Apple v. Samsung: Don't Take Your Eyes Off the Brand and User App Ball

Should I or shouldn't I? Should I or shouldn't I? With so much commentary about last Friday's jury verdict in the Apple v Samsung trial in the U.S., I have thought long and hard about whether to share my observations about the decision. The answer ultimately being "yes", I want to focus on one major point, namely the interrelationship between patent infringement, content aggregation via smartphone apps and brand strength. 

The Apple case is distinguished by the way that its results will potentially enable Apple to maintain and even extend is preeminent position in what really matters--the strength of its brand and the superiority of its apps-based user ecology. With all of the conversation about the value of the victorious Apple patents, one should not lose sight of the fact that patent litigation seldom, if ever, has the result of reshaping the structure of any entire industry. At the most, a given or a small number of products may be affected and the defendant may have to pay a substantial amount of money in damages. However,with the pharma industry as the possible exception, I am hard-pressed to recall a patent decision that has had an industry-altering effect. 

Compare this with social media, where copyright litigation (think, e.g., Napster), thanks to network effects, has forced the losing party to alter the structure of its business. Shutting down the file-sharing function of Napster's service put Napster out of business and changed the way that file-sharing is carried out. As for the instant case, however, even if the court imposes a broad form of permanent injunction against certain Samsung products, that fact alone will not be the main reason, should Apple then see its position in the smartphone product strengthened. Rather, the case is simply another means by which Apple can enhance the brand strength and user ecology of its products. Without these results, even if Apple's coffers are enriched by one (or more) billion dollars, the patent case will not deemed a victory to Apple's long-term strategic vision. At the end of the day, it is the Apple brand and user experience, not any short-term restrictions on competitors, that will determine Apple's ultimate fate. 

Seen in this light, the discussion last week about how the jury's result may lead to an increase in innovation in the smartphone industry seems misplaced. This is mere cant that misses the essence of what is going on in the smartphone industry. The Teece truism that was so powerfully expressed nearly 30 years ago in his article, "Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy", Research Policy (1986), namely that innovation per se is not what usually ensures commercial success, but rather complementary assets such as marketing and distribution skills, remains true today. Indeed, one might say that if Apple succeeds in severely diminishing the role of Android phones, it will have turned Teece partly on this head: enough an IP position for Apple to leverage the complementary assets that really matter.

 

If wants a technically competent competitor to the Apple smartphone that does not seem to be in the line of Apple's litigation fire, then one need go no further than the new Nokia-Microsoft device. But Nokia has little brand strength in the smartphone space, there are far too few apps, the chicken and egg problem of how to encourage more developers to develop new apps remains stalled, and whether or not Microsoft is the operating system for this smartphone is of little value in convincing a consumer to purchase this product. From the Teece perspective, the Apple brand and the iPhone user experience/ecology/Apps store reign supreme and will only be strengthened. No, innovation is not the issue but whether the decision will enable Apple to leverage its brand and ecosystem in a way that will make it that much more difficult for competitors to flourish.

If this view is correct, Nokia/Microsoft will have to hope that they can attract a critical mass of competing apps, that the Microsoft operating system replaces the Android as the credible alternative to the iPhone and that Nokia and Microsoft can then leverage these factors to build a competing brand presence of the industry. As we watch these developments play out, the ultimate impact of last week's decision regarding patent infringement may well be of less significance.

CREATe to examine IP business models

The Arts & Humanities Research Council (AHRC) in the UK has announced a new initiative which promises to frame IP business models within an academic framework.  According to the AHRC's website:

"​A pioneering initiative to support the growth of the UK’s vital creative industries and arts sector was announced today. The Centre for Copyright and New Business Models in the Creative Economy, run by a consortium of UK universities led by the University of Glasgow, will examine a range of issues relating to new digital technologies with a view to meeting some of the central challenges facing the UK’s creative economy.

The UK has probably the largest creative sector in the world relative to GDP, accounting for over 6% of the overall economy and contributing around £60Bn per annum. However, building a business, cultural and regulatory infrastructure that can spark innovation, capitalise on new revenue streams and harness the potential of new and emerging technologies are challenges that face the sector as it aims to maintain the UK’s global leadership in this field.

The new Centre – called CREATe (Creativity, Regulation, Enterprise and Technology) - will address these and other challenges by exploring a range of issues such as those associated with digitisation, new intellectual property issues and how best to support relationships between the arts and technology.

CREATe is funded by the Arts and Humanities Research Council (AHRC), Engineering and Physical Sciences Research Council (EPSRC) and Economic and Social Research Council (ESRC).

Professor Ronan Deazley of the School of Law at the University of Glasgow is leading the consortium   ...

Led by the University of Glasgow, CREATe comprises the University of Edinburgh, University of Strathclyde, University of St Andrews, University of Nottingham’s digital economy hub (Horizon), the University of East Anglia (UEA) and Goldsmiths, University of London.

Although not providing funding, NESTA, the Intellectual Property Office and the Technology Strategy Board will also be involved in the CREATe centre".

IP Finance wishes this venture every success and looks forward to reporting on its progress.

Authors' earnings buoyed by movie income

After JK Rowling comes EL
James: does the use of double
initials increase the chance
of being a best-seller?

Earlier this month, the BBC website published some interesting figures concerning the earnings of authors. According to that site:

"Thriller writer James Patterson was the highest-earning author of the past year, according to Forbes magazine. The 65-year-old American earned an estimated $94m (£60.3m) from the 14 new titles he published in 2011 - 2012. The amount dwarfs that of the second author on the list, Stephen King, who earned $39m (£25m) thanks to a new instalment of his Dark Tower series. 

Forbes said its list was based on figures from Nielsen BookScan, authors, agents and publishers.   

Number three was the highest-earning female writer, Janet Evanovich - author of the Stephanie Plan suspense series - with $33m (£21.1m). John Grisham was next at four with $26m (£16.7m). His baseball novel Calico Joe helped prove he could write a bestseller away from his usual legal thrillers. 

Children's author Jeff Kinney was fifth after Cabin Fever, the latest book in his Wimpy Kid series, was the top-selling book of 2011 with 3.3 million copies sold. However part of his $25m (£16m) earnings come from film royalties - the movie version of fourth book Dog Days made $15m (£9.6m) in its opening weekend at the US box office. 

Other authors to feature in the top 15 include Danielle Steel at eight and Hunger Games author Suzanne Collins at nine. With film royalties from the Hollywood blockbuster released earlier this year and two more films still to come, Collins is expected to rise up the list next year. 

Harry Potter author JK Rowling was at 11 on the list with a large portion of her earnings coming from the $8m (£5.1m) advance for her first adult novel, The Casual Vacancy, due for release next month. Twilight writer Stephenie Meyer also features on the list at 13, still riding on the success of the film franchise. 

Forbes said it expected Fifty Shades of Grey author EL James to feature highly on next year's list. The erotic novel sold 20 million copies in the first four months of release and at its peak, the trilogy earned James more than $1m a week. She had also picked up an estimated $5m (£3.3m) for the film rights".

So what, if anything, can we learn from these figures? The death of copyright as we know it and the increasing predilection for legitimate online delivery as well as file-sharing have not resulted in top authors taking home plenty of cash, though film income, marketing and distribution techniques and the "branding" of top authors as bankable commodities in their own right provide a degree of income buoyancy to which most authors of lesser celebrity may never be likely to aspire.

Financial importance of a prior art search

IP Finance is pleased to host this little piece by Daniel Porter, a case researcher and writer for Patexia.com ("a social network for researcher, business, and innovation"). He writes as follows:

"The United States patent system is overburdened, and the results are becoming increasingly detrimental. Prior art, intended as the scepter of inventorship justice, has become a double-edged sword that cuts deep. Effectively searching for relevant prior art is among the most fundamental problems in intellectual property law today.

The basic rule is simple enough: an individual is not entitled to a patent if a record of that individual’s invention is publicly available prior to the patent application date. Ostensibly, this first-to-invent system offers protection to inventors who have publicly disclosed their invention but have not yet patented it: if the original inventor doesn’t patent the invention, nobody can. In practice, the waters are slightly more murky. Problems arise because the pool of potential prior art is nearly limitless. The system gives examiners the impossible task of wading through all previously published documents (everywhere) for prior art which could lead to patent invalidation. Invariably, already-pressed examiners miss relevant prior art. The result: swathes of patents which should not have been issued in the first place. The costs: excessive, if difficult to pin down.

The prior art is always a matter of impression, and one man's
murky pool is another man's priceless innovation ...
or Monet-making idea!

The best indicators of cost may be the results of an extensive annual survey published by the American Intellectual Property Law Association. In 2011, they found patent infringement litigation cost an average of $350,000 pre-trial, and $600,000 or more through discovery. These cases most often hinge on an effective prior art search.

When faced with an infringement lawsuit, the easiest and most common defense is to invalidate the patent claimed by the plaintiff. If a patent should not have been issued in the first place because unknown prior art existed but was not discovered, all a defendant need do is find this previously undiscovered prior art. Voilà! Patent; invalidated. Lavish legal expenses: wasted.

An increasingly litigious technology environment means that this problem will likely persist, but could have been avoided if a proper search was conducted before the patent was issued. A more comprehensive initial search by either the patent examiner or the filing inventor would ensure that the USPTO issues fewer, stronger patents. In turn this would mean that inventors, business, and courts alike could all focus on protecting legitimate intellectual property rights.

It would be good to test the hypothesis that there is any correlation between (i) the quality of pre-issue search,  (ii) the quality of granted patents and (iii) the incidence of post-grant invalidity litigation.  This blogger's contention is that the degree to which these three items are interrelated may be a good deal smaller than many people believe. This is because the validity of patents is not contested because they are inherently of poor quality but -- regardless of their quality -- because they are coming between the party contesting them and the aim which that party wishes to achieve, be it a licence on favourable terms, a clear path to bringing out a new product or indeed anything else. If that is so, then spending more cash up-front on patent search may not just one of a number of patent-seeking strategies rather than something which is always to be taken as best practice.

As usual, readers' views are welcomed.

So Which Is It for a Start-Up: A Patent or a Proto-Type?

The debate goes on: how important are patents for start-ups? At a conference in which I particpated last month in Singapore, the sense that I got from speakers ranging from Silicon Valley to Europe and Asia was that patents are less rather than more important for start-ups. Against that back-drop, I was intrigued by an article tht recently appeared in Bloomberg Business Week--"Startups' New Creed: Patent First, Prototype", by Ashlee Vance here. The thrust of the article is that, where once a start-up would give priority to first coming up with a prototype, today "they must first protect [there prototypes] with bulletproof intellectual property portfolios that can take years to build." According to the article, "this is the fallout" of the recent high-stakes patent disputes between such giants as Apple, Samsung and Google.

The article focuses on the operations of the Schox Patent Group, a patent boutique located in San Francisco. A look at the firm's website includes a brief video in which the founder, Jeffrey Schox, states that his office deals only with patent filings for start-ups ("no trademarks, no copyright, no licensing, no litigation"). From this starting point, the article recites the basic features of Schox's business model:

1. The firm charges a flat rate per patent application--$15,000, rather than charging on an hourly basis, "making him more like a partner to his client." According to the article, by contrast, the typical law firm charges for a patent are in the range of $40,000.  

2. His client base derives in material part from the contacts that he makes in teaching two classes at Stanford, attending angel investing clubs and devising ways "to identify promising companies." Indeed, he will sometimes take an equity interest in the companies that he represents.  

3. His office makes liberal recruiting use of students from the Institute of Design at Stanford because, as Schox observes, this provides a non-engineering perspective that is conducive to a more creative, "multidisplinary approach."  

4. Schox's approach to dealing with his start-up clients is to impress upon them that patents are a weapon. As such, the emphasis is on trying to conceptualize how competitors might design around a patent, leading to a consideration of coming up with "unusual extensions of the technology." (In the video promo, Schox states that a start-up to does not obtain a patent for enforcement purposes, but rather to make the company more attractive for investors.) In any event, in his view, "the going rate for a hot patent is about $1 million."

So which is it--are patents of secondary importance to start-ups, or are they now the primary currency for seeking to leverage one's hot new idea? Is the start-up paradigm more like Steve Jobs and Steve Wozniak, tinkering in their Palo Alto garage to develop a prototype for the nascent Apple computer, or like Craig Ciesla and his company, Tactus, as featured in the article, where his techology regarding a feature of flat screens yielded 20 patent applications before any outside funding sought?

A couple of thoughts in this regard:

1. Schox's model might well be idiosyncratic to the innovation ecology of Silicon Valley. In particular, there is an unparalled aggregation of creative human capital and technological prowess, against the backdrop of the billable hourly rate system for law firms that allows for different pricing models for patent preparation and prosecution. Or maybe not?  

2. Schox's fields of focus lend themselves more to seeking to protect features via patentable inventions rather a workable prototype. Still, we wonder about the role that patents play in the valuation of a typical start-up. Anecdotally, I listen weekly to a podcast, emanating from Stanford, focusing on innovation. I have been struck, time after time, how seldom patents are brought up in the presentations and discussion (especially as compared with quality of staff).  

3. Many commentators are heard to lament that there is a relative dearth of substantial innovation at the moment. If so, perhaps there is a correlation between the focus in start-ups on patent protection rather than coming up with a prototype at the outset, and this produces the alleged lack of substantial innovation. If so, an emphais on patent protection uber alles might be either a coincident indicator,or even a cause of the decline, in innovation.

European business still investing happily in R&D -- but not in pharma

According to the European Commission's Joint Research Centre (JRC, "the European Commission's in-House Science Service"), leading EU businesses expect their investments in research and development to rise by an average of 4% annually during the period 2012 to 2014. This information comes from the 2012 EU Survey on R&D Investment Business Trends, which was published here today (thanks, Chris Torrero, for the link).

The results of this survey, which was carried out by the JRC's Institute for Prospective Technological Studies(IPTS) together with the European Commission's Directorate-General for Research and Innovation, are based on information from 187 of the 1,000 EU-based companies that were studied when the 2011 EU Industrial R&D Investment Scoreboard was prepared. According to the report:

"It is in the software and computer services sector that the expectations of growth in R&D investments over 2012-2014 are the highest, with an average of 11% per year. Like for most sectors, this is higher than the annual R&D investment growth rates observed on average over the 2007-2010 period. However, in the pharmaceuticals and biotechnology sector, the expectations for 2012-2014, at 3% per annum, are lower than the average rate observed over 2007-2010".

This blogger is hardly surprised at the unpopularity of pharma R&D investment. If he had any cash to invest, he'd plough it into the generic pharma sector, where risks are low, profitability high and it may be seriously questioned whether patents continue to offer any genuine incentive to invest. In contrast, Linux and open-source hardly qualify as a generic threat to software patents and copyright, though, which is presumably why investment is heading into the software sector and computer services sector.

HTC Share Price Collapse

It's not been a good few months for Tawanese handset manufacturer HTC. It's seen its share price collapse by over 45% in the past three months and around 70% in the past year and has now reached a four year low . So what's up? Well part of it is certainly due to the drop in sales, but the patent disputes with Apple and Nokia cannot be very helpful. HTC lost to Apple over in the US International Trade Commission last year when the Commission ruled that HTC were infringing Apple's patent on links which enabled emails to be sent or information to be retrieved. The counter attack using "borrowed" patents from Google seems to have failed with the ITC ruling that the patents may not be used. Even the good news from the UK relating to rejection of Apple's suit based on four patents, including the slide-to-unlock patent, has not helped the share price. 

Added to the Apple woes, the company has also been sued by erstwhile Finnish company, Nokia as well as by Kodak. The impact of these suits on the company's business model must be considerable. Reports suggest that HTC is paying Microsoft for the use of its patents USD5 per handset, and Microsoft wants to increase that sum. However, that is only one part of the equation. Other companies also hold patents related to mobile telecommunications standards for which HTC are either paying a royalty or elect to be doing so. That must be cutting into the profit margins on the HTC phones.

The question is: would HTC have been better sticking to their previous policy of making white label products for network operators, such as T-Mobile. It's unlikely that the other handset manufacturers would sue a network operator - and the network operator may well anyway have already obtained access to many of the relevant patent rights due to their own licences.

Technorati Tags: Patent Infringement, International Trade Commission, Smartphone, Patent

IP, exchange control and 'capital' in South Africa

Note: this post has also been posted on the Afro-IP weblog but, because of its subject-matter and given that very few IP Finance readers also follow Afro-IP, it seemed appropriate to repost it here.

Back in February 2010 a South African High Court ruled that a trade mark assignment entered into without prior exchange control approval from the South African Treasury did not contravene the South African Exchange Control Regulations. The South African Reserve Bank had previously required treasury approval from any South African entity wishing to transfer intellectual property offshore.Without approval the transfer of rights was null and void.

In Oilwell (Pty) Ltd v Protech International Limited (noted by Afro-IP here) the Supreme Court of Appeal (SCA) confirmed that foreign exchange approval was no longer required for an assignment of trade marks. The court based its decision on an interpretation of the term 'capital' in the Exchange Control Regulations, which provide that any transaction whereby capital is exported from the republic requires exchange control approval. The SCA held that a trade mark does not constitute 'capital' as envisaged in Regulation 10(1)(c) and that, accordingly, foreign exchange approval was not required to transfer trade marks offshore.

In response to this, the exchange control authorities have now amended the regulations specifically to state that 'capital' does include an IP right, whether registered or not, and that “exported from the republic” includes the transfer of an IP right to a person who is not resident in the Republic of South Africa. This means that it is again necessary for exchange control approval to be obtained when any intellectual property is assigned to an offshore entity.

Source: "Exchange Control Regulations amended in response to Oilwell decision" by Megan Reimers (Spoor & Fisher, Pretoria), Trademark Law Review, 30 July 2012

A bridge too far?

In Quick Draw LP v Global Live Events LLP and others [2012] EWHC 2105 (Ch), 30 July 2012, Sarah Asplin QC, sitting as a Deputy High Court Judge in the Chancery Division, England and Wales, had to  consider, in the context of a bridging finance agreement, whether there had been a transfer of intellectual property rights.

Quick Draw provided bridging finance by way of a loan agreement and debenture to the first defendant, Global, for the 2011 Michael Jackson Forever tribute concert. The second and third defendants, Hunt and Henry, were the concert organisers. The fourth defendant, Iambic was a company which Global set up and then commissioned to produce film and sound recordings for the concert. Once it transpired that Global was unable to repay the loan, Quick Draw brought claims relating to the financing arrangement and also claimed to have acquired intellectual property rights from Global in relation to the concert way of security for the loan.

In a 226-paragraph judgment Sarah Asplin QC upheld Quick Draw's claim and rejected Global's assertions that the IP rights were not covered by the commissioning agreement or the debenture but were owned by Iambic. The debenture should be construed as though it were a mortgage and not a mere charge; as regards copyright, the commissioning agreement operated as an assignment subject to reassignment on satisfaction of the security, covering both future copyright and debts. The judge went further, holding that there was no licence in favour of Iambic to counter copyright infringement relating to the production of an edited programme which was later made by or for Iambic.

Since Quick Draw enjoyed the IP rights, it followed that Henry had infringed copyright by seeking to authorise others to commit infringing acts and that Iambic had infringed performers' rights by making copies of the concert recordings for the edited programme and by issuing copies of the recordings to the public. There was common design between Hunt, Henry and Iambic to infringe Quick Draw's copyright and performers' rights.

In an ideal world, disputes of this nature would never arise because the terms of the bridging finance would be so crystal clear, so explicit, that the question of ownership or control of copyright and performers' rights would never come close to being in dispute.