Apple Dodges a Bullet as Smartphone War Escalates

A special thanks to Daniel Parrish for the following post:

Last week saw the latest volley in the escalating “smart-phone war” as the United States International Trade Commission (ITC) ruled that Apple did not infringe an HTC patent.  The ITC determined that no violations occurred and closed the case, ending a May 2010 suit alleging infringement of five patents.  Here, the final HTC patent in question taught methods for power management of a smartphone, illustrating methods of managing “PDA sub-systems” (e.g., apps) while other systems (e.g., calls/texts) are active, and vice versa.  Although Apple certainly does have power management systems on its smartphones, the ITC investigation held that the specific algorithms differ from those disclosed by HTC.  A detailed blow-by-blow account of the investigation can be found in a recent Foss Patents blog post.  Unfortunately for HTC, this ruling does alter a prior ITC decision, boycotting the importation of certain HTC devices into the USA.

A casual reader may ask why HTC filed this complaint with the ITC instead of a US District Court.  The most likely reason is time, as ITC decisions are expected in roughly 16 months as opposed to 2+ years in District Court.  The downside: the ITC can only award an injunction on importing/exporting products, whereas district courts can award damages.  That said, the ITC’s decision may be persuasive in subsequent district court decisions.  Many companies in HTC’s position would calculate that the potential of increased future repeat customers outweigh the potential damages, which are often based on the number of infringing devices actually sold.

When comparing smartphones, many consumers not only place a high value on the user interface, but tend to favor interfaces they are familiar with.  Companies like Apple and HTC know this, and therefore try to stake a claim in features that set their devices apart from the crowd.  What better way to do this than with patents, which provide strong protection and can be enforced internationally.

Patents, as opposed to copyright or trade secrets, provide some of the strongest intellectual property protection.  Copyright merely protects the “expression of an idea,” but only to the extent that others cannot copy an original author.  An independent creator of the same idea is equally entitled to copyright protection.  What this means for a software-copyright holder is that if someone else either comes up with an alternative method of achieving the same functionality, or independently creates the same product, the original copyright holder must share the market space with the subsequent inventor.  Trade secrets are similar with the additional caveat that if another company independently engineers similar or identical software, the later inventor could actually patent the invention, barring the first inventor from producing the software.  This could occur if the subsequent invention occurs prior to “the invention [being] made in this country,” under 102(g)(2).  However, once the invention is commercially available, even if it is secretly commercialized, subsequent inventors are barred under 102(g)(2) and potentially under 102(b).

A patent, by contrast, can provide protection of the functionality itself, awarding the inventor or assignee a temporary (twenty year) right to exclude others from making, selling, and importing the claimed invention.  If a competitor infringes on this technology, the patent holder has the right to sue and collect often substantial damages.  (e.g., a 2011 PricewaterhouseCoopers patent litigation study reported median damages for telecommunications patents at $25M and software patents near $7M)

As smart phone companies work to distinguish themselves from one another, these patents become more and more valuable, providing strong protection through robust rights to exclude as well as the potential for lucrative licensing.  These economics are not lost on the industry giants, each of which has a notable arsenal of patents (Google will soon increase its portfolio with its recently approved acquisition of Motorola Mobility).  Naturally, as companies both increase their stock of patents and converge on each other’s good ideas, infringement is bound to occur.

It can be tough to appreciate the complexity and volume of these suits.  Last September, the Foss Patents blog mapped the ongoing battle between Apple and HTC in a presentation, the first 22 slides of which outline a plethora of suits and countersuits spanning four different courts.  Although I won’t go into detail here, it is easy to see that even between two companies (three if you count S3, an HTC subsidiary), the litigation can quickly escalate.  Stepping back and looking at the industry as a whole, simply keeping track of all the suits is a full time job.  Just last week, Apple made patent headlines on three occasions, [1] it’s win over HTC at the ITC covered above, [2] a setback in a German court, and [3] a recent patent infringement filing against Samsung in a California District Court.

How will it all play out?  It is tough to say.  An example of another recent “patent war” is in the implantable medical device industry, wherein big hitters such as Medtronic, Boston Scientific, and St. Jude Medical went head-to-head.  In the end, as costs escalated and companies elucidated patent portfolio strengths and weaknesses, a series of cross-licensing agreements and payouts occurred.

Although the future is tough to predict, it would appear that the rate of technological change (and thus new patents) would make litigation at this scale unsustainable for the smartphone industry.  Then again, as smartphone use increases globally, especially in emerging markets, the costs of litigation are increasingly justified.  This patents “arms-race” may just be the tip of the iceberg!

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