This blog covers software patent news and issues with a particular focus on wireless, mobile devices (smartphones, tablet computers, connected cars) as well as select antitrust matters surrounding those devices.
On the slide preceding this one, Microsoft recalls that "[i]ntellectual property is an important element of the smart devices business", stating two reasons:
Unless managed proactively, patent issues can create uncertainty for smartphone shipments
Unless managed creatively, patent royalties can add over 10 percent to the costs of a smartphone Bill of Materials
I don't doubt that Microsoft's intellectual property and licensing group is managing these deals proactively and creatively -- we'll get to that in a moment. But it's not just about proactive and creative management. It's also the strength of the IP that a company brings to the table. If you have strong patents and manage them well, you will do well. If you don't have a strong portfolio and then make management mistakes, which Google clearly made in connection with the Motorola deal that was a huge waste of money with respect to the patents involved and only got it into antitrust trouble, then your problem gets worse.
In an interview with National Public Radio's Marketplace Morning Report, I just said that Google owned hardly any patents when it acquired Motorola and had to shore up its portfolio, while Microsoft already has a strong portfolio and is primarily interested in long-term access. (Of course, as I always do, I disclosed proactively to the Marketplace interviewer the fact that Microsoft is one of my clients -- but I'm not involved with this transaction and I speak only for myself, not for any client.)
The philosophies of Microsoft and Google with respect to intellectual property -- and, as part of that, litigation avoidance -- couldn't be further apart. The whole idea of the Google-Motorola deal was to buy patents in order to sue others over them, hoping that this would bring about a stalemate -- a strategy that has been an utter failure. Compare this to Microsoft's focus on licensing patents in order to avoid litigation from being brought in the first place.
It's easy to see that Google's Motorola strategy has failed. There are only two ways in which you can get leverage out of a patent portfolio. The most important one by far and away is to obtain injunctions. Motorola has won zero enforceable injunctions against Microsoft and it just lost the only injunction it has been enforcing recently against Apple, which a German appeals court confirmed to me (will discuss this one in my next post). The alternative approach to get leverage out of patents is to seek monetary compensation, and a U.S. district court awarded Motorola less than one-twentieth of a percent of the royalty rate it initially demanded from Microsoft (a German court has also indicated it won't bless Motorola's royalty demand from Apple).
The slide from Microsoft's rationale document that I published further above gives an example of one of the mistakes that led Google to totally overpay for Motorola's patents: it didn't take into consideration that a broadly-licensed patent portfolio is less valuable than one you can still assert against pretty much everyone in a given industry. Microsoft says that "Nokia is also conveying rights under its agreements with IBM, Motorola Mobility, and Motorola Solutions". This means that a Motorola-Nokia license deal struck a few years ago apparently goes with Nokia's wireless devices business. As a result, Google's Motorola can't sue Microsoft's future smartphone business for the remaining term of that agreement, and Motorola's patent portfolio gets less valuable by the day.
License agreements are typically not published, and litigation is often the only way to find out about any of their terms. I don't know the specific terms that will enable Microsoft to benefit from those Nokia deals with IBM, Motorola Mobility, and Motorola Solutions. But my best guess is that those license agreements were phrased in a way that would make the license travel with the licensed business unit and products. That's not unusual. But there are deals that don't come with the related provisions.
The mentioning of IBM is interesting not because IBM would be likely to sue Microsoft directly (I don't think that would ever happen) but because IBM has repeatedly sold patents to Google.
IBM, Motorola Mobility and Motorola Solutions are only three examples of the "more than 60 patent licenses with third parties", claimed to come with "attractive royalty arrangements", from which Microsoft will benefit. Microsoft will also be assigned Nokia's "existing license with Qualcomm".
Without these additional benefits to Microsoft, it would have had to work out a number of wireless patent license deals as a result of the Nokia deal. Now it appears that the relevant mobile devices will have a comfortable licensing position to start from because Nokia assigns benefits under five dozen deals to Microsoft.
It gets even better. Apparently Microsoft has -- as I infer from the slide published further above -- previously signed patent cross-license agreements with other companies that also apply to new acquisitions by Microsoft. In this regard, Microsoft mentions some very interesting companies including the two global leaders in the smartphone market:
"Microsoft's agreement with Samsung will provide coverage for these additional devices without added payments"
Low-cost or (ideally) free-of-charge access to other players' IP is a key success factor. The final bullet point on that slide of Microsoft's strategy presentation says:
"Put all together, Microsoft will have the most cost-effective patent arrangements for smart devices"
This may prove a far more important competitive advantage than many people think today. It will enable Microsoft, after this deal closes, to deliver smartphone functionality at attractive prices while maintaining a reasonable level of profitability. Companies that own weaker portfolios (because they contributed less to innovation and didn't do the smartest acquisitions and license deals) will find themselves at a disadvantage, unless they have something to offer that enough customers are willing to pay a premium for.
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According to today's Wall Street Journal, Apple and Google as well as Android device makers including Samsung and HTC (both of whom are embroiled in litigation with Apple, as is Google's Motorola Mobility) may form part of a large group of industry players contemplating a joint bid for Eastman Kodak's patent portfolio.
The WSJ is right that these companies would be odd bedfellows, and I can also see why antitrust watchdogs might be concerned if this alliance materialized, but it makes a whole lot of sense. There's some auction fatigue in the industry. Even though Apple and the Android camp are probably going to keep fighting each other for a long time to come, what may end up uniting them for the purposes of this auction and possible future auctions is that they hate the notion of vastly overpaying for patent portfolios of, at best, average value only due to the auction dynamics that the Apple-Android patent war brings about.
More than a year ago, Nortel's patent portfolio sold to an Apple-led consortium for $4.5 billion, roughly five times Google's winning preliminary bid (the "stalking-horse bid"). That price was really high above analyst expectations, but at least this was a deal that presented some unique risks (to the losing side) and opportunities (to the winning side) because of the strength of the portfolio and the fact that bankruptcy could potentially render all existing contractual commitments (in a worst-case scenario even including FRAND pledges) renegotiable. I'm not going to take a position on what the legal situation of those patents is at this stage, and on what obligations Rockstar BidCo, the company formed by the prevailing consortium, may or may not have. That's outside my focus, and I lack most of the information I would need to form an opinion. I pointed to those risks and opportunities only because they were reflected by various companies' filings with a Delaware-based federal bankruptcy court as well as by the strong interest the Department of Justice took in the transaction. So there were certain winner-takes-all considerations that resulted in auction dynamics, and when winner-takes-all auction dynamics kick in, forget about valuation or any other rational criteria: it becomes a failure-is-not-an-option situation.
Google lost, and it panicked, as is evidenced by the $12.5 billion it shortly thereafter offered, and a few months ago finally paid, for Motorola Mobility. That deal was announced one year and two days ago, and from today's perspective it just wasn't worth it. But Google somehow felt it needed to do something to shore up its patent holdings and play a role in the patent arms race that is going on in the wireless platform industry.
Kodak's patent portfolio does not play in the same league as Nortel's. What calls its value into question is the outcome of an ITC investigation in which Kodak was going after Apple and RIM (though Kodak immediately announced an appeal). As I told the Rochester Democrat and Chronicle, the leading newspaper in Kodak's home region, after the ITC decision, buyers weren't necessarily going to lose their interest only because of one ruling on one patent (albeit a key one), and a buyer might think he could manage litigation better than Kodak did in recent years (see page 2 of the article I just linked to). And in such a large portfolio (roughly 1,100 digital imaging patents), there might still be some patents that could be leveraged effectively. But there is now a lot of doubt about the value of that portfolio, and initial bids were apparently so low that Kodak indicated it might just keep those patents and exploit them itself as a failed-business-turned-patent-troll.
A reasonable value of that portfolio would probably be only in the hundreds of millions of dollars. But if Apple and the Google-led Android camp were to be played off against each other, the price could reach irrational proportions only because of one camp's desire to keep the patents out of the other camp's hands -- not because of a lot of belief in the realistic commercial value of this portfolio. Those auction dynamics could be a joint Apple-Google-Samsung problem not only in connection with Kodak's patents but also, at some point, with such portfolios as RIM's. More and more companies with comparable patent portfolios may in the coming years reach the stage at which they are prepared to sell all or part of their portfolios only to benefit from the Apple-Android conflict.
Recently, both Apple and Google spent far more money on patent acquisitions than on research and development during the same relevant periods. Granted, a patent portfolio is an asset that you amortize over the years, while R&D is a reoccurring cost. Still, if there continue to be Nortel-like auctions and Motorola-like overvaluations every year, then these companies will continue to spend more, year after year, on patent acquisitions than on new innovation. That's not in the interest of those companies, their shareholders, and especially not good for customers. It would be a world in which the losers of the past would impose a massive tax on today's winners by playing them off against each other. Seen in that light, an Apple-Google alliance, however problematic it is from an antitrust point of view, makes a lot of business sense for those companies and whoever else may join the group in order to avoid this problem.
In my opinion, antitrust regulators should support alliances that serve the purpose of taking failed companies' portfolios from the market in order to neutralize them, but if fierce rivals such as Apple and Google join forces, a deal must be blocked unless meaningful measures are taken to ensure that such bidding groups are reasonably inclusive and that they won't use those patents unfairly against those who are not members of the club. That may not be easy to achieve, but I can't see how anything less than a meaningful FRAND commitment (by which I mean a sufficiently clear one that rules out, above all, the pursuit of injunctive relief, or royalty demands and damages claims that violate the entire market value rule) would be acceptable if Apple, Google and Samsung (considering that Apple and Samsung jointly represent about 90% of the mobile device industry's total profits) join forces.
Google (because of Motorola Mobility) and Samsung are being investigated for abuse of FRAND-pledged standard-essential patents, and HTC is being sued by Apple in Virginia because of a questionable transaction involving SEPs. When companies with such a track record are on board a cartel, antitrust regulators must impose tough restrictions -- I mean, very serious remedies, not just those of the cosmetic face-saving kind.
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Approximately two weeks ago I reported on Google's motion to intervene in the ITC investigation of Nokia's complaint against HTC as an additional respondent. Since Google's motion was sealed in its entirety (apart from the headline), it wasn't immediately clear on which basis Google sought to become a co-defendant in that particular action, given that dozens of Android-related infringement complaints had been filed before in different courts without Google ever asking to join as a respondent. Thus far, Google was (unless it was sued directly) only a third party to Android-related infringement proceedings.
A filing that HTC made in support of Google's motion on Thursday (which entered the public record on Friday) sheds some more light on this, and unless HTC omitted any important facts, it appears that there's absolutely nothing special about this Nokia-HTC action that would require Google's involvement any more than those dozens of other Android-related infringement cases I just mentioned.
HTC argues that "Google is uniquely situated to provide information necessary for the efficient resolution of Nokia's infringement allegations with respect to at least five of the patents asserted in this Investigation, which are primarily directed to features of Google developed applications that are embedded in the accused HTC products". HTC also says that "Nokia's infringement charts for five of the asserted patents that were included with the Complaint specifically identify and rely upon features of Gmail, Google Calendar, or other aspects of the Android operating system in order to allege infringement by these accused HTC products".
Android and Google-developed applications have been at issue in numerous other infringement actions, yet Google didn't seek to join those as a co-defendant: it contented itself with the role of a third party. For example, the "data tapping" patent that won Apple and import ban against HTC reads on Android's Linkify library. HTC's brief doesn't provide any indication as to why Google would not be able to provide whatever information it is "uniquely situated to provide" simply as a third party (the parties to the investigation would be free to subpoena Google anytime). HTC just says that "allowing Google to participate as a Respondent in this Investigation will avoid the need for complicated third party discovery with respect to those accused features", without specifying why third-party discovery wouldn't be sufficient, or why it would be "complicated". If a third party is particularly eager to provide information that helps the ITC adjudicate the issues, that only makes things easier, but even a party that doesn't volunteer to provide information will ultimately have to meet its legal obligations.
The ITC is a trade agency, not a court, and its focus in Section 337 investigations is on distortions of competition resulting from the importation of infringing products. HTC imports devices allegedly infringing Nokia's patents. Google provides software to HTC, and it has to accept responsibility for the software it publishes, but Google's role here may not fall within the narrow scope of Section 337 investigations by the ITC.
That said, I believe it's a positive thing that Google is willing to go further than before in its efforts to support Android device makers. HTC has been defending itself against Android-related patent litigation for almost two and a half years, and Google should have lent more support early on. The question is not if but how Google should come to HTC's (and other third-party device makers') aid. A recent transfer of patents from Google to HTC (for the purpose of countersuing Apple over them) fell short of a transfer of all rights, title and interest in the ITC's opinion. Now Google has brought a motion to join as an additional respondent that doesn't appear to state extremely compelling reasons. Nokia has opposed Google's motion in a brief that is just as sealed Google's motion itself. Based on HTC's brief (the only one in this context that is publicly-accessible so far), I'm not sure the ITC will see the need for Google to be anything other than a third party to the proceedings. Google can't force Nokia to sue it. Patent holders can sue anyone in the supply chain who creates or redistributes infringing material.
With respect to Google's attempts to support its device makers facing patent issues because of Android's infringement issues, the Wall Street Journal reported on Friday afternoon that Google is leading a consortium bidding for Eastman Kodak's digital imaging patents. According to the report (which cautioned readers that things could still change before formal bids are submitted on Monday), Google has joined forces with HTC as well as Samsung and LG. Google has also brought in a patent aggregator named RPX that security software maker Kaspersky Labs accused of extortion, racketeering and wire fraud.
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On Friday, the ITC threw out Eastman Kodak's patent complaint against Apple and RIM. Kodak has meanwhile vowed to appeal that decision to the United States Court of Appeals for the Federal Circuit.
Today, the Federal Circuit ruled against Apple's ITC countersuit against Kodak by affirming an ITC ruling form a year ago that didn't hold Kodak to violate two Apple patents (U.S. Patent No. 6,031,964 on a "system and method for using a unified memory architecture to implement a digital camera device" and RE38,911 on "modular digital image processing via an image processing chain with modifiable parameter controls").
Today's Federal Circuit ruling doesn't hurt Apple too much, for two reasons:
By now, Kodak is almost a patent troll: as a failed business, it primarily wants to monetize its own patents to the detriment of companies that build successful products. As a result, any findings that Kodak's own products infringed or continue to infringe third-party patents won't affect Kodak's pursuit of patent litigation to the extent that it would work against a company that primarily wants to make and sell products.
The two Apple patents at issue in this ITC investigation are digital camera patents that Apple used against Kodak but hasn't asserted against Android device makers as far as I can see. Therefore, the decision doesn't affect litigation pending against other companies.
It's generally harder to get an ITC decision reversed than to successfully appeal a district court decision. As a government agency, the ITC enjoys a fair amount of deference in connection with its findings, and a huge amount as far as the interpretation of Section 337, the statute governing the ITC, is concerned. But the ITC isn't unassailable. A significant number of decisions that the ITC made on some high-profile smartphone patent cases may be overruled on appeal. A large number of issues decided by the ITC in cases involving players like Apple, HTC, Microsoft and Motorola have been appealed, but decisions on those appeals will most likely come down in 2013 (only Apple's appeal of the decision on its complaint against HTCmight be adjudicated before the end of this year).
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There a major imponderabilities in patent litigation. Companies that face the threat of an injunction or its ITC equivalent, an exclusion order (i.e., import ban) have tough choices to make. As a general trend, defendants now tend to stand their ground for much longer. For a long time, the vast majority of patent lawsuits in the United States got settled ahead of trial. Now there are more companies than ever that defend themselves not only against nuisance lawsuits (litigation brought by trolls that have weak cases and will settle for less than the cost of a proper defense) but also against serious attacks by large and well-known businesses.
Late on Friday, the ITC announced its determination to dismiss Eastman Kodak's digital camera patent action against Apple and BlackBerry maker Research In Motion. The trade agency's top-level decisions makers agreed with the Administrative Law Judge (ALJ) in charge of the investigation that the accused RIM products and the iPhone 3G (an import ban on which would have had very limited impact on Apple's business at this stage) infringe claim 15 of U.S. Patent No. 6,292,218 on an "electronic camera for initiating capture of still images while previewing motion images", but they also agreed with the ALJ that this patent claim was invalid. Another ALJ had found that patent invalid before, but his decision was remanded and, after his resignation, assigned to another ALJ. The finding of invalidity has now been affirmed "on modified grounds".
The Kodak bankruptcy estate could appeal this decision to the Federal Circuit, and that may very well happen. But Apple is now in a strong position. So far it has only incurred legal fees, and if the Kodak bankruptcy estate wanted to settle now, Apple would probably pay only a very limited amount in order to avoid litigation over other patents and the uncertainties that come with an appeal.
It's a safe assumption that Apple's total bill for its "Kodak moment" is going to be a small fraction of the $550 million that its major rival in today's smartphone market, Samsung, coughed up for a patent license from Kodak in early 2010. But in all fairness, Samsung came under pressure that Apple never experienced in its dispute with Kodak.
On December 17, 2009, an ALJ made an initial determination that found Samsung to infringe two Kodak patents, the '218 patent that has now (but not back then) been held invalid and another one, U.S. Patent No. 5,493,335. Samsung's co-defendant was another Korean company, LG. And LG was so scared of the initial determination that it settled, for $414 million dollars, on the eve of that preliminary ruling. Two days after the ID, Samsung agreed to negotiate again, and a few weeks later, in January, the companies announced the conclusion of a royalty-bearing license agreement. This article, which was published much later, states the figure paid by LG as well as the $550 million that Samsung ended up paying.
Not only are companies now more willing to let cases go to trial but they're also ever less ready to back down because of initial determinations by ALJs. After an initial determination, there's a Commission review, and even the final ITC decision can be appealed to the Federal Circuit.
Kodak has claimed all along that it invented digital photography and therefore thinks it's entitled to substantial payments. I don't want to disparage or belittle what this once-great company did. It's sad enough how his business has gone down the tubes. But as far as that '218 patent is concerned, I can only say: good riddance!
If Apple, RIM, Samsung, LG and others had actually infringed some real technological creation by Kodak, such as some highly complex technology at the heart of the sensors that make cameras work, then I would accept, in principle, the notion that someone has to pay for it. But the '218 patent has nothing whatsoever to do with serious, hard-core technology.
For a point of reference, here's the wording of the relevant claim (claim 15), along with comments from me in brackets -- but if you have a hard time understanding it at first because of all the technical terminology, just skip to my explanation:
An electronic still camera for initiating capture of a still image while previewing motion images on a display, comprising:
(a) an image sensor having a two-dimensional array of photosites covered by a mosaic pattern of color filters including at least three different colors for capturing images of a scene, each captured image having a first number of color pixel values provided in a first color pattern; [this is just one of the characteristics, so the patent doesn't cover all image sensors of this kind]
(b) a motion processor for generating from the captured images, a second number of color pixel values provided in a second color pattern having at least three different colors and representative of a series of motion images to be previewed, the second number of color pixel values being less than the first number of color pixel values, and the second color pattern being different from the first color pattern;
(c) a color display for presenting at least some of the motion images of the series of motion images corresponding to the captured images of the scene, the color display having an arrangement of color display pixels including at least three different colors in a pattern different from the first color pattern;
(d) a capture button for initiating capture of a still image while previewing the motion images presented on the color display; [all photo cameras have a capture button...]
(e) a still processor for generating a third number of color pixel values including at least three different colors representative of a captured still image; and
(f) a digital memory for storing the processed captured still image. [obviously any computer memory, such as the one found in smartphones, can store a "processed captured still image"]
While that patent claim mentions a lot of real technology, especially sensors, none of that was novel at the time Kodak filed for this patent. All of this was simply prior art that Kodak combined in a novel way. So what's the benefit of this particular combination?
The basic idea is that on the one hand you can have a low-resolution preview on a screen of a small device (be it a dedicated digital camera or a multifunctional smartphone), which is a "motion" preview because it is constantly refreshed as you move the device, and on the other hand you can then press a button and capture a high-resolution still image. That's it. The "invention" is that you take existing sensors, an existing capture button, an existing screen, and you show on the screen, in a low resolution, what you can capture in a high resolution. And you store it in memory, which is also none of Kodak's inventions.
But unless you have some legalistic reason for arguing non-infringement (for example, one of Apple's defenses had to do with the mechanism of actually capturing, arguing that newer iPhones didn't really capture the image only when the button is pressed but already had the higher-resolution version available in memory anyway), there wouldn't be a practical way to steer clear of infringement. The image that the user will ultimately get is always going to have a far higher resolution than the preview screen -- at least for all of the foreseeable future and certainly well beyond the expiration date of this patent (December 2014).
Distilled to its essence, this patent really made no contribution whatsoever to imaging technology. If this is the best patent that Kodak has (I doubt it, but it's what Kodak's lawyers apparently thought after the favorable initial determination in 2009), its creditors shouldn't expect it to extract much value out of its patent portfolio.
Now that I've criticized a patent that was asserted against Apple, I also want to mention that on Friday, the day of that ITC decision, I also criticized the inventive height (in technological terms) of Apple's "overscroll bounce", or "rubber-banding", patent. But the overscroll bounce patent was a brilliant idea resulting from outside-the-box thinking, even if there isn't any serious technology involved in making it work. Kodak's '218 patent, however, is a combination of pre-existing components that anybody would have combined in the same way since the preview screens of small devices simply don't offer as high a resolutions as the images that today's cameras generate.
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Eastman Kodak keeps trying to force Apple into a license agreement relating to its portfolio of approximately 1,000 digital imaging patents. It hasn't achieved a breakthrough in an ongoing ITC investigation (the target date of which was recently extented to September), but today it brought two new lawsuits -- one against Apple, another one against HTC -- in the Western District of New York (Kodak's home court). Here's the header of the complaint against Apple:
The complaint targets the iPad 2, iPhone 3G, iPhone 3GS, iPhone 4, iPhone 4S, and the iPod touch (4th generation). The four patents-in-suit against Apple are:
U.S. Patent No. 7,210,161 on "automatically transmitting images from an electronic camera to a service provider using a network configuration file"
U.S. Patent No. 7,742,084 on a "network configuration file for automatically transmitting images from an electronic still camera"
U.S. Patent No. 7,936,391 on a "digital camera with communications interface for selectively transmitting images over a cellular phone network and a wireless LAN network to a destination"
Kodak is asserting those four patents as well as a fifth one against HTC's Android-based devices. This is the fifth patent-in-suit against HTC:
U.S. Patent No. 6,292,218 on an "electronic camera for initiating capture of still images while previewing motion images"; this patent is being asserted against Apple and RIM in the aforementioned ITC investigation
The complaint against HTC lists the following devices: the HTC EVO View 4G, Flyer, Jetstream, Vivid, Amaze 4G, Desire, Evo Design 4G, Hero S, Rezound, Rhyme, Sensation 4G, and the Wildfire S. All of those are Android-based. While the complaint is explicitly "not limited to" those products, it appears, at least for now, that Kodak's lawsuit is not targeting Windows Phone devices such as the HTC Titan.
While Apple and HTC are suing each other, they will probably cooperate with respect to the patents Kodak is asserting against both of them. At the very least they will probably conduct a joint prior art search, and they could also be interested in narrowing the scope of the asserted patents claims so as to avoid liability for infringement.
Kodak has been trying for some time to find a strategic buyer for its digital imaging patents. Today's lawsuits are presumably part of the sales and marketing effort for those patents: Kodak seeks to demonstrate that there are still some interesting assets in its portfolio that can be used to sue major wireless device makers.
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This week's ITC decisions involving various of Apple's and Microsoft's patent infringement claims against Android were important, but every time the ITC rules on one of those smartphone patent cases, I am less surprised than before about the high drop-out rate of patent claims. That doesn't mean that those decisions don't matter. It's just that the ITC is ever less likely to become a forum that would singlehandeldy force, through its decisions, the relevant parties to settle their disputes.
As an analyst I have to recognize new trends and digest information, and to adjust my positions accordingly. It's not just that I have to -- I thoroughly enjoy it. Almost 15 months back, I wrote an article on the role of the ITC as an increasingly popular patent enforcement agency, and I have linked to it on a number of occasions ever since. In principle, I still stand by the information in that article, but since then, I've seen a number of smartphone-related ITC positions (recommendations as well as preliminary and final decisions) that show it's a huge gamble for patent holders to take their claims there.
It can be a fast avenue to favorable decisions, and that's really tempting, but at least in connection with smartphones, there's also a high risk of the ITC's actions creating a perception of some patents or patent portfolios being less powerful than they actually are. We'll still hear a lot from and about the ITC in 2012 (complaints, hearings, recommendations and decisions), but I wouldn't be surprised if some major patent holders now adjusted their litigation strategies and deemphasized ITC complaints in favor of actions in United States district courts as well as foreign courts. It's not just that it's hard for anyone to win there: it also takes longer. Apple's complaint against HTC was brought in March 2010 and finally adjudicated 21 months later. During that period, Apple could have completed two full subsequent rounds of litigation in Mannheim and Munich, and would only be a few months away from decisions on a third round. Also, a decision on an Eastman Kodak complaint against Apple and RIM, filed almost two years ago, just got pushed off by nine months. And when the ITC opens new investigations, it recently set 18-month target dates from the beginning, counting from the launch of the investigation (about one month after the complaint) and likely being subject to further delays.
If I were a conspiracy theorist, I could think of a many possible explanations. For example, with the ITC clearly aching under its huge caseload, one might speculate whether it actually hopes plaintiffs-to-be recognize that all their lawsuits slow down the process, hoping that this -- rather than more taxpayers' money for the agency -- will ultimately redress the balance between supply and demand. But let's be deferential to the ITC, which has an important task, and focus on the hard facts here.
One of the hard facts is also that fending off an ITC complaint in whole or in large parts still takes hard work. None of this is meant to diminish the defensive achievements of the respective defendants. Let there be no doubt: HTC and Motorola have reasons to be proud of the work they've done, and happy about the fact that they've contained the damage for the most part -- and for now. Their disputes are far from over, but things could have been much worse for them. That said, at the ITC it's undoubtedly the complainants who face an uphill battle, and the level of expectation of independent observers is rather low now.
Maybe it wouldn't have been easier to win at the ITC in previous years. But the rate of settlements is conspicuously low in connection with smartphone patent disputes, so there are more decisions relative to the number of compaints, and those decisions don't serve to facilitate settlements.
Here's a chronology of ITC smartphone decisions and recommendations that came down since my aforementioned October 2010 article -- I decided not to produce a table (patents asserted, enforced, dismissed) because the specifics of each case must be taken into account:
January 2011: in investigation no. 337-TA-703, then-chief ALJ Paul Luckern finds no violation of a key Eastman Kodak patent on digital imaging by Apple and RIM. 13 months earlier, a different ALJ had made an initial determination that held Samsung and LG (which settled at about that time) to infringe that patent.
July 2011: an ALJ believes Apple infringes two S3 Graphics patents (out of four asserted ones). Those two patents are closely related to each other, which makes it more like a potential win on several claims from the same patent. Shortly thereafter HTC announces the acquisition of S3G. The companies had a major shareholder in common. But it turns out that Apple's core products aren't suspected of infringement, and in November 2011, the ITC concludes a review with the complete dismissal of the complaint.
July 2011: the ALJ in charge of investigation no. 337-TA-710 makes an initial determination that HTC infringes on two of Apple's ten originally asserted patents. But this determination is reviewed, and this week one of those two patents was found infringed and the other was not (or it was considered invalid).
I think the situation between Nokia and Apple was an interesting one. Both companies were heading toward a "goalless draw" (though Nokia still had some hopes that a review of the initial determination might improve the outcome). The ITC, which has the job of protecting the domestic industry against unfair competition from imported products, didn't make things easier for the U.S. company than for its Finnish competitor. Both parties' claims got a rough ride.
The ITC can uphold and protect intellectual property in connection with smartphones since those devices are all manufactured outside the United States, even if their makers (like Apple and Motorola) are based in the US. At any rate, the dispute between Apple and Nokia is a good example of the ITC being a consistently difficult forum for all patent holders rather than pursuing a protectionist agenda. It has certain policies and all the time stakeholders try to sway the ITC on non-legal or pseudo-legal political grounds, but it doesn't disadvantage foreign companies. For example, Samsung doesn't have to be afraid of the ITC playing favorites with Apple. That dispute is taking place in ten countries and in the end neither litigation in the U.S. nor in South Korea (Samsung's home country) is likely to decide the overall outcome. That one will likely depend in no small part on jurisdictions like Germany, France and Australia, or any other of the ten countries in which they're suing each other.
In general, I like it when courts or quasi-judicial agencies set a reasonably high bar for patent infringement claims to succeed. On this blog I have repeatedly criticized judicial decisions that set the bar too low. The ITC may set it too high, considering that its primary task is the effective protection of intellectual property. But if we all look back at the ITC's role in a year or so, we may once again see the same consistent pattern that I just discussed -- possibly with adjustments where the merits of certain cases warrant it, but the ITC is probably going to continue to dismiss the vast majority of smartphone patent claims brought before it.
District courts and similar courts in other countries are in a different position. After they rule, stakeholders can ask for changes to the law, but they can't ask political decision makers to overrule. With the ITC, which is a government agency, there are political challenges, somewhat similar to the ones that antitrust regulators also face all the time.
Any recommendation of an import ban is subject to a Presidential Review. While U.S. presidents frequently delegate this to the U.S. Trade Representative, and even before the first smartphone-related import ban was handed down, leading U.S. carrier Verizon asked President Obama to veto any bans. Verizon knows there are many cases pending in U.S. district courts, and there will be injunctions by such courts at some point, but its political call related only to the ITC. And as I explained, the ITC's decisions don't provide the slightest indication of any such thing as protectionism (if one wanted to accuse them of anything, it would have to be the opposite), but if foreign nations thought their companies are treated unfairly, they would likely complain through diplomatic channels and their impressions could influence their own trade and IP enforcement policies.
In light of that, it's often the safest and easiest bet for the ITC to take skeptical positions on patent claims (though that also had political repercussions in connection with the Kodak case). I guess the ITC really hopes to avoid that it orders an import ban on a patent that might be invalidated shortly thereafter. There isn't going to be much of a public debate over whether the ITC has recently struck the right balance. That's outside of my focus, too. But I do take note of its decisions, and just the ones I listed above involve a number of major players and dozens of patents, and chances are that those complaints would have been considerably more successful in district courts and definitely in certain international courts.
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A week ago I reported on the ITC's postponement of its decision on Kodak's complaint against Apple and BlackBerry maker RIM over an image preview patent.
The ITC could have taken a final decision today, either affirming the initial determination made by the Administrative Law Judge -- the ALJ found the relevant patent claim invalid and not infringed -- or reversing it entirely by finding Apple and RIM liable for infringement of a valid patent claim. Instead, the ITC decided to reverse only certain elements of the initial determination and to remand the case to the ALJ for a new analysis. Here's the ITC's decision.
The new target date for the decision is now August 30, 2011.
This is going to be an uphill battle for Kodak because the Commission still leaves it to the ALJ to decide whether the relevant patent claim is valid. If the ALJ once again concludes that it's invalid, Kodak loses. Only the infringement of a valid patent is legally relevant. If the ITC had definitively reaffirmed the judge's determination of invalidity, that would have resulted in a definitive and immediate decision against Kodak's complaint.
The area in which the Commission clearly overturned the ALJ's determination is claim construction. I recently explained the role of claim construction in connection with the ITC's investigation of Microsoft's complaint against Motorola. In the Kodak case, a few key terms must now be interpreted differently by the judge in the further proceeding than before. For two of the modified terms, today's decision doesn't take a position on whether the different constructions must result in a different determination concerning infringement. For two other terms, the Commission does state that its modified construction suggests infringement, but an infringement analysis always depends on all key elements of a patent claim, so even if some elements are now deemed infringed, there are still others concerning which the judge may arrive at the same conclusion as before.
In other words, the ALJ can still rule against Kodak, and it's reasonably probable that he will. Kodak gains more time and gets the opportunity to present new arguments. Given that Kodak is not too likely to prevail, a possible outcome now is a settlement that would cost Apple and RIM a fraction -- possibly a tiny fraction -- of the billion-dollar amount Kodak and some observers previously considered realistic. This way, Kodak would at least get some cash to finance its restructuring while Apple and RIM could eliminate the remaining risk of losing. Also, let's not forget that there are federal lawsuits going on, and Apple and RIM would presumably also like to get rid of those -- but on their terms now rather than Kodak's.
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[Update] The ITC has surprisingly given notice that the target date for the decision has been extended by one week. It's now June 30, 2011. This could either be due to a delay on the ITC's part or a way for the ITC to give the parties more time to negotiate a settlement. [/Update]
The ITC was slated to issue today its decision in the investigation it instituted last year at Eastman Kodak's request against Apple and BlackBerry maker Research In Motion (RIM). The investigation's official title is "Certain mobile telephones and wireless communication devices featuring digital cameras, and components thereof" (investigation no. 337-TA-703). As the title shows, this is about the cameras built into smartphones -- but in a software (not hardware) sense: Kodak is asserting an image preview patent.
In this blog post I'll now discuss certain aspects of this dispute ahead of the decision, on which I will comment in a separate post once it has been issued.
Among other things, I'll also take a look at the patent claim at issue.
Disputes of this kind usually get settled before the ITC issues its final decision because defendants don't want to get to the point at which the ITC orders an import ban -- which is what could happen today.
For example, Kodak previously (in November 2008) filed an ITC complaint against Samsung and LG over the patent now at issue in the case against Apple and RIM, as well as other patents. On December 17, 2009, the Administrative Law Judge (ALJ) in charge of the investigation issued a so-called final initial determination (FID) in Kodak's favor. The FID can still be overruled by the ITC's highest decision-making body, the six-member Commission, which may or may not be the outcome of today's decision. LG settled with Kodak the day before the FID for $414 million, and Samsung, three calendar weeks later (considering Christmas, this was more like settling two business weeks later) for $550 million.
More recently, Apple settled with Nokia at a point that was just a few weeks away from today's situation in Kodak's case: after a FID that found no infringement of valid patent claims, the Commission had decided to take another look, and a decision was approaching.
So why hasn't it happened in this camera (image preview) patent case?
Both Apple and RIM are experienced in such processes. If they take risks, those risks are usually calculated and well-considered. The fact that neither of them has paid up suggests they are optimistic that the Commission will reaffirm the FID and/or they may believe that even if an import ban was ordered today, they could appeal this case to the Court of Appeals for the Federal Circuit (CAFC) and have such a ban stayed pending the appeal. In the latter case, Kodak would have to wait several more years, but it needs the money in the foreseeable future, which could give Apple and RIM some leverage.
Or maybe they are still negotiating and a deal will still happen at some point before the decision is issued. If the parties agreed on a license deal, an import ban wouldn't take effect anymore in practical terms.
131-year-old Eastman Kodak is a victim of technological change. It's not yet a victim in terms of having gone completely down the tubes, but it's a shadow of its former self.
A large part of Kodak's problem is that more and more consumers don't buy a digital camera as a stand-alone device anymore: they get it as part of a smartphone. The most demanding photographers still have needs that only dedicated camera devices can meet, but the mass market is fine with the many megapixels provided by today's smartphones, especially the ones at the higher end (such as Apple's iPhone and RIM's higher-end BlackBerry devices). Those consumers avoid the extra cost, weight and space requirements of a separate digital camera.
Similar effects may already affect other product categories such as alarm clocks, but probably not to the same devastating degree that Kodak and other camera makers have experienced.
Since 2004, Kodak has reported only one full-year profit — in 2007 — and expects another annual loss this year before crossing back to profitability sometime in 2012. It has trimmed its work force to 18,800 from 70,000 in 2002.
The article also talks about "four growth businesses" in which Kodak "is investing heavily". So the company hopes to find a future in one or more of those areas (workflow software, packaging, home inkjet printers and high-speed inkjet presses). It doesn't want to become just a patent troll, though a portfolio of 11,000 patents would certainly be a basis for that kind of business. Kodak looks for patent royalties to finance its transition. Of course, should that transition fail, then the world may get another patent troll, or another huge patent auction comparable to the one of the patents belonging to Nortel's bankruptcy estate (that auction is scheduled for this coming Monday).
As a tidbit, I have uploaded to this Scribd folder letters recently sent to the ITC by influential politicians from Kodak's home state of New York: Governor Andrew Cuomo, Senator Charles Schumer, Congresswoman Louise Slaughter and Congressman Tom Reed. Those letters stress the need for Kodak to generate income from patents to avoid layoffs. (I'd like to underscore that I have confidence in the independence of the ITC, which I believe will take a decision based exclusively on the merits of the case.)
In this recent press release Kodak listed the following licensees (not a complete list) of its imaging patents: LG, MEI/Panasonic, Motorola, Nokia, Olympus, Samsung, Sanyo, Sharp, Sony, and Sony Ericsson.
Those didn't all license those patents voluntarily. I mentioned Kodak's lawsuit against Samsung and LG before. Nokia was also sued and took a license to settle the case. (And possibly others, too.)
Kodak calls itself a pioneer of digital photography (which I think is true) and claims that 1,000 of its 11,000 patents relate to digital imaging technologies. But in this case, we're not talking about thousands of patents -- it's now all about just one patent, and even of that one everything depends on only one particular independent claim (Kodak also asserted in its original complaint several more claims dependent on that one): claim 15 of U.S. Patent No. 6,292,218 on an "electronic camera for initiating capture of still images while previewing motion images."
That title may sound like a hardware patent covering many technical aspects of digital cameras. But that's not the scope of the monopoly this patent represents (if valid) to Kodak. That scope is narrower.
In connection with yesterday's outrage over a broad multitouch-related patent granted to Apple I already emphasized (as quoted by PC Magazine's website) that a given patent claim is only infringed if the accused technology matches all of its characteristics at the same time. Let's look at what claim 15 of Kodak's patent-in-suit specifies -- and my in-line comments appear in italics:
An electronic still camera for initiating capture of a still image while previewing motion images on a display, comprising:
(a) an image sensor having a two-dimensional array of photosites covered by a mosaic pattern of color filters including at least three different colors for capturing images of a scene, each captured image having a first number of color pixel values provided in a first color pattern; [this is just one of the characteristics, so the patent doesn't cover all image sensors of this kind]
(b) a motion processor for generating from the captured images, a second number of color pixel values provided in a second color pattern having at least three different colors and representative of a series of motion images to be previewed, the second number of color pixel values being less than the first number of color pixel values, and the second color pattern being different from the first color pattern;
(c) a color display for presenting at least some of the motion images of the series of motion images corresponding to the captured images of the scene, the color display having an arrangement of color display pixels including at least three different colors in a pattern different from the first color pattern;
(d) a capture button for initiating capture of a still image while previewing the motion images presented on the color display; [all photo cameras have a capture button...]
(e) a still processor for generating a third number of color pixel values including at least three different colors representative of a captured still image; and
(f) a digital memory for storing the processed captured still image. [obviously any computer memory, such as the one found in smartphones, can store a "processed captured still image"]
So the key thing here is that Kodak obtained this patent on the idea of combining the usual elements of a digital camera with the concept of a preview image.
Out of 11,000 patents -- and 1,000 allegedly covering digital imaging -- this is the patent that Kodak hopes will give it leverage for what could be a billion-dollar deal with Apple and RIM.
There are also federal lawsuits in which Kodak asserts several additional patents. However, the ITC is Kodak's best bet for a quick but highly impactful decision.
The ALJ found in his FID that the patent claim was invalid because it was obvious as compared to existing prior art. In other words, the height of the claimed inventive step was insufficient. Digital camera technology may be inventive, but the idea of storing a preview image in memory was considered obvious.
The ALJ also doubted that the patent claim was infringed even if it was valid.
I have no position on the infringement question, but as a critic of software patents in general and trivial software patents in particular, I absolutely agree with the ALJ that this patent doesn't really add anything seriously inventive. It's a nice idea to have a still preview image, but technologically it's not really the kind of advance that I believe deserves the 20-year monopoly that a patent potentially is.
Unfortunately there are some important decision-makers who don't agree with me. The USPTO upheld this patent claim when the patent was reexamined. And in the aforementioned ITC investigation against Samsung and LG, that patent claim was deemed valid (and infringed by the two Korean vendors).
As patent reexamination expert and experienced patent attorney Scott Daniels points out on his WHDA Reexamination Alert blog (the one I recommend to anyone interested in U.S. patent reexaminations), it will be interesting to see how the ITC takes the USPTO's reexamination decision into consideration. I believe this is also somewhat interesting in light of a recent Supreme Court decision (Microsoft v. i4i) related to the evidence standard required to have a patent considered invalid in a lawsuit.
On June 30 we should finally know more about patent quality standards and evidence standards related to the alleged invalidity of a patent... and we'll know if a billion dollars (or maybe even more) changes hands or if the fight continues in the federal courts.
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I'm sure many Apple stakeholders (shareholders, employees, partners, app developers) are asking themselves the above question. There's news about Apple and patents all the time. Most of the time it's about litigation, or threats of litigation, and there's also a lot of interest in Apple's new patent applications, which often provide a clue to possible future products and features.
These days there's a lot of attention to the problems faced by app developers, and yesterday there was bad news for Apple because Eastman Kodak appears to be on the winning track against Apple (and RIM) at the ITC (I'll get to that further below).
This is a good point in time to take a look at Apple's different patent battlefields. Things can always change in any of those disputes, and new important disputes could come up any moment.
Before I look at those war theaters one by one, let me actually start with what my personal guess is. I believe the bottom line of the outcomes of Apple's different patent disputes will be a combination of light and shadow, and Apple may have overrated the strength of its own portfolio and underestimated the strength of its adversaries, but there's so much going on in connection with Android that others might still win the patent game to Apple's immense benefit.
However, Apple should take the Nortel patent auction seriously.
Yesterday Eastman Kodak's shares rose by about 15% because of recommendations by the ITC staff that greatly increase the probability of a huge payday. Bloomberg did an article that explains those developments very well.
Kodak isn't going for Apple's throats but certainly for its wallet, big time. Apple might have to pay a billion dollars or so for past infringement of Kodak patents, and maybe hundreds of millions a year going forward. Kodak uses one of its relatively old digital photography patents to tax today's smartphone industry. Previously, Samsung paid about $500 million and LG $414 million to Kodak. But Apple's smartphone revenues are far greater than those of Samsung and LG, and the specter of Kodak getting the ITC to order an import ban against the iPhone creates a situation in which Apple may have to write a huge check plus commit to future royalty payments. That would be the costly version of the much-advertised "Kodak moment."
I have explained on various previous occasions, such as this one in March, that fortunes can change in an ITC proceeding. However, we are now approaching Judgment Day: June 23, 2011.
Apple could certainly hope until the last moment that things work out (which would still be a possibility), but if Apple really takes its chances and loses, Kodak could have an import ban in his hand, which would be huge leverage. At the same time, settling ahead of the decision would make sense for Kodak, which probably prefers a bird in the hand over two birds in the bush. Kodak's core business has been largely cannibalized by today's smartphones, so they really depend on monetizing their patents. They wouldn't settle for little because that doesn't help them, but they're probably not going to shoot for "all or nothing" because they can't responsibly afford to.
Apple tried to countersue Kodak, but isn't on the winning track in that process: the Administrative Law Judge on that case made a final initial determination that Kodak doesn't infringe Apple's patents (see this Reuters report). Actually, that was also the case in Kodak's case against Apple, but the ITC decided to review that final initial determination. It could also do so in Apple's case against Kodak, but the difference is that in Kodak's case against Apple that review was ordered and it's going well for Kodak, while a review of the decision in Apple's countersuit might not happen. Apple's case against Kodak is a few months behind, which is another tactical disadvantage.
In 2009 Nokia wanted to do a license deal with Apple under which Apple would have had to pay royalties for Nokia's standards-related and other patents but would also have had to grant Nokia a license to its own patents, particularly the smartphone-related ones such as on multi-touch user interfaces. Apple wanted a one-way street, Nokia said no and went to court. What followed is a tit-for-tat of mutual claims, with lawsuits filed in different courts in the US and Europe, and the current battlefield looks like this:
The initial ITC complaints that the parties filed against each other more than a year ago appear to be heading for a "goalless draw". But Nokia filed a second ITC complaint, which the ITC recently voted (as expected)to investigate. This was a way for Nokia to show that it still has patents in stock to use against Apple, while Apple might slowly but surely be running out of patents to use in counterclaims.
Apple was the first one of the two parties to sue in Europe, but that may backfire because Nokia's patents may be stronger under European patent law, which allows software patents only if they are presented as "computer-implemented inventions", something that Nokia is pretty good at while Apple's asserted patents are pretty easily identifiable as straightforward software patents and therefore not necessarily enforceable in Europe.
But the biggest strategic problem is Nokia's game-changing move to adopt Windows Phone for its future smartphones. By the time Apple might get enforceable rulings against Nokia's Symbian-based products, it's possible that Nokia won't care too much. They might have to pay damages for past use, but they might not have a problem with taking those products off the market. If Apple wanted to attack Nokia's future Windows-based products, it wouldn't get anywhere because Microsoft (unlike Google) protects its licensees. Microsoft owns far more patents than Apple and files for about five times as many new ones at the current run rate.
So the situation for Apple is that Nokia has little (if anything) to lose while Apple would, if things go wrong, have a lot (if not everything) to lose. Time is now clearly on Nokia's side on various fronts, and I think Apple will most likely end up paying a "Nokia tax". And that one could easily exceed a potential "Kodak tax"...
Apple is frequently named as a defendant in patent infringement suits, including many of the ones I blog about. It has to fend off dozens of such challenges every year. While this is a cost factor and distraction to Apple, it's actually not that important in the greater scheme of things. One Kodak deal could be more costly than dealing with dozens of little trolls, and in strategic terms, the damage that Android can do to Apple's business model dwarfs whatever problems little trolls can cause to Apple. Those are just like annoying little flies.
While large players like Apple can deal with the excesses of the U.S. patent system, app developers have a fundamental problem: they lack the resources to defend themselves, so even if dubious patents and/or spurious infringement claims are used to threaten them, they have to pay up. They can't afford to defend themselves in protracted litigation and overturn bad patents (of which there are too many) or prove that they don't infringe. Nor could they reject economically unreasonable demands in hopes of getting a better deal if a court orders damages. If anything goes wrong, their companies will be out of business.
All of that can discourage app development. Normally the capital requirements to do an iOS app are in the hundreds of dollars; if app devs have to fend off patent litigation repeatedly, they need a capital base of many millions. Unless someone behaves likes MacroSolve and sues right away, app devs might be able to just get away with royalty payments. Each one of those may be bearable, but it is a major injustice that little guys can be threatened without any chance to defend themselves. Even though it will take a number of patent royalty demands before app devs pay a similar amount to trolls as Apple's 30% app store cut, the legitimacy of Apple's cut is greater because app devs know beforehand what they have to pay and it's take-it-or-leave-it, while the trolls only go after them later and they're defenseless at that point.
The Lodsys issue could even drive a wedge between Apple an some of its app devs for four reasons. One, it appears that it's not easy (or even impossible) to implement Apple's in-app purchasing API without Lodsys demanding royalties. This has already prompted app devs to post "bug reports" to Apple's developer platform. Two, Lodsys says that Apple has a license to the patent for its own "nameplate" products and services. Three, Apple itself is an investor in Intellectual Ventures, which acquired those patents from the original "inventor" and sold them. So Apple's money was involved in the chain of transactions that led to this mess. Four, while Lodsys hints between the lines that assertions against developers on other platforms (such as Android) may follow, its assertions are limited to iOS apps at this stage, while MacroSolve already targets multiple platforms.
Apple can't accept responsibility for each and every patent infringement by an iOS app, but the only chance that app devs have to get peace of mind concerning patents is for Apple to take care of them. Some have recently asked the question of whether app devs could solve the problem through an insurance, but as I told TiPb's Rene Ritchie in an interview, the average app dev doesn't even have enough revenues to afford an IP insurance. However, Apple would be in a position to play the role of that insurance, given that its strategic interest in its app store goes way beyond its 30% commission.
The best outcome for the app devs would be for Apple to play the Godfather role and strike down on the likes of Lodsys and MacroSolve, indicating that the app ecosystem is a territory where they shouldn't mess around. In MacroSolve's case, most of the apps are cross-platform, but Apple could protect at least those defendants who do Apple-only apps, and they should try to work out something with Google and RIM (whose app markets are also under attack by MacroSolve) so that cross-platform apps will be jointly protected.
If Apple doesn't do this, there's a risk of further exacerbation of the problem. If all it takes to collect money from app devs is a patent no matter how weak it may be, and an infringement assertion no matter how questionable it may be, there will be trolls around all the time. Maybe they won't all claim to own a patent on something that a very large number of apps do, but I've learned that some trolls have already gone after little app devs in connection with functionality that only smaller numbers of apps use. Those cases just didn't get the publicity that Lodsys did.
I can see why Apple would view Android as an iPhone/iPad rip-off and fight it. But it's another question whether Apple really is enough of a patent powerhouse to do that.
Apple's first target was the patently weakest one of the three major Android device makers: HTC. Things aren't going well for Apple in its ITC proceeding against HTC. If Apple doesn't win that one, it will have to wait for future decisions by federal courts.
More than six months after suing HTC, Apple tackled Motorola. Actually, Motorola sued first, but that looked more like a pre-emptive strike as they knew what Apple was preparing for. Motorola, a pioneer in mobile devices, made a lot of counterclaims against Apple. The battlemap of Apple's fights with HTC and Motorola looks like this:
That diagram shows that HTC is much weaker, but Motorola is mounting significant resistance. I'm pretty sure Apple will win against HTC, and that could be devastating for HTC because Apple might not give them a license for any amount of money that HTC could possibly pay, but it may take much longer than Apple hoped. I think Apple can prevail over Motorola, but Motorola's own patent portfolio may be strong enough that Apple may have to content itself with a cross-license deal in which Motorola may or may not be the net payer.
Most recently, Apple took on Samsung despite the fact that it's one of Apple's most important suppliers. Apple's complaint against Samsung is a piece of art (even in the eyes of a software patent critic like me) because it masterfully asserts different types of intellectual property rights and convincingly exposes Samsung as a copycat.
It was obvious that Samsung owns a lot of patents. It's an electronics industry giant. I'm not even too impressed by the kinds of patents they assert; nor is Nilay Patel, a lawyer by training and former Engadget editor. But it's quite remarkable how quickly Samsung orchestrated countersuits in four countries on three continents.
Apple is now suing all of the three big Android device makers. It could also try to sue some smaller ones, and I actually wonder why they didn't name some of those as additional defendants in their suits against HTC and Motorola, just in order to discourage companies from adopting Android. There are three dozen Android device makers out there, and it's likely that Apple will several more of those over time.
Android is a fundamental threat to Apple's business. Android has already surpassed the iPhone in terms of daily activations in all of the major markets in the world, while the iPad is still selling almost as well as if it were the only game in town. But the next generation of Android-based tablets could already be much more successful than the current one.
There are analysts who speculate about Apple's stock price possibly reaching $2,000 in a few years (it's now trading around §340). The reality is that Android has the potential to take Apple down to $200, if not less, within a couple of years.
Patents are certainly a strategic weakness of Android. Apple itself may not achieve the results in its own patent battles against the major Android device makers that it hopes for. But the overall patent situation surrounding Android -- with patent holders of all kinds and sizes asserting their rights -- could affect Android's competitiveness and help Apple sustain its margins.
For instance, things are going according to plan so far for Oracle against Google. Oracle isn't on a mission to destroy Android. It wants to make money and assert its control over Java (including any transformations of Java class files into other virtual machine executables). But the fallout could be that Google has to pay so much per Android unit to Oracle that it may not even be able to provide Android to device makers free of charge after such a settlement. And that's just one patent holder of many. By my most recent counts there are 42 Android-related patent infringement suits that have been filed since March 2010. It's the combination of all of that enforcement activity that may seriously hamper Android's ability to commoditize Apple's business.
About 6,000 patents, a number of them LTE-related, are on the auction block now as a result of Nortel's bankruptcy. Google won a pre-auction market test with a $900 million bid and is, therefore, in the pole position now as the so-called "stalking horse bidder" who would get a compensation of $25 million if others do outbid them in the real auction, which will take place next month.
Apple has cash reserves of $60 billion and could replenish its coffers from a successful Nortel bid within roughly a month. It would make a lot of sense for Apple to buy those patents. While a number of patent holders asserting their rights against Android would not be affected by a possible acquisition of those patents by Google (for example, I can't see how Google could use those patents against Oracle, and there may be licensing commitments in place that limit whatever buyer's ability to assert them against some other players), the psychological effect would be that a lot of people in the industry as well as analysts and journalists will think that Google all of a sudden has a sufficiently strong patent portfolio. Google's patent portfolio would grow by a factor of about 10. That cannot be in Apple's interest. If Google has to acquire patents at smaller auctions (which they try all the time), it will take a long time before another Nortel-like opportunity to buy a huge patent portfolio in just one deal will come along.
I already stated at the start of this post that Apple may ultimately benefit from all of the patent disputes going on, although this will most likely turn into an example of "you win some, you lose some".
If it weren't for Android, Apple would probably be better off in a world without patents. But if a multitude of patent holders, all of whom but Apple only pursue license deals, collectively has the effect of significant cost increases for Android-based devices, Apple may even (although it would never say so) be glad to pay "taxes" to players like Kodak and Nokia, as well as to a number of little trolls attacking Apple directly.
It remains to be seen how Apple deals with the problem of patent assertions against defenseless little app devs. Taking good care of its ecosystem would pay dividends in my opinion, but Apple knows its business inside out and its own cost-benefit analysis may yield a different result.
Concerning the Nortel auction, I continue to think it would make sense for Apple to outbid Google. But so far it's not publicly known whether Apple will make a serious effort at all.
We will see how all of this plays out. There will be lots of Apple-related events involving patents, and maybe the picture looks very different later this year, or next year. I just tried to describe the situation as I see it today.
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