Three years ago to the day, Apple filed its original California patent infringement complaint against Samsung. On the occasion of this anniversary, here's a scan of the cover sheet with the date stamp (click on the image to enlarge; this post continues below the document):
I've been watching this dispute for three years. I downloaded countless filings from electronic dockets in the U.S. and attended well over a dozen German Apple v. Samsung and Samsung v. Apple trials, plus an injunction hearing in France. And I can't tell you how tired I am of this.
After three years and dozens of filings in at least 10 countries, there is still no endgame in sight. Later today, these two companies will square off again in the San Jose court, where a jury will have to render a verdict that, no matter the outcome, won't have the potential to resolve this global dispute.
A couple of weeks ago I made a call for input concerning the terms on which it would make sense for both parties to settle their global dispute. A large part of the feedback I received was non-numerical and came down to saying that Apple should sue Samsung forever and keep pursuing injunctions. Some of the messages I received specified potential royalty rates, some of which basically fell into the previous category of replies.
In this post I'm now going to lay out and explain my own thinking, not influenced by anyone (in fact, I did not tell or indicate to anyone beforehand what numbers I had in mind, nor did anyone request or suggest that I take a particular position).
At the current juncture (and the ongoing trial is unlikely to have a material effect on this assessment), these are the terms I would propose if I were a mediator:
Apple should pay $1 per cellular device to Samsung.
Samsung should pay $3 per device to Apple.
This is more favorable to Apple than it appears at first sight because Samsung's volumes are higher.
These terms should also apply retroactively to the last 36 months.
Samsung should additionally make a one-time payment of $750 million to settle any past infringement issues relating to design patents (basically, the first California case). Design patents would not be licensed going forward.
There should be an anti-cloning provision (something that most of the readers who gave my input stressed), but it would have to be very reasonable.
This proposal is a "package deal", so these two parties might very well make rather different demands in licensing negotiations with third parties.
Obviously, if the parties agreed that these are the right terms, they would already have entered into a settlement on that basis and the current California trial wouldn't have to be held anymore. Still they presumably talk all the time. I will now explain how I would defend this proposal against both parties' likely objections (if I were, in a parallel universe, their mediator), but before I do that, I'll say something about many people's fundamental misconceptions regarding the strategic and financial value of patents in a situation like this.
Jury trials are circus events, but the name of the game is not whether someone's internal benchmarking documents suggest "copying" (a term that makes sense in connection with copyright, not patent law) or whether someone revolutionized a market (there is no intellectual property right that protects market share or rewards a company for persuading consumers to use small portable touchscreen devices). The name of the game is that a patent is worth the difference between the scope of its valid claims and the best non-infringing alternative (i.e., workaround). It's about the impact on someone else's business if they are required to work around the patent.
I have recently highlighted the limited scope of Apple's patents-in-suit (and in retrospect I think I should have talked about this a lot more in the months before, though I still believed until last summer that Apple could still gain some decisive leverage at some point). I had been very patient with Apple's effort to prove the strength of its patents in court. Certain reactions to the conclusions I had to draw have focused on conspiracy theories and on evidence of "copying", all of which is pretty simple stuff, but none of the feedback I received was specific to the strength of the relevant patent claims relative to workarounds. None of those who disagreed with me pointed to Apple's exclusive ownership of particular features. Let's please not forget about the name of the game.
With the foregoing in mind, I will now outline how I as a mediator would explain the rationale behind my proposed terms to the parties.
I would tell both of them that the money they spend on lawyers is little if you compare it to the size of the relevant market, but given that those patents have turned out to be non-nuclear, costs are too high.
Another message to both of them would be that they should consider the value of a business partnership in certain areas (manufacturing of components). Companies can do business while being embroiled in litigation, but that is not the ideal climate. If those patents were much stronger than they have turned out to be, I would recommend to both of them to regard the benefits of a commercial partnership as far less important than what is strategically at stake. But that's not the case.
Either of them would argue that their patents are worth much more than I propose. In fact, my proposal comes down to almost exactly one-tenth of what both have demanded (Samsung wants 2.4% of Apple's sales for a cash-only license to its wireless SEPs (i.e., $12 on a $500 device), and Apple approached Samsung in 2010 with a $30-per-unit licensing proposal. My proposal comes down to slashing their demands by a factor of 10.
I believe Apple would probably not have a problem with the $1-per-unit fee for Samsung's patents. In 2012 Apple told a U.S. court that it would accept a FRAND royalty determination of up to $1 per iPhone to secure a license to Motorola's patents (and it didn't rule out paying more, but in that case it wanted to reserve the right to continue to litigate). I don't think Apple would claim that Samsung's patents are less valuable than Motorola's. And it has turned out that antitrust regulators are not inclined to impose sanctions on Samsung for its SEP assertions against Apple.
Samsung would probably still want a lot more than $1 per device, but I would encourage Samsung to look at this rate in the greater context of a comprehensive cross-license agreement.
I don't know how Samsung would react to the idea of paying $3 per Android device to Apple, nor whether Google would somehow contribute financially to such a settlement. Of course, Samsung could argue that Apple doesn't have any serious leverage and will ultimately get nothing, or next to nothing, out of all of these lawsuits. Conversely, Apple could also argue that it believes it would have more leverage further down the road. But on that basis they would both never settle and keep litigating forever.
By far and away the biggest obstacle to an agreement on these proposed terms would be the reality distortion field surrounding Apple's perspective on the value of its patents. This bullet point from Apple's 2010 proposal to Samsung shows just how unrealistic Apple was at the outset and still might be (click on the image to enlarge or read the text below the image):
"Since Apple's paradigm of an advanced smartphone won -> Apple's portfolio will become the most important and most valuable part of the IP stack for the next decade."
The "Since" part is true, the conclusion from it is not. Apple does not own a market because it created the market: it merely owns any technology it created, and since essentially all of the relevant technology existed before the iPhone, Apple can't claim ownership of an entire category. So far its proven ownership is limited to rubber-banding...
Apple has now been litigating against Android device makers for almost 50 months. It has tried everything. Hardware patents. Software patents. iPhone-era patents. Pre-iPhone Mac patents. And the only complete feature that it has been able to force Android device makers to remove from their devices is the overscroll bounceback.
If litigation drags on and on and on, Apple will over time be granted new patents that it may assert in litigation. But that is also true of Samsung. Both can also make patent acquisitions anytime. On that basis, they would never settle.
If Apple thought $3 was too little, I'd remind them of their own position on an appropriate royalty base (given that most of their patents-in-suit against Samsung are software patents) and tell them that based on the leverage they presently have in litigation, a royalty-free cross-license would make a lot of sense, and if Apple didn't settle now on these proposed terms, a zero-zero deal could easily be the ultimate outcome.
If Samsung thought $3 was too much to pay to someone who doesn't have serious leverage, I would tell Samsung to consider that as long as there is no settlement, Apple will keep trying to gain leverage, and there is some economic value in eliminating the remaining uncertainty. While I would agree with Samsung that Apple's current non-leverage does not justify $3 per device, there could also be a situation further down the road (not as a result of the ongoing trial, but later on) in which a per-unit royalty of $5 or more (though always below $10 as long as the U.S. is the only jurisdiction in which Apple, which has not scored a single lasting win over Samsung in Europe, can prevail on anything other than rubber-banding) would be the correct outcome.
These are the key messages I would have for them. I would also be able to go into much more detail with them on the results (or absence of results) of three years of litigation, the scope of claims, and the workaround options. But in this post I just wanted to focus on my conclusions from having watched this dispute for three long years and having finally arrived at the conclusion that Apple can basically just score symbolical wins. So far at least. If Apple came up with a "killer patent" and proved it in court, then we could talk again. I doubt it.
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