Brian J. Love: Fuzzy math of Apple-Samsung patent fight
In late August, a San Jose jury awarded Apple Inc. $1.05 billion in damages for patent infringement, a huge win for Apple in its worldwide patent fight with smartphone manufacturers that, like Samsung, sell devices equipped with Google's Android operating system.
The award, the third-largest in the history of U.S. patent litigation, will likely cruise into first place next month when U.S. District Court Judge Lucy Koh decides what additional amount Apple should receive from Samsung based on the jury's finding that much of the infringement was "willful." But even without that enhancement, which could add another $2 billion to Samsung's tab, the jury's $1 billion-plus verdict breaks down to just under $48 for each of the roughly 22 million infringing phones sold by Samsung. To the jury, 50 bucks per phone must have sounded like a reasonable figure, and it may well to you too.
But it's not -- it's way too high -- and here's why: The average smartphone may arguably infringe as many as 250,000 patents, not to mention myriad copyrights and other design-related intellectual property. (Companies don't sift through every patent coming out of Washington before engineering and releasing a product; they create devices and battle claims as necessary.)
If you were to divide the average retail price of a smartphone -- about $400 -- by those 250,000 potentially applicable patents, you'd find that each one would account for just $0.0016 of the phone's value. And, in reality, even that's too much, once you factor in the costs of raw materials, labor, transportation and marketing, which also contribute to a phone's value.
Yet for infringing just a handful of Apple's patents, Samsung faces a minimum payment of $48 per phone, a shocking 30,000 times the average per patent value. Put another way, if the owners of all the 250,000 inventions that might be present in Samsung smartphones were awarded damages at the same level as Apple, Samsung would have to charge a ludicrous $2 million per phone just to break even.
But wait, you say, the San Jose jury no doubt included some level of punishment in its award, to "send a message." But, by law, patent damages are meant to compensate, not punish, as the jury was expressly instructed.
Or maybe Apple's patents are worth far more than average intellectual property and are therefore deserving of a higher rate? Perhaps so. But thousands of times more valuable? For that matter, why shouldn't we also entertain the possibility that Apple's patents are actually worth less than the average? It may sound blasphemous to question the value of intellectual property owned by the world's most valuable company, but consider this: When purchasing a phone are you willing to pay more for rounded corners and stylish icons or for the device's ability to transmit data to a cell tower? In the smartphone wars, Apple is primarily enforcing patents on the former, Samsung and Motorola on the latter.
Surprisingly, Apple is well aware of arguments about the real worth of each patent per phone: "In a world where a device can be made up of thousands of patented components, patent infringement damages should be proportionate to the value of the component in question rather than the entire product." That's a 2008 quote from the Coalition for Patent Fairness, an advocacy group formed by Apple and other tech companies frequently sued for patent infringement.
Indeed, Apple makes this same point in some form or fashion dozens of times a year when playing defense against patent suits filed by other, much smaller patent owners. Over the last five years, no company has been sued more times for infringement than Apple. When the shoe was on the other foot, however, it was content to check its patent law principles at the courtroom door: It actually asked for far more than it received, about $2.5 billion total in "compensatory" damages.
So, Apple, congratulations on your large award. Next time you're accused of patent infringement by a start-up, an individual inventor or a dreaded "patent troll," I'm sure you'll be flattered when the patent owner uses your own damages calculations against you. Actually, on second thought, here's betting you won't like it much at all.