1 April 2011Patents

Fighting the smartphone wars

Smartphones are handheld computers capable of Internet browsing, sending and receiving emails, playing videos, not to mention making calls.

Information technology research company Gartner says that more than 80 million smartphones were sold worldwide in the third quarter of 2010, a 96 percent increase on sales in the same period in 2009. Market share in the smartphone sector is very valuable. The main players are inventing—and securing patents for their inventions—as a means of differentiating their products from those of their competitors and carving out a greater share of the market.

Innovation in the smartphone sector has been followed by a high level of increasingly complex patent litigation between those competing for market share and looking to earn revenue from their patent portfolios.

Asserted patents cover a range of key hardware components such as touch-screen technology, as well as important software technologies such as operating systems. The companies involved in the litigation are often asserting multiple patents across various jurisdictions.

For example, Nokia has asserted 46 patents against Apple. In some cases, certain patents have been asserted in multiple jurisdictions—in Delaware and Wisconsin district courts, and the US International Trade Commission (ITC), as well as courts in Germany, the UK and the Netherlands.

“If a company can make its competitor take its products off the shelf or force them to remove features entirely from their product to get around an injunction, that is more valuable than any $30 million settlement.”

The number of companies that are either plaintiffs or defendants in pending and completed patent litigation in the industry is vast. They include Apple, HTC, LG, Motorola, Nokia, Research In Motion, Samsung, Sony-Ericsson, Spansion, Toshiba, Elan, Gemalto, Hitachi, Kodak, Kyocera, Sanyo, Sharp, Google, Microsoft, Qualcomm, Oracle, St. Clair IP consultants, NTP, and Acacia Research and its subsidiary, Smartphone Technologies.

Horacio Gutierrez, corporate vice president and deputy general counsel at Microsoft, says that smartphones are a product of the ‘open innovation’ paradigm. Commenting on litigation between Apple and HTC in March 2010, he said: “[D]evice manufacturers do not do all of their development in-house, but add their own innovations to those of others to create a product that users want.”

He explained that open innovation is only possible through the licensing of third-party IP rights because this ensures that innovators are properly compensated for their investments. “After all, technology just doesn’t appear, fully developed, from Zeus’s head,” Gutierrez said. “It requires lots of hard work and resources to create.”

Steve Jobs, Apple’s chief executive officer, went even further in March 2010. When Apple announced that it was suing HTC for infringing 20 Apple patents concerning the iPhone’s user interface, underlying architecture and hardware, Jobs said: “We can sit by and watch competitors steal our patented inventions, or we can do something about it. We’ve decided to do something about it. We think competition is healthy, but competitors should create their own original technology, not steal ours.”

An original smartphone can attract a loyal set of customers who are prepared to buy a new model every time one is released. This can lead to a potentially lucrative market share.

“There’s a fundamental fact with these consumers,” says Adam Seitz, a partner and patent litigator at Shook Hardy and Bacon LLP, based in Kansas City. “Once they find a smartphone or operating system they like, they tend to stick to that technology. There’s a huge fight to get customers in, because typically once they’re there, they stay a repeat customer with that one smartphone or operating system.”

Competition to attract these consumers is fierce and patent litigation represents another avenue— like product differentiation and marketing—for companies to out-compete their rivals.

Not afraid to converge

The litigation surrounding smartphone patents is symptomatic of the number of technologies required to create the device itself. David Carey is vice president of technical intelligence at UBM TechInsights, an advisor to technology companies. He manages the team that deconstructs, analyses and reports on the design and make-up of integrated circuits and the systems in which integrated circuits are found.

He says: “The smartphone is richest in all the constituent technologies of cellular communications, memory and storage, processor technologies, display, sensors and touch screens. All those bits and pieces that make it a high-end device—smartphones have to draw on a larger pool of technologies to become the end product.”

This means that companies that have not traditionally operated in telecommunications have entered the market, according to Mike McLean, vice president of IPRs, professional services at UBM TechInsights. “There’s been a disruption in terms of the market players,” says McLean.

“Companies that traditionally have not played in the cell phone arena have now become engaged and own significant market share. Whenever that happens, the incumbents are going to be looking to leverage their patent portfolios to protect their legacy businesses.”

The convergence of technology into a single product has happened in other industries. Joe Chernesky, vice president of licensing at Intellectual Ventures, a non-practising entity (NPE) and patent investment company, previously held management positions at semiconductor manufacturer Intel.

In the 1990s, the microprocessor began incorporating lots of technology, including graphics and video. “Once this happened, Intel was potentially infringing or had liability to lots of patents,” says Chernesky. “We actually did a study to determine this. Then we developed a strategy to go out and address that invention gap. I think you see the same thing today.”

Litigating to license

Patent litigation offers companies the opportunity to achieve a commercial aim. Jane Mutimear, a partner and IP litigator in Bird & Bird LLP’s IP group, says that litigation is always a means to a commercial end, and the litigation surrounding smartphone patents is no different.

“The claimants are either seeking higher royalty rates than those which they have been able to achieve in negotiation,” she says. “[Or claimants] are trying to prevent a competitor from using technology which was developed to differentiate the patentee from its competitors.”

The value of a licensing royalty is often lower than the value of the lost profit associated with a lost sale to a competitor, according to Paul Sutton, a founding partner of New York-based firm Sutton Magidoff LLP. This means that protecting the lawful monopoly that a patent provides is the preferred aim, but in the end, licensing deals are welcome.

Sutton says: “The best defence is offence. If there are going to be cross-licences and licence arrangements down the road that will settle these lawsuits, the more they’re suing and the more arrows they have in their quiver, the better position they’ll be in to negotiate more favourable financial terms.”

“Licensing third party IP rights seems to be the most amicable solution to the litigation surrounding sm artphone technology.”

Asserting patents in multiple jurisdictions happens because each jurisdiction has its own strengths, awards and remedies. “In Europe, Germany is favoured by patentees as it is a split system which enables infringement to be determined first,” says Mutimear. “Although the defendant will bring a nullity action against the patent as soon as possible, this will usually lag behind the infringement case. The US is favoured due to the high damages awards which are possible.”

Actions in the US are often filed concurrently in a district court and the US ITC. Wisconsin, Delaware, Texas and Eastern Virginia are popular choices of district court because they can provide speedy decisions or a convenient location in which to file. District courts offer high monetary damages and the US ITC offers injunctive relief; infringing products will be prevented from entering the US from abroad.

Choosing a US venue depends on the aims of the parties to the lawsuit. “NPEs are not looking for the injunctive relief that the US ITC can provide,” says Seitz. “They’re looking for monetary damages and that only comes from district courts.”

“In the competitor versus competitor suits, those are best litigated in the US ITC. Regardless of whether it is hardware or software, you can get both components through an investigation in the US ITC. If a company can make its competitor take its products off the shelf or force them to remove features entirely from their product to get around an injunction, that is way more valuable than any $30 million settlement. That allows the company to gain more customers.”

The power of an injunction could make smartphone manufacturers and technology companies fear exclusion from the market. “All of the smartphone companies have plenty of cash, so they’re not necessarily worried about the cost of litigation,” says Chernesky. “But they are worried about an injunction because the injunction is a really difficult thing. It’s harder for NPEs to get injunctions, but at the end of the day, the vast majority of them are interested in licensing.”

He adds: “Companies need to be smarter, and I think in the smartphone industry, companies are more progressive on their IP. They recognise that they can’t pay nothing for all of those patents and they really want to pay as little as possible.”

Unknown entity

The cost of the litigation surrounding smartphones is adding up. When money is tight, it would make sense for the companies involved to be weighing the benefits of litigation against the cost of litigating against a host of companies, potentially for years.

Chernesky considers litigation to be an inefficient way of negotiating licensing deals and it seems that companies such as his can offer an alternative. But not everyone agrees that they contribute positively to the industry.

Intellectual Ventures buys patents, aggregates them into large industry-specific portfolios and provides licences to those portfolios to their customers. Intellectual Ventures’ investors include a mix of Fortune 500 companies, university endowments, institutional investors and individuals.

Chernesky says: “I think Intellectual Ventures plays a very important role in funding invention and providing investors with a way of recouping some their investment through licensing their technologies. In our experience, if you fund those inventors and give them an avenue other than litigation or licensing on their own, they’re going to take that money and continue to invest in new inventions.”

Acacia Research is actively involved in smartphone litigation and licenses patents concerning smartphones to companies such as Microsoft and Samsung through its dedicated subsidiary, Smartphone Technologies. It also counts AT&T, a telecommunication company, as a licensing customer. Acacia either owns patents transferred to it or has the exclusive right to license patents. It controls more than 300 patents related to smartphones.

Paul Ryan, Acacia’s chief executive officer, says that companies come to Acacia if they don’t want to license or enforce their patents themselves.

“We’re an outsourcing partner,” he says. “We’re deal-makers. Anyone can file a lawsuit, but we understand that companies have plenty of royalty obligations, and litigation can significantly add to these obligations. We use litigation as a background for negotiation. We’re not looking to enjoin anyone or take anyone out of the market. Our aim is to get the fair, reasonable and nondiscriminatory royalties that our patents and the patents of our partners deserve.

But Seitz says that a lot of the patents that are asserted by NPEs are not for technologies that are key to smartphones.

He explains: “The reason for this is that the main smartphone players and other technology companies are holding on to the key patents for inventions that are moving the industry forward. What we’ve seen from NPEs are patents that are related to relatively trivial or not often used features. The patents being asserted by the NPEs are not industry-changing patents.”

Crossing paths

Licensing third-party IP rights seems to be the most amicable solution to the litigation surrounding smartphone technology, according to Sutton. “I do believe that there will be a host of settlements of these law suits and a host of licence and cross-licence agreements,” he says. “Companies will come to their senses.”

Any potential licensing agreements can take different forms, according to McLean. “There can be assertive-based licensing that looks at increasing revenue associated with patent portfolios,” he says. “There can be pools and partnership agreements set up.”

He explains: “Look at the Microsoft/Nokia partnership—part of that will be a patent licensing deal. It all comes down to licensing, but there are a lot of different flavours of how licences can be structured, and how to bring different parties into that can make it less of a conflict-type situation and more of a partnership-type situation. Right now it doesn’t seem like many of the players are thinking along those lines.”

Patent litigation is a commercial tool. It can remove competitors from the market, or secure licensing revenues to fund invention. The remedies available to patent holders are effective, yet the process for getting them is flawed. It’s costly, time-consuming and potentially painful. Open innovation has created a technology that combines innovation from a host of companies and inventors, so patent infringement is likely.

Companies and inventors have to decide whether possible infringement is worth a share of the valuable market. Those that want to be paid their dues have to decide what their patents are worth and secure the necessary licences. Litigation will continue to play a major role in this.

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