Microsoft says Samsung used "meritless" "excuses" to back out of deal after Nokia Devices purchase was announced

After three years of relative peace between Microsoft Corp. (MSFT) and Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) over patents, war has broken out.  On Friday Microsoft filed a lawsuit against Samsung in the U.S. District Court, Southern District of New York (USDC-SDNY).  In the suit, it alleges that the top Android phonemaker has broken its promises it made in a 2011 contract in which Samsung agreed to pay Microsoft a per-device licensing fee on Android phones, tablets, and Chrome OS laptops it sells.

I. Broken Promises

Microsoft -- who produces the rival Windows Phone platform -- was careful to praise Samsung in its press release.  It wrote:

In 2011, after months of painstaking negotiation, Samsung voluntarily entered into a legally binding contract with Microsoft to cross-license IP – an agreement which has been extremely beneficial for both parties. Samsung had been complying with the contract and paying to use Microsoft’s IP.


Since Samsung entered into the agreement, its smartphone sales have quadrupled and it is now the leading worldwide player in the smartphone market. Consider this: when Samsung entered into the agreement in 2011, it shipped 82 million Android smartphones. Just three years later, it shipped 314 million Android smartphones. [Source: IDC, WW Quarterly Mobile Phone Tracker – 2014 Q1, Published: May 2014] Samsung predicted it would be successful, but no one imagined their Android smartphone sales would increase this much.


Microsoft and Samsung have a long history of collaboration. Microsoft values and respects our partnership with Samsung and expects it to continue. We are simply asking the Court to settle our disagreement, and we are confident the contract will be enforced.

Indeed, Samsung produces a number of premium Windows laptops/ultrabooks and has dabbled in Windows Phone with devices such as the Ativ S.

Samsung Ativ S

But according to Microsoft, Samsung forced its hand when it willfully breached its contract following Microsoft's September announcement of its pending purchase of Nokia Devices, a division of Finland's Nokia Oyj. (HEX:NOK1V) .  Microsoft writes:

We don’t take lightly filing a legal action, especially against a company with which we’ve enjoyed a long and productive partnership. Unfortunately, even partners sometimes disagree. After spending months trying to resolve our disagreement, Samsung has made clear in a series of letters and discussions that we have a fundamental disagreement as to the meaning of our contract.


After becoming the leading player in the worldwide smartphone market, Samsung decided late last year to stop complying with its agreement with Microsoft. In September 2013, after Microsoft announced it was acquiring the Nokia Devices and Services business, Samsung began using the acquisition as an excuse to breach its contract. Curiously, Samsung did not ask the court to decide whether the Nokia acquisition invalidated its contract with Microsoft, likely because it knew its position was meritless.

Samsung has yet to comment on the suit.

II. A Popular Target

As a titan of smartphone and tablet sales, Samsung has been a popular target for patent litigation, a form of legal strife which has increasingly haunted the smartphone market in recent years.

Samsung's most publicized struggle has been against Apple, Inc. (AAPL) who accused Samsung of "slavishly copying" the iPhone in an April 2011 lawsuit.

A jury ruled in 2012 that internal Samsung documents indicated it indeed shifted its designs to imitate the look and certain features found in the iPhone.  won the first round, After some minor recalculations Samsung was ordered to pay $890M USD in damages for willful infringement.

Most recently, in May the pair wrapped up a second trial.   This time around Samsung enjoyed a much better outcome when a jury ruled in U.S. federal court that both Apple and Samsung's recent devices were guilty of stealing patented features.  The jury ordered Apple to may $158,400 USD for "accidental" infringement of one key Samsung patent, while Samsung was ordered to pay $119.6M USD for willful infringement of two patents across most of its device lineup, and infringement of another Apple patent across parts of its device lineup.

Samsung vs. Apple trial
Apple and Samsung fought to a draw in a second court trial this spring. [Image Source: Reuters]

While Apple scored more money in the jury verdict, it was a major moral loss as it was to be found guilty of stealing, something it had accused Samsung of doing for so long.  Apple's awarded damages were also a mere tenth of what it sought.  The pair have yet to solve their dispute.

Besides Apple, Samsung has faced off against a couple of proxies of or close allies of Microsoft, despite its 2011 licensing pact with Microsoft itself.  

Samsung and a number of fellow Android phonemakers were sued in Texas federal court by a patent pool called the Rockstar Consortium.  The Rockstar patent holding company was formed to monetize a major portfolio of patents Microsoft, Apple, and other founding members purchased in mid-2011 from bankrupt Canadian telecommunications firm Nortel.  The other co-owners of Rockstar include a a single Android OEM -- Japan's Sony Corp. (TYO:6758) -- and a number of other familiar names: BlackBerry, Inc. (TSE:BB), Sweden's Ericsson AB (STO:ERIC.AERIC.B), the Mass.-based EMC Corp. (EMC).

Google has filed a countersuit to try to shield Samsung and other partners, but legal experts say the tactic used has a low success rate on the appeals circuit.  The fight between Samsung and Rockstar is ongoing.

Samsung also clashed with Nokia -- long the biggest Windows Phone licenser -- but settled the legal dispute with a cross-licensing deal in November.

III. Is Samsung Eyeing a Better Contract?

While it has at times clashed in court with Microsoft subsidiaries, Samsung has long enjoyed relative peace with Microsoft itself.  Samsung is likely the most lucrative component of Microsoft's Android patent licensing business that is believed to earn the veteran operating system maker over a billion dollars annually.  

At least 21 other OEMs have entered similar licensing agreements.  A breached agreement by the largest licensee is an alarming precedent for Microsoft who probably fears that other OEMs could follow in suit.

It's unclear what Samsung's reasoning in breaching the contract is.  One possibility is that Samsung is looking to renegotiate its licensing rate.  Samsung was one of the first Android OEMs to agree to licensing with Microsoft and it reportedly pays one of the highest rates -- as much as $15 USD per premium Android smartphone.

Samsung Galaxy S5
The Samsung Galaxy S5

It's possible that the licensing deal with Nokia may preclude it from needing to license certain patents from Microsoft.  Also, Samsung in January signed a licensing deal with Google Inc. (GOOG), which might help protect Samsung in the event of a breach of its Microsoft contract.

The 10.5-inch Galaxy Tab S

One thing's for sure -- Microsoft's report clearly indicates that it engaged in a lengthy internal dispute with Samsung over the last year or so after Samsung decided to stop paying.  With its own smartphone efforts bleeding cash, it's not about to let Samsung off the hook so easily.

Source: Microsoft [press release]

"We are going to continue to work with them to make sure they understand the reality of the Internet.  A lot of these people don't have Ph.Ds, and they don't have a degree in computer science." -- RIM co-CEO Michael Lazaridis

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