Apple vs Samsung — Patents, Monopolies & Innovation

The verdict unanimously delivered by the 9-head jury in San Jose in the Apple vs Samsung case raises several questions — apart from the obvious one whether the question posed by Judge Koh to Apple’s lawyer if he smoked crack should really have been addressed to the jury. In this context, granting Apple compensation for patent infringement for Samsung’s Galaxy Tab 10.1 LTE and Intercept, two devices that the jury itself found not to be infringing Apple patents, may not build up that kind of confidence that would be essential for a verdict made by a jury that is most likely completely clueless about the complex lawsuit.

If anything, the Apple vs Samsung lawsuit has brought to our attention that the bulk of so-called patents in the mobile sector is based on prior art. The reason for this is twofold:

First, it hints at overburdened (national) patent offices that lack the capacity (and maybe competency) to differentiate between genuinely new ideas and ideas that look new but in fact aren’t. Samsung proved that there had been early tablet prototypes outside the US without making it into commercial production. Hewlett-Packard, however, marketed its tablet TC1000 as early as 2002–8 years before Apple’s iPad. And of course there is Stanley Kubrick’s film 2001: A Space Odyssey from 1968 (!) which featured a tablet-like device. Also, Apple’s Pinch-to-Zoom patent and the bounce-back patent have been found to be based on prior art. Without knowing whether the idea is genuinely new, a coincidental simultaneous finding or just a copy of something someone else didn’t bother to patent, patents offices are simply unable to grant patents on meaningful grounds. As a direct consequence of understaffed and overburdened patent offices, too many patents are being issued.

Second, Federal Appeals Court Judge Richard Posner points out that the patent system itself is flawed as patent law does not take into account specificities of industries. Posner argues that some industries like the pharmaceutical sector do need patent protections for three reasons. First, the costs of inventing in the pharmaceutical industry are very high. Second, the patent term (usually 20 years) begins when the invention is made but before drug testing. As this phase often takes up to 10 years, the effective protection from competition is halved. Third, while the cost of inventing a drug is very high, the cost of producing it is very low. Therefore, the inventor of a drug would not be able to recover its expenditures without being granted a monopoly over the sale of the drug.

The mobile sector, however, differs greatly from the pharmaceutical sector, as Posner remarks. Innovations in the mobile and other fast-paced sectors are cheap and firms employ teams of engineers that will eventually all make similar improvements in the process of product improvement. This raises the question whether it is in the interest of consumers that a company that makes a new improvement one day or one week before competitors should be given a patent and thus be granted a monopoly on it. As a matter of fact, most of the features and ideas that are discussed in courtrooms all over the world are function-driven. As such they don’t allow many different ways to approach them. The slide-to-unlock gesture, for example, as Matthew Yglesias points out, is an excellent idea. But it shouldn’t be a patent. Unlocking phones in the Nokia era was pressing a combination of keys. That was when mobile phones actually still had keys, of course. With a keyless smartphone, how else would you unlock the device? Regardless of the fact that this again had been based on prior art when Apple was granted the patent on it, the crucial point is that even if it had been Apple’s idea, it is contrary to the public interest to grant patents on such things. Erik Kain on Forbes links the unlock feature to the essentiality of a doorknob. Without any question, doors without doorknobs would make our lives difficult if some company had patented its use. The doorknob, however, has not been patented — for good reasons. And neither should have slide-to-unlock and many other things, not the least of which is a rectangular shape with rounded edges.

Proponents of strict intellectual property rights usually argue that patents ensure that companies spend money on research and development, which in turn boosts the economy. This point is highly questionable especially for a sector in which the firm that markets an innovation first has its name associated with it even without a patent. Since we are not talking about stealing in the narrow sense but either developing independently but simultaneously or imitating in the worst case, expenditures on research and development are not likely to decrease in a quick environment like the mobile sector without patents. And innovation is not only based on property rights as history shows. Switzerland, for example, didn’t have any until 1907 and neither did the Netherlands until 1912. Both countries, however, were highly innovative, being at the forefront of industrialisation in continental Europe. Recent research conducted by Lea Sheaver (PDF) confirms that the “innovation hypothesis”, holding that stronger intellectual property rights increase innovation, is lacking empirical evidence. On the contrary, her findings suggest that patents may be detrimental to innovation and growth.

Tellingly, most innovative firms in Silicon Valley are opposing proposals from the drug and entertainment industry aiming at strengthening intellectual property rights. Apple on the other hand has not missed any chance in the past 20 years to sue on intellectual property grounds. It tried to prevent HP and Microsoft from using a graphical desktop interface back in 1994 and deservedly lost when the court ruled that “Apple cannot get patent-like protection for the idea of a graphical user interface, or the idea of a desktop metaphor”. Now Apple sued Samsung and won. The reason why Apple is upholding a patent system that may be well-suited for other sectors but not the innovative mobile sector is probably the most obvious: Apple is not an innovative company that excels in innovation and own ideas which it casts into new products. Apple’s products are themselves a rip-off based on a wide array of others’ ideas. What Apple excels in is marketing and promoting its products, suggesting that they are based on Apple’s genius alone — which usually they aren’t.

The bottom line is that firms like Apple try to extract rents by exploiting their monopoly positions. By aggressively suing competitors, Apple attempts to profit as long as possible from innovations, which may or may not be theirs, that gave them a dominant market share early on. Profit margins of 58%, which Apple generates on iPhone sales, are only sustainable if competitors can be deterred from entering the market or, in the case of Samsung, exclude them. The ones who suffer are the consumers. Unfortunately, Apple’s way seems to be the way many companies chose to go. In our system being innovative and producing products that add value for consumers seems to be significantly more difficult than erecting and exploiting monopoly powers.


Originally published at finhistomics.com on August 30, 2012.

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