Obama's Apple Rescue

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Obama's Apple Rescue

In June, the U.S. International Trade Commission banned the import of older iPhones and iPads, ruling that the devices infringed on one of Samsung’s most basic patents, regarding the way cell phones connect to a network. On Friday, however, the Obama Administration came to Apple’s rescue and vetoed the ban, a step no President has taken since 1987. (Samsung was the disappointed party then, too.) Obama did not simply bail out America’s homegrown high-tech champion; he showed how he plans to use the Oval Office to reform the U.S. patent system, one of the promised centerpieces of his technology policy.

In its complaint to the I.T.C., Samsung accused Apple of violating a number of patents. Ultimately, the I.T.C. found that Apple infringed just one of them, Patent No. 7,706,348, also known as the ’348 patent. Samsung says it is a “standard-essential patent.” Industries often coalesce around standard technologies, such as videotapes or Blu-ray discs. Standard-essential patents cover basic components of that technology: the spools in a VCR, or the laser diode in a PlayStation 3 that reads Blu-ray discs. The technology in the ’348 patent helps a mobile device’s baseband processor decode and encode the data on cellular networks—a bit like finding and playing your favorite radio station. Without this technology, cell phones and tablets could not connect to A. T. & T. or T-Mobile’s 3G cellular networks.

To facilitate the adoption of industry standards, standard-essential patents should be licensed at stress-free prices to anyone who wants to use them. (This is called “fair, reasonable, and non-discriminatory,” or FRAND, licensing.) Phone companies and mobile-device makers generally like FRAND licensing: standards eased the adoption of 3G networks. Just as Gilded Age industrialists standardized the gauge of railroad tracks in order to focus on building better trains, Apple, Samsung, Google, and others tried to set standards for the transmission of mobile data so that they could focus on building better mobile devices and applications. But Apple decided to use the technology without licensing Samsung’s ’348 patent, either because Apple was stubborn or because Samsung demanded too much for a FRAND license, depending on whom you ask.

Samsung did not ask for billions of dollars in monetary damages, as Apple did in a recent, separate patent-infringement lawsuit against Samsung, in California. Instead of going to federal court to sue, Samsung went to the I.T.C. The I.T.C. has become a trendy forum for patent disputes because it holds several advantages over the federal court: it can make speedy decisions without costly discovery; it has a limited appeal process; and its decisions do not have precedential effect, meaning that if Samsung lost at the I.T.C., it could try again in federal court. But the I.T.C.’s most attractive offering is that it can ban infringing imports without going through a federal court’s narrow criteria, which disfavors such bans. This is what Samsung wanted: it asked the I.T.C. to ban the import and sale of the iPhone 3GS, the iPhone 4, and older iPads entirely.

The I.T.C. obliged. Under the draconian law governing I.T.C. proceedings, an “exclusion order”—an import ban—is the punishment levied against patent infringers. The statute permits bans unless they harm the “public health and welfare” or “competitive conditions in the United States economy.” The I.T.C. found that Apple had infringed the ’348 patent, and reasoned that because the offending products were Apple’s older models, it would not harm the public interest to ban them.

But Samsung overplayed its hand. During the I.T.C. process, Apple argued that Samsung would only issue a license for the ’348 patent in exchange for a license to Apple’s nonessential patents—the patents covering the technologies that make the iPhone special and different from, say, Samsung’s phones. This demand, to essentially tie the licensing of Samsung’s standard-essential patent to Apple’s nonessential ones, earned Samsung a blistering dissent from one commissioner of the I.T.C. And now there is speculation that the other I.T.C. commissioners in fact granted the ban in order to trigger President Obama’s proposed I.T.C. reforms, which would make import bans more difficult to win.

Had the Obama Administration not stepped in, the ban would have gone into effect this week, and Apple’s older, discounted, A. T. & T.-friendly models—the iPhone 3GS, the iPhone 4, and the first three iPads with a cellular data connection—would have idled on barges in the South China Sea. For Samsung, a ban on Apple’s imports would have been far better than a one-time billion-dollar jury verdict. The ban would have derailed Apple’s current strategy of selling older models to compete with Samsung’s cheaper line of phones. It also would have emboldened Samsung to stretch the definition of FRAND licensing, and to demand more for its basic patents, which would potentially set off a terrible chain reaction of patent battles within the mobile industry, threatening to grind innovation to a halt.

As U.S. Trade Representative Michael B. G. Froman wrote in a letter explaining the Obama veto, the aggressive use of standard-essential patents is dangerous. Froman argued that SEP owners like Samsung should not squeeze competitors with outrageous FRAND license prices. He also argued that tech implementers like Apple should not refuse a FRAND license in an attempt to sabotage an industry standard. Railroad tracks should be railroad tracks.
President Obama’s veto should dim the attraction of the U.S.I.T.C. as a forum for patent disputes. Companies looking for a quick knockout will have to reëvaluate their options. Samsung’s lawyers may take their talents to Seoul, Tokyo, London, or other venues in which home-court advantage is increasingly important, but President Obama’s decision signals that forum shopping is no substitute for market competition in the United States.
Patent disputes are important: if an innovation is best served by patent protection, then infringement of that innovation should be punished. But President Obama’s vigilance is good policy because, as patent litigation explodes in the United States—it was up thirty per cent in 2012—essential technology standards should be off-limits. This metastatic growth of patent disputes is detracting from what tech companies do best, which is to build products that improve our lives.
Michael Phillips is an associate at a Wall Street litigation firm.
Photograph by Oliver Morris/Getty.

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