Economics Honor Thesis: The Market Effects of Smartphone Patent War

AN EVENT STUDY OF PATENT LAWSUITS ON SMARTPHONE PLAYERS’ PERFORMANCES IN THE PUBLIC MARKET

I wrote my economics honor thesis on smartphone patent war. You can view the full paper here:

http://www.scribd.com/doc/223837349/The-Market-Effects-of-Smartphone-Patent-War

Enjoy!

Usage of Social Media

I think it’s good that it’s very interactive among students, and I really learned a lot from my peers since everyone looks at patent issues from very different perspectives.

Blog:

For me, at first it was really hard to do these blog posts, since I tend to spend a lot of time on researching interesting and informative topics, and I want to be as comprehensive and as accurate as possible.

It did get easier because towards the end of the class, I knew about what I am interested in, so the topics that I would like to cover was narrower than before. It was also because I gradually became more comfortable with the class materials and was able to absorb them, so researching on new topics was not as hard.

I think blog is a wonderful tool for students to be more proactive and curious about the class topic, and being able to explore different topics really helped a lot for learning more in depth.

YouTube video:

I personally do not like doing YouTube videos, because even after a whole semester, being a self-conscious person, I still feel a bit awkward videoing myself talking in my room. English is not my first language, and it is not for some other students in the class. I suppose having people understanding my accent in videos takes some extra efforts, so maybe people would cherry pick sometimes. This might not be the case, but I just want to throw it out there.

Comment:

Comment is great since it allows me to really take ample time to read others’ blogs and view their videos. It helps me with expanding my horizon and see how other students approach the same topics from very different angles. It also introduce me to many new topics related to patent. 

Class Reflection

Overall, this class is a great experience for me. From this class, I learned a lot about what is a patent, what can be patented, how is it composed, how to test the validity of a patent, what’s the application process, and what does it entail when a patent is infringed, and how to mitigate the risks, as well as patent trolling behaviors and the smartphone patent ecosystem.

Personally, I found this class to be useful enough that I actually switched my Economics honor thesis to a topic that’s patent related. I am currently writing my thesis on understanding the impact of patent lawsuits on smartphone manufacturers’ performances in the public market. I always assumed that plaintiffs are going after the damage rewards or licensing deals, which can definitely be true in many cases. But from the first few classes, I learned the main reasoning behind all these messy and abundant lawsuits among top smartphone players: to slow down competitors’ pace in research and development, which is very different from what I thought from the very beginning.

Also, since I did a lot of independent researches for writing the blog posts, I had a great chance to understand many terminologies and their applications, such as standard essential patents, FRAND, functional claims, patent trolling, patent licensing, etc. Having a good understanding of these buzzwords really helped me doing my research since I had to read a lot of court rulings and dockets.

The reason why I take this class is because I’m going to work for Cornerstone Research as a full-time Economic Consultant. My job is mainly using financial and economic models to quantify damages for lawsuits, so the majority of our clients are big law firms. I’m certain that many cases that I will be working on are patent related. I strongly believe that being able to have a deeper understanding about patents is crucial for me to succeed in the workplace. 

Silly Patent: The Flatulence Deodorizer

https://www.google.com/patents/US6313371?dq=US+6313371&hl=en&sa=X&ei=UNteU523DujJ8wGPtIG4DQ&ved=0CDcQ6AEwAA

Have you ever find yourself in an awkward situation that you are next to someone, close enough for the person to breathe the same air as you do, but you can't help yourself with the desire to fart? Well, now I present you a perfect solution: the flatulence deodorizer!

The name of this patent says everything: the flatulence deodorizer discloses a pad to be worn by a user for absorbing gas due to flatulence. And let me tell you, this is a serious business: it can be purchased at http://www.flat-d.com/. The company has a number of products related to this technology.

Judging from the fact that they have a website up and running, this product, which sounds extremely ridiculous to me, is actually commercializable. Maybe there are people who are willing to wear an adult diaper after all to avoid embarrassing moments.

Now let's run the test of the three criteria for patents:

1. Novel:
I won't argue this point.

2. Non-obvious:
It's probably not as obvious for someone skilled in the prior art to create an adult diaper for deodorizing.

3. Useful:
It is useful, but will people actually be willing to wear them? In my personal opinion, wearing it is more embarrassing than the embarrassment caused from farting in the public itself.

Let me know what you think.

Silly Patent: Animal Ear Protectors

http://www.google.com/patents/US4233942

This invention provides a device for protecting the ears of animals, especially long-haired dogs, from becoming soiled by the animal's food while the animal is eating. And it looks like this:

Will you ever ask yourself, "Is this a reasonable concern that I do not want to have food in my dog's ears?" I mean, maybe as a dog lover, I do sometimes if I don't want my pet get super messy. But do I honestly want the discomfort that my dog has to suffer through in order to be neat? And is this even pretty or at least presentable to the public? Not so much.

Now let's run through the test for validity of this patent.

1. Novel:

To be fair, it is novel that no existing patents is anything like this one.

2. Non-obvious:

Yes, it is non-obvious, simply because I think nobody else would ever bother to even think about     having stuff over dogs' ears.

3. Useful:

Is it useful? Maybe and maybe not. But useful does not necessarily mean commercially viable. I doubt a dog owner would want to have his dog have this on and this might just torture the dog in many ways.

Let me know what you think.

Business Methods Obviousness

For many years, the USPTO took the position that "methods of doing business" were not patentable. However, court’s 1998 decision in State Street Bank & Trust Co. v. Signature Financial Group opened the doors for patenting novel methods of doing business. The court rejected the theory that a method of doing business was excluded subject matter. The USPTO continued to require, however, that business method inventions must apply, involve, use or advance the "technological arts" in order to be patentable.

So when is a business method non-obvious? In re Bilski is a case dealing with the patentability of business method. Bernard Bilski and Rand Warsaw applied for a patent on methods for hedging risks for commodities trading via a fixed bill system.

The patent is a method to provide a fixed bill energy contract to consumers. So consumers pay a fixed price for their future energy consumption in advance of winter based on their past energy usage. This way, if any given winter is usually freezing and require more energy for heating, consumers are protected by the fixed bill. However, if any given winter is usually warm and therefore require less energy, consumers would still have to pay for the fixed bill even though in reality they consume less compared to what they paid for.

The examiner rejected the patent on the grounds that "the invention is not implemented on a specific apparatus and merely manipulates an abstract idea and solves a purely mathematical problem without any limitation to a practical application, therefore, the invention is not directed to the technological arts."

Examination Guidelines Regarding Obviousness

Ever since the court’s decision in KSR Int'l Co. v. Teleflex Inc., the guidelines for determining obviousness have changed. Below is a summary of the several reasons an examiner can employ to support an obviousness rejection:

(A) Combining prior art elements according to known methods to yield predictable results;

(B) Simple substitution of one known element for another to obtain predictable results;

(C) Use of known technique to improve similar devices (methods, or products) in the same way;

(D) Applying a known technique to a known device (method, or product) ready for improvement to yield predictable results;

(E) ''Obvious to try'' - choosing from a finite number of identified, predictable solutions, with a reasonable expectation of success;

(F) Known work in one field of endeavor may prompt variations of it for use in either the same field or a different one based on design incentives or other market forces if the variations would have been predictable to one of ordinary skill in the art;

(G) Some teaching, suggestion, or motivation in the prior art that would have led one of ordinary skill to modify the prior art reference or to combine prior art reference teachings to arrive at the claimed invention.

A patent applicant can challenge the examiner’s decision by arguing:

(1) One of ordinary skill in the art could not have combined the claimed elements by known methods (e.g., due to technological difficulties);

(2) The elements in combination do not merely perform the function that each element performs separately;  

(3) The results of the claimed combination were unexpected," as well as evidence relating to the secondary considerations enunciated in Graham(long-felt need, commercial success, and failure of others). 

In class, I was still confused about (E) – the “obvious to try” doctrine. Hence, I did some additional research and found out that the obvious to try doctrine was originally developed by Judge Rich in Huellmantel, Tomlinson, and O’Farrell. According to Judge Rich, "obvious to try doctrine is relevant when “a prior art suggests the possibility of a claimed invention, but expresses or infers at least some uncertainty that the invention can be made or will function as expected”. The standard to determine whether this doctrine should be employed or not is based on “whether there is a reasonable expectation of success”.

Does any of these doctrines surprise you or confuse you? Why?

Notoriously Famous Trivial Software Patents

Bad patents, also referred to as trivial patents, are “patents that cover either trivial inventions or inventions that would have been obvious to persons of ordinary skill in the art at the time the invention was made.”

Bad patents are especially widespread for the software industry. The reason that bad patents exist is because patent examiners, unfortunately, do not have a comprehensive knowledge set of the software technology they are examining. The humongous amount of software can allow some bad patents bypass examiners even though these patents are only some trivial extensions of existing software patents.

Currently, Apple and Samsung, among many other smartphone manufacturers, are constantly accused of being granted trivial patents.

In the blog post, I want to explore some notoriously famous trivial patents and their obviousness.

XOR flashing cursor

The first one is XOR-draw for screen cursors. The XOR patent covers the use of the machine language XOR (which is short for a logical operation: exclusive or) operator to make a cursor blink in a bitmapped display. In another word, it’s a patent for a flashing cursor on a computer screen using XOR language. This patent is definitely on the top of the list of patent nonsense. First of all, it was actually filled long after almost every computer graphic company already knew how to use it. But firms in the early days simply didn’t bother to file a patent for such a thing that’s so trivial. Any given software program is comprised by numerous pieces of technologies like this one. One critic said, “It would be absurd to grant patent privileges to each such idea.”

However, USPTO did approve this patent, and many tech companies are paying loyalties towards it:

Autodesk had to pay $25,000 to ``license'' this patent;

Amiga CD32, the first 32-bit CD-ROM based video game console, went bankrupt since they were not able to pay $10M in patent royalty for their use of XOR patent.

You can view this patent here: http://www.google.com/patents/US4197590

Amazon 1-Click

“1-Click shopping removes the single biggest friction point for completing an online purchase: the checkout process…In fairly broad terms, it protects any E-commerce transaction executed with one-click using stored customer credentials to validate.”

There is no doubt that 1-Click has generated a huge amount of additional sales for Amazon, since now customers don’t have the time for a second thought before they click through the transaction. And since credit card information is already stored in the system, customers, supposedly, would feel less guilty about spending money on things they probably don’t need.

Within the US, Amazon has sued under it (Barnes and Noble) and they are also licensing it (to Apple, who uses the patent in iTunes store). However, 1-Click never get passed in Europe.

"The Board does not consider that the idea of reducing the number of steps necessary to make an order would contribute to inventive step," the EPO said.

You can view this patent here: http://www.google.com/patents/US5960411

Google Doodles

Doodles are the customized version of the Google logo that the company puts on its home page to celebrate holidays and other events. Well, for this patent, how trivial it is, you go figure.

You can view this patent here: https://www.google.com/patents/US7912915

Can You Patent Software?

Software is a pretty interesting field in the patent world. There has been a lot of debates regarding whether software can be patented or should be patented. Some people argue that software is essentially an algorithm in a programming language which is used to solve some complicated problems, and it should be treated just like math, which is not patentable.

However, software is not equivalent to math if we think about it this way: “the code is a series of instructions written using mathematical logic as its foundation.” Software code is heavily influenced by math, but the nature of its usage is very different. We need to focus on the output of the software code and evaluate whether the output is something sufficiently novel and nonobvious to be patented.  

“Although software functions by using algorithms and mathematics, it may be patentable if it produces some concrete and useful result. However, what cannot be patented is software whose only purpose is to perform mathematical operations. Thus, software that converts one set of numbers to another will not be patentable; but software that converts one set of numbers to another to make rubber will be patentable.”

According to case law, only software that has a “technical effect” can be patented. And this means that the contribution of the patented technology is novel and not obvious to a person skilled in the art. However, this term is rather vague and is ultimately decided by USPTO. Therefore, we have critics argue that many software should not be patented because they are trivial and would have been obvious.

When Not to Use Trade Secrets

Even though trade secret has a number of advantages, it has some disadvantages as well. In the following scenarios, patent would be a better option than trade secret.

1) The technology can be reverse engineered or invented independently

If the technology can be taken in parts and be analyzed, it is not a good idea to keep it a trade secret. One example is hardware. If Apple wants to know how Samsung Galaxy S4’s processor works, they can take the smartphone apart and understand exactly what’s inside. Apple can manage to produce something very similar, and then release the new product to the market in order to compete with Samsung. Another example is software. Reverse engineers can use several tools to disassemble a program. If someone else has developed the technology, he can claim ownership over it by filing a patent, even though you are the one who first come up with it.

2) Licensing the technology out

If the firm wants to license out the invention, it would be harder to manage keeping the technology a secret if the licensor fails to maintain the secret. What’s more, a licensor would be more attracted by patented technologies since the rights are clearly defined by patents.

3) It is costly or too difficult to maintain the trade secret

Again, using Coca-Cola as an example, the firm is really good at protecting its secret formula. It’s known that the piece of paper containing the recipe lies deep inside a vault in Atlanta.

“To protect the formula only a few corporate executives know the exact recipe, and each is bound by oath not to reveal its contents. When one of these individuals die, the others approve a successor. These keepers of the recipe travel separately to ensure that a single accident won't eliminate all of them.”

The amount of work required to protect trade secret can be highly costly. Costs include restricting physical access to the secret, and a lot of contract costs associated with the duty not to disclose. Nonetheless, even as careful as Coca-Cola, the firm had an insider, Joya Williams, a former secretary who was convicted of trying to selling the formula to Pepsi in 2007. Managing employees to not disclose or sell the trade secret can be the most challenging task.

4) Risks involved with utilizing trade secret

The value of trade secret can be wiped out overnight once it’s disclosed to the public. A company can easily lose its core competency if its sales and operations are depending on the trade secret. Firms definitely need to be extra careful regarding choosing between trade secret and patent. 

When to Use Trade Secrets

When should the inventor use trade secrets? There are a few scenarios when trade secrets would be favorable:

1) When other competitors cannot reverse engineer your invention

A classic example would be the secret formula for Coca-Cola, which cannot be reverse engineered. This is because even though we might be able to identify most of the ingredients, there are a few that are hard to identify since their tastes are so similar; plus, it would be impossible to figure out the exact amount of usage and conditions of these ingredients, even though we can’t really differentiate the tastes among different mixers.  

2) Trade secret can theoretically last forever unless there is a disclosure

Patent will only remain in force for 20 years since the filing date of the patent application, but trade secret protection has the advantage of not being limited in time.  If the inventor of Coca-Cola formula had applied for patent protection, this formula would be made public a long time ago and became accessible by anyone. However, keeping this formula as a trade secret has allowed Coca-Cola to continually dominate the soft drink industry over one hundred years. 

3) Something that is not patentable

In the case of customer lists, sources of supply or manufacturing process, these are clearly not patentable. Firms however would love to keep information like these secrets to protect their businesses.

4) The ownership of the technology has short duration

If it takes longer for a patent to be issued than the technology to be used, obtaining a patent has very little or no use for short-lived and soon-to-be obsolete technology.

5) Trade secrets do not need to be registered

This means first of all, the inventor doesn’t need to pay for the expensive registration costs. Costs involved with filing a patent include:

-          Patent search with detailed patentability assessment

-          Provisional patent application prepared and filed

-          Filing fee to the USPTO

-          Nonprovisional patent application based off provisional filing

-          Filing fee to the USPTO for nonprovisional patent application

-          Professional illustrations for nonprovisional patent application

Costs vary based on the technology involved. Some simple inventions may cost under $10,000, but for a complex technology, the cost can easily go up to $15,000 to $30,000 and more.

On the contrary, trade secrets need none of these above. Yet, be mindful, depending on what kind of information it is, the costs to keep the information confidential can be extreme high in some situations. 

Standard Essential Patents in Context

http://www.fosspatents.com/2013/04/apple-defeats-samsung-in-california.html

http://www.fosspatents.com/2014/02/korea-fair-trade-commission-clears.html

In the last blog, I talked about what is Standard Essential Patents (SEPs) and what are the issues caused by them. Now, I would like to pay a close attention to the smartphone industry and explore some of the battles among companies and what are the implications.

“In the smartphone and device space, many SEPs pertain to WiFi, 3G and 4G (such as WiMAX and LTE) technology that allows all wireless broadband devices to utilize the networks of wireless broadband providers.”

Standardization can have a lot of benefits. If we think about wall sockets, there are all exactly the same so that we can charge many different electronic devices using the same socket. Because of standardization, we can have more robust innovations in a particular industry since they are very similar to one another and they must compete on R&D in order to gain market share.

Samsung was accused of abusing its SEPs and breaking the antitrust laws by Apple, but Korea Fair Trade Commission (KFTC) found the otherwise to be true and I cite it here: "more than 50 companies hold over 15,000 SEPs relating to 3G wireless communication (UMTS/WCDMA) technology". Therefore, KFTC ruled that Samsung has not used its SEPs in a monopolistic way.

So far, there is only one SEP infringement lawsuit filed by Samsung prevailed, U.S. Patent No. 7,756,087, and the rest of them are not successful. What’s more striking is Samsung actually has zero successful non-SEP assertions worldwide. It has failed miserably in Germany (three times already), in France, in Italy, and in the Netherlands. I think purely based on the statistics, we can derive some interesting insights:

- Does Samsung really have a case here?

- What are they trying to achieve by filling these SEP infringements?

- Are they abusing SEPs?

- If a SEP related lawsuit prevails, what would the defendant have to lose?

A Deeper Look into Standard Essential Patents

http://www.fosspatents.com/2014/02/korea-fair-trade-commission-clears.html

Standard essential patents (SEPs) have gained its publicity in the press recently due to a chain of SEP litigations between Apple and Samsung. In the past decade or so, SEPs have increasingly becoming an issue for many sectors. I thought I would like to explain what is SEP and how does it work.

So imagine that you are Apple and you are trying to enter the Korean market. In Korea, there is a number of technologies that are established as the standard in the smartphone industry. It could be de facto, which means that there isn’t an explicit agreement within this industry but firms have adopted the standard. The standards can also be de jure, which means a government agency has imposed that standard on the industry.

So when Apple wants to enter the Korean market, Apple should incline to meet the standard of technologies. And now let’s assume that Samsung has either developed or acquired a bunch of technologies which are now the SEPs for the industry in Korea. Therefore, Apple would have to pay royalties to Samsung in order to acquire license on these technologies. Samsung, being the SEP owner, should offer a fair price for anyone who comes to them seeking for licensing. Nonetheless, if Apple chooses not to purchase but later got found out that it has infringed Samsung’s SEPs, then it will be forced to pay royalties as well as a fee for damages.

Since SEPs can create barrier of entry in certain industries, SEPs are required to be offered at a fair, reasonable, and nondiscriminatory (FRAND) price so that other firms can have access to the market. However, the definition of FRAND is really arbitrary and there isn’t a regulation over it, unless the SEP owner voluntary agrees to be bound by a standard setting organization (SSO). Sometimes, the owner of SEPs would actually bundle SEPs with some non-SEPs and license them out together. This can really complicate things. Hypothetically speaking, if Samsung is actually licensing out a portfolio of both SEPs and non-SEPs, how much should Samsung charge the licensees for? Should it still follow the FRAND rule if non-SEPs are involved? Again, there isn’t any regulations that specify the mandatory pricing strategy for this situation.

We can clearly see that the legal system for SEP related regulations is far from completed. I personally feel the follow aspects should be regulated:

- SSEP owners’ duties and rights

- Licenses’ duties and rights

- Standard for FRAND

- Pricing strategy for non-SEPs or the bundle of SEPs and non-SEPs

- Prevention of SEP abuse

- Legal damage payment for infringing SEPs 

Functional Claims Explained

http://patentlyo.com/patent/2011/07/the-frequency-of-means-plus-function-claims.html

http://patentlyo.com/patent/2014/01/functional-language-patents.html

What is functional claims?

A Functional claim will be written in what is called means-plus-function form. In patent law, claim defines the scope of your monopoly patent right over the market. Therefore, an inventor would want the claim to cover as wide as possible to protect his innovations from competition and patent infringements.

There are two ways to structure a claim: functional limits and structural limits. Like the words suggest, functional limits would describe the function of the patented technology, whereas structural limits would go into the details of the construction of the patented technology.

In proper functional claims, we can expect to see the following phrases:

-         -  Means

-         -  Means for

-         - Configured to

Why draft functional claims?

Apparently, drafting a function claim gives you broader scope to describe your patents. To give you an example, it’s easier to protect your design for the first cellphone in the market by claiming ownership over “a device that’s mean for remote, wireless communication over a radio link” than “a device that’s made of a plastic or metal rectangular piece with a screen, speakers and buttons.”

When to use functional claims?

It’s more reasonable to utilize function claims for electrical and electronic devices since the physical structure can be rather hard to explain in a clear manner. There might be too many parts and configurations that inventor has to cover in order to achieve his goal. On the contrary, using a function claim can characterize the innovation using significantly fewer claims.

Software is another good example for proper usage of means-plus-function forms. Since software can be written by many programmers who can use different codes to achieve the same purpose, it would be better to emphasis on protecting what the software can accomplish rather than simply protecting the actual lines of codes.

Patent Troll: “Carrot and Stick”

http://www.fosspatents.com/2014/01/huawei-settles-with-rockstar-consortium.html

In late January this year, Huawei and Rockstar Consortium filled a joint motion to dismiss the lawsuit against Huawei on its Android-based devices. We don’t know the amount of money that Huawei had to pay to Rockstar, but one thing for sure, it’s certainly not a small amount that Rockstar would like to settle for letting Huawei off the hook.

Rockstar is known to be a patent troll for its exploitation of ex-Nortel patent portfolios. Its core value lies in reengineering existing products on the market and collecting evidences that they have used Nortel patents. This way, Rockstar can therefore generates financial rewards by suing these companies for patent infringements.

There are two ways for patent troll to make money, and we would like to use the carrot and stick analogy to explain this. In Rockstar’s case, a carrot licensing would be Rockstar goes after firms and tries to sell its patents by claiming “my patented technology is cheaper/ better/more efficient/more appearing, etc.” This way, Rockstar can friendly lures target companies to licensing its products. So the licensee is not under compulsion but rather persuasion to license the patent.

In contrast to carrot licensing strategy, stick licensing approach is Rockstar actively sources firms that have been using ex-Nortel’s patent technologies, and approach them with a threat of patent infringement lawsuit. “The value proposition here is ‘take a license or else… (I will see you in court).’” It’s an interesting argument that if it is not the fear for lawsuits, nobody would ever buy license. Hence, “every carrot license is really a stick license in disguise”.

Patent Licensing in a Nutshell

http://patentlyo.com/patent/2014/01/acquired-patent-licensing-guest-post-by-prof-risch.html

Why license your patent?

Should you license or manufacture your own invention? This difficult question has always troubled inventors. When should the inventor invest massive amount of time and energy figuring out the best business plan and execute it?

If we think about it, producing a product might sound easy, but there are many steps involved. First of all, you need to invest in factories and warehouses. And this is a whole lot of money upfront. Then you have to work with engineers and designers to further improve the product. Most importantly, you will need to establish a sales and marketing team to negotiate with various distribution channels and get your products on the shelf. These steps cannot be done overnight. They are capital-intensive and time-consuming, so before you are absolutely certain that you can make your money back, think twice about the amount of financing that will be needed before producing the products on your own.

On the other hand, licensing your patent out can make things easier, and it will be less-expensive for you to start generating returns. The drawback is of course your profit margin will go down. Be mindful, certain products might be very easy to get a head start, so it makes sense for you to start your own small business, while some other products are too complicated in nature that licensing would be the best way to go about it.

How to make money?

“A license is simply an agreement in which you let someone else commercially use or develop your invention for a period of time.” You can sell your patent outright, or you can simply license out your invention and collect royalties.

An exclusive license is a permanent transfer of ownership rights from you to the licensee. You give up the rights to use the patent and the right to sue for patent infringement. The licensee now take over all the rights you had previously. A non-exclusive license is giving rights to the licensee for using your patent; essentially, you are promising that you won’t sue the licensee for patent infringement.  As an inventor-for-royalties, you are pretty much waiting for the paychecks to come periodically while having more time to allocate to creating more innovations. 

If You Can't Beat Them, Sue Them

http://www.fosspatents.com/2013/11/failed-44-billion-bid-for-nortel.html

Rockstar, a consortium formed to negotiate licensing for patents acquired from bankrupt Nortel Networks, is consisted of six industry giants: Apple, Inc., BlackBerry, Ericsson, Microsoft, and Sony.

To understand why Rockstar has been numerously accused for being a patent troll, we need to first of all understand its nature. It’s a patent licensing company that owns more than 4,000 patents, which are developed by Nortel. The business model is claimed to be patent licensing and patent sales.

Something very interesting about Rockstar is when you go to its website, there is a tab called “Innovation”. However, instead of talking about how the firm can bring new technologies and innovations to the society, it talks about “protect when necessary” and “when patent infringement occurs”. So what Rockstar essentially does is to help its six members defend their patents against infringement. Its business roots in multi-million and sometimes multi-billion dollar settlements, and of course, forced licensing agreements.

With a group of smart engineers - many of whom are patent holders themselves - Rockstar however does not focus on research and development. Its engineers are too busy reverse engineering on its six owners’ competitors’ products, and suing them for damages.

Rockstar filed lawsuits against Google, Samsung, HTC and other Android manufacturers, and most likely file more in the future. This Nortel patent portfolio is truly a nuclear stockpile; it can be very dangerous in the wrong hands. If Google owns it, it would further strengthen Google’s portfolio and gives it more monopoly rights over the market. Nonetheless, the technology giant Google failed to win Nortel over with its highest bid $4.4 billion against Rockstar’s $4.5 billion bid. Some people were relieved when Google didn’t take over Nortel, but now it seems that Nortel is still in the wrong hands after all. Innovations are discouraged and customers are ultimately negatively affected.

Impact of Patent War on Smartphone Ecosystem and Its Implications

The smartphone patent war is a maze. All the major players are tangled up together and each one of them is trying to find a way to block others, while finding the best way out.

However, with more than 250,000 patents in play in the smartphone ecosystem, it is virtually impossible for either company to achieve a decisive victory. And it seems like there is no significant influence on brand recognition regardless of the result. Then why are companies so pumped at beating each other knowing it won't knock them down? Do they really need the billions of dollars claimed? Will it even product positive cash flows when firms are feeding all the expensive law firms to help them fight for the case?

The answer is simple: Firms want to slow down the competition while enjoying dominating the market sales. They are dragging each other from the back to prevent them from creating newer and better technologies to regain the market.

Go back to the question, does winning a patent infringement lawsuit has any material impact on the brand name? Currently, it seems that stockholders would respond to the lawsuit's outcome, but consumers are indifferent regarding to what is happening in the court room. To customers, a smartphone is a smartphone, a device that can allow people to communicate and social with each other, play games, track calenders, etc. It doesn't really bother a customer that Samsung copied Apple's rounded corners design; the thing that a customer cares about is really just how much he likes the device in terms of functionality and usability. 

But look at what patent war has done to the smartphone ecosystem. It slows down innovation generation. It's anti-competitive. Firms spend $1,000 per hour on IP lawyers instead of engineers to defend its products. All in all, it's counterproductive to what would actually benefit costumers. The patent war is malicious; in the long-run, it will create a vicious cycle that would severely damage the smartphone ecosystem.

The Curious Case of Motorola Changing Hands

First announced in August 2011, Google offered $12.5 billion to acquire Motorola Mobility. Motorola is great at making devices with a total history of over 80 years, and Google on the other hand, is the pioneer at software innovation, so the marriage of these two seems to be a great idea at that time to many people. Google needed Motorola to strengthen its patent portfolio, which was crucial for Google to defend itself from numerous lawsuits from Apple, Microsoft, Oracle, along with other aggressive competitors. At the time, Motorola had 17,000 patents, with 7,500 more patents pending. It's the treasure land for Google to dig up armors and swords, and be more offensive in the smartphone patent war in order to defend its Android operating system.

It was a very interesting case because at that time, Google got outbid by Apple in a $4.5 billion acquisition deal of acquiring Nortel Networks, a Canadian telecommunications manufacturer. This gave Apple strategic advantages to go head-to-head in the battle with its main competitors in the market, including Google Android system. Ever since acquired Nortel, Apple started filing massive amount of patent infringement lawsuits in order to slow down the competition, and dominate the fast-growing market.

Just a few days ago on January 29th, Google once again dropped a bomb announcing that it would sell Motorola Mobility to Lenovo for $2.91 billion. This brings some whole new dynamics to the game. Lenovo is a Chinese technology company which acquired IBM personal computer division in 2005, and found its way to enter the US market with IBM's solid PC products.

"Using Motorola, just as Lenovo used the IBM ThinkPad brand, to gain quick credibility and access to desirable markets and build critical mass makes a lot of sense."

It's obvious for us to see the Lenovo is eager to cut a share in the U.S. smart phone market. Previously, Lenovo, among other Chinese brands such as Huawei, is experiencing distrust from U.S. customers. Chinese products are perceived as low quality and have potential security issues. But accessing Motorola's patents and having this brand name would allow Lenovo to muscle its way into the playground of smartphones, and potentially adds more conflicts in the patent wars.

If we think about it, there are many reasons why a company would want to acquire another existing business, but for the three above cases we have seen here, there is one fundamental reason for them to do the acquisition: to expand its patent portfolio, to build higher and more solid wall around its castle, which also enables the firm to attack better. Acquisitions add value in a different way that it is more strategic rather than valuing the company's intrinsic value.  

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I was working for a venture capital firm in Bay Area over the past summer, and I’m quite familiar with the importance of having patents. I have seen it many times that lacking certain patents on the products can result in losing potential massive amount of funding from ventral capitalists.

I am interested in this course because now I want to see the other side of the story from an engineer’s perspective. Since I will start working at Cornerstone Research this summer and doing a lot of cases that will involve patent infringements, I would like to dig into the mechanics of patent claiming and learn more about it in depth. I would like to take up the challenges and go through the process from protecting intellectual properties to avoiding patent infringements. There is no doubt that this course would help me think more critically and analytically, and allow me to contribute my full potential to my company. 

Blog 1

My name is Tian Zou, a current Economics senior year student at Cal. I’m originally from Beijing, and I lived in Philadelphia before I came to Cal. I will start working at Cornerstone Research, an economic consulting firm in New York post graduation.

I’m open and easy to get along with. I like to social and mingle with others; I get to know many interesting people with very diverse backgrounds this way. I’m also adventurous and like to think about things from different angles. I am always up to trying new things and I want to acquire new skills. I have been trying gymnastics and fencing so far this year and having a blast. I am a huge believer in that the learning curve should never end. I enjoy and appreciate the beauty around me and there are times that I would just jog into the sunset along Berkeley Marina to enjoy the scenery and peacefulness.