Why Apple escalated its war on Samsung – and won

Apple, Samsung battle began two years ago and devolved into a fundamental disagreement over the importance of design patents. Samsung now faces huge damages and a potential ban on sales of its Galaxy smartphones and tablets. 

In August 2010, just a few months after Samsung Electronics launched its Galaxy smartphone, a team of Apple Inc lawyers flew to South Korea.

Apple's late co-founder, Steve Jobs, had already told Samsung executives at a meeting earlier that summer that he considered the Galaxy S, based on Google's Android operating system, an illegal copy of the iPhone. But given the extensive business ties between the two companies - Samsung is one of Apple's key component suppliers - a negotiated solution seemed most likely.

The Apple attorneys were blunt: "Android is designed to lead companies to imitate the iPhone product design and strategy," read the second slide in their presentation.

But the meeting did not go well, according to a person familiar with the case. Samsung attorneys bristled at being accused of copying, and produced a set of their own patents that they said Apple was using without permission.

The meeting brought to the fore a fundamental disagreement between the two companies, and set the stage for a bitter, multi-country patent dispute that led to Friday's U.S. jury verdict that Samsung had violated Apple's patents. The jury awarded Apple $1.05 billion in damages, which could be tripled as the jury found Samsung acted willfully.

Samsung could now face a costly ban on sales of key smartphone and tablet products. Shares in Samsung - the world's biggest technology firm by revenue - tumbled more than 7 percent on Monday, set for its biggest daily percentage drop in nearly four years, wiping $12 billion off its market value.

Samsung says it will seek to overturn the decision, and the worldwide patent battles among tech giants are hardly over. But for now at least the decision in what was widely seen as a critical case promises to re-set the competitive balance in the industry.

The vast majority of patent disputes settle before trial, particularly between competitors. In this case, though, the stakes were just too high - and the two companies ultimately had very different views of the often murky legal issues.

Samsung believed its wireless communications patents were strong and valuable, and would serve as a counter-weight to any Apple showing of infringement, people close to the case say.

The South Korean company also didn't believe Apple could or should be allowed to claim patent protection on design elements like the form of a rectangle, or the front flat surface embodied on the iPhone.

Apple, for its part, considered its feature and design patents to be very high up on the intellectual property food chain - and demonstrating their validity was critical to a much wider war against Android.

The two companies never came close to settling their differences, according to courtroom testimony, trial evidence and interviews with several sources close to the case.

And when it came to the trial, Samsung's lawyers miscalculated in arguing that a verdict for Apple would harm competition in the marketplace. The jurors, led by a foreman who holds his own patent, were more persuaded by Apple's pleas to protect innovation. For them, it ultimately wasn't even a close call.

A spokesman for Samsung in Seoul had no immediate comment.

CORDIAL BUT ADAMANT

Apple launched the iPhone in 2007, revolutionizing the mobile phone market. But later that year Google, then still an ally of Apple's, unveiled the Open Handset Alliance, with the aim of distributing its Android smartphone software to all-comers.

Google's open approach quickly caught on among manufacturers looking to compete with Apple. The strategy infuriated Jobs, and by 2009 relations between the two companies had soured and Google's then-CEO, Eric Schmidt, left Apple's board. Jobs' biographer famously quotes him as accusing Google of "grand theft" and vowing to "go to thermonuclear war" over the issue.

In January 2010, Taiwanese phone manufacturer HTC Corp launched a touch screen, Android-based smartphone that sported features very similar to the iPhone. Apple sued in March of that year, and the Android smartphone patent wars were on.

HTC, though, was a minor player compared with Samsung.

After the cordial but failed August 2010 meeting, attorneys from Apple and Samsung talked in a series of meetings both in South Korea, California and elsewhere in the United States.

Apple's attorneys set to work putting a price tag on a royalty demand. By October 2010, they had concluded that Samsung should pay $24 per smartphone, and $32 per tablet. Based on Samsung's own estimation of its profits, Apple's royalty payments would effectively wipe out more than half of Samsung's margins on any phone priced less than $450.

And, Apple's offer wouldn't have covered the "unique user experience" patents Apple holds dear. "We made that clear," said Apple licensing chief Boris Teksler.

By the end of 2010, the meetings stopped as the two sides were too far apart.

VIEWED AS RIP-OFF

Apple hoped its relationship with Samsung would make filing an actual lawsuit unnecessary. Yet instead of wilting under Apple's pressure, Samsung instead pressed its own patent claims, including a critical one relating to how mobile products send and receive information over wireless networks.

Samsung eventually would request a 2.4 percent royalty on those patents, or $14.40 per device.

But Samsung had committed to license its wireless patents on fair terms to competitors over the years, in exchange for the technology becoming part of the industry standard. Courts have generally been reluctant to bar companies from using such "standards essential" patents, and thus they are often less valuable than other types of intellectual property.

Then, in early 2011, Samsung released the Galaxy Tab 10.1. To Apple, it was a clear rip-off of the iPad, and showed Samsung had no intention of modifying its products.

Apple sued Samsung in a San Jose, California federal court in April 2011, saying the Korean company "slavishly" copied its designs. Samsung quickly counter sued, and the dispute bled into at least 10 courts around the world, including Australia and South Korea.

Over the next year, outside law firms hired by both companies racked up thousands of billable hours around the world, but no decisive rulings threatened either side. Jobs passed away in October 2011, and Cook carried on the litigation, filed "reluctantly," he said.

Until recently it had mostly been a see-saw battle. Apple largely succeeded in thwarting HTC. But earlier this year a federal judge in Chicago threw out a case pitting Apple against Google's Motorola Mobility unit, saying neither side could prove damages.

For Apple, the California lawsuit against Samsung took on even more urgency as it sought to prove the basic validity of its iPhone and iPad patent claims.

It scored its first serious victory in the San Jose court when U.S. District Judge Lucy Koh issued two sales bans: one against the Galaxy Tab 10.1, and the other against the Galaxy Nexus phone. In her ruling on the tablet, Koh said Samsung had the right to compete, "but does not have right to compete unfairly."

Yet Koh repeatedly urged the two sides to settle. Last month, Cook and his Samsung counterpart Choi Gee-sung participated in one last mediation in an attempt to stave off the impending U.S. trial.

They couldn't agree. Besides the dispute over the "standards essential" patents, Samsung believes it has a stronger patent portfolio than Apple when it comes to next-generation technology like 4G.

OUT OF TIME

The trial began on July 30. Apple presented top executives who testified in coherent narratives, and revealed damaging internal Samsung documents that showed the company modifying its products to be more like the iPhone.

Samsung's case was far less slick. Koh gave both sides 25 hours of trial time, but Samsung lawyers used up too much time in the beginning and couldn't cross examine some Apple witnesses towards the end. Samsung employees testified through interpreters, or in video depositions that alienated jurors.

"Instead of witnesses, they sent you lawyers," Apple attorney Harold McElhinny said during his closing argument.

And while Samsung's own patents were a major part of behind-the-scenes negotiations, at trial its lawyers struggled to present them on an equal footing with Apple's intuitively comprehensible design and feature patents.

Samsung could have opted for a separate trial on its patents, but declined. Its lawyers may have believed that placing its own allegations in front of the same jury would balance out any toxic impact from breaches of Apple patents.

It didn't work. Samsung violated six of Apple's patents, the jury said. Whether damages will be tripled is a decision for Koh in the coming weeks.

Samsung asked for up to $399 million on its standards patents. It got nothing.

Samsung has vowed to keep fighting. It could get an appeals court to delay any potential sales ban, which would give it time to bring new, modified products to the market.

But barring a reversal on appeal, Apple now has a clear verdict: how it values its intellectual property is more than just a theory.

The case in U.S. District Court, Northern District of California, is Apple Inc v. Samsung Electronics Co Ltd et al, 11-1846.