Can cross-licensing end the smartphone patent wars?
Is the recent patent cross-licensing agreement between Apple and HTC a paradigm for a way out of the smartphone patent wars? This blog examines why this is unfortunately not the case.
Patent warfare, the industry wide litigation over patent rights, has occurred in one form or another for at least the last one hundred and fifty years. In the mid to late 1800’s there were episodes of mass litigation around sewing machines and farm machinery, both of which sparked calls for patent system reform similar to today. These early episodes of patent warfare were eventually solved by the parties coming together to cross-license (or in cases of more than two parties, ‘pool’) their patents. Cross licenses are the law’s equivalent of a cease-fire, since they effectively prohibit any further patent-related litigation. In the highly litigious climate of the smartphone marketplace, it is worth asking the question, can cross-licensing end the smartphone patent wars?
There are some glimmers of hope. Last Saturday (10 November), Apple and HTC brought an end to their on-going patent warfare by agreeing to cross-license all current and future patents for a period of ten years. The settlement is significant, as it shuts down Apple’s longest running lawsuit against an Android manufacturer. In fact, it is currently the only settlement between Apple and an Android manufacturer. Despite this small gain on the side of patent peace, there are serious reasons to doubt cross-licensing and patent pools to be panaceas to the smartphone patent wars. These reasons include, first, strategic considerations, which may encourage companies to keep on litigating, and, second, the presence of a novel class of patent holder for whom patent peace is not in its best interest.
Strategic reasons to keep litigating
Since cross-licenses are effectively settlements to a patent dispute, they are concluded in the shadow of litigation. This means that their terms often reflect the relative strengths of the parties’ positions as revealed in Court. If both companies fancy their chances in Court they will continue to litigate until one party is shown to clearly have the upper hand. But determining when to stop litigating is very much a balancing act: companies must weigh the continued legal costs, the risk of injunctions (for and against), and definitive findings about patent invalidity against the chances of receiving damages and an increased freedom to operate. If the stakes are high enough on both sides it is sometimes rational to go on litigating until no options are left. In the other Apple versus Android cases of Samsung and Motorola Mobility, this seems to be the case. Numerous offers of cross-licenses have already been proposed and rejected by the parties, as they continue to jostle for stronger positions in the Courts.
The threat of Non-practising Entities
One significant complicating factor for the emergence of a general industry-wide patent peace in the smartphone sector is the presence of Non-practising entities (‘NPEs’), sometimes known as ‘patent trolls’- companies who own patents but do not practise them. Unlike practising companies, NPEs are able to assert patent infringement claims without entailing a counter-suit, so that a cross-licensing settlement is never an option. NPEs also have no real incentive to join patent pools because they invariably earn more by unilateral licensing. Instead, such companies are usually bought off by royalty fees. Practising companies have little choice since the alternative is to aim for patent invalidation of the asserted patents, but this is always costly and uncertain. Agreeing to pay up however can make the problem worse. The attraction of an easy buck encourages more NPE’s to enter the patent monetization business. Last year, 40% of all patent infringement suits in the US were brought by NPE’s, up 20% compared to 2007.
Conclusion and looking ahead
In conclusion, what once worked for sewing machines and farm machinery may not work today in bringing an end to the smartphone patent wars. The strategic environment is different, and the increased concentration of players such as NPEs has altered the prospects and incentives for cross-licensing and patent pools. In any case, even if the latter are off the table as fix-all panaceas to the patent wars, one should not underestimate the deviousness and ingenuity of the marketplace in coming up with new solutions.