Apple Scores a Landmark Victory That Will Shape Mobile Competition

Just as Tim Cook was celebrating his one-year anniversary of becoming CEO of Apple (Nasdaq: AAPL  ) , he saw quite an anniversary gift: $1.05 billion awarded to the company. In the iPhone maker's high-profile patent war with frenemy Samsung, the jury sided with Apple in a major blow to its South Korean competitor and component supplier and also importantly to the Google (Nasdaq: GOOG  ) Android army.

Apple: 6, Samsung: 0
It was a landslide victory for Apple, with jurors finding that Samsung had infringed on six out of seven of Apple's patents. The verdict was reached in about 21 hours, spanning over three days, which was faster than most observers were expecting. The patents covered both software and interface components as well as hardware designs.

Apple iPhone 3GS (left) vs. Samsung Galaxy S I9000 (right). Sources: Apple, Samsung.

The jury was tasked with sorting through a slew of accused Samsung devices and deciding whether each one violated various patents. With such a broad product lineup, this was a daunting task, but here's a summary.

Apple Patent

Infringed?

Utility patent '163: Tapping to zoom Yes, 16 out of 24 accused devices
Utility patent '381: "Rubber-band effect," bouncing back when scrolling to end of a page Yes, 21 out of 21 accused devices
Utility patent '915: "Pinch-to-zoom," distinguishing between single-touch and multitouch gestures Yes, 21 out of 24 accused devices
Design patent '087: iPhone design, rounded corners and front face Yes, 3 out of 8 accused devices
Design patent '305: Icon interface and grid layout Yes, 13 out of 13 accused devices
Design patent '677: iPhone design, edge-to-edge glass and display borders, front speaker Yes, 12 out of 13 accused devices
Design patent '889: iPad design, rectangular shape with rounded corners No, 0 out of 2 accused devices

Source: The Wall Street Journal.

The one iPad-related patent that didn't score any votes involved what Samsung had been calling Apple's "black rectangle problem," saying the iPad maker couldn't simply patent geometric shapes, because the patent amounted to little more than a rectangle with rounded corners.

Regarding Samsung's countersuit, alleging infringement on five of its patents, the jury gave Sammy a big fat goose egg. Sifting through accused Apple's devices was a bit easier for the jury, since Apple has only a handful of models.

Samsung Patent

Infringed?

Standards-essential patent '516: Power-limiting technology to reduce 3G data interference No, 0 out of 2 accused devices
Standards-essential patent '941: E-bit technology that transfers data more efficiently No, 0 out of 2 accused devices
Feature patent '711: Playing music in the background while multitasking No, 0 out of 4 accused devices
Feature patent '460: Sending emails, with or without photos, from a phone with a camera No, 0 out of 5 accused devices
Feature patent '893: Changing from photo and image display modes. No, 0 out of 4 accused devices

Source: The Wall Street Journal.

Samsung's attempt to use its standard-essential patents was unsuccessful, because Apple argued that it purchased wireless baseband chips from Intel (Nasdaq: INTC  ) , which pays a licensing fee to Samsung. That covers Intel's customers in what's called patent exhaustion, and since Samsung had already effectively been paid for the usage of its IP, it can't turn around and sue Intel's customers further down the supply chain to get paid twice.

Another important aspect was that the jury found Samsung's infringement willful, which also means that Judge Lucy Koh can potentially triple the monetary award, which theoretically could put Samsung on the hook for $3.15 billion. There was ample evidence of willful infringement -- such as the 132-page internal Samsung document all about how the Galaxy S1 would be better if only it were more like the iPhone.

In an exclusive interview with CNET, one of the jurors added, "The emails that went back and forth from Samsung execs about the Apple features that they should incorporate into their devices was pretty damning to me."

Can't complain
The monetary award was shy of the $2.5 billion that Apple had originally been shooting for, but I don't think you'll hear any complaints coming out of Cupertino. On the contrary, here's Cook memo to employees in the wake of the verdict:

Today was an important day for Apple and for innovators everywhere.

Many of you have been closely following the trial against Samsung in San Jose for the past few weeks. We chose legal action very reluctantly and only after repeatedly asking Samsung to stop copying our work. For us this lawsuit has always been about something much more important than patents or money. It's about values. We value originality and innovation and pour our lives into making the best products on earth. And we do this to delight our customers, not for competitors to flagrantly copy.

We owe a debt of gratitude to the jury who invested their time in listening to our story. We were thrilled to finally have the opportunity to tell it. The mountain of evidence presented during the trial showed that Samsung's copying went far deeper than we knew.

The jury has now spoken. We applaud them for finding Samsung's behavior willful and for sending a loud and clear message that stealing isn't right.

I am very proud of the work that each of you do.

Today, values have won and I hope the whole world listens.

Tim

Source: 9to5Mac.

Samsung's response naturally couldn't be more to the contrary: "Today's verdict should not be viewed as a win for Apple, but as a loss for the American consumer. It will lead to fewer choices, less innovation, and potentially higher prices."

The next step, beyond the inevitable appeal that Samsung will file, is a preliminary hearing on sales injunctions for infringing devices. That could potentially lead to sales bans on infringing devices. That hearing is set for Sept. 20, which incidentally is the day before Apple's rumored iPhone launch.

"Windows Phone is looking gooood right now."
The whole mobile world has been watching the trial, because it carries heavy implications for Android OEMs. Many of the software features that Apple scored victories on are also characteristics of Android itself. That means consumers can expect to see some interface changes coming to Android to design around these patents. The victory sends a battle cry against Android OEMs that are likely to be shuddering upon hearing the news.

Samsung is one of the most powerful electronic conglomerates in the world, but many in the Android camp are smaller OEMs that simply can't afford such a costly and drawn-out legal battle, much less billion-dollar damages if they're also found guilty.

This is potentially a major boon for Microsoft (Nasdaq: MSFT  ) Windows Phone if OEMs become disenchanted with Android as a result. Instead of just paying Microsoft Android-related royalties, OEMs could just pay Microsoft a Windows Phone licensing fee.

They could also feel safer knowing that Apple isn't likely to come after Windows Phone. Through the course of the trial, it was also revealed that Apple and Microsoft have a cross-licensing agreement dating to 1997 that covers a broad range of patents, although there are specific provisions against copying each other's products. Some of the dated legalese is vague, but chances are good that Apple won't be patently attacking Microsoft or its OEMs anytime soon over its mobile devices.

In the words of Microsoft marketing exec Bill Cox, "Windows Phone is looking gooood right now."

The Motley Fool has just recently launched premium ticker-specific reports that lay out everything you need to know. They all come with free updates included at no additional cost. Make sure to grab the one on Apple and the one on Microsoft today!

Fool contributor Evan Niu owns shares of Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Google, Intel, Microsoft, and Apple and creating a synthetic covered call position in Microsoft. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (31) | Recommend This Article (74)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 25, 2012, at 7:30 PM, JaanS wrote:

    Evan - Grat post. You really laid out the issue clearly.

    You might want to take a look at analysis of Tim Cook's statement here:

    http://beta.fool.com/jaans/2012/08/25/apple-wins-tim-cook-me...

  • Report this Comment On August 26, 2012, at 1:13 AM, techy46 wrote:

    So Elop was crazy for going with Windows Phone and not Android? Don't think so little robots.

  • Report this Comment On August 26, 2012, at 11:37 AM, kahunacfa wrote:

    It is NOT at all unusual for Asian Companies like Samsung and of course many, many others to "Borrow" Western Technolgy. India is very bad, China far far worse.

    Any company that exports to Asia, faces great risk of their product with different trade-names coming right-back at them usually within less than six months. Of course, it is the US or Euro-zone company's own fault. They manufacture Off-shore to save on Labor costs and avoid and bypass the powerful Trade Unions. What happens next is the company's own fault.

    Kahuna, CFA

  • Report this Comment On August 26, 2012, at 1:37 PM, ravens9111 wrote:

    I wonder how much AAPL will get from licensing fees for future Samsung revenue on their smartphones and tablets from this verdict? Would anyone be surprised if AAPL distributes a special dividend from the money received? With treble damages, it could be over $3 billion.

  • Report this Comment On August 26, 2012, at 2:14 PM, dmvcal wrote:

    Seems nearly every comment is of the non-sensical right brained variety. AAPL expended huge resources on THEIR UNIQUE vision of what a cellphone should be like: as opposed to the clunky, obscene, idiotic bricks that were offered by all the junk purveyors. The iPhone was a huge risk that AAPL undertook. I still recall all the disparaging "expertise" that was offered up by numerous detractors. The purveyors of fake Rolexes & Louis Vuitton are now inconvenienced. Boo-hoo.

  • Report this Comment On August 26, 2012, at 9:20 PM, sheldonross wrote:

    What an an utter joke the patent system is in this country. Grid layout for icons? Come on.

    And none of Samsungs patents were violated?

    So they just brought them along for the fun of it?

    It's amazing the pro-Apple bias the USA has.

    It's almost like some form of corporate jingoism, Go Apple, support the mother company!

  • Report this Comment On August 26, 2012, at 10:59 PM, Jozher wrote:

    I like Samsung products and think they have done a fantastic job with super lightweight and technically powerful phones. I owned an iPhone previously and now have a galaxy II and it's way better than an iPhone. Galaxy III is amazing too.

    Sure the grid layout is identical and Samsung was obviously were jealous of iPhones success. But Apple stole that grid layout from PALM, another UI that is composed of icons on a grid. So it's not the grid that Samsung stole, its the 'graphical style'. Meaning their icons looked too alike - which I have to say was pretty dumb on Samsungs part.

    And the bouncing menus - that's amazing that Apple was able to put a trademark on a "tween". Tween engines have been around a long time and Apple didn't invent them. The Macromedia community was more likely the originator.

    I hope Motley Fools do a full review of Samsung as a potential investment. Seems like it could be a CORE stock because of their breadth of services and products globally and expertise with electronics, and continued growth.

    If this means Samsungs stock price is going on sale, now might be a good time to buy ;)

  • Report this Comment On August 27, 2012, at 2:32 AM, lovesaves wrote:

    An American jury awards an American company $1 billion to be paid by a Korean company. No big surprise here. Lawsuits are being launched all over the globe by both Apple and Samsung. There will be trials, verdicts, appeals, injunctions and reversals. Makes me wonder why American automobile manufacturers don't sue Toyota and Honda for patent infringement? Surely Ford must feel that they've been wronged by Japanese and Korean car companies? In the end, only the lawyers win.

  • Report this Comment On August 27, 2012, at 9:58 AM, Darwood11 wrote:

    At least the jury didn't outlaw rectangular smartphones unless made by AAPL.

    In the short term, this means less choice for Americans and higher prices.

    Longer term, it means more tech litigation. Seems the service economy is in full swing.

    Long term, competitors will develop competitive products which will be allowed.

    Final comment. I do find the "grid layout" judgement to be particularly annoying. Industrial processes, and even more recent stove and microwave oven have used grid layouts with rectangular buttons for nearly 75 years. This for the simple reason that text and many images fit better.

    I can only imagine what I would today be paying for the notebook PC I am typing on, had AAPL "invented" it instead of IBM. I do remember the days when 16 MB of RAM cost about $650. Back then, a 286 laptop cost $4,000. Take into account inflation, and that same PC would cost $8,000 today. After patents? Who knows?

    So overall, was this a "win" for the consumer? I suspect not. But it will force competitors to make adjustments

    It is also a win for Foxconn who will reap the benefits. Will it translate into better working conditions in the factories? Shouldn't it? After all If Samsung can make the Galaxy in South Korea in modern plants then why can't AAPL?

    I do of course realize that this is an investment website and so the ultimate question is whether or not AAPL is a good investment. How they got where they are and how they manufacture their products, or under what conditions and with whom, what's inside, or which landfill they are discarded into, none of this is of any real consequence, is it?

  • Report this Comment On August 27, 2012, at 2:03 PM, jay2yeux wrote:

    American courts and judicial system has been notoriously biased and a joke worldwide for a long time. It's not looking better in this last ruling on apple vs samsung...

    cheers !

  • Report this Comment On August 27, 2012, at 5:33 PM, xetn wrote:

    Perhaps Samsung will sue Apple in Korea and get a $1 billion award in Korea.

    What ever happens, you can bet there will be appeals.

  • Report this Comment On August 27, 2012, at 5:48 PM, saximan1 wrote:

    can anyone show me real, legitimate proof that more competition actually means lower prices? I believe that's a hard argument to make with electronics, as their prices plummet monthly anyways. When TXU was deregulated in Texas, prices did not go down. I'm not convinced this concept works. The airline industry all copy each other and keep prices in line, except the "no frill" airlines. I look forward to your comments.

  • Report this Comment On August 27, 2012, at 6:23 PM, eldetorre wrote:

    Legitimate competition lowers prices. Oligopolies, like airlines and cable comnpanies, do not really compete. There were many competitors in the phone industry. This ridiculous outcome will result in fewer competitors it willl turn into an oligopoly.

  • Report this Comment On August 27, 2012, at 6:30 PM, erniemink wrote:

    I still do not, nor will I EVER like Apple or their crappy products and services. Many are switching to the Windows 7.5 phones with Mango, like the Nokia LUmina. So what if they have lots of money, that still doesn;t make their stuff better at all, and they are proprietary and inferior and insecure products. It cannot always be about money just because you want to get rich. I have never made over 13 dollars an hour in my life and I would love to get more money, but I do not obsess over it nor do I think Apple is better because they sell more stuff. They force their ipod/ipad crap on the world and it all sucks!

  • Report this Comment On August 27, 2012, at 6:54 PM, xetn wrote:

    saximan1:

    The Texas Railroad Commission regulates most (All) energy companies in Texas. This is NOT a free market. That is why "deregulation" did not produce any meaningful cost reduction to consumers. It did provide numerous resellers of electricity each with different prices per KWH. But they are only marginally different.

  • Report this Comment On August 27, 2012, at 7:44 PM, Zinj wrote:

    @erniecrank -

    You sound like the guys I used to work with b*tching about how software code in the 1960's was so much more secure, 'WINTEL' was a joke, etc. etc.

    Except that, in the case of those guys, they were actually right.

    Maybe you'll bump into them sometime at a 'the way things used to be' convention. Sounds like a blast.

  • Report this Comment On August 27, 2012, at 7:52 PM, TheRealRacc wrote:

    @SheldonRoss, you have hit the nail on the head. It blows my mind that the Comments section on this post lacks an influx of pro-AAPL supporters. E-mail me, cgracioppo@gmail.com, would like to discuss with you.

  • Report this Comment On August 27, 2012, at 8:15 PM, Foolme2x wrote:

    I doubt if Apple is counting their money yet, this is probably years from being the final word on this case. Juries typically get patent cases wrong, then get overturned in higher courts. Even lower level patent court decisions are frequently overturned, and for $1 billion (and all the further ramifications of this case) you can be sure this will go to the highest appeals level before it is finally truly decided.

    Anyone who has any experience at all in the patent courts (I have) knows that the four design patents are a joke (as are virtually all design patents). Any part of the award that would be based on those patents is pure fantasy.

    Tap (and click) to zoom was around long before the iPhone, so it likely that patent will eventually be found invalid. Don't know about the so-called Rubber-band effect patent. It may be valid, but who cares? I'm not certain what it means, but if my Samsung phone does it, I certainly wouldn't miss it if it didn't. Since it is obscure and sounds to be a novelty of little or no practical usefulness, not a lot of value could be ascribed to it even if it is valid and being infringed.

    That leaves what the author calls the Pinch-to-zoom utility patent. Since that is an action that has been used on notebook touchpads and on other touchscreen devices for the same purpose prior to the iPhone, it also is of questionable validity. It also is of sufficient obviousness to be of questionable validity as a patentable claim even if it hadn't already been in use.

    At some level in the appeals court system one would expect most of these patents to be sent back to the Patent Office for reconsideration of the claims in light of obvious prior art. Any remaining claims that survive that re-examination are likely to be more clearly defined (and less broad) than those on which the just concluded trial was based.

  • Report this Comment On August 27, 2012, at 10:10 PM, HeftyDude wrote:

    This case highlights the problems with the patent system. Apple and other tech companies have abused it by patenting such ridiculous things that they didn't even develop themselves, they just did enough research to realize that nobody else was smart enough to go patent it themselves. Seriously, the rectangle with rounded corners actually got patented? The rubberband effect got patented?

    What's really curious to me (and I have no idea), but how many of those allegations are really Google's inclusion into the OS? Why isn't Apple suing Google? And why isn't Samsung claiming that they paid Google a licensing fee and that Apple's real beef is with Google?

    On Google maps I double click on it to zoom in? How is that any different than a double finger tap to zoom? I bet in the patent world a double-tap is a separate patent from a double-click.

    Apple - if you had any credibility you would go sue the source of those infringements. I guess it is easier to sue a foreign company in a courthouse 10 minutes from your world headquarters. I want to see Apple and Google duke it out in court.

    What is really ironic is that I just switched from iPhone to Galaxy S3 because I got tired of the iPhone hardware lagging current tech by such long periods of time. Seriously. After just a week with the S3 I couldn't believe how long I put up with such an outdated phone.

    Apple may innovate, but they've gotten to where they do it very slowly. And then they sue...

  • Report this Comment On August 28, 2012, at 1:13 AM, somethingnew wrote:

    Apple: 6 Consumers: 0

  • Report this Comment On August 28, 2012, at 9:22 AM, stampf11 wrote:

    I am happy that Apple does not make an iCar and thus has patented the wheel.

  • Report this Comment On August 28, 2012, at 10:02 AM, Jozher wrote:

    @Darwood11 "How they got where they are and how they manufacture their products, or under what conditions and with whom, what's inside, or which landfill they are discarded into, none of this is of any real consequence, is it?"

    I think you raise a great point. Motley Fools do not address Corporate Responsibility in their analysis, but everyone would benefit tremendously if they begin to include it in the future. If a company is only financially sustainable, but not environmentally and socially sustainable, then they aren't really built for the long haul.

  • Report this Comment On August 28, 2012, at 10:31 AM, Mega wrote:

    The names of the Apple patents makes it pretty clear they are not legitimate inventions that should be eligible for patenting.

    Patenting tap to zoom and pinch to zoom? So I guess Samsung is left with telepathy as their only legal zoom option.

  • Report this Comment On August 28, 2012, at 12:46 PM, paulgcurtis wrote:

    I agree with many who have posted here. I guess the issue is to fix the US Patent office. The standards for what is patentable and what is not need to be re-addressed. The current standard clearly is not appropriate in today's environment

  • Report this Comment On August 28, 2012, at 1:16 PM, lowmaple wrote:

    In hindsight these patents look so simple that they are ridiculous. However we can look back in history and see many simple ideas that have changed our world. The value of these ideas are of incedible more worth than the most beautiful gems.

  • Report this Comment On August 31, 2012, at 3:34 AM, FrithiofLindahl wrote:

    When the jury came to the conclusion that a a sumsung device was a plagiate of Iphone, though sold 18 months before Iphone was launched the credibility of the court was crashed. When all american pc used a swedish patent for colour and that ended with the patenholder loosing all, I sopped believing in american justice.

  • Report this Comment On August 31, 2012, at 9:18 PM, BrotherBob100 wrote:

    Foolme2x, that was an excellent post. Thank you.

  • Report this Comment On September 02, 2012, at 9:15 PM, firemachine69 wrote:

    "Design patent '889: iPad design, rectangular shape with rounded corners"

    versus

    "Feature patent '711: Playing music in the background while multitasking"

    Nope, no bias for Apple there, jury-folks!

    (P.S. This stupidity of granting vague and generic patents is destroying the spirit to innovate.)

  • Report this Comment On September 02, 2012, at 10:33 PM, printing724 wrote:

    It's disappointing to see so many emotional posts in a place that is supposed to be dedicated to investment analysis. Here is my attempt to be objective...

    (1) The Apple v Samsung jury verdict will likely be raised due to the willful infringement finding. It will also be reduced due to issues with the way the jury arrived at its damage amounts. It's impossible to predict what the final number will be.

    (2) The Apple v Samsung jury verdict will be appealed, and could be overturned. I have been following the trial since it started. The verdict was not surprising. What is surprising is the number of appeal issues that Samsung has available. I suggest reading http://www.groklaw.net/ for a semi objective view of the legal issues. Groklaw is biased but has a pretty good track record of being right on the trials it covers (SCO v IBM, SCO v Novell, Oracle v Google, and now Apple v Samsung).

    (3) Having followed the Apple v The World campaign since it started, I offer the following observations...

    (a) Apple is innovative and patent conscious.

    (b) Competitors learn from their mistakes.

    (c) I can't think of a single tech related case where IP litigation altered the long term competitive fundamentals in a market segment.

    (d) Mobile communication devices are so complex that I would postulate it is impossible to build one without infringing on someone else's IP no matter how much due diligence is done before production starts.

    (d) Apple is vulnerable in that they have a limited product line and a longer product cycle than their competitors.

    Near term, I think Apple is positioned well to fight IP battles. They have first mover advantage in many courts around the world. But I don't think it is a war they can win. As an investor, I'd like to see them pursue a strategy more focused on innovation. Until I see evidence of that, I'm not buying any more AAPL stock.

    (Disclosure: I am long AAPL and GOOG)

  • Report this Comment On September 03, 2012, at 11:43 AM, emptorski wrote:

    If it is not your invention, you shouldn't be allowed to patent it at all. To paraphrase a politician, " you didn't build that".

    If you stood on the shoulders of giants and created something good out of their work - you should be admired for it, not awarded a patent for it.

    You cannot patent someone else's idea just to prevent others from copying an idea you copied yourself.

    Amen.

  • Report this Comment On September 03, 2012, at 12:06 PM, emptorski wrote:

    It is not just the patent system that is broken...it is the jury system that is the problem.

    How can a group of randomly selected people - who are more likely to be burger flippers than NASA scientists - deliver correct verdicts on violations of US Intellectual Property Rights laws?

    The members of the jury probably said Apple was right because they thought Apple products were "cool".

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