June 5, 2013 12:59 pm

Obama faces high stakes dilemma in Apple-Samsung battle

Over the next 60 days, Barack Obama faces a dilemma in a dispute pitting two of the world’s biggest companies against each other and carrying far-reaching implications about the ownership of intellectual property in the technology sector.

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Mr Obama could use his presidential powers to overturn a ruling by the International Trade Commission, a Washington agency, that on Tuesday banned Apple from selling certain iPhones and iPads in the US.

Alternatively, he could follow the example of most of his predecessors in such cases and stand by the ITC ruling. This would favour South Korea’s Samsung, Apple’s bitter rival that was found in an earlier case to be copying the iPhone’s designs.

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“These are two electronics giants; he’s going to offend someone whichever way he goes,” says Susan Kohn Ross, a partner specialising in trade disputes and intellectual property at law firm Mitchell Silberberg & Knupp.

Mr Obama’s quandary comes as his administration has put renewed focus on patent reform. The last US president to use his veto in an ITC case was Ronald Reagan. Bans ordered by the ITC are subject to a 60-day window in which they are reviewed by the president.

If there is pressure on Mr Obama, it is greater on Apple, which until now had fared well in the US courts.

In last summer’s blockbuster patent trial in California, a jury sided with Apple on almost every count, finding Samsung guilty of infringing the iPhone’s design and technology patents, while exonerating Apple of any such violation. The $1bn verdict has since been reduced.

“Samsung has been on a bit of a losing streak. The importance of this case to Samsung cannot be understated,” says Michael Carrier, a professor at Rutgers School of Law in New Jersey which specialises in intellectual property.

In April, Google’s Motorola unit lost two big cases involving the same kind of “standards essential patents” that Samsung alleged Apple infringed. SEPs apply to a technology deemed essential to the functioning of any device of its kind and must be licensed at a “fair and reasonable” rate.

Google first lost to Apple at the ITC over a standard patent for touchscreens and then again to Microsoft, when a Seattle judge said the rate Motorola could charge to license its video and WiFi SEPs was far lower than it had hoped.

So Tuesday’s sudden reversal of last autumn’s preliminary ITC ruling, which had also cleared Apple of infringing Samsung’s patents, came as a surprise to many US observers. The ITC found that Apple’s AT&T versions of the iPhone 4 and iPad 2, along with some older devices that are no longer on sale, infringed on one Samsung patent and should be banned from import into the US.

Although the iPhones 4S and 5 are unaffected by the ruling, a ban would not lack commercial bite.

If there is, for the first time, a phone taken off the market, that is something Apple will feel and give Samsung some leverage

- Michael Carrier, professor, Rutgers School of Law

The devices caught by the import ban are the AT&T variants of the iPhone 4, 3GS and 3G, as well as the original iPad and iPad 2.

The iPhone 4, launched in 2010, is still a strong seller in the US, mobile operators say, as it can be bought for only 99 cents, along with a two-year contract – rather than $199 or more for the iPhone 5. Similarly, the older, cheaper iPad model remains popular in the education market, for instance.

The dispute also presents a risk to Apple’s reputation as the US’s foremost innovator, when it is already facing stiff criticism in Washington for its tax contributions.

Outside the US, Apple’s legal record against Samsung has been mixed. It has largely failed to obtain significant injunctions against its rival to prevent Samsung Galaxy smartphones and tablets from going on sale.

While a US jury might be expected to support the “home team” over a Korean competitor, the precedent for a president to do the same is weak.

“It would be a pretty strong move for him to make,” says Mr Carrier. “Vetoes are extremely rare in this situation; it has only been done five times” since the ITC was founded in 1916, he adds.

However, Mr Obama may have teed up such a dramatic move by announcing a package of proposed patent reforms only hours before Tuesday’s ruling.

The measures are largely aimed at “patent trolls”, which acquire intellectual property for use in litigation rather than innovation. However, they also include proposals to temper the ease with which the ITC can grant injunctions.

The trade body’s greater reliance on import bans, rather than financial penalties, as a remedy for patent infringement has made it a popular venue for the intellectual-property battles that rage in the smartphone market. None of these cases has so far resulted in a smartphone being banned from sale in the US.

“If there is, for the first time, a phone taken off the market, that is something Apple will feel and give Samsung some leverage,” says Mr Carrier.

The high stakes for both companies are expected to prompt frenzied lobbying in Washington ahead of any presidential decision, as it did in another high-profile patent dispute at the ITC between Qualcomm and Broadcom in 2007.

Qualcomm’s pleas that a ban on mobile video technology be overturned were denied by then US President George W. Bush and then again in 2008 by the US Court of Appeals at the Federal Circuit. In 2009, the two chipmakers settled their many legal disputes, with Qualcomm paying Broadcom $891m.

Experts disagree as to whether this week’s ITC ruling will push Apple and Samsung closer towards a settlement, despite the lack of a clear victor in their many cases around the world.

But if Mr Obama decides not to veto the ITC’s ruling, Apple may succeed in avoiding the worst of the ban by following Qualcomm’s example and appealing to the Federal Circuit.

There it could obtain a stay on the injunction until the case is resolved, which could take six to 12 months. That might be enough for it to release a new, cheaper iPhone that is widely reported to be in development – and render the iPhone 4 obsolete.

“This certainly is a victory for Samsung,” says Ms Kohn Ross. “But it may be shortlived.”

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