When Apple CEO Tim Cook unveiled the iPhone 6 and 6 Plus in September, amid the “oohs” and “ahs,” some of us were thinking, “Wow, these stretched iPhones look a lot like Samsung’s Galaxy devices.”
So it’s ironic that the two companies just resumed a years-long war over Samsung’s supposed copying of Apple’s products in a D.C. federal court. Apple claims that in the smartphone’s early days, Samsung’s device shapes and graphical icons too closely resembled the iPhone’s. After Apple tried, but failed, to ban importation of all Samsung devices, a jury awarded Apple an astounding $929 million. Another case awarded Apple $120 million — though Apple had been seeking more than $2 billion. This summer the firms settled some 40 disputes around the world, which leaves the two big U.S. verdicts, both of which are under appeal.
The numbers are so large because a quirk of the 1887 law governing “design patents” seemingly allows for the disgorgement of the “total profit” derived from the infringing products. Yet there is controversy over the meaning of the law in a modern technological economy. And like the debate over suspect software patents, many question the very validity of some types of design patents, which cover not technical functionality but appearance, or “look and feel.”
Apple v. Samsung is important because of its place in what I call the “patent reformation.” Over the last several decades, we issued far too many patents of dubious quality — often for software code, or business practices, or appearance, as in the Apple-Samsung cases. The flood of patents fueled a litigation explosion, and the link between intellectual property and real innovation frayed. In a new report, for example, the Congressional Budget Office shows that the large increase in patent applications and awards over the last three decades has not boosted productivity growth.
Most technology and policy experts over the last few years came to agree on the need for major reform. Last session, Congress narrowly failed to enact a major intellectual-property overhaul. But in June, the Supreme Court revised software patent law, in the landmark CLS Bank v. Alice Corp. case. Since then, courts have been invalidating software patents at a faster rate than ever. “Among the invalidated patents,” notes The Wall Street Journal, “was one involving an online dieting tool, another for a computer bingo game, and yet another for using a computer to convert reward points from one company's loyalty program to another’s.” In addition to a tightening of judicial reins, a number of big technology companies, including Google, have voluntarily settled major disputes, leaving Apple-Samsung as the unresolved stand-off in what Steve Jobs called the “thermonuclear” smartphone wars.
The question is whether the remedy in these cases — the award to the plaintiff of the total profits earned by the defendant’s product — makes any sense in the modern world.
A smartphone is a complex integration of thousands of hardware and software technologies, manufacturing processes, aesthetic designs and concepts. These components may each be patented, or licensed, or not at all, by any number of firms. A smartphone, by one estimate, may contain up to 250,000 patents. Does a minor design patent comprising a tiny fraction of a product’s overall makeup drive the purchase decision? If company A’s product contains one infringing component among many thousands, even if it has no knowledge or intent to infringe, and even if the patent should never have been issued, does it make sense that company B gets all company A’s profits?
Advocates of the total-profit penalty say all this is irrelevant. Read the plain text of the 1887 law, they say. The phrase — “shall be liable to the owner to the extent of his total profit” — may appear to support their view. But why couldn’t “total profit” mean the total profits of the firm? Fortunately, a more natural reading is at hand. Given the realities of highly integrated modern technologies, the phrase “to the extent” can easily be read to limit the award in proportion to the severity of the infringement. This is more in keeping with the law of trademarks and copyrights, which (although imperfect themselves) more closely resemble design “patents” and often provide for more common sense remedies.
Absolutists reply that the total profit penalty is the only effective deterrent against counterfeiting. They say proportional penalties would be like royalties, a simple cost of doing business, and thus would not discourage counterfeiting. This, however, presumes the quality control of the issued design patents. When “designs” are everywhere, no one can hope to completely avoid infringement, and thus no one is safe from the total loss of one’s profits.
Intellectual property is a crucial foundation of innovation and economic growth. But too many frivolous patents and lawsuits render it a tool not of invention but of destructive gamesmanship. If the appeals court reins in total-profit penalties, the patent reformation will achieve another important advance.
Bret Swanson is president of Entropy Economics LLC, a strategic insight firm specializing in technology, innovation and the global economy, and president of Entropy Capital, a firm that invests in both public companies and private technology ventures. He is also a scholar at the U.S. Chamber of Commerce Foundation and a visiting fellow at the American Enterprise Institute’s technology research program.