Apple Won! So What?

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This weekend, you couldn't look at a media outlet without hearing about Apple's (Nasdaq: AAPL  ) big patent win over Samsung. "Apple Gets Decisive Win in Patent Case" was the title of a Wall Street Journal piece. Fortune's online arm wondered, "Will Apple now sue Google?" Fellow Fool Evan Niu called it a "landslide victory for Apple."

Reading the headlines or myriad of stories, you may think that Apple now has some stranglehold on the intellectual property behind smartphones because it won its case against Samsung. You would be right to take some credence in the media's portrayal that the win was huge for Apple, but the details are far more complex than that, and Apple hasn't crushed the competition into oblivion with this one verdict -- far from it. In this case, Apple was protecting the design and feel of its products, not the guts or the way they work. This is an important distinction, something investors need to keep in mind before coming to broad conclusions about Apple or any of its competitors.

What really happened
This particular case was more about the design of Samsung's devices than the inner workings of the device. Apple is heavily protected with what the industry calls design patents, something other tech companies (or other companies in general) don't focus as heavily on, but that was the focus of this case. A design patent is just what it sounds like; it protects the physical design a company's product has. The patents in question are nothing more than simple images of the iPhone and screen shots of the display, essentially saying, "don't make products that look generally like this."

In this case, jurors were given Apple and Samsung devices during deliberations and expected to determine whether they were similar. The legal standard jurors were told to determine was whether the "Samsung design is substantially the same as the overall appearance of the claimed Apple design patent." Language like this does leave room for interpretation by Samsung and a jury, which is why it wasn't a slam-dunk case. The jurors found that the devices were indeed "substantially the same," something that isn't surprising when you compare the iPhone and Samsung's older generation of products side by side.

When you're talking about a physical device, especially one as ubiquitous as the iPhone, these questions are relatively simple to answer in a technical sense. There is subjectivity, of course, but the questions are simple. Does this look like that? Could you confuse the two?

That's probably one of the reasons Apple was happy to let the case go to a jury. They could understand the simple pictures in the design patents and rule whether Samsung had violated them.

Even the utility patents in question were also relatively simple, relating to only three claims (out of more than 100): a "rubber-band effect," pinch to zoom, and double tapping to zoom. This won't be the case for other patent cases, which I'll get to in a minute.

Dumb or dumber?
When reading the verdict and comments from jurors, it seems Apple's win over Samsung has more to do with Samsung's stupidity than Apple's great patent protection. A document that included a grid comparing features and how Samsung could improve them was a main exhibit during the trial. Apple's lawyers sold the document as evidence that Samsung tried to copy the iPhone in certain ways and was probably the jury's justification for finding "willful infringement."

Had Samsung made a product that was slightly more different, the damages could have been less or even nothing at all. And don't think that Samsung will take the $1.05 billion verdict lying down. This court battle has just begun.

Don't think this is the end
Over the weekend, I asked patent attorney Jason Lorfing (who does not represent Apple or Samsung) what the impact of the case would be. He said: "The patent community doesn't tend to put a lot of stock in district court rulings because the case will be appealed to a specialized appeals court, called the Federal Circuit. This court is specialized for patent cases and has a higher overturn rate than other federal cases, so the likelihood the case is overturned upon appeal is relatively high." To give you an idea of the likelihood of a successful appeal, The Wall Street Journal reported that the Federal Circuit modified a jury's verdicts (overturning or modifying damages) about 50% of the time. Outright reversal happened 19% of the time in a one-year span from 2007 to 2008, more than double the rate of other federal courts.

This weekend, fellow Fool Anders Bylund pointed out that the verdict already has holes that Samsung will try to punch through.

The real challenge lies ahead
Apple's win in a case centered on design will affect smartphone and tablet designers as well as operating-system designers, but it won't change the game entirely. Even if the case stands up to appeals, changes in the smartphone and tablet markets will be swift, and many have already taken place.

It is also likely Samsung and others are already under way in making its next round of devices that are "not substantially the same" as Apple's design patents. In fact, I would argue that most of the current models wouldn't have a problem against these design patents.

Apple has set a precedent that it won't allow its products to be copied and is willing to go to great lengths to protect them, so these differences will need to be made clear. But companies deal with this every day.

I also don't think it changes the game for Google's (Nasdaq: GOOG  ) Android operating system in the long term. The patents in question can be designed around, as most patents can, and the current operating system has addressed many of the issues. Will it help Apple and the Microsoft (Nasdaq: MSFT  ) /Nokia (NYSE: NOK  ) partnership gain some share as others have suggested? I doubt it.

Design patents have the downside of being relatively narrow in what they protect against. Yes, Samsung was found to have infringed on Apple's design patents, but a few tweaks here and a square corner there, and Samsung will be able to get around them. It's what businesses do, it's the game that's played, and it's why there are so many patents and so many lawyers on both sides of this fight. Utility patents, though, are another story entirely.

A war of mutually assured destruction
What this case doesn't decide is how the growing patent war involving Apple, Microsoft, Google, Research In Motion (Nasdaq: RIMM  ) , Nokia, HTC, and a myriad of other technology companies will play out. Most of these cases involve utility patents, which are much more complex for a jury and involve technologies that are protected more by intellectual property than designs generally are.

Each of these companies owns hundreds or thousands of utility patents relating to the operation of their devices, and many patents overlap. The difference between the ruling on a few design patents and the growing war with utility patents is a distinction investors should keep in mind before rushing to conclusions about Apple's IP position or the position of any other tech company.

In my opinion, the case is almost irrelevant. The Samsung Galaxy SIII is now Apple's biggest competition, and it doesn't appear to be "substantially the same" as the iPhone, physically or operationally. In a $220 billion smartphone market, a $1.05 billion verdict is little more than a slap on the wrist, and it does little to change anything other than presenting a few more challenges for designers making smartphones or the next-generation operating system.

Craving more information about Apple and its position in the smartphone market? We've created a premium report that details the company's competitive advantages and provides you with updates when big news happens. Find out more.

Fool contributor Travis Hoium manages an account that owns shares of Apple and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Google, Apple, and Microsoft, creating a bull call spread position in 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 (9) | Recommend This Article (14)

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 27, 2012, at 8:38 PM, 33311lbk wrote:

    Here we go again. Another smart guy betting the wrong way. No matter he serves a usefull purpose persuading people to sell or sell short, clearing the way for another spurt upwards. My friend it is all about design; that's what people are buying. Jobs was, and Apple remains the Yves St Laurent of the tech world. Thanks.

  • Report this Comment On August 27, 2012, at 9:47 PM, TMFFlushDraw wrote:

    I don't think I ever said sell or sell short, in fact I own the stock in an account I manage. I'm simply providing facts about the case and what it really means to Apple and its competitors.

    Travis Hoium

  • Report this Comment On August 28, 2012, at 2:07 AM, eltoro2827 wrote:

    Really? Get over it. No matter how you spin it, Samsung phones look like iPhones.

    Thanks for playing.

  • Report this Comment On August 28, 2012, at 12:20 PM, TMFFlushDraw wrote:


    Looking like iPhones and being "substantially the same" from a legal perspective are two different things. There are a lot of products that look similar that wouldn't meet this legal definition.

    Travis Hoium

  • Report this Comment On August 28, 2012, at 1:14 PM, actuary99 wrote:

    I'm interested as to what exactly Apple has a patent on here. They're touch-screen smart phones. It makes sense to have a thin rectangle (rectangular prism, whatever) with only a few physical buttons.

    Is it illegal for anyone but Apple to make a thin rectangular phone with only one physical button? If all Samsung had to do was round off the corners a bit more or add a button or two, then I'd have to agree this was stupid on Samsung's part.

    The double-tap-to-zoom thing? Really? They got a patent for that? That'd be like Microsoft patenting Ctrl+Alt+Delete.

    I can understand how the pinch-to-zoom thing might be patented, though.

  • Report this Comment On August 28, 2012, at 2:16 PM, TheRealRacc wrote:

    In fact, the word "sell" doesn't even appear in this article Not sure where 33311lbk's comment applies.

    Much like everything that Apple does, this case has received entirely too much attention and has probably run up AAPL a little too much in the short-term. I expect market to retract in the near future.

  • Report this Comment On August 28, 2012, at 3:16 PM, JimmyZangwow wrote:

    Oh to be young, and a lawyer for a high-profile tech company.

  • Report this Comment On August 28, 2012, at 10:31 PM, TMFFlushDraw wrote:


    I have copies if you want to read them. Shoot me an email if interested (link in the disclosure).

    The validity will come up in the Federal Circuit, so stay tuned to that. In general, you can't patent a square, but there are distinctions in design that Samsung can't copy outright.

    Travis Hoium

  • Report this Comment On August 29, 2012, at 12:22 AM, connectr2 wrote:

    If past history is any indication of future earnings, methinks that it is time to be short selling APPL. While Samsung may not benefit in the short term, it has been proved reliably that leaning on your IP portfolio for earnings is fools errand.

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