Trial outcome is a relative win for Samsung, particularly after the devastation of the last trial

Apple, Inc.'s (AAPL) hope of extracting over $2B USD out of its South Korean arch-rival Samsung Electronics Comp., Ltd. (KRX:005930) (KRX:005935) over patent infringement claims relating to the Galaxy Note, Note II, Galaxy S3 and other mobile devices was met with disappointment this week after a long and bitter battle in court.  The trial was the second between the world's top smartphone at tablet makers, and unlike last round's resounding win for Apple, this was by most accounts a stalemate which could damage both companies' brand image.

I. The Big Picture

Samsung and Apple are both found guilty of patent infringement on roughly 50 percent of the claims they asserted against each other.  A jury ruled that both companies "stole" some of each others features.

In Apple's case, it was found to have stolen parts of the video streaming technology that it used to build its FaceTime app, a key feature of iOS.  In Samsung's case it was found to have stolen certain autocorrect and link-generating algorithms that run in the background in iOS.  Or more aptly Google Inc. (GOOG) may have stolen them, but Samsung is on the hook, as it uses Google's Android operating system.

A jury ruled that Apple stole features from FaceTime from its arch-rival Samsung, a pioneer in the phone industry.

Samsung is ordered to pay a much larger amount of damages, but an amount that is still a relative slap on the wrist -- only 1/60th of its quarterly profit.  Apple is ordered to pay next to nothing.

Judge and jury express a degree of frustration at both companies, with the judge in the case calling the lawsuit "one action in a worldwide constellation of litigation between the two companies."

Samsung autocorrect
Some of Samsung's autocorrect techniques were also deemed stolen from Apple.
[Image Source: YouTube/SamsTech]

Both companies now have the means to potentially ban each others' older products.  In Samsung's case the Galaxy Note II and Galaxy S III could see bans.  In Apple's case the iPhone 5, iPad 4, and original iPad Mini.  But first and foremost these are all older products, which are low volume in each company's sales (or resales) chain.  Second, U.S. courts have in the past have shown hesistance to ban products from the market over minor infringement of software patents.  Hence any bans we do see will likely be brief.

Each company will look to spin this verdict as a win, as will their supporters.

In contrast from the last case, the verdict certainly seems much more of a win for Samsung.  It successfully convinced a jury that it was an innovator and that Apple stole some of its technology, unlike the first court trial where a jury rejected all of its claims.  It also substantially trimmed the size of the infringement payout.
Apple Gavel
[Image Source: CNET]

To put the payout in contest, Apple may pay more than $119M USD to settle a 2011 class action suit against Silicon Valley employees who alleged it conspired with Google (who will also be paying up) and a handful of other companies to create a non-compete pack barring poaching each others employees, in an attempt to artificially suppress wages.  As many have noted, that sum is a pittance for Apple; so too is this sum for Samsung.

That said, from both a dollar figure and from the basis of how many infringement claims were upheld, Apple certainly seems to have come out ahead in this case.  It supporters will surely cling to the fact that no matter how small the damages ruling (relatively, speaking) and no matter if Apple was also found guilty, the jury seemed to judge Samsung as "more guilty" (relatively speaking).

Samsung Galaxy S4 vs. iPhone 5
A jury ruled both Samsung and Apple are guilty of copying each others' patented technology. [Image Source: Getty Images]

But from a big picture perspective its a Pyrrhic victory for either company, perhaps best viewed as a stalemate.  The courts have acknowledged that both companies have borrowed from and been inspired by each others' products.

The onus is now on both Samsung and Apple's leadership to come to some sort of licensing arrangement, or continue to waste each others' time and risk reputation damage by continuing this court fight which serves as a black mark on each company's brand.

II. Samsung: Guilty on Two (and 1/2) of Apple's Five Infringement Claims

A jury has found Samsung guilty of infringement, but has awarded damages of only $119.6M USD -- less than a tenth of what Apple was pursuing.  Apple had pursued damages of $2.191B USD, which equated to retroactive royalty payments of about $40 USD per device.  By contrast the amount awarded it would work out to be about $2 USD per device in question in the case.

Apple had accused a plethora of Samsung products including the: ...of infringing on five of its patents:
  • U.S. Patent No. 5,946,647 (the '647 patent)
    • Covers "data detectors" that generate actionable links on webpages or other documents (e.g. link a phone number to the dialer app)
    • Filed: Feb. 1, 1996
    • Granted: Aug., 31, 1999
    • Was originally describing software on Power Macintosh desktop computer
  • U.S. Patent No. 6,847,959 (the '959 patent)
    • A patent on universal search which can search both internet and local data sets on a mobile or desktop device.
    • Filed: Jan. 5, 2000
    • Granted: Jan. 25, 2005
    • Was designed for the Macintosh Operating System, Apple's desktop computer operating system, which predated OS X.

      Mac OS
                  [Image Source: Computer History]
  • U.S. Patent No. 7,761,414 (the '414 patent)
    • A patent on data synchronization
    • Filed: Jan 7, 2007
    • Granted: Jul 20, 2010
    • Described technologies used by the iCloud
  • U.S. Patent No. 8,046,721 (the '721 patent)
    • Gesture based slide to unlock with heuristics to detect accidental swipes.
    • Filed: Jun 2, 2009
    • Granted: Oct 25, 2011
    • Covers the slide gesture that mirrors pulling a bolt lock, only in touch screen form.

      Slide to unlcok
  • U.S. Patent No. 8,074,172 (the '172 patent)
    • Covers features used in iOS's autocorrect API.
    • Filed: Jan 5, 2007
    • Granted: Dec 6, 2011
    • Covers the autocorrect technology developed for original iPhone in 2007.
Samsung's devices were found to be almost universally guilty of infringing on the '172 patent (autocorrect features) and the '647 patent.  Some devices, but not others were found guilty of infringing on the '721 patent, a patent Apple suggested was the least valuable in the case.

Samsung was found not guilty of infringing the '959 universal search patent  -- which Apple considered the second least valuable in the case -- and the '414 patent.  The '414 patent was a major blow as it was considered one of Apple's more valuable ones, but the jury clearly felt Samsung's technology differed sufficiently not to be infringement, so Apple gets nothing on that claim.

Apple had tried to convinced jurors of the universal search infringement via heavily redacted blog posts.  In these posts, Apple had posted large black blocks over comments mocking its company and products, posts which were apparently in relative abundance.  Clearly this "evidence" proved unconvincing to jurors.

The slide to unlock patent is a temproary headache for Samsung, but it has new unclok mechanisms, so this will not be an ongoing headache.  Perhaps the biggest blow to Samsung from a features standpoint is the autocorrect, which could force it to negotiate licensing with Apple or significantly "dumb" down some features of its correction software.

III. Apple Embarassed by Disclosures of its Mounting Image, Growth Struggles

In its closing arguments, Apple's top lawyer, Harold McElhinny of law firm Morrison Foerster, started by evoking the familiar argument that Samsung was a habitual copycat.  He told jurors:

Let’s remember how we got here.  We are here because of a series of decisions by Samsung Electronics [including] month after month of frenzied activity [to copy Apple technology].

We've tried to prove every fact from Samsung's documents.  They show what people at Samsung were actually thinking at the time. They never thought those documents would see the light of day.

More than 37 million devices are at issue in this case. And unlike in fairy tales, we know Samsung's illegal strategy has been wildly successful.  The only products that are selling today are Apple products ... and infringing Samsung products. It is literally a two-horse race.

He added that the jurors shouldn't be confused that the case was about Google or Android as a whole.  He told the jury:

So much for the concept of a 'holy war.' ... at the end of the day, Google should not be an issue. Samsung makes, issues, and sells.  There is no claim Google makes any of these features. No expert came here and said they relied on it.

Bringing this lawsuit was Apple's last choice. Its last option.  Apple cannot simply walk away from its inventions. Apple cannot do that to the people that you saw, and other people like that who worked so hard to work with such fabulous ideas. So we are here, 37 million acts of infringement later, and we are counting on you for justice.

Apple tried to spin the decision as a win, telling Re/Code:

We are grateful to the jury and the court for their service.  Today’s ruling reinforces what courts around the world have already found: that Samsung willfully stole our ideas and copied our products. We are fighting to defend the hard work that goes into beloved products like the iPhone, which our employees devote their lives to designing and delivering for our customers.

But the case revealed plenty of embarassments for Apple, such as emails by marketing head Phil Schiller, who appeared to become outraged and distraught at the positive response to Samsung's successful "fanboy" ads

Dude you're a barista

Mr. Schiller emailed Apple's ad firm, TBWA/Media Arts Lab, demanding they counter the campaign.  TBWA responded to Mr. Schiller:

We understand that this moment is pretty close to 1997 in terms of the need for advertising to help pull Apple through this moment.

The allusion to Apple's near bankruptcy in the 1990s was met with an explosion of rage in a response from Mr. Schiller.  He considered firing TWBA, but eventually cooled off.  But he also emailed staff and the agency an email entitled "Has Apple lost its cool to Samsung" (alluding to a Wall Street Journal article of the same name) telling them:

We have a lot of work to do to turn this around.

In an internally distributed slide deck, he also bemoaned:

Customers want want we don't have [large screens, <$300 phones].  [The iPhone's] growth is slowing.

Apple slides... customers want what we don't have.

iPhone growth slowing

The slides show that internally Apple's top executives are struggling even as the company continues to coast with record profits.  They appear fearful that unlike in the era of Steve Jobs, Apple is for once behind the curve.

These embarassing disclosures were masterminded by Quinn Emanuel Urquhart & Sullivan partner John Quinn, who represented Samsung.

They represent a quandry for Apple -- even if Apple can indeed come out a bit ahead in these lawsuits, how much of its internal dirty laundry and secrets will be spilled in the process to achieve that win?

IV. Apple Guilty on One of Samsung's Pair of Infringement Claims

More painful to Apple's supporters will likely be the fact that the jury also found Apple guilty of "stealing" Samsung's patented technology, although it found infringement of only one Samsung patent and ordered Apple to pay Samsung a respectively smaller $158,400 USD.

Samsung had accused Apple of infringing on a pair of patents:
  • U.S. Patent No. 5,579,239 (the '239 patent)
  • U.S. Patent No. 6,226,449 (the '449 patent)
    • A patent on formats for recording and storing digital images and audio
    • Filed: Apr 17, 1997
    • Granted: May 1, 2001
    • Apple's cameras were accused of infringing on this patent with their compression and storage algorithms

      iPhone 5S camera
Samsung claimed that a large selection of Apple devices infringed on these patents, including the:
The jury ruled that Apple indeed was guilty of infringing on the '239 patent across its devices, but was not guilty of infringement on the '449 patent.  This is a major win for Samsung as it now has an infringement finding that it can use to ban a wide variety of Apple products potentially, should Apple refuse to approach it with a reasonable licensing offer.

Such an approach would not be possible with standards patents on cellular technologies, which Samsung had focused on in its claims against Apple in the previous case.  But Samsung appeared to have learned its lesson; it agreed in March to drop two of its asserted patents -- U.S. Patent No. 7,756,087 and U.S. Patent No. 7,551,596 -- which were deemed essential as part of the European Telecommunications Standards Institute (ETSI) in 2006 and 2010, respectively.

Like Apple its asserted patents in this case appear to not be encumbered by so-called "fair, reasonable, and non-discriminatory" (FRAND) licensing terms and hence can be used to pursue product bans.

V. Samsung Says Apple Should Get Back to Innovating

Quinn Emanuael lawyer Bruce Price delivered part of the closing remarks, commenting:

We didn't copy. Samsung didn't copy. They weren't told to copy. The engineers ... they didn't copy.  Every patent which Apple claims is infringed in this case, is infringed with the basic Google Android software.

They choose the Galaxy Nexus of infringing every one of their five patents here. And you heard [Google Android VP of engineering Hiroshi] Lockheimer say the source code was developed by engineers at Google.

We know in October 2010 that Steve Jobs realized 'we need to start a holy war on Google. 

When you read about [Samsung emails], they are praising the iPhone.  Nowhere does it say 'let's make an iPhone.'

He argued that Apple's patents didn't add value to Samsung's devices and that Apple should figure out how to be an innovator again.  He concluded:

Let's get real: nobody ever bought a phone to get these things.  Even slide to unlock. I dare say, nobody ever bought a phone because they wanted to get slide to unlock.  We don’t think we owe Apple a nickel.

I think what Apple needs to understand is the answer to that innovators dilemma — the one mentioned by Steve Jobs in that email — is not in the courtroom.  [Apple needs to instead] come out with great products [like a watch or television].  That’s what Apple should get back to doing.

The reason why Samsung's damages were much lower than Apple's was because the jury ruled that Apple's infringement was unintentional, not willful.  By contrast it had ruled that Samsung's infringement of the patents was willful.

Samsung did not comment on the case.

Apple vs. Samsung
[Image Source: Ubergizmo]

In the first round Samsung had been ordered to pay $890M USD, after it was found guilty of violating a pair of design patents, plus four technology patents.  That case dealt primarily with the Galaxy S and Galaxy S II.
Galaxy S II
The Galaxy S II

The case resulted in a ban on the original Galaxy Tab 10.1 tablet in the U.S.  The Obama administration also approved a ban on the Galaxy S 4G and several other devices in Oct. 2013.  The devices were banned under a U.S. International Trade Commission (ITC) import ban order, following Samsung's loss in the first trial.

VI. Technicals, Overview of the Trial, and Verdict

Samsung is the number one smartphone maker globally and Apple is the second place phonemaker in terms of global unit sales.  Samsung outsells Apple about 2 to 1 on a per-unit basis in the smartphone market.  In terms of mobile profit the roles are reversed; Samsung was in second place earning "only" $7.3B USD in Q1 2014, versus around $10.2B USD for Apple.  

Apple is the world's largest maker of tablet computers, as well, although its sales are shrinking and Samsung -- currently in second place -- may look to pass it within the next year in unit sales.

The jury trial which heard both companies patent infringement claims over features found in each others' smartphones, tablets, and media players began at the end of March [PDF].  It was tried in the San Jose, Calif. courtroom of the U.S. District Court for the Northern District of California.  It was presided over by Judge Lucy Koh, the same judge who presided over the first trial.

Samsung vs. Apple trial
An artist sketch of the second trial [Image Source: Reuters]

The jury consisted of eight men and women.  According to the WSJ, jurors included a an executive assistant and a former manager at International Business Machines Corp. (IBM).  The jury heard over 50 hours of testimony over the last month, plus the opening and closing statements.

It took the jurors three days of deliberation to reach their decision.  The verdict was delivered late Friday evening, at around 7:00 p.m. EST or 4:00 PST.  The decision was reached after three days of deliberation.

Here is the full jury verdict:

Apple v. Samsung Jury Verdict Form

And the summary of what the jury believed each company should pay:
damages form
Apple's lawyers asserted the jury did not order payments for infringement on one of the devices, so the jurors will have to meet on Monday to figure that out; the damages total against Samsung is thus expected to increase slightly.

The chief criticism about Samsung appears to be that it bought the patent Apple was found guilty of infringing.  Samsung's lawyer Kevin Johnson actually responded to this in their closing statements, commenting, "There's nothing wrong with purchasing patents.  Companies buy and sell patents every day."

Of course at least one of the patents Apple asserted in the first trial was purchased from FingerWorks.

A primary criticism of Apple's patent assertions has been that many of its patents appear to be clearly intended to cover desktop personal computers.  People feel Apple is overly reaching and broadening these patents by trying to apply them to modern mobile devices.

But again,  Samsung's patents are rather old and refer to PC applications as well.

Sources: RE/Code, WSJ, Apple Insider

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