Inside Business

August 7, 2013 6:19 pm

Obama veto leaves patents under a cloud

Owners of standard-essential patents lose a vital bargaining chip

President Barack Obama’s intervention in the legal wrangling between Apple and Samsung may just have tipped the balance of advantage in the wider smartphone patent wars. It is also likely to affect the emergence of new technology markets in the future – though whether it will help or hinder them is not yet clear.

Those have been the tech industry’s first reactions to last weekend’s rare presidential action in favour of Apple. An exclusion order issued by the US International Trade Commission looked set to bar imports from Asia of some older models of the iPhone and iPad, until Mr Obama stepped in and overruled it.

The case involved Samsung intellectual property that all smartphones rely on to communicate over wireless networks – making it, in the jargon of the industry, a standard-essential patent. Companies with patents such as this have a special responsibility and shouldn’t use them to block rivals, the Obama administration said. The message: owners of such patents just lost a vital bargaining chip.

Three things are likely to flow from this.

The first is that the value of patent portfolios with a heavy element of standard-essential IP in them will fall. The losers are companies like Qualcomm and, ironically, Google; Motorola, which it acquired to get into the patent game, also owns technology foundational to the wireless industry. Licensees may seek to scrap old agreements if they think they could now negotiate lower licensing fees.

The Obama administration’s defanging of the ITC was the latest in a series of actions that have robbed patent holders of ways to force other companies to pay up. Antitrust regulators on both sides of the Atlantic have been leaning heavily on them to be freer in their licensing.

One reason the ITC has become such an important venue for patent cases is that US district courts have been less willing to issue injunctions blocking sales of infringing products. So it is ironic that Apple is about to find itself arguing publicly for more stringent sales bans: on Friday, a US appeals court will hear its argument for an injunction in a separate case against Samsung, in which the South Korean company has already been found to have infringed Apple’s IP.

The second result of the Obama veto is that the smartphone patent wars are likely to drag on longer than they otherwise would have – though there is also less danger that they will turn out to be disruptive for consumers.

A ban on some Apple sales in the US had been seen as a strong incentive to get the rival smartphone makers back into their on-again, off-again settlement negotiations. With the legal risk diminished, so too has the pressure for a deal – though Samsung may feel the heat should another ITC case due to conclude Friday be decided in Apple’s favour.

In future, any company negotiating a licence on standard-essential technology has every incentive to drag out the process through the courts, said one person familiar with the Samsung case. Even if they were to lose, the worst result would be much the same licensing deal they would have struck at the outset, plus legal fees.

For consumers, meanwhile, there is less risk of sales bans that result in gadgets being taken off the shelves, or of big new licensing fees that add to the cost of handsets. The Obama administration gave only the most broad-brush explanation for exactly why it overturned the ITC ruling, but if these are the short-term benefits it had in mind, it seems likely to be successful.

The third outcome is harder to predict. It relates to the longer-term changes in behaviour in the tech industry that will result from resetting the rules around patent enforcement – in particular, what impact it will have on the emergence of new technology markets.

If the balance has tipped away from companies that hold standard-essential patents, some lawyers argue that they will be less inclined to submit their IP for inclusion in standards. Keeping their “crown jewel” technologies to themselves would give them much more bargaining power with rivals. But it might also lead to more fragmentation and a lack of interoperability in new technology markets, slowing wider adoption.

The counter-argument, backed strongly by companies like Apple and Microsoft, is that breaking the power of the standard-essential patent holders lowers the barriers to entry to important new technology markets and allows disruptive outsiders to break in. Which of these outcomes will result from adjusting the balance of power in patent enforcement is likely to take years to become clear.

Richard Waters is the Financial Times’ West Coast managing editor

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