johnson
International Business Machines Corp
Silicon Graphics International Corp
Eastman Kodak Co
In her black robe and strand of white pearls, Lucy Koh projects the serious, deliberate demeanor befitting a U.S. District Court judge. The Harvard-educated former federal prosecutor has served on the California state bench and as a partner in a Silicon Valley law firm, where she litigated technology patent lawsuits. For all her earnestness, Koh, 43, could not resist needling the lawyers skirmishing before her at a hearing last June in San Jose.
“Last time you were here,” the judge noted, “you said that you had a business relationship—I forget what the number was—$8 million, $8 billion?”
“I think it was in excess of $7 billion,” said attorney Harold McElhinny. That’s how much McElhinny’s client, Apple (AAPL), pays annually for components made by Samsung Electronics (005930), the company Apple is suing for patent infringement. Apple is Samsung’s single biggest customer, responsible for 7.6 percent of the Korean company’s 2011 revenue of $109 billion. The dependence runs both ways: Apple’s absurdly lucrative iPad and iPhone operations would grind to a halt without Samsung’s parts. Yet here in Koh’s courtroom, the companies were bashing each other’s brains out.
“Seven billion,” Judge Koh mused. “Can we all just get along here? Can I send you out to ADR?” she wondered, referring to alternative dispute resolution, a form of private mediation. “I will send you with boxes of chocolates,” the judge said. “I mean, whatever.”
Nine months later, the case of Apple v. Samsung shows no sign of abating. Rather than conciliate, Apple returned in February to the federal courthouse in San Jose to sue Samsung again, claiming the Korean manufacturer “slavishly copied” Apple. An unrelenting recidivist, in Apple’s portrayal, Samsung has “continued to flood the market with copycat products, including at least 18 new infringing products released over the last eight months.”
The clash reflects life in the tech big leagues: Apple sharply reminding a formidable rival who’s boss. At the same time, Apple v. Samsung is remarkable for its scale. The combatants barely notice the millions of dollars in legal expenses they’re each spending annually to flog the other in an epic struggle that will surely test their multibillion-dollar symbiotic relationship. The battle also signals a broader conflict pitting Apple against multiple mobile-device manufacturers in some three dozen legal and regulatory actions pending in 10 countries. Beyond Samsung, Apple’s notable antagonists include Motorola Mobility (MMI) and HTC (2498). As Silicon Valley sophisticates underscore, however, the phone and tablet makers are mere proxies for another foe—Android, the operating system Google (GOOG) gives away to manufacturers. Google employs a come-one, come-all business model radically at odds with Apple’s and, in the late Steve Jobs’s view, existentially threatening to his company.
In the last 18 months of his life, Jobs, who died on Oct. 5 at age 56, was obsessed with crushing Android. He explained to his authorized biographer, Walter Isaacson, that the litigation against device manufacturers was meant to communicate an unmistakable message: “Google, you f–king ripped off the iPhone, wholesale ripped us off. Grand theft.” Jobs swore he would “spend my last dying breath” and “every penny” in Apple’s coffers “to right this wrong. I’m going to destroy Android, because it’s a stolen product. I’m willing to go to thermonuclear war on this.”
One problem with nuclear attacks, even those of the metaphoric variety, is that the targets may retaliate with nukes of their own. That is precisely what has happened. For every Apple allegation, a rival has countered that Apple is not as uniquely innovative as Jobs liked to boast. To the contrary, Samsung, Motorola, and others insist that some of Apple’s most valuable patents—such as those protecting the minimalist design of the iPhone and iPad—were never valid in the first place.
By pushing the launch button on his legal ICBMs, Jobs bequeathed a significant risk to his successors. Apple may succeed in forcing competitors to deactivate a few phone features, or maybe even yank an entire model or two from a major market. But Apple has many rivals: If one falters, others will step in. Samsung’s website lists no fewer than 134 phone models. Apple, by contrast, has only two core products at issue in the patent war: the iPhone and iPad. Unlikely as it might seem, if a competing manufacturer manages to persuade a judge or a trade commission somewhere in the world that Apple has relied on a faulty patent for something important, the Cupertino (Calif.)-based juggernaut could suffer profound reputational damage and—more important to stakeholders—market-share erosion.
From a distance, the mobile-device patent wars resemble a mad free-for-all, but the salient strain of conflict can be traced to Cupertino in early 2010. With Apple’s iPhone continuing to sell millions of units, Jobs in January of that year introduced the slender iPad tablet computer. Both devices run iOS, Apple’s proprietary operating system that coordinates individual software programs and enables Apple devices to communicate with one another. Jobs famously sought to keep Apple’s operating systems exclusive—closed off from rivals—and tightly integrated with Apple hardware. Google designed Android, by contrast, based on open-source code, which Google makes available for free to multiple hardware manufacturers to install on phones and tablets. Google spreads Android to make money from the online advertising that trails Android wherever it goes, not from device sales. It’s the same strategy Google uses with its ubiquitous Internet search service.
Android’s very existence offended Jobs. “We did not enter the search business,” he told Apple employees during a meeting at the company’s headquarters in January 2010, according to the Isaacson biography. “They entered the phone business. Make no mistake. They want to kill the iPhone.”
Jobs’s outrage reflected his formative corporate experience in the 1980s, when he refused to license the Macintosh operating system for Apple’s stylish desktop computer. His nemesis, Bill Gates, licensed Microsoft’s (MSFT) competing Windows operating system (and DOS before that) to numerous PC manufacturers. Jobs disdained Windows as an inferior product, but snob appeal notwithstanding, Microsoft stomped Apple in the desktop software marketplace. Would something similar come to pass with iOS and Android?
What particularly irked Jobs about Google’s operating system was that Android phones offered so many features he felt Apple had created, including the overall look of the devices and their use of multitouch finger swiping. In 2008, Jobs had visited Google’s Palo Alto offices to tell founders Larry Page and Sergey Brin that if they backed off, perhaps Apple would grant Google access to a couple of icons on the iPhone’s home screen. If they developed Android to compete with iOS, Jobs warned, he would go to court. (While Apple remains the world’s most valuable business, as measured by market capitalization, and its iPad dominates rival tablets, Android has blown past Apple’s share of the phone operating-system business. Phones with Android software accounted for nearly 51.6 percent of smartphone shipments worldwide in the final quarter of 2011, according to research firm Canalys. The iPhone had 23.4 percent.)
Jobs’s notion of channeling his pique into a federal case faced several obstacles, however. As a practical matter, a judge could not order Google to stop selling copycat phones because Google didn’t sell phones in the first place. Likewise, Google couldn’t be forced to pay money damages related to allegedly contraband phones manufactured and marketed by other companies. On a symbolic level, stabbing straight at Google’s jugular might have provoked antipathy toward Apple among consumers and the Silicon Valley elite.
So in March 2010, Jobs attacked an Android proxy, accusing the Taiwanese company HTC of violating 10 patents in products such as the Nexus One, Touch Pro, and Droid Eris. “We can sit by and watch competitors steal our patented inventions,” Jobs declared at the time, “or we can do something about it.”
Founded in 1997, HTC had used its Android partnership with Google (which began in 2007) to evolve from a contract manufacturer of gear for other brands to a major smartphone seller in its own right. It punctuated its advertising with the understated slogan, “Quietly Brilliant.” Apple chose to accuse HTC before the International Trade Commission, a quasi-judicial Washington agency that moves more quickly than congested federal courts and has authority to exclude imports by intellectual-property wrongdoers. “Apple went after what looked like a soft target,” says Willy Shih, an intellectual property scholar and professor of management practice at Harvard Business School. Wounding HTC would send a signal to other Android-affiliated manufacturers.
HTC turned out to be tougher than expected. It hired topflight outside legal counsel, including the San Francisco-based firm Quinn Emanuel Urquhart & Sullivan, which also (not coincidentally) has represented Google. The Taiwanese company contended in its filings that it had done nothing wrong and Apple was fighting in court to undercut its competition. Before trial, Apple tellingly began to back off, dropping several of its allegations. An ITC administrative law judge further narrowed the case when he found preliminarily that the Taiwanese company infringed just two Apple patents. In December 2011, the full commission whittled the case down again, concluding that HTC violated only a sole patent covering a minor feature allowing a smartphone to recognize a number so it can be called instantly. HTC met this news by announcing that it had designed a work-around that would allow it to avoid the import ban Apple sought. Following the final commission decision and a stock-buyback announcement, HTC’s shares shot up 7 percent, the maximum permitted during a single day’s trading on the Taiwan Stock Exchange.
For this dubious outcome, Apple paid a price: HTC and other phone makers began filing patent claims against Apple. Motorola Mobility didn’t wait for Jobs to move first. In October 2010, the Libertyville (Ill.)-based manufacturer, represented by Quinn Emanuel, filed a trio of lawsuits and an ITC complaint accusing Apple of infringing its patents. Apple responded with an ITC action that Motorola phones running Android—the Droid, Droid 2, Droid X—copied the iPhone. For procedural reasons, Apple’s claim moved more swiftly, and in January of this year, an ITC administrative law judge ruled that Apple had failed to show any violations by Motorola. On March 16, the commission upheld Motorola’s victory.
In this tit-for-tat fashion, the patent war spread from Washington to Chicago to Delaware, and on to Britain, France, Germany, Holland, Italy, and Australia. New motions, hearings, and appeals occur on a daily basis. In one ruling, a court in Mannheim, Germany, decided in February that Apple had infringed a Motorola patent for a feature that automatically “pushes” incoming e-mail messages onto a phone’s screen. Days later, in a court in Munich, Apple won an injunction against Motorola related to “slide-to-unlock” technology. Each side is appealing each ruling, with no end in sight.
A mobile-phone pioneer for decades, Motorola possesses a trove of basic patents essential to building most digital devices. So valuable is Motorola’s intellectual property that in August 2011, Google announced it would pay $12.5 billion to acquire the company’s mobile-phone operation and its 17,000 patents. The deal, said Google CEO Page, will “enable us to better protect Android from anticompetitive threats from Microsoft, Apple, and other companies.” In other words: You sue us, we sue you. In February, Apple lodged a complaint with the European Commission, alleging that Motorola is using so-called standard essential patents to try to block competing products—a claim Motorola, of course, contests.
In March 2011, during the gala unveiling of the iPad 2, Steve Jobs turned his often-cruel attention to Samsung. He made fun of its Galaxy Tab and gave the Korean company top billing in a chart proclaiming 2011 the “Year of the Copycats.” A month later, Apple sued Samsung in San Jose.
Until the turn of the 21st century, Samsung and other family-controlled Korean conglomerates, or chaebols, were widely viewed as congenital imitators: manufacturers of unimaginative electronics, kitchen appliances, and cars. Without much fanfare, Samsung grew into the world’s largest tech company as measured by revenue and one of the biggest suppliers of memory chips, microprocessors, and smartphone displays. Today it generates roughly a fifth of all Korean exports and wields extraordinary influence in its home country. In 2008, Samsung Chairman Lee Kun-hee, one of Korea’s richest men, was charged with tax evasion and breach of trust; convicted of both crimes, he managed to avoid prison, receive a presidential pardon, and return to the company’s helm.Photograph by Associated Press
Unlike Taiwan’s HTC, which embraced the Android operating system in 2007, Samsung waited another couple of years to introduce its Android-equipped Galaxy line of phones. According to an Apple legal filing, Samsung skipped the difficult task of original research and development and simply aped “Apple’s innovative technology, distinctive user interfaces, and elegant and distinctive product and packaging design.” Apple alleges that when Samsung announced its Galaxy i9000 phone in March 2010, it had copied “every aspect of the distinctive and minimalist Apple iPhone 3G trade dress: a rectangular product with four evenly rounded corners, a flat clear face covering the front of the product, [and] a large display screen under the clear surface.” Says Apple spokesman Steve Dowling: “This kind of blatant copying is wrong, and we need to protect Apple’s intellectual property when companies steal our ideas.”
Samsung does not deny that, at some level, its smartphones look and function like Apple’s. The Korean company instead argues in legal papers that competing products—be they microwave ovens or the latest, coolest phones—often resemble each other. And, anyway, just how amazingly innovative are rounded corners on a rectangular communication device? Apple, according to Samsung, is trying to use litigation to obtain something no competitor should have: “perpetual domination of the smartphone and mobile-computer market.” Adds Samsung spokesman James Chung: “Samsung will continue to defend our intellectual property to serve our customers and ensure our continued innovation and leadership in mobile communications.”
Several Asian manufacturers were noodling around with similar-looking rectangular smartphones before the iPhone came to market. Tipping its hat to a fellow Korean manufacturer, Samsung notes that in 2006, nearly a year before the iPhone appeared, LG Electronics (066570) announced the round-cornered LG Chocolate, with “virtually all of the [design] features Apple claims” to have patented. In December 2006, before Apple released images of the iPhone, Samsung itself filed a design patent in Korea for a similar rectangular phone called the F700. Smartphone and tablet-computer design was “naturally evolving” in the direction Apple claims it has exclusive rights to use, according to Samsung. If true, that matters because basic patent law states that if an idea is “obvious” to an “ordinary observer” at the time of its invention, it doesn’t deserve patent protection. By attacking Samsung, Apple has inadvertently put its own patents into play.
“Patent suits are a double-edged sword,” says Harvard’s Shih. If anyone has any doubt, they need only look at the largest patent infringement verdict in history. In 2009, Johnson & Johnson’s (JNJ) Centocor unit won a $1.67 billion victory over Abbott Laboratories (ABT). But J&J overreached. Last year an appellate court threw out the verdict, ruling that the J&J patent (for human antibodies used in arthritis drugs) had been invalid all along. The appeals court disparaged the J&J patent as, at most, “a wish list of properties” that the antibodies might possess and, in the process, provided critical legal protection for Abbott’s competing remedy, Humira.
Shih himself bears some scars from IP fights during a long corporate career as an executive at IBM (IBM), Digital Equipment, Silicon Graphics International (SGI), and Eastman Kodak (EKDKQ). Since joining the faculty at Harvard five years ago, he has turned a cozy, book-lined campus office into an informal museum of digital gadgetry. His shelves and closets contain rudimentary computer motherboards, intricate telephone chip sets (genuine and Chinese fakes), anachronistic pocket cameras, and, incongruously, a scale model of an F-18 fighter jet.
“Most modern technology exists at the top of what I like to call a pyramid of innovation,” Shih says. A smartphone has so many components building on earlier inventions that “it’s implicating countless patents someone could sue over,” he adds. “It’s genuinely difficult to look down the pyramid from the top and see comprehensively all of the building blocks. … It’s a recipe for litigation.”
Since the early 1600s, Anglo-American law has granted tinkerers and visionaries temporary monopolies on inventions. Someone willing to disclose an innovation via the modern U.S. patent system generally may exclude others from exploiting it for 20 years. Public disclosure, in theory, alerts others who might want to take advantage of a patented advance, for which they could offer a licensing fee. And this theory has often held up in practice—especially in computer technology—but not always.
For one thing, license negotiations sometimes break down. Apple claims in its legal papers that it approached Samsung in 2010 to seek licensing fees, but the discussions concluded without agreement. Samsung lawyers have confirmed in court there were such negotiations, without going into detail.
Shih suggests that a mobile-device patent war may have been inevitable. Gargantuan rivals with deep pockets converged on the market from several directions: Apple (and Microsoft) out of the computer business, Google from the Internet search-and-advertising business, Asian manufacturers from telecommunications. Suing over patents became just another weapon, like marketing or pricing.
Another factor has contributed to a boom in tech litigation: Beginning in the early 1990s, the U.S. Patent and Trademark Office instituted policies that encouraged patent proliferation. One required examiners to provide written justification for denying applications but not for granting them. Annual patent grants have risen 150 percent since 1990—from 99,077 to 247,713.
Odd as it may seem to outsiders, Shih says, Apple and Samsung will probably continue their supply-chain relationship even as they slug it out in court. Although the companies generally decline to discuss their ties, just last year, in the midst of all the high-volume litigation, Samsung began shipping A5 logic chips—the brain of the latest iPhones and iPads—from a new factory in Austin, Tex. The A5 is twice as fast as its predecessor, the A4, which is also made by Samsung.iPad 2: Getty Images; Fidler/Knight-Ridder Tablet: Courtesy of Reynolds Journalism Institute
In addition, the Korean company sells Apple the highly touted screens that provide supervivid images on the third-generation iPad. Apple turned to Samsung after LG Display and Sharp (6753) didn’t meet its stringent quality requirements, an analyst with iSuppli (IHS) told Bloomberg News in March. “The display specifications on the new iPad are very demanding in terms of the very high resolution,” the analyst, Vinita Jakhanwal, said. For all the scorn Apple heaps on Samsung as an also-ran tech innovator, the American company remains awfully reliant on it.
Four months after Judge Koh joked about sending the lawyers to a mediator with boxes of chocolate, she held another hearing, this one on Apple’s motion for a preliminary injunction to stop Samsung from selling three phones—the Galaxy S 4G, Infuse 4G, and Droid Charge—and the Galaxy Tab 10.1 tablet in the U.S. Apple claimed that without the judicial order it would suffer “irreparable harm.”
“There is a battle going on between the Android operating system and the iOS,” explained McElhinny, Apple’s lead attorney and a partner with the San Francisco-based law firm Morrison & Foerster. “A large percentage of the American public has yet to choose a smartphone,” he added. “Once people make that choice, they remain loyal to that operating system, and they are likely to make their future purchases in that environment.” (Worldwide, Apple shipped a top-ranked 37 million smartphones in the fourth quarter of 2011, a 128 percent increase over 2010, according to research firm IDC. Samsung shipped 36 million smartphones, for an even more impressive 275 percent gain.)
In the preliminary injunction hearing, Apple relied on four of its patents to argue that its phones are “earthshakingly new, completely novel.” For good measure, McElhinny said the iPad tablet had “created an entirely new product category.”
Two of the patents cover the iPhone’s exterior design. Patents are referred to by their last three digits, and this pair is known as the D’087 and the D’677. The claim covered by the D’087 is simply that of “the ornamental design of an electronic device,” as depicted in a series of 48 schematic drawings. A third patent, D’889, covers the visual characteristics of a tablet device, as described by similarly basic schematic drawings.
A fourth patent, ’381, issued on Dec. 23, 2008, has no “D” prefix because it covers a function rather than a design—specifically, a method “for list scrolling and document translation, scaling, and rotation on a touchscreen display.” For shorthand, this function is known as “bounce back.” When a user places her finger on a device screen and drags an image or document past the screen’s edge, and then releases her finger, the image or document bounces back to fill the full screen. All three of the Samsung phones, as well as the Galaxy Tab 10.1, have bounce back.Photograph by David Paul Morris/Bloomberg
Kathleen M. Sullivan, a Quinn Emanuel partner speaking on behalf of Samsung, pointed out to the judge that all kinds of devices predating Apple’s products—phones and tablets—look, and in some regards, work like the iPhone and iPad. Apple is seeking an unjust monopoly on rectangular smartphones and tablets with a flat surface and rounded corners, Sullivan said.
Judge Koh interrupted at one point and held up the competing Samsung and Apple tablets. Could Sullivan tell them apart?
“Not at this distance, your honor,” the lawyer admitted. Judge and attorney were about 10 paces apart.
“All right, I’ll bring it up closer,” the judge said. “Which one is which?”
Finally, Sullivan correctly identified the iPad.
“It took a long time to make that distinction,” the judge said. Her point was that inattentive consumers might confuse the Samsung for an Apple. Consumer confusion is an important criterion in determining whether patent infringement has occurred.
“Your Honor,” Sullivan protested, “with respect, I’m standing far away from you and you covered up the brand logo. … [T]he D’889 patent is for the whole device, and you didn’t show us the back.”
Koh, as it turned out, had not made up her mind. Samsung, she suggested, may have imitated Apple, but Apple may have imitated a much earlier (commercially unsuccessful) device introduced in 1994 by the newspaper publisher Knight-Ridder.
“Well, then, we’ll accept that, your honor,” responded Sullivan, an advocate smart enough to know when to stop talking and sit down.
On Dec. 2, Koh issued a 65-page ruling that for its clarity, if nothing else, could be the core text for a law school patent course. “Judge Koh was an IP litigator before she joined the bench, so she is very knowledgeable about these issues,” observes Mark Lemley, a professor at Stanford Law School and director of its program in law, science, and technology.
The judge’s findings were tentative. All she ruled on was Apple’s request for a preliminary injunction blocking the sale in the U.S. of Samsung devices pending a final determination at a trial scheduled to begin in July. Koh’s opinion avoids both Apple’s heroic self-regard and Samsung’s irreverence toward Apple’s singular aura as a brand.
As a first step, the judge reaffirmed that while a product design is patentable, aspects “dictated by functionality” are not. Apple’s patents do not give it ownership of the idea of making smartphones small enough to hold conveniently. If they could, no one else would ever be able to sell a usable smartphone. Similarly, Apple can’t preclude rivals from having a screen large enough for the user to control with the touch of a finger, or a speaker in the upper portion of the device’s front face so it can be placed next to the ear.
Turning to the concept of “obviousness,” Koh showed sympathy for Samsung’s argument that Apple’s claims of “earthshaking” innovation may be a tad exaggerated. She analyzed a Japanese patent issued to the Japanese company Sharp on June 6, 2005, well before Apple obtained its relevant patents. Foreign patents can be cited as “prior art” to undercut U.S. patents. Illustrating her opinion with sketches from U.S. Patent Office records, Koh said the Sharp patent, like Apple’s D’087, has “rounded corners, a bezel, a similarly shaped speaker, and similar proportions of screen and border.” The Sharp patent “discloses an overall simple, minimalistic design.” She added: “An ordinary observer would likely consider [Apple’s] D’087 to be substantially the same” as Sharp’s patent.
Without reaching a firm conclusion—that will come at trial this summer—the judge ruled that “Samsung has met its burden and raised substantial questions regarding the validity of the D’087 patent.” By picking this fight, Apple jeopardized a potentially crucial piece of intellectual property. In practical terms, that means the company’s belligerence may have diminished its leverage in future litigation or cross-licensing negotiations.
Patent law analysis follows convolutions that can leave the layman with a headache. Assuming that the other Apple design patent would be found valid at trial, Judge Koh said it was likely that Samsung’s S 4G and Infuse 4 phones infringed it. But she chose not to halt the sales of those phones, in part because she saw the issue of infringement as a “close question” requiring more evidence. Samsung, she continued, “faces the distinct possibility of wrongly having to withdraw two of its cell phones from the market.” For the moment, she denied Apple’s bid to bar the two Samsung phones from being sold in the U.S.Photograph by Solal/Sipa
Apple got even more discouraging results on its iPad design. Again peppering her ruling with handy graphic illustrations, Koh showed how the crude-looking 1994 Fidler/Knight Ridder tablet, designed for reading newspapers digitally, created “the same basic visual impression” as Apple’s D’889 patent for the iPad. “The Court,” she wrote, “therefore finds that Samsung has raised a substantial question regarding the validity of the D’889 patent on obviousness grounds.” So, maybe the iPad’s design is up for grabs! In any event, Koh declined to enjoin Samsung’s Galaxy Tab 10.1.
Undeterred, Apple hired an additional law firm, Los Angeles-based Gibson, Dunn & Crutcher, and dispatched it along with Morrison & Foerster to file the new suit in February, alleging that Samsung’s latest products infringe additional Apple patents. The inevitable counterclaims (and replies to counterclaims) ensued; Koh’s docket for smartphones and tablets continues to expand, as do corresponding dockets in courts in other cities and countries.
People familiar with the situation, however, note that top-level executives at both Apple and Samsung have communicated lately about potential settlement options. Apple CEO Tim Cook does not seem to share his predecessor’s passion about laying all foes to waste. Cook appears to view litigation as a necessary evil, not a vehicle of cosmic revenge.
Still, the larger contest between Apple and Google is nowhere near resolution. And it’s not just about smartphones and tablets. While they struggle for dominance in mobile devices, Apple and Google are protecting their flanks from Microsoft and girding for a coming clash over the market for digital hubs that integrate the Internet with television.
In the short run, the tech giants could save themselves considerable legal fees and distraction if they were to lock their lawyers in a hallway of conference rooms and refuse to release them until they had crafted a series of comprehensive cross-licensing pacts. This process eventually resolved similar litigation in the desktop computer field. Such a solution “is still probably what will happen here,” says Stanford’s Lemley. “But in the meantime, these companies have paid their lawyers more than $400 million” over the last several years. “It’s not clear what they’re getting for that money.”