Apple Vs Samsung Patent Lawsuit 2011-2012: Analysis of the Effectiveness of Patent Protection Enforcement

APPLE VS SAMSUNG PATENT LAWSUIT 2011-2012: ANALYSIS OF THE EFFECTIVENESS OF PATENT PROTECTION ENFORCEMENT

BAYU DHARMAWAN WICAKSONO 016200900005

A thesis presented to the Faculty of Business and International Relations President University In partial fulfillment of the requirements for Bachelor Degree in International Relations

January 2013 PANEL OF EXAMINERS APPROVAL SHEETS

The Panel of Examiners declares that the thesis entitled “Apple VS Samsung Patent Lawsuit 2011-2012: Analysis of the Effectiveness of Patent Protection Enforcement” that was submitted by Bayu Dharmawan Wicaksono majoring in International Relations from the Faculty of Business and International Relations was assessed and approved to have passed the Thesis Defense on January 22nd 2013.

Prof. Anak Agung Banyu Perwita, Ph.D Chair of Panel of Examiner

Teuku Rezasyah, Ph.D Examiner

Bantarto Bandoro, MA. Adviser i

THESIS ADVISER RECOMMENDATION LETTER

This thesis entitled “Apple VS Samsung Patent Lawsuit 2011-2012: Analysis of the Effectiveness of Patent Protection Enforcement” prepared and submitted by Bayu Dharmawan Wicaksono in partial fulfillment of the requirements for the degree of Bachelor in the Faculty of Business and International Relations has been reviewed and found to have satisfied the requirements for a thesis fit to be examined. I therefore recommend this thesis for Oral Defense.

Cikarang, Indonesia, 6 January 2013

Bantarto Bandoro, MA.

DECLARATION OF ORIGINALITY

I declare that this thesis, entitled “Apple VS Samsung Patent Lawsuit 2011-2012: Analysis of the Effectiveness of Patent Protection Enforcement” is, to the best of my knowledge and belief, an original piece of work that has not been submitted, either in whole or in part, to another university to obtain a degree.

Cikarang, Indonesia, 6 January 2013

Bayu Dharmawan Wicaksono

iii

PREFACE

The development of technology in smart phone industry grows so fast and rapid. It is coherent with people demand in order to accommodate their technology- related daily need. It motivates smart phone producers to compete tightly providing various sophisticated devices with different range of price. Among them, some well- known producers are listed, such as HTC, Nokia, Motorola, Apple, and Samsung. In order to guarantee their sacrifices, both effort and cash, to invent new technologies, they utilize patent to protect it. Unfortunately, patent enforcement in smart phone development has been colored with many patent dispute involving two or more smart phone producers. One of the famous patent disputes was between Apple and Samsung in 2011-2012. It took place in several countries around the world, but the enormous moment occurred in United States of America. The popularity of Apple and Samsung patent dispute has led the researcher to conduct comprehensive analysis to explore some points, which are most related to this case. Those points are patent monopoly, the future of innovation and US consumers, and comparison between invent-around activity and licensing agreement in respond to patent protection. It is aimed to figure whether patent protection had been effectively enforced. This research is expected to be worthwhile for the development of International Relations study, especially in trade and economy field, and encourage further research related to the topic discussed. Nevertheless, the researcher is open for any critics, suggestions, and advices.

Bekasi, 4 January 2013

Bayu Dharmawan Wicaksono iv

ACKNOWLEDGEMENT

Assalamu’alaikum Wr. Wb,

First of all, a great thank for Allah SWT and His bestowal for the researcher from the beginning, during, until the end of the thesis writing process. The author also recognize some close persons who have contributed to the thesis writing process, even though this research still needs improvement in the future. Hence, a wonderful gratitude is delivered to those people respectively, who are:

1. Bantarto Bandoro, MA. As a mentor/adviser/supervisor of thesis writing. Thank you for plenty of your advices, knowledge transfer, and patience guiding the researcher during the process.

2. Prof. Anak Agung Banyu Perwita, Ph.D as the Head of Study Program of International Relations.

3. Teuku Rezasyah, Ph.D as an examiner in my thesis defense and also lecturer.

4. IR lecturers, Mr. Sigit Andi Rahman for the advice and Mr. Alm. Sulaiman Abdulmanan for his kindness to lend me some books related to World Trade Organization, which is useful for the researcher’s understanding on Intellectual Property Rights in trade context.

5. The researcher’s parents and sister, Mr. Dwi Prasetyo Widhiatmoko and Mrs. Mulyani, Ms. Hayuning Widyandhani for endless and priceless support, care, and huge love that make the researcher to keep stand strong facing any problems and challenges. A great thank also delivered to the researcher’s grandfather, Mr. Alm. Anas Soebagyo, for his priceless support for my development. May you have a best place in His side.

6. Yunita Panggabean, secretary of International Relations department, for her contribution bridging the communication between the faculty to the researcher.

7. Thank also be given to Almira Citra Amelia, the researcher best friend since Senior High School, for her infinite support, fun, and care for the last many years; someone that will never be expected to leave forever.

8. IR 2009 colleagues, especially Ervina Elya Vitriyana, Riady Ibnu Khaldun, Putri Dwinatalis Baeha, and Yashinta Mayestika, for sharing information and knowledge transfer during thesis writing.

9. The researcher’s close friends in campus, Aprilia Winda Kusuma, Dendia Nurfajri, and Fanny Trijayanti Dhaspito for sharing the laugh, sweat, pain, love, and fun during the last 3 years.

ABSTRACT

Name : Bayu Dharmawan Wicaksono

Study Program : International Relations

Title :

“Apple VS Samsung Patent Lawsuit 2011-2012: Analysis of the Effectiveness of Patent Protection Enforcement”

This research aims to explore the possibility of patent monopoly done by Apple against Samsung, the significance of Apple and Samsung patent dispute case towards innovation and US consumers’ choice, and preferred alternative between licensing agreement and invent-around activities in respond to patented technologies and designs. The scope of time limitation of this study case is between 2011 and 2012, capturing several major events, from the beginning of case in San Jose Federal Court, USA until Apple’s failure to propose US sales ban for Samsung in the late December 2012. This case has received international attention and had been captured by international media, such as Bloomberg, Reuters, and Forbes. This research was conducted through qualitative approach by raising a study case. The data sources came from reliable online articles, case-related official documents released in the internet, and books. The analysis concludes that liberalism theory has faced challenge to play its role effectively, while rivalrous invention/competition theory has succeeded to prove its thought related to preference that possibly taken by competitor in response to patented technology owned by another.

Key Words: Patent, Patent infringement, Technical Patent, Design Patent, iPad, iPhone, Samsung Galaxy, Monopoly, invent around, innovation vii

TABLE OF CONTENTS

PANEL OF EXAMINERS APPROVAL SHEETS……………………………… i

THESIS ADVISER RECOMMENDATION LETTER….……………………… ii

DECLARATION OF ORIGINALITY…………………………………...……… iii

PREFACE………………………………………….………………………………. iv

ACKNOWLEDGEMENT……………………………………….………………... v

ABSTRACT………………………………………………..…………………..…. vii

TABLE OF CONTENTS…………………….……………………………….…. viii

LIST OF TABLES…………………………………………………………….….. xi

LIST OF FIGURES…………….………………………………………………… xii

LIST OF ABBREVIATIONS……………………………………..…………...... xiii

LIST OF APPENDIX……………………………………………………..…...… xiv

CHAPTER I INTRODUCTION………………………………………………..….1

1.1 Background of the Study………………………………………………...…. 1

1.2 Problem Identification……………………………………………..……...... 4

1.3 Theoretical Framework………………………………………..…………..... 7

1.4 Literature Review………………………………………..……………….... 11

1.5 Research Method……………………………….……………………...…....14

1.6 Objectives and Significance of Study……………………………………... 15

viii

1.7 Thesis Structure…………………………………………….…………….... 16

CHAPTER II OVERVIEW OF PATENT DISPUTE BETWEEN APPLE AND

SAMSUNG………………………………………………………………………… 18

2.1 A Reflection of Smart Phone Patent Dispute………………...... …………... 18

2.1.1 Patent Dispute Historical Records Prior to Apple vs. Samsung Lawsuit

………………………………………..…………………………………….. 19

2.1.2 The Pattern of Patent Dispute ………….……………………...…….. 24

2.2 Reflection of Apple’s and Samsung’s Smart Phone Market Share ...……... 26

2.3 Apple and Samsung Company Profile ……………………...…………….. 30

2.3.1 Samsung Company Profile: The Rise of the Firm and Its Galaxy…... 30

2.3.2 Apple Company Profile: The Victory of iPad and iPhone………….. 32

CHAPTER III ANALYSIS OF APPLE AND SAMSUNG PATENT DISPUTE

AND INVENT-AROUND ACTIVITIES………………...……..……………….. 36

3.1 Details Exposure on Apple VS Samsung Patent Lawsuit…….…..…………… 36

3.2 Patent Monopoly in Apple and Samsung Patent Wars ….…….……………… 40

3.3 Patent Wars Between Apple and Samsung: The Future of Innovation and

Consumers Choice………………………………………………………………… 42

3.4 Preferred Alternative: Invent-Around or Licensing Agreement? ...... 46

3.5 Evaluation on Validity of Liberalism Theory and Rivalrous Invention Theory.. 49

3.5.1 Liberalism Theory Challenge on Apple vs. Samsung Patent Dispute…... 49

3.5.2 Rivalrous Invention/Competition Theory………………………………. 56

CHAPTER IV CONCLUSION…………………………………….……………. 58

BIBLIOGRAPHY…………………………………………………..…….……… 64

LIST OF TABLES

CHAPTER 2

Table 2.1 29 HTC devices accused by Apple……………………………………... 23

Table 2.2 IDC Report on Smart Phones Shipping Comparison in Third Quarter of

2011 & 2012……………………………………………………………………….. 27

Table 2.3 Gartner’s Report on Operating System Market Share Worldwide……… 28

Table 2.4 iPhone annual release date and renewal technology……………………. 32

Table 2.5 iPad and iPhone Revenue 2007-2012…………………………………………. 34

CHAPTER 3

Table 3.1 Apple’s Claimed Patents Against Samsung…………………………….. 36

Table 3.2 Samsung’s Claimed Patents Against Apple…………………………….. 38

LIST OF FIGURES

Figure 3.1 Firms, Society, and State inter-relations in Apple vs. Samsung patent

Dispute……………………………………………………………………………... 49

xii

LIST OF ABBREVIATIONS

CDMA Code-Division Multiple Access

ECOSOC Economic and Social Council

GATT General Agreement on Tariff and Trade

HTC High Tech Computer

IDC International Data Corporation

IGO Inter-Governmental Organization

IMF International Monetary Fund

IR International Relations

ITC International Trade Commission

ITU International Telecommunication Union

LTE Long Term Evolution

MNC Multinational Corporation

NGO Non-Government Organization

R & D Research and Development

TRIPs Trade Related Aspects of Intellectual Property Rights

WIPO World Intellectual Property Organization

WTO World Trade Organization

xiii

LIST OF APPENDIX

Appendix 1 Complete Data of Apple’s Disputed Patents, Technologies or Designs

Covered, and Samsung Galaxy Devices Accused

Appendix 2 Samsung-Apple Licensing Discussion on October 5, 2010

Appendix 3 Samsung’s Use of Apple Patents in Smartphones

Appendix 4 Amended Preliminary Verdict From San Jose Federal Court, USA

xiv

CHAPTER I

INTRODUCTION

1.1 Background of the Study The challenges faced by the world seem like a virus in medical science. They exist and suffering. The suffered object with the cure will defeat them. But the virus will not completely disappear. They still live inside, modify themselves to be more sophisticated and complicated than before, and be ready to attack again that same object. The previous cure used will not effectively knock it down again and need to be modified as well. This situation is what exactly the world has been experiencing. One of the studies that directly deal with these dynamic changes is international relations study. International relations studies about worldwide issues occurred among states, which exposes the role of states, Inter- Governmental Organization (IGO), Non-Government Organization (NGO), and Multinational Corporation (MNC)1. Besides deeply concern on political issues, International relations also put its attention to economy sector, such as the significance of globalization to the economic development. Since the happening of globalization, International Relations (IR) study has been more intensively put its concern to the economic relations. The complication around the development of economy in any scale should be responded with the establishment of appropriate organizations or special agencies that directly deal with the specific aspects within the economy. There are some international actors that have been built to answer that need, such as World Trade Organization (WTO), International Monetary Fund (IMF), and

1 Makamla Mnungu. Development Studies/ International Relations. Retrieved December 8, 2012 at 2.14 p.m. from http://www.aiu.edu/publications/student/english/DEVELOPMENT%20STUDIES%20%20INTERNA TIONAL%20RELATIONS.html

World Bank. United Nations, which consists of 193 countries around the world with the last registered member, is South Sudan in 20112, also established a committee within its body namely Economic and Social Council (ECOSOC). They are also actors that contribute to the development of IR study. Inside the economy’s boundary, there is a trade. The happening of globalization has also significantly influenced the development of trade. Now, the trade is not only conducted within the country, but also across the border. As the consequence of the broader scope of transaction, the problems arise around trade are also more complicated. Trade barriers emerge as topics coloring the art of trade. One of issues concerned around trade is about the protection of intellectual Property. The necessity of protecting of Intellectual Property was sounded first time in GATT/WTO Framework, Uruguay Round. Multinational Corporations (MNC) in Pharmaceutical and Information Technology, especially in United States, which stated that there was a huge loss on their sales because Intellectual Property in abroad is insufficiently protected3. This history later becomes the background of the establishment of agreement namely Trade Related Aspects of Intellectual Property Rights (TRIPs). It is administered under WTO. Similar response on Intellectual Property protection came from United Nations by building a specialized agency called World Intellectual Property Organization (WIPO), under the administration of Economic and Social Council (ECOSOC), which now the number of state members of WIPO is 185 countries4. It was established as the result of the Convention Establishing the World

2 Growth of United Nations Membership from 1945-present, Retrieved September 24th, 2012 from http://www.un.org/en/members/growth.shtml

3 Fatoumata Jawara and Aileen Kwa (2003). Behind the Scenes at the WTO: The Real World of International Trade Organizations. London and New York: Zed Books. p. 36.

4 WIPO Member States, Retrieved September 27th, 2012 from http://www.wipo.int/members/en/

Intellectual Property Organization signing off at Stockholm in 1967 and effectively implemented in 19705. The importance of Intellectual Property protection comes from the capability of people to innovate. Innovation can bring an invention for a something new, which sometimes is the replacement for the existed one. Meanwhile, create inventions are not cheap. The inventors should sacrifice much of their energy, effort, time, and capital to do Research and Development (R&D) as the steps to invent something new. Meanwhile, there are some more people that did not spend anything to invent, but potentially capable to reap the benefit from others by reproducing the invented products. It will impact to the huge loss on inventors’ investment. Therefore, inventors have right to protect their inventions by the others. These are the reasons why Intellectual Property Rights has been established; to give recognition, acknowledgement, and protection to the inventors and the results from any commercial or economic uses by other parties. Even though the settlement for patent dispute has been established through WTO with its TRIPs and WIPO, the number of the cases is still adding. One of the biggest contributors to the increasing number of patent lawsuit list is Information Technology industry. For many times, mass media exposes the patent infringement between two big IT companies, especially in smart phones area, that accusing one another related to the violation of the patents they own. There are some examples of this situation, such as the patent battle between Apple and Motorola, Microsoft sued Motorola, Nokia accused Apple, Apple with HTC, and the most recent, which got international attention to follow, was Apple versus Samsung. The latest patent dispute that involved Apple and Samsung can be considered bigger than the previous patent dispute cases. The number of taken place where the case emerged showed it. At least, there were 6

5 International Bureau of WIPO, WIPO Intellectual Property Handbook, WIPO Pub. No. 489 (E), 2004

countries became the battle stage for those two big companies. Both companies proposed several patents they own as the evidences of patent violation that they have accused to its opponent in the trial. Various results released from every country that settled the dispute. Some is in favor with Apple, and some more won Samsung. In consequence of these trials, several products from each company are at stake. In US, Apple looked for the ban for, at least and can be added in future, 8 Samsung Galaxy series6. In South Korea, the court decided to ban 10 Samsung Galaxy products and prohibited Apple to sell its iPad and iPhone products in South Korea7. From this patent lawsuit event, it shows that the existence of patent complicates the international trade. Furthermore, the patent will significantly influence to the growth of innovation. Therefore, the evaluation of the patent is necessary to be conducted, especially to its relations with trade and innovation.

1.2 Problem Identification The lawsuit on patent infringement involved Apple and Samsung filed in April 2011 in California. Legal experts and Wall Street analyst realized that Samsung became the powerless in the US trial compared to Apple, as cited in www.dailymail.co.uk. This view comes on the reasons that Apple’s headquarter is located in 10 miles from the courthouse and the selected juries came from Silicon Valley, where Steve Jobs was honored as a technology vanguard8. Apple

6 Daftar Produk Samsung yang Diincar Apple. Retrieved September 5th, 2012 at 10.58 a.m. from http://tekno.kompas.com/read/2012/08/28/07530965/Daftar.Produk.Samsung.yang.Diincar.Apple

7 Bayu Galih (2012). Korsel Larang Sejumlah Produk Apple & Samsung. Retrieved September 5th, 2012 at 11.07 a.m. from http://us.teknologi.news.viva.co.id/news/read/346051-korsel-larang-beberapa- produk-apple---samsung

8 Staff (2012). Will Apple now sue Google?: Analysts openly question whether the two Silicon Valley giants will lock horns over the Android operating system following Samsung's $1 billion patent defeat. Retrieved February 15th, 2013 at 7.54 p.m. from http://www.dailymail.co.uk/news/article- 2193735/Will-Apple-sue-Google--Analysts-openly-question-Silicone-Valley-giants-lock-horns- Android-operating-following-Samsungs-1-billion-patent-defeat.html

accused several Samsung Galaxy products, including Galaxy Tab 10.1, had been infringed its seven patents. At July 2011, the case started to heat up with Samsung confrontation suing Apple with Samsung’s 3G patents that have also been violated by iPhone 4, iPhone 4S and iPad 2 devices9. The detail about Apple’s patent names, explanation on its patent coverage, and the list of Samsung devices accused from each Apple’s patents will be elaborated in Chapter 3. Apple expected to receive award from the trial with amount, proposed to the federal court, US$ 2.525 Billion. It composed from own profit loss suffered by Apple $ 500 million and US$ 2 billion profits received by Samsung related to patent infringed products10. The verdict was built in August 24th, 2012 by the juries with an award granted to Apple for US$ 1.051 billion which borne by Samsung. This Apple’s victory came up after the juries agreed that Samsung has violated 6 out of 7 apple’s patents. For the 7th patent, which is related to iPad design (Apple Patent number D'899), juries did not see any patent violation in any galaxy tab 10.1 series. This decision was followed by the banning revocation for Samsung Galaxy Tab 10.1 in United States11. Many hours later after the verdict in, Lucy Koh asked the Juries to go back to the court to respond the indication of error decision done in the previous verdict. The error was related to Samsung Intercept device and Apple’s patents infringement number 381, 915, and 163. Juries amended the verdict, which previously stated that Samsung Intercept has infringed those three apple’s patents and later revised it with “No”. The error was also found in the decision towards Samsung Galaxy Tab 10.1 4G

9 Apple v. Samsung Timeline: The Guide to What's Happening. Retrieved September 20, 2012 from http://www.zdnet.com/apple-v-samsung-timeline-the-guide-to-whats-happening-7000002625/ 10 Macari, Matt (2012). Apple vs. Samsung: the complete guide to a billion-dollar trial. Retrieved October 4th, 2012 from http://www.theverge.com/2012/7/30/3199424/apple-vs-samsung-trial-guide

11 Rachmatunisa (2012). Blokir dicabut, Samsung boleh jualan Galaxy Tab. Retrieved October 5th, 2012 from http://inet.detik.com/read/2012/10/02/130347/2052520/399/blokir-dicabut-samsung-boleh- jualan-galaxy-tab

LTE. The juries agreed to discharge this device because there is no patent violation indication. But when it came to calculation, the juries charged Samsung for US$ 219,694 over Samsung Galaxy Tab 4G LTE. The juries eventually overturned it and change it into US$ 0 on that particular charge. This amended verdict gave a favorable action to Samsung, which reduce US$ 2.2 million on fine, from US$1,051,855,000, now Samsung only has to pay US$1,049,343,54012. On the other side, Apple seemed not satisfy. It was shown by its action few days later after verdict by proposing a banning action for 8 Samsung Galaxy devices in US market. The list about those 8 Samsung Galaxy devices’ name will be presented in Chapter 3. During the trial, Samsung also sued Apple over its five patents that have been violated by iPhone 3G, iPhone 3GS, iPhone 4, iPad 2 3G, and iPod Touch 4th Generation13. But the court was not in favor with Samsung; Samsung lost the battle. The dispute between Apple and Samsung was enormous; it was not only about the actors itself, but also the numbers of places where the dispute took the stage. It was not only took place in US, but also, at least, in 5 more countries around the world. Those 5 countries were Germany, Australia, England, Netherlands, and South Korea14. Depart from the case exposed above, This research attempts to explore the patent lawsuit case occurred between Apple and Samsung in order to find out the possibility of Apple to seize the market share of Samsung in smart phones

12 Gallagher, Billy (2012). Apple Awarded $1.049 Billion In Damages As Jury Finds Samsung Infringed On Design And Software Patents. Retrieved October 4th, 2012 from http://techcrunch.com/2012/08/24/apple-wins-patent-ruling-as-jury-finds-samsung-infringes/

13 The complete detail of Samsung’s claimed patents, both the registered names and its technology covered will be explained in Chapter 3

14 Fino Yurio Kristo (2012). Peta 'Peperangan' Samsung vs Apple. Retrieved September 5th, 2012 at 11.57 a.m. from http://inet.detik.com/read/2012/08/27/105312/1999642/399/peta-peperangan- samsung-vs-apple?id771108bcj

competition through enforcing the implementation of patent protection. This research is also intended to analyze the effect that might be happened from this dispute to the future of the innovation and US consumers’ choice. Moreover, it aimed to figure out the preference of smart phone firms opting licensing agreement or invent around activity to enjoy already-patented technologies and designs.

1.3 Theoretical Framework This research is strengthened by two relevant theories around patent and trade that are fit to be the foundation of this conducted research. Those two theories are liberalism theory and rivalrous invention/ competition theory. The detail of the theories will be elaborate below.

1. Liberalism theory

Liberalism believes that world politic actors are not only states, but also International laws, International organizations, and Non-government Organization15. Liberalism is an opposite of realism. Liberalism sees international relations as interactions between states that have potential for mutual gain, while realism sees it as a zero-sum-game. Liberalism also believes that states are interdependence and Multinational Corporation (MNC) also takes the stage16. In economic perspective of liberalism, scholars believe that the happening of globalization in world market, the rise of transnational networks and Non-Governmental Organizations, and also the advancement of global communication network have been undermining

15 Theories of International Relations. Retrieved in February 2, 2013 at 2.00 p.m. from http://www.usdiplomacy.org/diplomacytoday/values/theories.php

16 IR Paradigms, Approaches and Theories. Retrieved in February 2, 2013 at 2.14 p.m. from http://libguides.usc.edu/content.php?pid=22394&sid=726640 7

the role of state and shift concern away from military activities to economy and social welfare17. Moreover, Economic interdependence would undermine states to use military forces against one and another because warfare would only threaten their prosperity. A pluralist society will immune from a conflict if it possesses a dynamic balance in facing any forms of social and political obedience. This balance or equality is what liberalism, through its institutions, is seeking for. Individual Property Rights provides minimum level of individual security, stabilize individual expectations, allows person to explore local knowledge, stimulate long-term calculations, and promote individual initiative by inviting private sectors return to the investment and innovation to be closer in parallel with social benefits18.

According to liberalism theory above, there are some elements which are in line with the existence of Intellectual Property, specifically patent. Therefore, this theory will be accompanied with patent stand point in order to optimize in achieving these research objectives and keep running this topic within International Relations study scope. Intellectual property defines as social reward given to the inventor in the form of exclusive right towards their invention and trigger further inventive activities19. The utilitarian incentive-based argues that, cited in Stanford Encyclopedia of Philosophy, patent acts as incentive is necessary to be granted for a limited time of ownership to authors or inventors in

17 Stephen M. Walt (1998). International Relations: One World, Many Theories. Washington: Foreign Policy

18 Andrew Moravcsik , Liberalism and International Relations Theory, Harvard University and University of Chicago. paper No. 92-6, no date, p.24

19 Incentive Theory Law & Legal Definition. Retrieved October 4th, 2012 from http://definitions.uslegal.com/i/incentive-theory/

order to promote valuable intellectual works, to sustain the engagement of inventors to keep innovating, and to stimulate social progress20. Furthermore, this site also quoted Moore (2001, 2003), who said that granting patent does not guarantee a success for the inventors, but at least avoiding bankruptcy suffers inventors from the piracy from the people who did not involve in investment cost but capable to reproduce it. This theory has also been supported by argument of William D. Nordhaus, captured by William Fisher, that escalation on strength and duration of patents will generate more inventive activities21. In the other side, Nordhaus also said that patent will also increase the price of patented products which will contribute to the reduction of social welfare.

2. Rivalrous Invention/Competition Theory The purpose of this theory is to weaken the Intellectual Property rights’ power in order to spur the duplicative and unmanageable activities of invention22. Yoram Barzel, as quoted by William Fisher, has delivered his thought that there are three levels of invention activities that bring an economic waste. First, a valuable invention will attract huge number of people or organizations to compete one and another to be the very first inventor on such invention. Second, the competition over the improvement of existed invented products triggers the same struggle to reach the first inventor in secondary level. Last but not least, many companies tend to create similar functional invention around the already- patented technologies; similar but do not infringe.

20 Intellectual Property. Retrieved October 24, 2012 from http://plato.stanford.edu/entries/intellectual- property/#UtiIncBasArgForIntPro

21 William Fisher. Theories of Intellectual Property, in Stephen Munzer, ed., New Essays in the Legal and Political Theory of Property (Cambridge University Press, 2001), p. 10.

22 Fisher, Theories of Intellectual Property, p. 11. 9

Peter S Menell quoted another part of Barzel thought that the competition among innovators to obtain a patent is so rapid23. Meanwhile, for those innovators who own monopoly will very slow to innovate. In their 1982 paper, as quoted by Menell, Gilbert and Newberry expand Barzel’s thought by stating that the monopolists tend to renew their technologies before the rivals to maintain their monopoly power. Through replacement effect, which stated by Tirole (1988) and quoted by Menell that the innovation, towards renewable technology, done by the monopolists will only replace all or partially the existed profit received by them. In his paper, Menell also found that there are two perspectives emerged among the rivalrous competition literatures. First, quoted from Tandon (1983) and Wright (1985), it views that rivalrous competition is inefficient. This inefficiency refers to the research expenses on duplication which is the result of the competition and non-centralized research. Second, quoted from Fudenberg et al., (1983); Grossman and Shapiro, (1987); Harris and Vickers, (1987), rivalrous competition encourages the increasing of investment level and push the further advancement.

This theory has significant role in this research. It will help the researcher to figure out two things, which become the main framework to achieve the finding of this research. First, it will help to obtain the second objective of this research, which concern about the impact of patent dispute between Apple and Samsung to the future of innovation. Second, it is helpful to figure out why smart phone producers, which significantly have abundant capital to conduct research and development, prefer to invent around the technology owned by its competitors

23 Menell, Peter S. (1999). Intellectual Property: General Theories, p. 137-138. 10

instead of making a new technology that never exist before. This second concern also applies to the case study in this research, Samsung VS Apple.

1.4 Literatures Review The battle between Apple and Samsung over the patents they claimed has attracted international concern to follow every major event showed up. Both national and international media highlighted every event that occurred in this case. As far as this research conducted, there was no early published research can be found. To encounter that, the researcher decided to take scholars analysis articles published in official or trusted website. Some of them will be presented briefly below.

1. Martyn Perks, Apple v Samsung: innovation’s the loser. (2012) Analysis related to the patent war that involved Apple and Samsung had ever been written by Martyn Perks and published in Internet. One of the concerns of this analysis is about the existence of patent and the significance of license. Currently, what commonly is conducted by IT industries is to provide license over the patents they have for other manufacturers which are willing to adopt its technology with royalty fees in return for the licensor. Furthermore, the author provides an example about this licensing activity. Nuance has invented the technology of voice command24 for smart phones and provide license for the adoption of this technology. Apple and Samsung are some of the licensees. Apple adopted this technology first time in its iPhone 4S and it is called Siri. Meanwhile, Samsung injected this technology first time in its Samsung Galaxy S2 with the name S-Voice. Beside the licensing action, he also concerns about the use of patent protection as prevention for Smart phone

24 This technology possibly the user to order the phone to open an application, make a text, or playing a saved music.

producer’s competitors to develop similar idea. By providing an example, he showed the battle between Apple and HTC over a patent of pinch-to- zoom claimed by Apple. But the court was in favor with HTC because actually the technology of pinch-to-zoom owned by a Swedish company, name NeoNode. By referring to some examples showed in his analysis, he tried to conclude that instead of conducting research to spring new innovation with their abundant capital, big IT manufactures prefer to spend it for suing one another over their patented technologies which actually stand on the invention of third-party providers. The purpose of patent protection has been shifted in the perspective of those industries; it moves from idea protection into a weapon to hinder the rivals conducting similar innovation development. It will impact to the lesser encouragement for new innovation. The new behavior of big companies related patent treatment, either trading the patent license to reap the benefit from royalty fees forced towards the licensees or blocking other intention to develop similar ideas, refers the author to the existence of ‘patent trolls’. Patent trolls refer to a company who owns a patent that has significant influence to the work of companies25. Instead of producing something, product or technique, this company prefers to use it as a trap for other companies once they implement its patented thing. It will become a reason for the patent holder to accuse and threaten the trapped company to the court. The purpose of this action is to gather benefit by insisting the accused company to pay off the royalty fee or will bring the case to the court which consequently will spend much more money26.

25 Brander, James A. (2007). Intellectual Property Protection as Strategic Trade Policy. Asia-Pacific Journal of Accounting & Economics 14, p.198. 26 Ibid.

Through his writing, Martyn Perks sets his perspective on patent dispute in the position where patent is seen as a potential income by licensing it to other IT manufactures. He also looked up to the recent tendency of IT companies to spend their overwhelming capital to sue its competitors by claiming patent instead of doing research to create new invention. This perspective is coherent with this on-going research. It shows the current treatment of IT companies over patents they own and will be very helpful for the researcher to support its finding especially for the first research objective. Nevertheless, this research will set different angle to look out the case. This research will analyze the general pattern emerged when the patent dispute was occurring between two smart phone producers.

2. Steve Lohr, Apple-Samsung Case Shows Smartphone as Legal Magnet. (2012). Through his article27, Steve Lohr begins with his point of view that patent system does not run properly. Josh Lerner as the economist and patent expert in Harvard Law School stated, as quoted by Steve Lohr, that role of patents has been shifted from incentive of innovation to the lawsuit tools and trade commodities. Around 250,000 patents cover technical and design of smart phones, it potentially capable to sue. In the trial between Apple and Samsung, he sees that Google, the android-maker, is the main enemy of Apple itself. Another quote took the statement from a reputable federal appeals court judge in Chicago, Judge Richard A. Posner, that by looking at this case, he concludes that patent system is in chaotic moment. This statement is strengthened by legal experts who said that the lawsuit

27 Lohr, Steve (2012), Apple-Samsung Case Shows Smartphone as Legal Magnet. Retrieved October 6th, 2012 from http://www.nytimes.com/2012/08/26/technology/apple-samsung-case-shows- smartphone-as-lawsuit-magnet.html?_r=1

is generated by the companies registering patents as both offensive and defensive tools and overwhelm the patent authority to reward the patent very easy. Steve Lohr also quoted the statement from James E. Bessen, a patent expert and lecturer at the Boston University School of Law, that he observed the patent wars appear as the consequence of granting non- prioritized patents on smart phone innovation. Lohr closes his analysis by quoting Colleen V. Chien expression, an assistant professor at the Santa Clara University School of Law, that the verdict from California federal court towards Apple and Samsung dispute clearly deliver a message that all smart phone makers should create products differentiation among them. Kevin G. Rivette, a Silicon Valley consultant and former vice president of intellectual property strategy for I.B.M said, as cited in this paper, that the growth of patent number and innovation will harm patent’s power, but the wars around it will flatten and proper accommodation will be gained. Additionally he said that the wars around patent will slow competitor’s performance down for a while, but not about to stop it. In the second analysis, Lohr sets his perspective toward Smart phone patent management. By quoting some experts’ statement, he saw that patent management is messy. This analysis supports the on-going research by providing information that will strengthen the finding of this research in the next chapters. Nonetheless, this research attempts to complement that analysis by focusing to the impact of Apple and Samsung patent lawsuit towards future innovation and patent function.

1.5 Research Method

This research is conducted through qualitative approach, which concerns on subjective assessment and facilitates researcher’s knowledge and impression28. The type of research that is used is descriptive analytical which the researcher has no control over the variables and only capable to deliver the past and present situation of the case29. This type of research allows the researcher to discover the causes of the event although has no power to manage the variable. The method of data collection for primary sources significantly uses content-analysis method, which works by analyzing document materials30. With the purpose to avoid misinterpretation within the qualitative approach, the researcher utilizes triangulation procedure which allows the activities on gathering abundant data to clarify the meaning and to obtain deeper understanding about the case31. The methods employed in this research are document review and critical incident reports. The primary sources that are utilized in this research rely on the published official documents from the U.S. Federal Court, Leaked confidential documents owned by both Apple and Samsung in the internet during the trial, online articles published by reliable mass media and TRIPs published documents. Meanwhile, the secondary sources come from books and published scholars’ papers. The presentation of the data in this research will use text, table, and other appropriate methods.

1.6 Objectives and Significance of Research The objectives of this study are: 1) Explore the case study on patent dispute between Apple and Samsung and find out the possibility came from Apple seizing Samsung’s market share in US by enforcing the implementation of patent

28 Kothari, C.R (2004). Research Methodology: Methods and Techniques (2nd revised edition). New Age International (P) Ltd., Publishers 29 Ibid, p.2. 30 Ibid, p.110 31 Linda Dale Bloomberg and Marie Volpe (2008). Completing Your Qualitative Dissertation: A Roadmap from Beginning to End. California: Sage Publication, Inc. 15

2) Review the effectiveness of patent protection in encouraging innovation. 3) To analyze the correlation between invent-around activity and patent licensing based on Apple VS Samsung patent lawsuit case. Meanwhile, this research possesses some significance. Firstly, to provide a deeper understanding on Apple and Samsung patent lawsuit so that it helps to figure out the role of patent protection within the competition between those two companies to seize the bigger market share. Second, it broadens the point of view in assessing the significance of patent protection in promoting innovation. Third, it observes the relationship of patent licensing with invent-around activities exist in IT industry by referring to Apple and Samsung patent dispute.

1.7 Thesis Structure Chapter I: Introduction

It consists of Background of the study, Problem identification with statement of the problem, theoretical framework, literature review, research methodology, objectives and significance of the research, and thesis outline.

Chapter II: Overview of Patent Dispute between Apple and Samsung

This chapter covers, firstly, the flashback on patent dispute histories occurred in the past, before and beside the battle between Apple and Samsung, within smart phones competition. It captures the actors, causes and settlements over the problems. Second, the concern also focuses to the background of Apple and Samsung, its historical background, values, products, and some more relevant aspects related to the cases raised in this research.

Chapter III: Analysis of Apple and Samsung Patent Dispute and Invent- Around Activities

This chapter is intended to expose the researcher’s analysis towards the role of patent protection in the lawsuit involved Apple and Samsung which follow the objectives and the significance of research stated in Chapter I.

Chapter IV: Conclusion

This chapter will summarize the analysis done in Chapter III and provide recommendations which are expected to be useful for the further development and implementation of patent protection.

CHAPTER II

OVERVIEW OF PATENT DISPUTE BETWEEN APPLE

AND SAMSUNG

This chapter discusses about the patent disputes that had been occurred around mobile phone industry prior to case between Apple and Samsung showed up. The purpose of this overview is to capture the actors, causes and settlements, including the verdict released by the court. In another sub-chapter, there is a discussion about the pattern or trend that generally involve around the smart phone patent disputes. Furthermore, it is expected to be a helpful source for doing case analysis in chapter three. In the next sub-chapter two, the researcher also provides both company profiles of Apple and Samsung. It captures the brief historical backgrounds of Apple and Samsung from their first development until now becoming two large corporations that conquer big market share, specifically, on smart phones trade. The necessity to put company profile in this chapter also comes from the fact that in the verdict form released by the US Federal Court, San Jose, California, which handled the battle between Apple and Samsung, defined three Samsung companies were involved in the dispute, namely Samsung Electronics America, Inc., Samsung Telecommunications America, LLC, Samsung Electronics Co., Ltd. By having these brief explanations, it will complement the understanding on the essence of patent disputes in general and later specifically to the actors, Apple and Samsung, in the case that is analyzed within this research.

2.1 A Reflection of Smart Phone Patent Dispute

This sub-chapter covers two patent disputes within mobile phone industry that have ever occurred prior to Apple and Samsung patent lawsuit in 2011- 2012.

2.1.1 Patent Dispute Historical Records Prior to Apple vs. Samsung Lawsuit

1. Apple vs. Nokia This lawsuit occurred in October 22nd, 2009 and took place in U.S. District Court in Delaware32. Nokia accused Apple had been violated 10 patents related to wireless network owned by Nokia. Those referred wireless network are about GSM/ Global System for Mobile communications), UMTS/ Universal Mobile Telecommunications System (3G WCDMA), WLAN/ Wireless Local Area Network standards, cover wireless data, speech coding, security, and encryption. The development of those inventions took two decades and spent more than 40 billion Euros for research. These patents have now been becoming essential patents in mobile phone industry. It was recorded that 40 companies has obtained license agreements from Nokia to use it. In this case, Nokia sought a royalty fee from Apple because of the use of these patents in all Apple’s iPhone. The amount of royalty fee that was sought by Nokia over Apple was 1%-2% from every iPhone sold. The average price of an iPhone at that time was US$600 per device, Nokia would gain royalty fee worth US$1233. At that time, Apple had successfully traded 34 million iPhone devices since the first launch of iPhone in 2007.

32 Apple Insider Staff (2009). Nokia Sues Apple Over iPhone’s Use of Patented Wireless Standards. Retrieved October 26, 2012 from http://appleinsider.com/articles/09/10/22/nokia_sues_apple_over_iphones_use_of_patented_wireless_ standards.html

33 Hansell, Saul and Kevin J. O’Brien (2009). In Lawsuit, Nokia Says iPhone Infringes Its Patents. Retrieved October 26, 2012 from http://www.nytimes.com/2009/10/23/technology/companies/23nokia.html?_r=0

The story was not over yet. In December 2009, Apple reacted to the Nokia’s accusation by filing a countersuit to Nokia. The filed accusation contained Apple accused Nokia had been violated its 13 patents through Nokia E71 and Nokia N900, denied Nokia’s claimed patents as not essential, accused Nokia’s effort to nurture its existence in mobile phone market by burdening licensing fee, and violate Apple’s iPhone design34. In detail, the patents claimed by Apple over Nokia were about the capability of mobile phone connected to the PC by using data cable, teleconference application, energy-saving feature, and some ways of working of mobile phone software35. In addition, Apple incriminated Nokia violated its technical-related patents, such as the ability to zoom in document by tapping the touch screen, to adjust the view with landscape or portrait mode when the phone is rotated, and to scroll the documents. Eventually, the settlement had been reached and Nokia gained its victory over Apple. In June 14th, 2011 Apple agreed to pay the royalty fee, including the on-going use, to Nokia with one-time payment mode which the amount was not revealed36. At the same time, analysts predicted the on-going royalty that is should be paid by Apple in 2011 would worth for around US$ 430 million as the

34Conneally, Tim (2009). Apple countersues Nokia, says N900, E71, S60, Carbide C++ violate patents. Retrieved October 26, 2012 from http://betanews.com/2009/12/11/apple-countersues-nokia- says-n900-e71-s60-carbide-c-violate-patents/

35 Wray, Richard (2009). Apple Lawsuit Claims Nokia Copied the iPhone. Retrieved October 26, 2012 from http://www.guardian.co.uk/technology/2009/dec/11/apple-nokia-countersuit

36 Nokia and Apple Settle Patent Dispute. Retrieved October 26, 2012 from http://www.bbc.co.uk/news/business-13759612

result of iPhone sales on that year with the assumption the portion of Nokia’s royalty fee was 1% from average price of iPhone sold37.

2. Apple vs. HTC Apple seemingly has a pleasure to sue its competitors. After had a long-running lawsuit with Nokia, in March 2nd, 2010 Apple filed a patent lawsuit against High Tech Computer/ HTC, the Taiwanese mobile phone manufacture38. There were 20 Apple’s patents attached in the complaint, which generally cover user interface of iPhone, basic architecture, and hardware. The battle took place in U.S District Court in Delaware and U.S. International Trade Commission39. In order to response Apple, in May 12th, 2010 HTC also filed a complaint against Apple to U.S. International Trade Commission over five infringed HTC patents and looked forward for import and sale ban action on iPhone, iPad, and iPod in United States, as cited by TechCrunch from HTC Press release40. During the lawsuit, there were many significant events colored. Both companies reacted for any movement done by the opponent;

37 Arthur, Charles (2011). Apple to Pay Nokia Big Settlement Plus Royalties on Patent Dispute. Retrieved October 26, 2012 from http://www.guardian.co.uk/technology/2011/jun/14/apple-nokia- patent-case

38 Patel, Nilay (2010). Apple Sues HTC For Infringing 20 iPhone Patents. Retrieved October 27, 2012 from http://www.engadget.com/2010/03/02/apple-sues-htc-for-infringing-20-iphone-patents/

39 AppleInsider staff (2010). Apple sues HTC for alleged infringement of 20 iPhone patents. Retrieved October 27, 2012 from http://appleinsider.com/articles/10/03/02/apple_sues_htc_for_alleged_infringement_of_20_iphone_pat ents.html

40 Kincaid, Jason (2010). HTC Countersues Apple, Claims Apple Is Infringing On Five Patents. Retrieved October 27, 2012 from http://techcrunch.com/2010/05/12/htc-countersues-apple-claims- apple-is-infringing-on-five-patents/

dropped and raised claimed patents. In December 19th, 2011 Apple won against HTC by imposing immediate patent-related features removal from HTC’s devices or Sales ban over particular HTC devices would be effectively enforced in April, 19th 201241. The referred devices which were subject to the ruling including Sprint Evo 4G, Verizon Droid Incredible, AT&T Aria, and T-Mobile G242. Immediately, HTC responded by declaring that its engineers would find alternative to avoid patent infringement. It responded the violation done by HTC over Apple patent ‘647, which the process allows a mobile device to recognize things like e-mail addresses, phone numbers, and addresses in text and automatically move them to a calendar, dialer, or mapping application (Musil, 2011: http://news.cnet.com). The ruling of sale ban took the effect first time to the suspended selling of HTC One X and Evo 4G LTE in May16th, 2012 enforced by US Customs officials for review purpose43. The battle between Apple and HTC was not ended. In June 6th, 2012 Apple for once again filed a complaint for patent infringement against HTC and looked forward for sales ban of 29 series of HTC

41 Yarow, Jay (2011). Apple Wins Patent Lawsuit Against HTC. Retrieved October 27, 2012 from http://articles.businessinsider.com/2011-12-19/tech/30533308_1_import-ban-patent-ruling-patent- claims

42 Patel, Nilay (2011). Apple wins ban of HTC Android devices at US International Trade Commission. Retrieved October 27, 2012 from http://www.theverge.com/2011/12/19/2647362/apple-wins-ban-of-htc-devices-itc

43 Patel, Nilay (2012). HTC One X and Evo 4G LTE indefinitely delayed at US Customs for investigation of Apple patent infringement. Retrieved October 27, 2012 from http://www.theverge.com/2012/5/15/3022907/at-t-htc-one-x-blocked-at-us-customs-infringing-apple

Smart phones44. The patent that was being discussed for this complaint was still the same with the previous lawsuit, Apple’s patent number ‘647 or Apple Data Detector patent. Apple was reported bringing two files of screen-captured from some HTC devices along with the accusation as the patent infringement’s evidence. Those 29 HTC devices that were accused in this latest complaint are listed below:

Table 2.1 29 HTC devices accused by Apple HTC One X HTC One S HTC One V HTC Inspire 4G HTC Vivid HTC Status HTC Sensation HTC Sensation 4G HTC Wildfire HTC Wildfire S HTC Hero HTC Hero S HTC EVO 4G HTC Evo 4G HTC Evo V 4G HTC Evo Design LTE 4G HTC Evo 3D HTC Amaze 4G HTC Droid Incredible HTC myTouch 4G 4G LTE HTC Merge HTC Rezound HTC myTouch 4G HTC Rhyme Slide HTC HTC Flyer HTC Jetstream HTC EVO View 4G ThunderBolt Droid Incredible 2 Source: Apple files yet another patent complaint against HTC. http://news.cnet.com. October 27th, 2012

HTC responded the accusation from Apple by filing complaint against Apple for 4G LTE patents, as reported on September 7th, 2012, and possible to look forward on sale ban of the latest series of

44 Oliver, Sam (2012). Apple files third ITC complaint against HTC targeting 29 new phones. Retrieved October 27, 2012 from http://appleinsider.com/articles/12/06/06/apple_files_third_itc_patent_complaint_against_htc.html

iPad and iPhone which adopted these patented technologies45. These patents cover data transmission technologies that allow faster download. HTC owned these patents in 2011, by purchasing worth US$ 75 Million to the former holder namely ADC Telecommunications Inc46. Soon after HTC acquired these patents, it stated that HTC is the early-adopted, even pioneer of 4G LTE. The dispute has finally ended in November 10, 2012. According to announcement published in Apple’s official website, the lawsuit had been settled between them, followed by removal existed lawsuits and a sign-off of ten years cross-licensing agreement47.

2.1.2 The Pattern of Patent Dispute Two patent disputes captured above showed few similarities that eventually created a general pattern, which emerge in smart phone patent dispute. It describes how two disputed firms perform during the trial related to patent infringement case. There is an obvious pattern that is composed by general behaviors of an IT company suing its competitors. First, Sales ban punishment. It showed up in the case between Apple and HTC, which both parties requested sales ban action to the authorities. Later, it also happened between Apple and Samsung. The purpose of this sales ban has been

45 Decker, Susan (2012). HTC Patents Challenged by Apple Probably Valid, Judge Say. Retrieved October 27, 2012 from http://www.businessweek.com/news/2012-09-06/htc-patents-challenged-by- apple-probably-valid-judge-say

46 Hill, Simon (2012). Apple struggles to overturn HTC’s LTE patents. Retrieved October 27, 2012 from http://www.androidauthority.com/apple-htc-lte-patents-113153/

47 HTC and Apple Settle Patent Dispute. Retrieved November 26, 2012 at 12.28 p.m from http://www.apple.com/pr/library/2012/11/11HTC-and-Apple-Settle-Patent-Dispute.html

explained well by Nokia, Qualcomm, and Ericsson in International Telecommunication Union (ITU), one of specialized agency of United Nations, meeting that was conducted in Geneva, Switzerland on October 10th, 2012. According to BBC, They argued that the sales ban action is an incentive to reach the deal with the potential licensees48. Sales ban is aimed to avoid defendant’s resistance to have fair payment, which will reduce future R&D capital. Surprisingly, Apple, which is known as the major actor of sales ban injunction over its competitors in patent dispute settlements, said in different point of view altogether with Microsoft and Cisco. In different BBC published article, it quoted those three IT big companies’ argument which sought for regulatory change to prevent sales blockade over products involving the standard-essential patent disputes49. Furthermore, Microsoft conveyed that the industry standards are crucial for the development of internet, mobile devices, and computers and the international standard system runs well because the companies guarantee to make the standard-essential patent available for others within the context of fair, non-discriminative, and reasonable. If this promise is undermined and trigger the emergence of sales ban, the whole industry and consumers will suffer. The standard-essential patent itself is an international standards set and adopted by relevant actors in Information Technology industry for technology development among others50. Furthermore, this patent is called essential because this patent

48 Regulators demand patent licence clarification. Retrieved October 29, 2012 from http://www.bbc.co.uk/news/technology-19904713 49 Kelion, Leo (2012). Tech firms and regulators meet at UN patent pow-wow. Retrieved October 29, 2012 from http://www.bbc.co.uk/news/technology-19887318

50 Frankel, Alison (2012). Analysis: Apple's win dents Android's standard-essential patent hopes. Retrieved October 29, 2012 from http://www.reuters.com/article/2012/08/27/us-apple-samsung- patents-idUSBRE87Q19Z20120827

has eternal power and there is no opportunity for other engineers to invent-around on this patent. Another behavior that emerges in smart phone patent dispute is invent-around. In the battle between Apple and HTC, the court which handled this case released a verdict for sales ban of several HTC devices as the result of patent infringement. In order to avoid the effective implementation of this verdict, HTC clearly stated, as quoted by The Verge, that its engineers had found alternative technology in order to respond the Apple’s patent number ‘647, which patent was violated by HTC51. In the study case between Apple and Samsung that later will be analyzed in Chapter 3, Samsung has also been captured designing around the technology covered by the Apple’s disputed patents52. These situations are indeed emphasizing the existence of rivalrous invention/competition theory.

2.2 Reflection of Apple’s and Samsung’s Smart Phone Market Share Competition in smart phone is very tight. There are multiple players involve in this competition, such as Nokia, Sony, Motorola, HTC, Samsung, and Apple. They compete to conquer majority of the market, which can be seen quantitatively in market share report. Apple and Samsung compete tightly to do so in US and South Korea market share. Each of them had their own first position in market share portion in different categories. Below is the finding

51 Patel, Nilay (2011). Apple wins ban of HTC Android devices at US International Trade Commission. Retrieved October 27, 2012 from http://www.theverge.com/2011/12/19/2647362/apple-wins-ban-of-htc-devices-itc

52 Elias, Paul (2012). Apple's $1B patent verdict could corner market. Retrieved October 29, 2012 from http://www.businessweek.com/ap/2012-08-25/apples-victory-could-mean-fewer-phone-options

about smart phone market share between Apple and Samsung, which is expected to be useful sources to conduct the analysis in chapter 3. Patent infringements which have done by smart phone producers are motivated by the huge number of market share that can be expanded to reach higher profit. As quoted by Business Wire, Strategy Analytics released its report in October 17th, 2012 and estimated that there are already 1,038 million smart phones used in this world until the third quarter of 2012 compare to the third quarter of 2011 which only reached 708 million units53. Furthermore, it cited Neil Mawston’s, Executive Director at Strategy Analytics, statement that the research estimates 1 out of 7 persons on earth already use smart phone by the third quarter of 2012. Further, he said that this growth remains low; by referring to the situation where China, India, and Africa, which no doubt for its very large market scope, do not contribute high number of smart phone users54. In the end, Business Wire quoted Strategy Analytics report with the estimation of another one billion units of smart phone will be used by 2015. International Data Corporation (IDC) provides more specific smart phone selling data by focusing on each smart phone manufactures portion in market share and shipment projections comparing same quarter in 2011 and 2012. It listed the top 5 smart phone manufactures that occupy major market share worldwide. The table below captures the data presented in IDC website:

Table 2.2 IDC Report on Smart Phones Shipping Comparison in Third Quarter of 2011 & 2012 Vendor 3Q12 Unit 3Q12 3Q11 Unit 3Q11 Year-over- Shipments Market Shipments Market year Change Share Share

53 Strategy Analytics: Worldwide Smartphone Population Tops 1 Billion in Q3 2012. Retrieved November 3, 2012 from http://www.businesswire.com/news/home/20121017005479/en/Strategy- Analytics-Worldwide-Smartphone-Population-Tops-1

54 Ibid

Samsung 56.3 31.3% 28.1 22.7% 100.4% Apple 26.9 15.0% 17.1 13.8% 57.3% Research In 7.7 4.3% 11.8 9.6% -34.7% Motion ZTE 7.5 4.2% 4.1 3.3% 82.9% HTC 7.3 4.0% 12.7 10.3% -42.5% Others 74.0 41.2% 49.9 40.3% 48.3% Total 179.7 100.0% 123.7 100.0% 45.3% Source: Smartphones Drive Third Quarter Growth in the Worldwide Mobile Phone Market, According to IDC. http://www.idc.com. November 6th 2012.

According to the table above, it is clearly stated that Apple and Samsung are in a very tight competition to reach first position on market share portion. But Samsung seems going further by recorded a doubled shipment in third quarter of 2012 comparing to the same quarter in 2011. Samsung smart phone today’s selling has been boosted by the Galaxy series products which offer simplicity, sophistication of technology, and Android experience. Android itself is an operating system developed by Google and it is rich with applications that can be downloaded by the users. Beside Samsung, there are some more mobile phone makers adopt Android as their smart phone’s operating system, such as Motorola, LG, and Sony Ericsson. Gartner official website has released a research finding in operating system’s market share, Apple seats in second position with its iOS and first position occupied by Android55. The data presented below shows the complete result of the Gartner’s research:

Table 2.3 Gartner’s Report on Operating System Market Share Worldwide Operating System 4Q11 (Units) 4Q11 Market 4Q10 (Units) 4Q10 Market Share (%) Share (%) Android 75,906.1 50.9 30,801.2 30.5 iOS 35,456.0 23.8 16,011.1 15.8 Symbian 17,458.4 11.7 32,642.1 32.3 Research In Motion 13,184.5 8.8 14,762.0 14.6

55 Gartner Says Worldwide Smartphone Sales Soared in Fourth Quarter of 2011 With 47 Percent Growth. Retrieved November 6, 2012 at 8.34 p.m. from http://www.gartner.com/it/page.jsp?id=1924314 28

Bada 3,111.3 2.1 2,026.8 2.0 Microsoft 2,759.0 1.9 3,419.3 3.4 Others 1,166.5 0.8 1,487.9 1.5 Total 149,041.8 100.0 101,150.3 100.0 Source: Gartner Says Worldwide Smartphone Sales Soared in Fourth Quarter of 2011 With 47 Percent Growth. http://www.gartner.com. Retrieved November 6, 2012. The researcher then figures out the composition of smart phone market share in United States and South Korea respectively. According to ComScore on its August 2012 report, Samsung sat at the first rank by occupying US market share with 25.7% and followed by LG with 18.2%, Apple 17.1%, Motorola 11.2% and HTC with 6.3%56. In the other side, Samsung gains its victory through its smart phone selling in South Korea by holding estimated 80% and followed by LG and Pantech in second and third position, as cited by Phone Arena from Yonhap57. Meanwhile, within a tablet computer market, reported by Javelin Strategy & Research of Pleasanton and quoted by Forbes, Apple’s iPad holds 55% US tablet computer market share and following with Android tablet, regardless the brands which adopt this operating system in their tablets, with nearly 25%58. In South Korea, Apple gains the same victory through its iPad by conquering 70%-80% tablet computer market share or around 1 million devices sold59. By looking at the evidences cited above, it

56 comScore Reports August 2012 U.S. Mobile Subscriber Market Share. Retrieved December 8, 2012 at 9.59 a.m. from http://www.comscore.com/Insights/Press_Releases/2012/10/comScore_Reports_August_2012_U.S._ Mobile_Subscriber_Market_Share

57 HTC moving out of South Korea due to poor smartphone sales. Retrieved November 6, 2012 at 9.54 a.m. from http://www.phonearena.com/news/HTC-moving-out-of-South-Korea-due-to-poor- smartphone-sales_id32813

58 Eric Lai, (2012). Analyst: Android has 35% of U.S. tablet market, will overtake iPad [Chart]. Retrieved November 6, 2012 at 9.55 p.m. from http://www.forbes.com/sites/sap/2012/04/18/analyst- android-has-35-of-u-s-tablet-market-will-overtake-ipad-chart/

59 iPad sales surpass 1 million in Korea. Retrieved November 6, 2012 at 10.00 p.m. from http://nwww.koreaherald.com/view.php?ud=20120212000241 29

clearly shows that Apple and Samsung are in a very tight competition for reaching market shares in their respective home countries.

2.3 Apple and Samsung Company Profile

2.3.1 Samsung Company Profile: The Rise of the Firm and Its Galaxy According to Samsung publication through its official website, www.samsung.com, Samsung success story started from a small business born in Taegu, South Korea and dealt with export activity matters. In its today business, Samsung has been transformed to be a world-leading technology company, which specifies its concern to digital appliances and media, semiconductors, memory, and system integration. The happening of digital is responded by Samsung by advancing technology, maintaining innovation, and providing competitive products. Samsung has established a new vision for challenging a new decade, up until 2020, by reflecting it in its motto, “Inspire the World, Create the Future”. Samsung set three key elements to support its vision; those are New Technology, Innovative Products, and Creative Solutions. As a company that deals with technology, Samsung produces mobile phone as a part of products offered to the consumers. Within the mobile phone products traded by Samsung, Galaxy series are now becoming very famous products and highly contribute to the increased revenue of Samsung. The introduction of Samsung Galaxy started in June 2009, marked with the launching of Samsung Galaxy i750060. The sophistication sense of Samsung Galaxy is not only supported by Samsung innovation and advancement of technology, but also powered by the good cooperation with Google, which develop Android operating

60 Dan Rowinski (2012). A Brief History of the (Samsung) Galaxy. Retrieved November 7, 2012 at 7.36 p.m. from http://readwrite.com/2012/04/26/a-brief-history-of-the-samsung-galaxy 30

system. Over the years, Samsung has been releasing various series of Galaxy phones, which categorized as smart phone. Until this research conducted, Samsung had just released its high-class smart phone name Samsung Galaxy Note II. The sale of Samsung Galaxy series has been lifting the amount of Samsung revenue from time to time. Based on Samsung released report, cited by The Guardian, the July-September net profit has almost doubled to 6.56 trillion won (£3.7bn) from 3.44tn won in the same period last year61. Moreover, its revenue rose 26% to 52.2tn won in third quarter. One of the big contributors on the rising of Samsung’s revenue is about the sale of Samsung Galaxy S3. Less than three months after its launch, in May 2012, Samsung Galaxy S3 has sold for 20 million units. Looking at the case between Apple and Samsung, especially to the verdict form released by the U.S Federal Court, in San Jose, California, there were two Samsung subsidiary companies being accused by Apple, Samsung Electronics America, Inc. and Samsung Telecommunications America, LLC. Samsung Electronics America, Inc. was established in 1977 and operates through its two divisions, which are Consumer Electronics and Information Technology62. Consumer electronics provides various digital products such as DVD players, Home Theater system, Digital Audio Players, High-Definition TV, Plasma TV, and home appliances. Meanwhile, Information Technology division provides wireless printers, fax machines, laser printers, laptops, and tablet PCs. Moreover, this company generally provides digital cameras, 3D LED and 3D plasma TV, and mobile devices. Next is Samsung

61 Galaxy sends Samsung profits sky high. Retrieved November 7, 2012 at 7.50 p.m. from http://www.guardian.co.uk/technology/2012/oct/26/samsung-galaxy-profit-shares 62 Company Overview of Samsung Electronics America, Inc. Retrieved October 15, 2012 from http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=3048562

Telecommunications America, LLC., which was founded in 1992 and deals with the research, development, and marketing of personal and business communications products in North America63. Some of the products covered by this company are bar phones, touch screen phones, and 4G handsets.

2.3.2 Apple Company Profile: The Victory of iPad and iPhone Apple was founded in April 1976 by Steve Wozniak and Steve Jobs64. Apple forms, produces, and sells its products, which are related to personal computers, related personal computing, and mobile devices along with various related software, services, peripherals, and networking solutions65. Apple strategy to sell its products all over the world is by utilizing online shops, resellers, its retail stores, and third-party wholesalers. Among the products offered by Apple to the consumers, some of them are very familiar and well-known like iPod, iMac, Macbook series, iTunes, iPad, and iPhone. As a part of Apple products, iPhone and iPad series become one of the big contributors of increased revenue of Apple. iPhone belongs to Apple’s mobile communication product, while iPad belongs to Apple’s tablet PC. The history of iPhone launching has been recorded well by www.pcmag.com and the table below is the summary:

Table 2.4 iPhone annual release date and renewal technology

63 Company Overview of Samsung Telecommunications America, LLC. Retrieved October 15, 2012 from http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=4172403

64 Apple Computer, Inc. - Company Profile, Information, Business Description, History, Background Information on Apple Computer, Inc. Retrieved November 7, 2012 from http://www.referenceforbusiness.com/history2/31/Apple-Computer-Inc.html

65 Company Profile for Apple Inc (AAPL). Retrieved November 8, 2012 at 11.22 a.m. from http://www.bloomberg.com/quote/AAPL:US/profile

Name Launch date Advanced Technology Adopted iPhone January 9, 2007 2G Network 3G Network, GPS, Push email, iPhone 3G June 9, 2008 app store, iOS 2.0, Mobile Me 3G HSDPA, camera recording iPhone 3GS June 8, 2009 480p, iOS 3.0, Copy and Paste method. iPhone 4G June 7, 2010 N/A iPhone 4S N/A Siri and iCloud support Source: A Visual History of the iPhone. http://www.pcmag.com. November 8th 2012.

The release of iPhone 4S was scheduled at October 14, 201166. But iPhone 4S was not the latest Apple’s smart phone device when this research was being conducted. The latest iPhone was iPhone 5. According to the official website of Apple, http://www.apple.com, iPhone 5 was released on September 12, 2012 and has made a new record sale by selling 5 million units only for 3 days in US, Australia, Canada, France, Germany, Hong Kong, Japan, Singapore and the UK67. Beside iPhone, Apple has added its range of products by releasing iPad, a 9.7 inch tablet PC. The first launch of iPad was in April 3, 2010 with only for iPad Wi-Fi model, followed by iPad 3G + Wi-Fi in the late April 201068. Next advanced series of iPad, called iPad 2, was released in

66 IPhone 4S Release: Apple Starts Selling Latest Handset October 14. Retrieved November 8, 2012 at 6.50 p.m. from http://www.huffingtonpost.com/2011/10/14/iphone-4s-release-apple-october- 14_n_1010591.html

67 iPhone 5 First Weekend Sales Top Five Million. Retrieved November 8, 2012 at 7.10 p.m. from http://www.apple.com/pr/library/2012/09/24iPhone-5-First-Weekend-Sales-Top-Five-Million.html

68 iPad Available in US on April 3. Retrieved November 8, 2012 at 7.27 p.m. from http://www.apple.com/pr/library/2010/03/05iPad-Available-in-US-on-April-3.html

March 2, 2011 which embodied 2 cameras as a part of its technologies and lighter and thinner than previous iPad69. Nevertheless, Apple did not stop improving iPad. In 2012, Apple released 3 series of iPad. First one was in March 16, 2012 with iPad 3 which adopt retina display technology, LTE connection, and higher screen resolution70. Not long after iPad 3 released, the improvement of iPad took place in October 23, 2012 with faster processor71. At the same date, Apple has also released an all-new series of iPad called iPad mini. iPad mini was born with 7.9 inch display with same resolution with the bigger series of iPad. Both iPad and iPhone have big contribution on Apple’s revenue. The record sales on iPad and iPhone, which generally increasing from time to time, enlarge the portion of both devices in making cash for Apple. Consumer loyalty and advanced technologies offered in both devices become main keys of Apple to boost the sale. The table below presents the revenue and profit portion of iPad and iPhone for Apple total revenue based on Business Insider report:

Table 2.5 iPad and iPhone Revenue 2007-2012 Year 2007 2008 2009 2010 2011 2012 (est.) iPhone revenue 6 22 34 40 48 51 (%)

69 Roman Loyola (2012). Apple reveals iPad 2. Retrieved November 8, 2012 at 7.41 p.m. from http://www.macworld.com/article/1158109/ipad2.html

70 Terrence O'Brien (2012). The new iPad is official, with Retina display, LTE and A5X CPU. Available March 16th. Retrieved November 8, 2012 at 7.50 p.m. from http://www.engadget.com/2012/03/07/the-new-ipad-is-official/

71 Apple Introduces iPad mini. Retrieved November 8, 2012 at 8.00 p.m. from https://www.apple.com/pr/library/2012/10/23Apple-Introduces-iPad-mini.html

iPad revenue 0 0 0 13 19 23 (%) iPhone profit 9 32 43 57 60 62 (%) iPad profit (%) 0 0 0 10 13 15 Source: In Case You Had Any Doubts About Where Apple’s Profit Comes From. http://www.businessinsider.com. November 8th, 2012.

By referring to the table above, it could be a reason why Apple sued Samsung over the patents violated. Apple’s patents that were violated by Samsung for its Galaxy series are very crucial for Apple because it covers some technologies that make iPad and iPhone feel sophisticated, look different and luxury, such as tap-to-zoom and pinch-to-zoom. The deeper analysis on this issue will be conducted in the chapter three.

CHAPTER III

ANALYSIS OF APPLE AND SAMSUNG PATENT

DISPUTE AND INVENT-AROUND ACTIVITIES

Patent trial between Apple and Samsung in San Jose Federal Court, USA leave some interesting points to be analyzed. As the world exposes it through international media, some people start to deliver their thoughts toward this case. It inspires the researcher to take few points concerned to be explored deeply. This research will analyze the possibility of patent monopoly done by Apple against Samsung, the forecast of the future of innovation and US consumers’ choice as the impact of preliminary verdict, and preferred alternative to respond patented design and technology; either licensing agreement or invent-around activity. Then, those three main concerns will be confronted with two relevant theories on this case, which are liberalism theory and rivalrous invention/competition theory.

3.1 Details Exposure on Apple VS Samsung Patent Lawsuit In chapter 1, the researcher has explained briefly about major events appeared during the happening of patent lawsuit between Apple and Samsung. In this early part of Chapter 3, the researcher will expose the detail of patents claimed by both sides during the trial, technologies covered, and the list of Smart phone devices had been accused. Here are the complete list of Apple’s patents, technologies covered, and list of Samsung Galaxy series that were being accused:

Table 3.1 Apple’s Claimed Patents Against Samsung Patent Name Description

Bounce Back (Apple It covers the ability to show bounce effect when the user scrolls Patent number 381) document to the bottom.

Single Scroll, Pinch to This patent covers the ability of the device in order to translate Zoom (Apple Patent the command from the user between single touch and multi- number 915) touch, like pinch-to-zoom action.

This patent encompasses the competence of device to enlarge Tap to Zoom (Apple or center portions the view when displaying photos, document, Patent number 163) or web page.

iPhone Front (Apple This patent includes the front-face design of iPhone Patent number D'677)

iPhone Back (Apple This patent covers the ornamental design of iPhone Patent number D'087)

iPhone Home Screen This patent is related to the grid design of application icons in menu that has rounded-tips against black background (Apple Patent number D'305) iPad Design (Apple This patent includes the industrial design of a tablet computer. Patent number D'899) Source: Apple Vs. Samsung Lawsuit: How The Tech Giants Responded To The $1 Billion Verdict [Full List Of Infringed Products]. http://www.ibtimes.com. September 20th 2012.

Samsung did not stay silent in responding Apple’s accusation. Samsung fought back Apple by claiming that Apple had infringed its five patents and directly pointed out the suspects, iPhone 3G, iPhone 3GS, iPhone 4, iPad 2 3G, and iPod Touch 4th Generation. Five claimed Samsung’s patents are listed as follow:

Table 3.2 Samsung’s Claimed Patents Against Apple Patent Number Function

This patent is associated with reducing transmission power for 516 Patent particular broadcast channels and prioritizing the most data channels.

941 Patent This patent covers the efficiency of radio resources use.

This patent describes about the capability of smart phone to do multi- 711 Patent tasking mode of Music player while the user is opening other menus.

This patent allows the user to see the capture result right after taking 460 Patent picture from his/her phone/tablet in gallery mode and allows the user to email it together with a message smoothly.

This patent provides a technique to access camera mode and take a 893 Patent picture while the user is viewing pictures in the gallery menu, and then go back to the gallery which displays the last view image.

Source: The ABCs of Apple v. Samsung. http://www.bbc.co.uk/ August 29th 2012.

Eventually, Apple won the war and left Samsung with huge amount of fine. But it did not seem to end, Apple sought for sales ban for eight Samsung galaxy series in US market. Those devices are Galaxy S 4G, Galaxy S2 Epic 4G, Galaxy S2 (Skyrocket), Galaxy S Showcase, Galaxy S2 (T-Mobile), Galaxy S2 (AT&T), Droid Charge, Galaxy Prevail72. In another article, Apple sought for sales ban injunction, if it is effectively applied, would impact to around 24 Samsung devices73. Samsung did the same towards Apple. In Wednesday, June

72 Wicaksono Surya Hidayat (2012). Daftar Produk Samsung yang Diincar Apple. Retrieved November 11, 2012 at 7.31 p.m. from http://tekno.kompas.com/read/2012/08/28/07530965/Daftar.Produk.Samsung.yang.Diincar.Apple

73 Charles Arthur (2012). Apple to seek injunction against Samsung smartphones and tablets. Retrieved January 5, 2013 at 12.01 p.m. from http://www.guardian.co.uk/technology/2012/aug/25/apple-samsung-injunction-fine 38

29, 2011, Samsung had submitted its complaint to US International Trade Commission (ITC), for banning the sale of some Apple’s products including iPhone 4, iPad 2, and iPod Touch in US market74. The complaint departed from Samsung accusation, which accused those Apple products had been violated 5 Samsung’s patents. Along the way, according to news.cnet.com, Samsung had withdrawn one of its claimed patents that covered about MP3 player technology and left 4 remaining patents that in the preliminary ruling of ITC stated that Apple did not infringe any of Samsung claimed patents75. Moreover, Cnet has elaborated those 4 remaining Samsung claimed patents, in its online article, are stated as follow:

1. 7,706,348 -- A patent covers CDMA wireless technology 2. 7,486,644 -- A patent covering packet transmission on wireless devices 3. 6,771,980 -- A patent covering dialing on smart phones 4. 7,450,114 -- A patent for digital documents

Eventually in December 17, 2012, a ruling released by Jude Koh in San Jose Federal Court denied Apple’s request for 26 Samsung devices sales ban in US market76. Apple has failed to deliver strong evidence that showing the popularity of Samsung Galaxy was supported by the technology stolen. Moreover, Samsung sales ban was not supported by public because

74 Kelly Olsen (2011). Samsung seeks US import ban against Apple products. Retrieved November 13, 2012 at 9.18 p.m. from http://usatoday30.usatoday.com/tech/products/2011-06-30-Samsung-patent- dispute_n.htm

75 Josh Lowensohn (2012). ITC sides with Apple, says no violation of Samsung patents. Retrieved November 13, 2012 at 9.32 p.m. from http://news.cnet.com/8301-13579_3-57513316-37/itc-sides- with-apple-says-no-violation-of-samsung-patents/

76 Karen Gullo and Joel Rosenblatt (2012). Apple-Samsung Judge Weighs Damages After Rejecting Ban. Retrieved January 5, 2013 at 12.13 p.m. from http://www.bloomberg.com/news/2012-12- 19/apple-samsung-judge-weighing-damages-after-rejecting-sales-ban.html

technologies and designs infringed were only partial elements of Samsung Galaxy.

3.2 Patent Monopoly in Apple and Samsung Patent Wars The trial in San Jose Federal Court, California, USA, had carried Samsung to a huge financial loss as the impact of patent infringement done by Samsung through the eyes of the juries. Within this story, a new perspective came up. Apple had been accused monopolizing its 3 technical and 3 design claimed patents against Samsung. The preliminary apple-favored verdict from the juries, at least, had smoothened Apple’s temptation to monopolize it. Apple’s willingness to monopolize its patents can be traced back from the historical record when Apple, through Steve Jobs, attempted to destroy Android. A biography book titled Steve Jobs, written by Walter Isaacson has captured it well. Cited by Huffington Post, Jobs thought that Google was a thief, through its Android operating system, and established a direct rivalry to iPhone, which had surpassed iPhone fame77. Steve Jobs called it as thermonuclear war. Steve Jobs committed to destroy Android and was ready to utilize all of Apple’s money to support it. However, there was a reason why Apple did not sue Google directly and tended to sue its clients. Google did not retrieve direct revenue from Android because it is free of use. Google relies more in advertising service for the revenue. It is better to sue Android-based smart phones like what Samsung and HTC had, which produce revenue for the manufactures. Moreover, direct physical comparison between iPhone and accused products is easier to be conducted as the evidence to the juries in the trial78.

77 Bianca Bosker (2011). Steve Jobs Said He'd 'Go Thermonuclear War' On Google Over iPhone 'Theft'. Retrieved November 26, 2012 at 11.04 a.m. from http://www.huffingtonpost.com/2011/10/20/steve-jobs-google-grand-theft_n_1023111.html

78 Roger Cheng (2012). Why Apple doesn't just sue Google and get it over with. Retrieved November 26, 2012 at 12.02 p.m. from http://news.cnet.com/8301-13579_3-57493056-37/why-apple-doesnt-just- sue-google-and-get-it-over-with/ 40

Apple’s temptation to monopolize its claimed patents can be seen in two actions taken by Apple during the story was happening. In 2010, Apple and Samsung conducted a discussion about licensing agreement to settle the patent dispute and it was recorded in an official leaked document titled Samsung-Apple Licensing Discussion. Apple proposed high royalty fee, USD 30 for each Samsung Android-based Galaxy smart phones and USD 40 for each Samsung Galaxy Tab sold. It represented 5% of average price of Samsung Galaxy devices, which was USD 60079. In contrary, Samsung only demanded 2.4% from each Apple’s accused products sold. Then, there was no any agreement signed off. Move to 2012, right after the verdict in from San Jose Federal Court, Apple proposed a complaint for sales ban to the International Trade Commission over eight Samsung Galaxy devices including head-to-head iPhone’s rivals, Samsung Galaxy S and S2. This sales ban request cannot be separated from the fact captured in chapter 2 that Apple felt threatened with the market share portion against Samsung and Android separately. In the third quarter of 2012, Apple occupied 15% smart phone market share and Samsung conquered 31.3%. Meanwhile, in operating system market share, Apple only covered 23.8% through iOS and Google reached 50.9% through Android. It happened because iOS was only adopted by Apple devices, while Android was adopted by some gigantic smart phone manufacturers such as Samsung, LG, Motorola, and HTC. The preliminary verdict, which was completely in favor with Apple, had justified Apple’s right to monopolize its claimed patents, such as Pinch-to-zoom, tap-to-zoom, rubber band effect, rounded-corners and rectangular design. Samsung response it by expressing regret that patent law system allows a

79 Philip Elmer-DeWitt (2012). Steve Jobs offered Samsung Apple's crown jewels for $250M. Retrieved November 26, 2012 at 10.29 a.m. from http://tech.fortune.cnn.com/2012/08/11/steve-jobs- offered-samsung-apples-crown-jewels-for-250m/

monopoly on rectangle with rounded-corners designs80. This monopoly could force Samsung to have revolutionary invention with early impact on Samsung delayed product release. It could lead to a significant loss for Samsung, fewer choices for consumers, and eventually the declining of market share occupation. But, this situation should not be worried. Samsung had released a newer Galaxy series, Samsung Galaxy S3 and Samsung Galaxy Note 2, which were expected to cover the possible loss experienced by Samsung. Sales ban request proposed by Apple was also not a truly nightmare. It is because Those 8 devices were no longer available in US market81; it was because of discontinued production and/or new series replacement, Samsung Galaxy S3 replacing Galaxy S2.

3.3 Patent Wars Between Apple and Samsung: The Future of Innovation and Consumers Choice

Case of Apple and Samsung patent lawsuit had attracted international concern. CNN, New York Times, The Economist, and Reuters are some international mass media that put the concern to the progress of this story. Behind that popularity, there was a concern about the impact of this lawsuit towards the future of innovation and consumers. The forecasts are various, depending on the range of time observed. The first possibility that would come up is a bad impact to the future of innovation. Samsung recognized it and expressed it right after the verdict in by saying that the verdict would cause the loss for American consumers and moreover it will impact to the declining of innovation, choice, and increasing of

80 Paul Elias (2012). Apple-Samsung Patent Lawsuit: Samsung Ordered To Pay Apple $1.05 Billion. Retrieved November 26, 2012 at 1.51 p.m. from http://www.huffingtonpost.com/2012/08/24/apple- samsung-patent-lawsuit-ruling_n_1829472.html

81 Matt Macari (2012). Apple identifies which Samsung products it will try to ban in US. Retrieved November 26, 2012 at 2.35 p.m. from http://www.theverge.com/2012/8/27/3272154/apple-identifies- samsung-products-injunction-after-verdict 42

price, as quoted by New York Times82. The verdict would significantly impact to android-based smart phone manufacturers and US consumers. The Apple- favored preliminary verdict would impact to the delay of releasing new products by non-Apple manufactures. It would impose some manufacturers, such as Samsung and HTC, to go back to their workshop redesigning their released-soon smart phones to avoid another patent lawsuit related to Apple’s claimed patents and it certainly would take time. During that time, there possibly only few of new smart phones generated to the market. Then, it would force them to have big steps in innovation to create a “new look and feel” for next smart phones. Non-Apple manufactures would face a big challenge to have a breakthrough invention, such as in a development of touch screen technology. In today’s trend, touch screen dominates smart phone technologies and accompanied with existed technical technology, such as Pinch-to-zoom and tap-to-zoom. Those technical technologies have been becoming an essential in smart phone technologies. Unfortunately, Apple held the patent covered those techniques in patent number 381 related to single and multiple fingers touch. The Economist concerns about it in its article. That article stated that the patent battle between Apple and Samsung would hinder the improvements of existed technology, which is also adopted by the firms83. More complex problem might arise from a combination of existed patents own by different firms required for the improvements. This thought is also supported by Joseph E. Stiglitz in his book. It states that patents hamper the spreading and utilization of knowledge and slow down further research because innovations actually stand on other previous and

82 Nick Wingfield (2012). Jury Awards $1 Billion to Apple in Samsung Patent Case. Retrieved November 21, 2012 at 6.18 p.m. from http://www.nytimes.com/2012/08/25/technology/jury-reaches- decision-in-apple-samsung-patent-trial.html?_r=0

83 iPhone, uCopy, iSue. Retrieved November 21, 2012 at 8.30 p.m. from http://www.economist.com/node/21561888 43

existed innovations, which consequently technology development goes slower84. It will be worsened if Apple truly attempts to monopolize its patents. Within patent system, there is patent licensing agreement that allows the holder to give a right to others to utilize the invented technology and requires royalty fee in return to the holder. The moment when Apple demanded Samsung for royalty fee worth USD 30 for each Samsung Galaxy smart phone and USD 40 for Samsung Galaxy Tab sold, would drive a new trend of high royalty fee. It is supported by The Washington Post online article, which argues that the verdict in Apple and Samsung case would drive to the higher price of licensing fee85. Furthermore, it also quoted Al Hilwa, a technology analyst with International Data Corp., that the ruling encourages the increasing on value of patents held by other companies, such as Microsoft and Research in Motion, whose wealth have been falling as the result of iPhone’s presence. Historically, patent royalty price is used to set below the Apple’s number asked to Samsung. Microsoft asked for USD 15 for each Samsung Android Smart phone devices86, while HTC was estimated to pay Microsoft’s patents at the rate USD 10 per device87.

84 Joseph E. Stiglitz (2007). Making Globalization Work. New York: Norton

85 Craig Timberg and Hayley Tsukayama (2012). Apple patents were violated by Samsung, jury rules. Retrieved in November 24, 2012 at 3.15 p.m. from http://www.washingtonpost.com/business/economy/apple-patents-were-violated-by-samsung-jury- rules/2012/08/24/d4e44b2a-ee3b-11e1-afd8-097e90f99d05_story.html

86 Miyoung Kim and Chris Lewis (2011). Microsoft wants Samsung to pay smartphone license: report. Retrieved in November 22, 2012 at 8.15 p.m. from http://www.reuters.com/article/2011/07/06/us- samsung-microsoft-idUSTRE7651DB20110706

87 Michael Santo (2012). Apple offered Samsung patent licensing at $30 per smartphone, $40 per tablet. Retrieved in November 22, 2012 at 8.18 p.m. from http://www.examiner.com/article/apple- offered-samsung-patent-licensing-at-30-per-smartphone-40-per-tablet

Patent dispute between Apple and Samsung would give effects to US consumers, both in short term and long term. In short term, consumers would face a shortage supply of new smart phones because non-Apple manufactures would delay some launches to redesign their released-soon smart phones in order to avoid Apple’s claimed patents and potential accusation. It is in line with Canaccord Genuity analyst’s statement, as cited by The Guardian, that Samsung would delay its released-soon Smart phones to design around Apple’s claimed patents88. It would happen when that particular adjustment takes some time and could be worsened if sales ban was effectively enforced. Chang In Whan, president of Seoul-based KTB Asset Management Co., stated and quoted by Bloomberg that there is a possibility of development and launch delays on new products, which can caused once in 6 months launching89. Furthermore, the readiness of the company to have mass production on new technology also needs an adjustment, which could lead extended time of delay. It is proved by online news from www.detik.com, which exposed the possibility of Samsung to delay the launch of its new Samsung Galaxy 4 in 201390. The problem was Display Division in Samsung had created new technology related to display screen that offer higher definition in viewing picture, but the supported technology to produce this in massive scale was still unavailable.

88 Charles Arthur (2012). Apple looks for US ban on eight Samsung phones – and could snare Galaxy S3. Retrieved in November 23, 2012 at 7.48 p.m from http://www.guardian.co.uk/technology/2012/aug/28/apple-ban-samsung-phones-galaxy-s3

89 Jun Yang and Saeromi Shin (2012). Samsung Facing Product Delays After Apple Wins U.S. Jury Verdict. Retrieved in November 23, 2012 at 7.54 p.m. from http://www.bloomberg.com/news/2012- 08-25/samsung-facing-product-delays-after-apple-wins-u-s-jury-verdict.html

90 Rachmatunisa (2012). Display Sulit Dibuat, Smartphone Super Samsung Bisa Molor. Retrieved November 22, 2012 at 10.23 p.m. from http://inet.detik.com/read/2012/11/22/101603/2097883/317/display-sulit-dibuat-smartphone-super- samsung-bisa-molor

In contrast, the effect in long term would be in favor with US consumers. Non-Apple brands would be expected and could finally have their different technologies that would offer various choices of sophistication to the consumers, which eventually, the consumers would be beneficial from it. In other word, big changes would occur to non-Apple products, while Apple would run its business normally, as usual91.

3.4 Preferred Alternative: Invent-Around or Licensing Agreement?

In the case of Apple and Samsung patent dispute, invent around or work around patent activity was a preferred technical improvements chosen by Samsung. It was clearly exhibited in one of Samsung’s leaked official documents the court room. The title of that file is Relative Evaluation Report on S1, iPhone and recorded as a presentation in March 2, 2010. In this 132 pages report, Samsung evaluated and compared its Samsung Galaxy S1 directly to iPhone. In its introductory page, Samsung found 126 problems for Samsung Galaxy S1 and it is specifically referred to basic functions, such as inefficient use of large screen, visual interaction effect, browsing, and messaging. In the comparison and evaluation part showed in that file, Samsung referred to iPhone’s sophistication in order to solve its Galaxy S1 problems and improvements. It made Samsung work around Apple’s patents, which later seen as patent infringement and became the main reason for Apple to sue. Samsung seemed does not want to have licensing agreement with Apple. Back again to the event where Apple and Samsung conducted a discussion about licensing agreement in October 5, 2010, regardless of the high price of royalty fees demanded by Apple. At that time, Apple demanded accumulative royalty

91 Brad McCarty (2012). The Apple vs Samsung Verdict – Here’s what it means for you. Retrieved in November 24, 2012 at 8.21 p.m. from http://thenextweb.com/mobile/2012/08/25/the-apple-vs- samsung-verdict-heres-means/

fees to Samsung for USD 250 Million and Samsung refused to pay and no agreement signed off. It impacted to the happening of patent trial in San Jose Federal Court, USA, which finally made Samsung found guilty and required to pay USD 1.049 Billion. Consequently, Samsung had to pay 4 times higher to Apple compared with demanded amount of money in 2010. In response to this unfavorable decision, Samsung had been working around the disputed patents92. Invent around activity done by Samsung was recognized well by Apple. It was recorded in Apple’s leaked official documents during the trial with the title Samsung’s Use of Apple Patents in Smartphone. However, Apple saw what Samsung had done towards Apple’s iPhone patents was the result of Android. In page 2 of that document, Apple acknowledged Android for utilizing Apple’s patents without prior authorization from Apple. Moreover, Apple accused Android to drive the companies imitating iPhone designs. The decision taken by Samsung to use Android without having any license from Apple had harmed the cooperation between those two parties. In page 10, Apple stated that Android had led Samsung to violate Apple’s patents and harm iPhone by imitating it. In response to that situation, Apple recognized Samsung’s necessity to take licensing agreement for Apple’s patents utilization to maintain a good cooperation as Apple seen that Samsung is a key partner for its business. During the trial, Samsung had denied Apple’s accusation on copying iPhone. Samsung’s denial had captured by All things D, through Samsung’s appointed attorney, Charles Verhoeven. Samsung did not violate Apple’s patent, which

92 AP (2012). Apple's $1B patent verdict could corner market. Retrieved in December 4, 2012 at 10.18 p.m. from http://www.canadianbusiness.com/article/96492--apple-s-1b-patent-verdict-could-corner- market

covers rectangular design, even Apple did not invent that design93. LG Prada phone released in 2006 had the rectangular design, one year before the first generation of iPhone released. HP and Fiddler tablet also had rectangular and large screen design with rounded-corners many years before iPad launch time. Samsung also believed that the Samsung designs accused by Apple had only viewed in a partial story. Samsung had used rectangular design before iPhone arrived and had designed non-rectangular designs for the latest products. Verhoeven showed Samsung has been working harder to participate in technology revolution. It was showed by the evidence that Samsung has been participating in the market in 1991, spending $35 billion in R&D from 2005 to 2010, and employed 20,000 engineers worldwide that included 1,000 designers. Verhoeven also responded the document that showing a head-to-head comparison between Galaxy S and iPhone as a part of competition and refused to be called copying. He quoted statement from Apple vice president, Greg Joswiak, that when a company is willing to be the best, it should know what competitors are doing. Those were the arguments declared by Verhoeven in order to defend his client, Samsung. According to the elaboration above, based on the available evidences, Samsung preferred to work around Apple’s patents instead of signing off licensing agreement as had proposed by Apple in 2010. It is align with the general pattern exposed in Chapter 2, which has been constructed based on two historical patent disputes happened prior to Samsung and Apple patent lawsuit. Moreover, licensing agreement seems becoming less favorable in the eyes of Samsung and it probably seen as a very last step to take when both of them already tired to spend a lot of money and effort to sue one and another in the court room. At least, Samsung started to see licensing agreement option, which

93 Ina Fried (2012). Samsung: Apple Didn’t Invent the Rectangle. Retrieved in December 5, 2012 at 12.00 p.m. from http://allthingsd.com/20120731/live-samsung-making-its-case-in-landmark-apple- trial/ 48

had been captured in the news related to Apple and HTC patent dispute settlement. In the proposed document to San Jose Federal Court with the title Motion to Compel Production of Settlement Agreement with HTC, Apple requested for exposure of the agreement and wanted to see the license agreement for Apple’s patents number 381 and 915 that also became the disputed patents between Apple and Samsung.

3.5 Evaluation on Validity of Liberalism Theory and Rivalrous Invention Theory

3.5.1 Liberalism Theory Challenge on Apple vs. Samsung Patent Dispute By referring to the case on Samsung vs. Apple, there are three important key elements took significant roles. Those three elements are state, society, and firms. The state in here was represented by United States with its court, society was represented by the juries in San Jose Federal Court and US consumers, and firms were Apple and Samsung. These three actors influenced and were connected to one and another as exhibited as follow:

Figure 3.1 Firms, Society, and State inter-relations in Apple vs. Samsung patent Dispute

In the case of patent dispute between Apple and Samsung, society is interconnected to the firms concerned. Society, which is represented by the juries in the courtroom and US consumers in a broader scope, had influenced the decision in preliminary verdict in San Jose Federal Court and later in US International Trade Commission. According to Karen Lisko, a senior litigation consultant with Persuasion Strategies and client’s adviser in jury selection during the trial, the verdict in San Jose Federal Court released by the juries would tend to rely on companies’ behavior in developing their smart phone products94. According to Pamela Jones that is Groklaw’s founder, cited by Forbes, she saw that the jury foreman wanted

94 Connie Guglielmo (2012). Apple, Samsung Patent War Puts Future of Innovation At Risk. Retrieved in January 9th , 2013 at 7.14 p.m. from http://www.forbes.com/sites/connieguglielmo/2012/08/23/apple-samsung-patent-war-puts-future-of- innovation-at-risk/

to send a message through their verdict and amount of damage95. It might be about the existence of both firms in the future. Apple had demanded for US$ 2.525 billion from Samsung, but the juries only granted for half of it and left Samsung in totally lose. The message is probably that the patent enforcement should be established but does not greatly harm the loser. Just one week before the verdict in, Apple had become the most valuable technology company in history, exceeding Microsoft96. Even in an online article published by Guardian, Apple had become the largest American company and becomes an identity and pride for America97. It might drive the juries to win Apple in the battle with Samsung. It is in line with John Stuart Mill thought, cited by Andrew Moravcsik that people tend to dependent with those that concern with them, not based on their effort but based on general relations of society98. The role of society was also matter for Apple in order to win this case in US. Refer back to the reasons why Apple sued Samsung in US boundary, especially in San Jose Federal Court, it was because Apple’s headquarter is located in 10 miles from the courthouse and the selected juries came from Silicon Valley, where Steve Jobs was honored as a

95 Haydn Shaughnessy (2012). The Apple vs Samsung Verdict, A Critique. Retrieved in January 9th, 2013 at 7.37 p.m. from http://www.forbes.com/sites/haydnshaughnessy/2012/12/21/the-apple-vs- samsung-verdict-a-critique/2/

96 Jeremy Wagstaff and Miyoung Kim (2012). Samsung The Innovator, Apple The Over-Promiser: How Samsung Is Getting A Leg Up. retrieved in January 9th, 2013 at 8.31 p.m. from http://www.huffingtonpost.com/2012/12/07/apple-and-samsung- competition_n_2262631.html?ncid=edlinkusaolp00000003

97 Michael Wolff (2012). Apple's rot starts with its Samsung lawsuit win. Retrieved in February 3rd, 2013 at 7.26 p.m. from http://www.guardian.co.uk/commentisfree/2012/aug/28/apple-rot-starts-with- samsung-lawsuit-win

98 Moravcsik , Liberalism and International Relations Theory, p.26

technology vanguard. The influence of Apple to the society must then actively play. Apple and Samsung patent dispute also exhibited the inter- relationship between firms and state within the process. United States, as a liberalist state, has inclined to implement laissez-faire behavior over its business sector. However, to some extent when a great case occurred, government can intervene. It can be found in Apple vs. Samsung patent lawsuit case related to document sealing motion. Both Apple and Samsung had requested to protect some of their documents from public view and later were responded by the court with denial, as reported by Reuters99. Document sealing is a common procedure in Intellectual Property related cases to protect some highly confidential information, such as trade secret, from a release during the lawsuit. Meanwhile, Lucy Koh, the judge in San Jose Federal Court, also refused Reuters’s motion to interfere with the case where some Apple’s and Samsung’s documents were redacted and kept out from the public. Lucy Koh, stated in her note that only highly sensitive information that can be redacted and sealed from the public. Comparing to the verdict released in United States and South Korea toward the patent dispute between Apple and Samsung, it showed indication that those firms has influenced the government. In US, home of Apple, the court won Apple completely against Samsung and left it to be the loser. American identity and pride on Apple could be a reason why the court preferred to win Apple in this case, beside its status as the most valuable technology company in history. In south Korea, another story happened. Both companies were found guilty. The court ordered Samsung

99 Dan Levine (2012). Judge rejects secrecy bids in Apple vs. Samsung battle. Retrieved in February 9th, 2013 at 6.18 p.m. from http://www.reuters.com/article/2012/07/18/us-apple-samsung-ruling- idUSBRE86H05520120718

to pay Apple with 25 million Won (USD 22,000), while Apple had to pay Samsung with 40 million Won100. Apple was found guilty in violating wireless technology patent owned by Samsung and Samsung was found guilty violating bounce back patent owned by Apple. Regardless to the violated patents concerned, the power of Samsung in South Korea should be considered. Samsung, in its home country, contributes approximately a fifth of South Korea’s gross domestic product. Moreover, Apple led the domestic market against Apple. From ten smart phone users in South Korea, only one person owned iPhone. This Samsung’s massive influence towards South Korea’s economy sector might has led its court to win implicitly Samsung against Apple by ordering smaller fine comparing to Apple101. Donny A. Sheyoputra, a Legal Practitioner on Intellectual Property, believed that the sentiment over nationalism was colored the disputes both in South Korea and United States. He stated that, as cited by Detik, the verdicts released by the respective courts were not only referred to the Intellectual Property matters, but also stood on the nationalism issue. He continued that it can be denied, but it does not not mean that nationalism issue does not exist because lose or win status embedded to each firm will affect its home country image102.

100 Youkyung Lee (2012). South Korean court rules Samsung didn't copy iPhone. Retrieved in February 9th, 2013 at 8.04 p.m. from http://usatoday30.usatoday.com/tech/news/story/2012-08- 23/apple-samsung-lawsuit/57260602/1

101 Chico Harlan (2012). In South Korea, the Republic of Samsung. Retrieved in December 19th , 2012 at 11.51 a.m. from http://articles.washingtonpost.com/2012-12-09/world/35721716_1_samsung- chairman-smartphone-market-samsung-credit-card

102 Ardhi Suryadhi (2012). 'Perang' Apple vs Samsung Dibumbui Sentimen Nasionalisme. Retrieved September 5th, 2012 at 11.10 a.m. from http://inet.detik.com/read/2012/08/27/104100/1999613/319/perang-apple-vs-samsung-dibumbui- sentimen-nasionalisme?991104topnews

There is one situation within the progress of the case that showed an inter-relationship between state and society. Society influence the verdict released by the court related to the sales ban over 26 Samsung Galaxy devices and the court consider its verdict by referring to the public response to the case concerned. Public refused to have Samsung Galaxy sales ban because the disputed patents just covered several part of Samsung Galaxy technology, not entirely. Furthermore, Apple had failed to show the proof that Samsung Galaxy popularity gained its popularity within US consumers as the result of Apple’s patents violation. Eventually, the court took action to deny Apple’s request on Samsung Galaxy sales ban as per its consideration toward public response. Patent is granted to protect somebody’s invention. It would be valid in response to the invention process that conducted personally, like Mary Anderson whose invention is windshield wiper. But in today business, patent fails and should be advanced in order to response the growth of invention emerged within companies, especially mobile phone companies. The capability of patent in giving incentive to encourage further innovation is challenged within this firms’ competition. It refers to the background of a company in running its business; to broaden its market and enlarge its profit by minimizing the number of competitors. Patent becomes one of the effective strategies for the companies to obtain that ultimate goal because of its capability of patent to provide legal monopoly over the invented technology covered by patents and the possibility to gain wealth from other competitors by granting licensing agreement. Unfortunately, this situation shifts the function of patent from encouraging further innovation to block other competitors to advance its products. It impacts to the needs of innovation that cannot be accommodated well because the patents are monopolized. While the innovation, more or less, stand on the existed

technology. It leads to the happening of patent dispute among mobile phone companies. According to Stanford University analysis that quoted by Forbes, USD 20 billion had been spent on patent disputes and patents purchase in the last two years within mobile phone industry103. New record had been broken by last year, where patent lawsuits expenditures of Apple and Google added with enormous amount of dollar spent in patent purchasing had transcended the amount of Research and Development expense, referred to public filings. In response to the case between Apple and Samsung, Apple had utilized its iPhone and iPad design patents to drag Samsung into the courtroom. This action would be in line with the use of design patents, which has been escalated within the companies, as part of extra blockade for other competitors to compete with104. Furthermore, design patents are more about dressing and physical style of product, which more appropriate for apparel firms, and contribute to a very small significance to the utility advancement of technology products. The victory of Apple opposing Samsung in US Federal Court over design patents would drive to the occurrence of firms’ competition for patenting product’ designs, as stated by Kevin G. Rivette, a Silicon Valley consultant and former vice president of intellectual property strategy for I.B.M, quoted by New York Times105. But, Legal experts think that design patents are weaker than utility patents.

103 Charles Duhigg and Steve Lohr (2012). The Patent, Used as a Sword. Retrieved in November 24, 2012 at 6.34 p.m. from http://www.nytimes.com/2012/10/08/technology/patent-wars-among-tech- giants-can-stifle-competition.html?pagewanted=all&_r=0

104 Morgan Churma (2012). Welfare, Innovation and Growth: The Patent Paradox. Retrieved in December 3, 2012 at 7.26 p.m from http://www.law.illinois.edu/bljournal/post/2012/11/02/Welfare- Innovation-and-Growth-The-Patent-Paradox.aspx

105 Steve Lohr (2012). Apple-Samsung Case Shows Smartphone as Legal Magnet. Retrieved in December 3, 2012 at 7.47 p.m. from http://www.nytimes.com/2012/08/26/technology/apple-samsung- case-shows-smartphone-as-lawsuit-magnet.html?_r=0

Even, the role of design patent is smaller than utility patent in conjunction with computing and consumer electronics and it is proved with the number of patent examiners in the U.S. Patent Office, which design patent examiners only consist of 99 out of 6,242 patent examiners106. Regardless on the role and power of design patents, firms would still prefer to utilize it in suing other competitors because it will be easier to prove physical damage in front of the juries.

3.5.2 Rivalrous Invention/Competition Theory According to the finding in sub-chapter III.4, which has elaborated about Samsung’s invent around activity, the thought of Yoram Barzel that quoted by William Fisher was applicable. In this case, Samsung has fulfilled the third category of wasting-economy invention activities mentioned by him. It was related to creating similar patented technology but aimed for not infringing. Samsung was attempted to work around Apple’s utility patents applied in iPhone for improving its Samsung Galaxy S1. Moreover, Samsung also intended to invent around the disputed devices to avoid sales ban, after the ruling in. For example, Samsung had implement invent around in order to respond the ruling from Germany court that prohibited the selling of Samsung Galaxy Tab 10.1 in Germany. Apple did slight change in its Galaxy Tab 10.1 appearance, by adding metal frame plus speakers in the front face107.

106 Charles Babcock (2012). Apple Worked A Broken Patent System. Retrieved in December 3, 2012 at 7.59 from http://www.informationweek.com/mobility/smart-phones/apple-worked-a-broken-patent- system/240006568

107 Joseph Parish (2011). Samsung's Galaxy Tab 10.1N redesigned around Apple's German design ban. Retrieved in December 6, 2012 at 6.58 p.m. from http://www.theverge.com/2011/11/16/2566533/samsung-redesigns-galaxy-tab-10-1n-avoid-german- sales-ban

Another part of rivalrous invention theory, which stated about the patent monopolist tends to slow down its innovation, had met another evidence. According to Trip Chowdhry, Global Equities Research, Apple seemed losing its passion to innovate by referred to the fact that Apple just applied touch screen and high definition technology to its iPhone and iPad, not expanded to apply in its iMac or Macbook series, while it became a necessity108. Furthermore, Apple was indicated to lose its roadmap for new products release and it made Apple released its new products in hurry. With the absence of that roadmap, it possibly made its engineers being pushed and lost their space to innovate. This rush could be happened in terms responding the massive and rapid penetration of android-based devices in smart phone and tablet PC, including Samsung with its various Galaxy series. It is clearly reflected in the launch of iPad in 2012, as recorded in Chapter 2, when Apple was rushing to release three new iPad series in a year and left its tradition to launch new improved products once a year, like iPhone. Those findings, at least, had justified that rivalrous invention theory is applicable to the case of Apple and Samsung patent lawsuit. Samsung had fulfilled one of Yoram Barzel’s waste-economy of invention activities. On the other side, Apple also strengthened another Barzel thought on the tendency of patent monopolists to retard their willingness to innovate.

108 Aabha Rathee (2012). Analyst: Apple Needs a New Product Roadmap. Retrieved in December 6, 2012 at 7.32 p.m. from http://wallstcheatsheet.com/stocks/analyst-apple-has-an-innovation- problem.html/

CHAPTER IV

CONCLUSION

The battle between Apple and Samsung in US, concerning about several claimed patents, caused a financial disaster for Samsung. In the preliminary verdict released by the juries, Apple was awarded with US$1,049,343,540, which should be borne by Samsung as per the finding from the judge that Samsung had violated 6 out of 7 Apple’s claimed patents. The only Apple’s claimed patent that Samsung can avoid from was the charge was related to iPad design. However, the winning of Apple in San Jose Federal Court against Samsung was not its ultimate goal. Basically, this war was aimed to defeat Android. This Google-made Operating System was recognized by Steve Jobs, Apple’s founder, as an imitator that had threatened Apple’s fame. Furthermore, Jobs had vowed to sacrifice all Apple’s financial asset to have war with Google, which later the war was called as thermonuclear war. During the happening of this case, Apple had indicated its willingness to knock down Android through one of its major clients, Samsung. The first indication was by monopolizing Apple’s claimed patents against Samsung. Apple proposed a complaint on patent infringement done by Samsung, which contained 7 claimed patents to San Jose Federal Court, USA. But only 6 Apple’s claimed patents approved by the jury that had been violated by Samsung, 3 technical patents and 3 design patents. Those three technical patents cover several technologies such as pinch-to-zoom, tap-to-zoom, and bounce back effect. On the other side, those three design patents cover iPhone trade dress such as rounded- corners and rectangular shape and application icons. It was, still, a huge victory for Apple and disaster for Samsung. Then, the preliminary verdict from the juries had smoothened Apple’s temptation to monopolize it. Move back to 2010, when Apple and Samsung sat together to discuss licensing agreement for the disputed patents, Apple had set a high price for royalty fee that should be paid by Samsung for each

Samsung Galaxy smart phone devices (USD 30) and Samsung Galaxy Tab (USD 40) sold. It was recorded well in a leaked official document during the trial with the title Samsung-Apple Licensing Discussion. Those royalty prices accounted 5% from average price of Samsung Galaxy devices, which was USD 600. While, Samsung demanded Apple to pay royalty fee as the compensation of Samsung claimed patents violation with only 2.4% of each Apple’s disputed mobile devices’ prices. The high set royalty price done by Apple indicated its temptation to monopolize the claimed patents. The preliminary verdict in 2012, which was completely in favor with Apple, did not stop Apple to attack Samsung. Few days after the verdict in, Apple proposed a sales ban action to International Trade Commission (ITC) for 8 Samsung Galaxy devices. By using its legally-recognized monopoly, Apple asked ITC to ban those Samsung Galaxy devices, particularly in US market. Few of them were Samsung Galaxy S and S2, which become direct competitors for iPhone sale. This further action taken by Apple was described on how Apple did not satisfy yet tackling Samsung after gaining triumph in San Jose Federal Court. Invent around Apple’s patents was seemingly preferably for Samsung to advance its Samsung Galaxy technologies in order to compete directly to iPhone. But, Apple recognized it as Android influence. In another leaked official document titled Samsung’s Use of Apple Patents in Smartphone, Apple accused Google, by its Android, stimulating Android-based smart phone manufacturers to design around Apple’s patents. It made sense when it should be referred to Samsung’s leaked official document titled Relative Evaluation Report on S1, iPhone. That document revealed Samsung intention to solve 126 problems found in Samsung Galaxy S by comparing head-to-head with iPhone and working around Apple’s patents as the problem solving. In addition, Samsung also intended to design around Apple’s patents in order to respond the unfavorable verdict and avoid the effectiveness of sales ban action ordered by the authorities. For example, Samsung had effectively

implemented invent around activity right after the verdict and sales ban action took places in German court. Samsung added metal frame and speaker slots on front-face Samsung Galaxy Tab 10.1 to get rid of disputed patents and make sure the consumers capable to differ it from iPad. Samsung refusal upon Apple’s proposed licensing agreement in 2010, with total USD 250 million of royalty fee should be borne by Samsung, drove a higher financial damage to Samsung by awarding Apple with USD 1,049 million as the result of the preliminary verdict released by the juries in San Jose Federal Court. This refusal also indicated that invent around was still favorable, although the consequence was awful. It showed that Samsung preferred to do invent around and moreover in line with Apple’s accusation to Google, who generated its Android partners to work around Apple’s patents. The lawsuit between Apple and Samsung eventually put innovation and US consumers at stake. But this nightmare was just about temporary effects. Innovation would be slowed down because smart phone makers focus more to redesign their released soon smart phone to avoid disputed patents infringement. A new breakthrough on technology could be in trouble. Basically, new invention steps on combined existed inventions. Since Apple monopolized some its invented technologies through patent enforcement, including touch screen technology in determining command based on single and multiple fingers touch, it would hinder new inventions related to that particular technology. In the other side, recorded high set royalty fee from Apple would drive the increasing value of other patents held by non-Apple firms. Then, it would encourage non-Apple firms to invent around activity to create similar but different look and feel of iPhone and iPad. At last, innovation would be one step behind in response to the short-term running after the verdict took place. In another aspect, the battle between Apple and Samsung would also give effect to US consumers. During the adjustment time, when android-based smart phone makers decide to redesign its released-soon smart phones, lesser choices

would suffer US consumers. While, the raising value of patent license price would trigger the increasing price of devices as well. It would violate US consumers’ buying capability. But again, it would temporarily happen. In the long-term running, non-apple firms would be encouraged to develop new technologies that could overturn this nightmare. Various technologies emerged and provide new sophistication, which is expected to be the characteristic from each smart phone from different brands. It is also expected to reduce their tendency to design around Apple’s technologies. US consumer would be offered with more various smart phones, at last. The patent dispute case between Apple and Samsung has shown the inter- related between state, firms, and society. These three elements have influenced one and another and led the various rulings within different societies, USA and South Korea. The US court referred to the society in establishing its verdict to the case concerned, the power of firms has influenced the verdict in US and South Korea, which led those firms win in their home-based country respectively. While, the US society also drove the court into refusal over Samsung Galaxy sales ban in the late 2012. According to the findings above, patent has failed to encourage further innovation. Furthermore, the capability of patent to provide legal monopoly over patented technology or design worsened the smart phone competition. These two key points, from what patent believes in its original purpose, had supported companies’ nature that aim to reduce the competition. The monopoly power offered by patent system benefits the company, which is willing to squeeze its competitors by dragging them to the court on behalf patent infringement complaint or offering licensing agreement that possibly reduce the selling profit of the rivals. Design patent, even though it is weaker than utility patent, would be the preferred type of patents that used for the companies to do patent monopoly. It was proved by what Apple had done to Samsung through rectangular and rounded-corners design. It figures how the patent system is in a mess situation and failed to obtain its original purpose.

Rivalrous invention/competition theory had received different conclusion based on this research. Invent around activity done by Samsung had supported Barzel’s third thought in wasted economy invention activity, invent something that is similar but not infringe. While, Apple also supported another thought within this theory. It is related to the tendency of patent monopolist to slow down its passion to innovate and just relies on the existed patented technologies. Trip Chowdhry from Global Equities Research found that Apple just felt satisfy embedding its high definition touch screen technology in iPad and iPhone, while other Apple products still did not adopt that sophisticated screen technology. Apple also lost its pathway to innovate and only concern to release new product prematurely in order to respond massive attack from its rivals with their various products offered. In the end, rivalrous invention theory had applied in this case. This qualitative approach research was established by a thesis statement, which later becomes the foundation of this research. This research is intended to investigate the possibility of Apple to reap the market share of Samsung in US by promoting patent protection and to find out the correlation between invent around activity and licensing agreement based on this particular case. In addition, this research is also aimed to analyze the possible situation happened to the future of innovation and US consumers as the result of this patent lawsuit. The findings of this research are expected to be a stimulation of a further analysis about the effectiveness of patent system related to the company interest because patent system requires immediate improvement. This immediate correction on patent system is expected to give positive influence, particularly to the development of smart phone. In today’s business, smart phones accommodate what people need to support their daily activity, not only for professionals but also for young people and even housewives from middle up to upper income level. The vendors answer it by launching various types of smart phones that offer different technology according to the price. If this failed patent system is still maintained, the potential disputes will still lengthen the

historical records of patent lawsuit. Eventually, consumers should endure the consequence by paying higher price of smart phone and less innovative devices because the makers are busy with invent around activity.

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APPENDICES

1. Complete Data of Apple’s Disputed Patents, Technologies/Designs Covered, and Samsung Galaxy Devices Accused

Patent Bounce Back (Apple Patent number Single Scroll, Pinch to Zoom (Apple Name 381) Patent number 915) Description It covers the ability to show bounce This patent covers the ability of the effect when the user scrolls document to device in order to translate the the bottom. command from the user between single touch and multi-touch, like pinch-to- zoom action. Samsung Captivate Galaxy S II (AT&T) Captivate Galaxy S II (T-Mobile) Products Continuum Galaxy S II (unlocked) Continuum Galaxy S II (unlocked) Droid Charge Galaxy Tab Droid Charge Galaxy Tab Epic 4G Galaxy Tab 10.1 Epic 4G Galaxy Tab 10.1 Exhibit 4G Gem Exhibit 4G Gem Fascinate Infuse 4G Fascinate Infuse 4G Galaxy Ace Mesmerize Galaxy Mesmerize Indulge Galaxy Nexus S 4G Galaxy Nexus S 4G Indulge Prevail Galaxy Replenish Galaxy S Transform Prevail Galaxy S Vibrant Galaxy S 4G Vibrant Galaxy S 4G Galaxy S II (AT&T)

Patent Tap to Zoom (Apple Patent number iPhone Front (Apple Patent number Name 163) D'677) Description This patent encompasses the This patent includes the front-face competence of device to enlarge or design of iPhone center portions the view when displaying photos, document, or web page. Samsung Droid Charge Galaxy S II (AT&T) Epic 4G Galaxy S II Products (Unlocked) Epic 4G Galaxy S II (T- Fascinate Galaxy S II Mobile) Skyrocket 78

Exhibit 4G Galaxy S II (unlocked) Galaxy S Infuse 4G Fascinate Galaxy Tab Galaxy S Showcase Mesmerize Galaxy Ace Galaxy Tab 10.1 Galaxy S II (AT&T) Vibrant Galaxy Prevail Infuse 4G Galaxy S II (T- Mobile) Galaxy S Mesmerize Galaxy S 4G Replenish

Patent iPhone Back (Apple Patent iPhone Home Screen (Apple Patent Name number D'087) number D'305) Description This patent covers the ornamental This patent is related to the grid design of design of iPhone application icons in menu that has rounded- tips against black background Samsung Galaxy Captivate Galaxy S Showcase Products Galaxy S 4G Continuum Galaxy S 4G Vibrant Droid Charge Gem Epic 4G Infuse 4G Fascinate Mesmerize Galaxy Indulge Vibrant Galaxy S

Patent Name iPad Design (Apple Patent number D'899) Description This patent includes the industrial design of a tablet computer. Samsung Products Galaxy Tab 10.1

2. Samsung-Apple Licensing Discussion on October 5, 2010

3. Samsung’s Use of Apple Patents in Smartphones

4. Amended Preliminary Verdict From San Jose Federal Court, USA