When Bullying Becomes a Good Business Strategy: Smartphone Patent Wars

Few will deny that Steve Jobs was a bully, both in his personal relationships and in his relationships with employees and co-workers in his company.  It should, then, be no surprise that he applied this methodology to his dealings with rival companies. This strategy was first evident in 2003 when Jobs threatened to sue Sun Microsystems over patent infringements. However, when Sun pointed out that Apple may have infringed on some of Sun’s patents, Jobs backed down. Had Jobs not backed down, this countersuit would have begun what is called a ‘patent war’. If you have a lot of money or at least have more money than your opposition, you may be able to break them with a long legal battle. You could win big money if the courts find in your favor or you could lose big money. Either way, the legal fees will be steep. Bullies tend to take on this strategy. They are usually large companies with plenty of resources. They figure that, even if they lose, they will hurt their opponents even more. If the companies are of similar size, or if one company is convinced they are in the right, they may suggest that the offending company pay a license fee for the use of their patents. This will often make the offending company back off and drop a countersuit it may have instigated. In the end, it’s simply a matter of money and paying a licensing fee may, in the long run, be a cheaper way out.

If a company is approximately the same size as a rival company or the rival is too large for a smaller company to risk an attack against, it is sometimes possible to attack that company indirectly by suing smaller companies that work with the main company. This is the strategy that Apple adopted in 2010 when they figured Google was too big to take on head to head. Jobs’ had earlier declared a “thermonuclear war” on Android, which is why he looked for the opportunity to bring lawsuits against Google. Instead, Apple filed lawsuits against hardware maker, HTC.

Jeffrey I. D. Lewis, President of the American Intellectual Property Law Association, noted that “there is not a single smart phone in the world that has not been accused of patent infringement”.  With over 250,000 applicable patents, it is almost impossible to make a smartphone that doesn’t infringe on somebody’s patent. For example, the curved edges on a smartphone have been patented and there are so many patents on touch screen technology that it is very hard to tell who owns what. In other words, lawsuits are simply another business tool in the world of smartphone producers. Keeping a competitor out of a potential market by tying them up in court and draining their financial resources can be an effective strategy, especially if you are a big company that dominates a market.

All big companies have been accused of bullying smaller companies at some time or other. At first it was Microsoft, then, it was Apple under Jobs. The problem comes when one bully confronts another. This happened when Apple confronted Samsung, another company that was used to getting its way. The confrontation produced what is known as The Great Smartphone War. The war proved costly for both adversaries (over a billion dollars) before delivering the winner, Apple, which was awarded almost a billion dollars by the courts. Of course, this doesn’t mean that Samsung won’t continue to challenge the ruling, only that Apple seems to have the better case. It also had the unexpected result of transferring the title of ‘King of the Bullies’ to Samsung, as Apple’s new CEO, Tim Cook, seems to have backed away from Jobs’ thermonuclear war approach.

Some say that Samsung’s strategy never included winning the lawsuit. Sam Baxter, a patent lawyer who once handled a case for Samsung, remarks that Samsung “never met a patent they didn’t think they might like to use, no matter who it belongs to.” Their strategy, when sued, is “countersue, delay, lose, delay, appeal, and then, when defeat is approaching, settle”. On the surface, this may not seem as much of a strategy, after all, in the end they lose, right? Not necessarily. While the patent ownership is being contested, Samsung can continue to use and improve upon the technology that the patent covers, all the while raking in far enough of a profit to easily pay for any losses in a lawsuit. If this is the result of battling with a giant such as Apple, you would have to pity any smaller companies whose patents Samsung may choose to ‘use’.

This brings us to the most recent lawsuit of Nvidia against Samsung. Nvidia is new to the lawsuit game. This is the first lawsuit it has ever filed in its 21-year history. Nvidia has accused Samsung of working with its partner, Qualcomm, in using Nvidia’s patented GPU technology. Unsurprisingly, Samsung countersued Nvidia and a small company it works with, Velocity Micro, which has something between 60 and 150 employees. The suit against Velocity Micro is somewhat, if not totally, spurious. Samsung just happens to need a company in Virginia to sue because Virginia is famous for its quick litigation, often referred to as the ‘rocket docket’. It is a pure strategy move that Velocity Micro was unfortunate enough to get caught up in. On the company’s blog, Velocity Micro’s founder, Randy Copeland, responded with a mixture of surprise and anger. “We have never been contacted by Samsung about these claims, and are caught off guard by the lawsuit, which seems completely out of the blue. We know nothing about the previous issues between Samsung and Nvidia, and we don’t care.” Care or not, they are likely to be its first victim. Copeland goes on to note, quite legitimately, that “they (Samsung) are all too willing to throw a private company under the proverbial bus for their own strategic reasons.” Copeland claims that they will “vigorously defend against the claims” of the lawsuit while fully realizing they may be financially damaged by doing so. It is unlikely that Samsung cares one way or another as they have bigger fish to fry, namely, Nvidia.

I have no doubt that Samsung can dust off some patent it registered back in the 1980s to use against both companies. In fact, it could probably use the same patent to attack every computer and cell phone maker on Earth. It is interesting to note, however, that as far back as 2012, Samsung was negotiating with Nvidia over licensing its intellectual property (IP). One must, thus, assume that Samsung implicitly accepted Nvidia’s patents as valid. It was only after numerous delays in paying the licensing fee that Nvidia decided it had no recourse but to sue. Interestingly, Samsung has a similar history with Microsoft. After paying licensing fees to Microsoft for many years, they suddenly decided not to pay $6.9 million in interest, which, in turn, caused Microsoft to sue them.

There may be more behind this current strategy than is initially apparent. The massive collapse of Android profits in 2014, highlighted by Samsung’s 60% drop in October, may have made them rethink their strategy. They may have considered it more profitable to engage in legal battles than to pay licensing fees. After all, they are still a huge company and can easily engage in legal battles that may force compromises among those it attacks. Velocity Micro will be collateral damage. Nvidia is a much larger company, but it is not on the same level as Samsung. They can expect to be legally outmaneuvered and financially damaged by the litigation, whether they are in the right or not. Until the court systems begin seeing such tactics for what they really are, bullying, it seems, will remain a viable business option.

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