The Great Smartphone War

[Anonymous]

The Great Smartphone War
By Kurt Eichenwald
For three years, Apple and Samsung have clashed on a scale almost unprecedented in business history, their legal war costing more than a billion dollars and spanning four continents. Beginning with the super-secret project that created the iPhone and the late Steve Jobs’s fury when Samsung—an Apple supplier!—brought out a shockingly similar device, Kurt Eichenwald explores the Korean company’s record of patent infringement, among other ruthless business tactics, and explains why Apple might win the battles but still lose the war.

iSPY Samsung chairman Lee Kun-hee, who was convicted of tax evasion in 2008 and pardoned soon after, and the late Apple C.E.O., Steve Jobs.

On August 4, 2010, amid the bustle of downtown Seoul, a small group of executives from Apple Inc. pushed through the revolving door into a blue-tinted, 44-story glass tower, ready to fire the first shot in what would become one of the bloodiest corporate wars in history. The showdown had been brewing since spring, when Samsung launched the Galaxy S, a new entry into the smartphone market. Apple had snagged one early overseas and gave it to the iPhone team at its Cupertino, California, headquarters. The designers studied it with growing disbelief. The Galaxy S, they thought, was pure piracy. The overall appearance of the phone, the screen, the icons, even the box looked the same as the iPhone’s. Patented features such as “rubber-banding,” in which a screen image bounces slightly when a user tries to scroll past the bottom, were identical. Same with “pinch to zoom,” which allows users to manipulate image size by pinching the thumb and forefinger together on the screen. And on and on.

Steve Jobs, Apple’s mercurial chief executive, was furious. His teams had toiled for years creating a breakthrough phone, and now, Jobs fumed, a competitor—an Apple supplier no less!—had stolen the design and many features. Jobs and Tim Cook, his chief operating officer, had spoken with Samsung president Jay Y. Lee in July to express their concern about the similarities of the two phones but received no satisfactory response.

After weeks of delicate dancing, of smiling requests and impatient urgings, Jobs decided to take the gloves off. Hence the meeting in Seoul. The Apple executives were escorted to a conference room high in the Samsung Electronics Building, where they were greeted by about half a dozen Korean engineers and lawyers. Dr. Seungho Ahn, a Samsung vice president, was in charge, according to court records and people who attended the meeting. After some pleasantries, Chip Lutton, then Apple’s associate general counsel for intellectual property, took the floor and put up a PowerPoint slide with the title “Samsung’s Use of Apple Patents in Smartphones.” Then he went into some of the similarities he considered especially outrageous, but the Samsung executives showed no reaction. So Lutton decided to be blunt.

“Galaxy copied the iPhone,” he said.

“What do you mean, copied?” Ahn replied.

“Exactly what I said,” Lutton insisted. “You copied the iPhone. The similarities are completely beyond the possibility of coincidence.”

Ahn would have none of it. “How dare you say that,” he snapped. “How dare you accuse us of that!” He paused, then said, “We’ve been building cell phones forever. We have our own patents, and Apple is probably violating some of those.”

The message was clear. If Apple executives pursued a claim against Samsung for stealing the iPhone, Samsung would come right back at them with a theft claim of its own. The battle lines were drawn. In the months and years that followed, Apple and Samsung would clash on a scale almost unprecedented in the business world, costing the two companies more than a billion dollars and engendering millions of pages of legal papers, multiple verdicts and rulings, and more hearings.

But that may have been Samsung’s intent all along. According to various court records and people who have worked with Samsung, ignoring competitors’ patents is not uncommon for the Korean company. And once it’s caught it launches into the same sort of tactics used in the Apple case: countersue, delay, lose, delay, appeal, and then, when defeat is approaching, settle. “They never met a patent they didn’t think they might like to use, no matter who it belongs to,” says Sam Baxter, a patent lawyer who once handled a case for Samsung. “I represented [the Swedish telecommunications company] Ericsson, and they couldn’t lie if their lives depended on it, and I represented Samsung and they couldn’t tell the truth if their lives depended on it.”

Samsung executives say that the pattern of suit-countersuit criticized by some outsiders misrepresents the reality of the company’s approach to patent issues. Because it is one of the largest patent holders in the world, the company often finds others in the technology industry have taken its intellectual property, but it chooses not to file lawsuits to challenge those actions. However, once Samsung itself is sued, the executives say, it will use countersuits as part of a defense strategy.

With the Apple litigation, the fight isn’t over—opening statements for the most recent patent lawsuit, which asserts that 22 more Samsung products ripped off Apple, were heard in the U.S. District Court in San Jose, California, on April 1. While both sides have grown weary of the litigation, court-ordered settlement talks have failed. The most recent attempt took place in February, but the two sides soon reported to the court that they could not resolve the dispute on their own.

No matter the financial outcome, Apple may well emerge from the legal wrangling as the loser. Two juries have found that Samsung did indeed plot to steal the iPhone’s appearance and technology, which is why a California jury, in 2012, awarded Apple more than a billion dollars in damages from Samsung (reduced to $890 million in late 2013 after the judge found that some of the calculations were faulty). But, as the litigation drags on, Samsung has grabbed an increasing share of the market (currently 31 percent versus Apple’s 15.6 percent), not only by pumping out “Apple-ish, only cheaper” technology but by creating its own innovative features and products.

“[Samsung] transitioned to a higher level of competition than they were at at that time, and I think part of that was a result of them having to fight this battle with Apple,” a former senior Apple executive says.

It was really just another page from the Samsung playbook, used many times before: When another company introduces a breakthrough technology, muscle in with less expensive versions of the same product. And the strategy had worked, helping the Samsung Group to grow from almost nothing into an international behemoth.

Patents Pending

Samsung was founded in 1938 by Lee Byung-chull, a college dropout and the son of a wealthy Korean landowning family. When Lee was 26, he used his inheritance to open a rice mill, but the business soon failed. So it was on to a new endeavor, a small fish-and-produce exporting concern that Lee named Samsung (Korean for “three stars”). Over the years that followed, Lee expanded into brewing and then, starting in 1953, added a sugar-refining company, a wool-textile subsidiary, and a couple of insurance businesses.

For years, there was nothing in this conglomerate even to hint that Samsung would enter the consumer-electronics business. Then, in 1969, it formed Samsung-Sanyo Electronics, which a year later began manufacturing black-and-white televisions—an outdated product chosen partly because the company didn’t have the technology to make color sets.

By the early 1990s, though, the company seemed like an also-ran, after the economic boom in Japan had pushed that nation’s businesses, such as Sony, to the forefront of the technology world; for those even aware of it, Samsung had the reputation for churning out inferior products and cheap knockoffs.

Still, some Samsung executives saw a path for boosting profits by boldly and illegally fixing prices with competitors in some of their top businesses. The first products known to have been the focus of one of Samsung’s major price-fixing conspiracies were cathode-ray tubes (C.R.T.’s), which were once the technological standard for televisions and computer monitors. According to investigators in the U.S. and Europe, the scheme was quite structured: competitors secretly got together in what they called “Glass Meetings” at hotels and resorts around the world—in South Korea, Taiwan, Singapore, Japan, and at least eight other countries. Some of the meetings involved the most senior executives, while others were for lower-level operational managers. The executives sometimes held what they called “Green Meetings,” characterized by rounds of golf, during which the co-conspirators agreed to raise prices and cut production to receive higher profits than would have been possible had they actually competed with one another. The scheme was eventually exposed, and over the course of 2011 and 2012, Samsung was fined $32 million in the U.S., $21.5 million in South Korea, and $197 million by the European Commission.

 

The success of the C.R.T. conspiracy apparently sparked similar schemes. By 1998 the market for L.C.D.’s—a newer technology that used liquid crystal to create the image and competed directly with the C.R.T.—was taking off. So in November, a Samsung manager spoke with representatives from two of the company’s competitors, Sharp and Hitachi. They all agreed to raise L.C.D. prices, according to investigators. The manager passed the exciting information on to a senior Samsung executive, and the L.C.D. conspiracy grew.

In 2001, the president of Samsung’s semiconductor division, Lee Yoon-woo, proposed to executives at another competitor, Chunghwa Picture Tubes, that they raise the already rigged price for one type of L.C.D. technology, prosecutors said. The scheme was formalized during “Crystal Meetings.” Again, the executives gathered in hotels and on golf courses to set prices illegally. But by 2006 the L.C.D. jig was up. Rumors began circulating among the conspirators that one of the victims of their crime—a company they referred to by the code name NYer—suspected that the suppliers were rigging prices. And Samsung executives presumably feared that NYer could spark a criminal investigation by the U.S. government; after all, NYer—in reality Apple Inc.—was pretty powerful. Samsung ran to the Justice Department under an anti-trust leniency program and ratted out its co-conspirators. But that didn’t lessen the pain much—the company was still forced to pay hundreds of millions of dollars to settle claims against it by state attorneys general and direct purchasers of L.C.D.’s.

The decision to fess up to the L.C.D. scheme may not have been driven just by Apple’s suspicions. Samsung was already in law enforcement’s sights: sometime earlier a co-conspirator in another criminal price-fixing conspiracy had given up Samsung. That scheme, beginning in 1999, involved Samsung’s huge business for dynamic random-access memory, or DRAM, which is used in computer memories. In 2005, after it was caught, Samsung agreed to pay $300 million in fines to the U.S. government. Six of its executives pleaded guilty and agreed to serve sentences of 7 to 14 months in American prisons.

In the years since the price-fixing scandals, Samsung executives claim, the company has adopted major new policies to address potential legal and ethics problems. “Samsung has made tremendous advancements in addressing compliance issues,” says Jaehwan Chi, executive vice president of global legal affairs and compliance. “We now have a strong corporate compliance organization, with a dedicated staff of lawyers, a set of clear policies and procedures, companywide training and reporting systems. As a result, every single one of our employees today, whether they’re in the Americas, Asia, or Africa, are given compliance education on an annual basis.”

Still, the tales of misconduct at Samsung during the years before those changes involved more than price-fixing. In 2007, its former top legal officer, Kim Yong-chul, who made his name as a star prosecutor in South Korea before joining Samsung, blew the whistle on what he said was massive corruption at the company. He accused senior executives of engaging in bribery, money-laundering, evidence tampering, stealing as much as $9 billion, and other crimes. In essence, Kim, who later wrote a book about his allegations, contended that Samsung was one of the most corrupt companies in the world.

A criminal investigation in Korea ensued, at first focusing on Kim’s allegation that Samsung executives maintained a slush fund to bribe politicians, judges, and prosecutors. In January 2008, government investigators raided the home and office of Lee Kun-hee, the chairman of Samsung, who was subsequently convicted of dodging some $37 million in taxes. He was given a three-year suspended sentence and ordered to pay $89 million in fines. A year and a half later, South Korean president Lee Myung-bak pardoned Lee.

And what of the bribery claims? Korean prosecutors declared that they could find no evidence substantiating Kim’s allegations—a determination that stunned the former general counsel, since he had turned over a list of other prosecutors whom he said he personally helped Samsung bribe. Moreover, a Korean lawmaker claimed that Samsung had once offered her a golf bag stuffed with cash, and a former presidential aide said the company had given him a cash gift of $5,400, which he returned. Kim published his book in 2010, saying he wanted to leave a record of his accusations. Samsung responded to the book’s allegations by labeling it nothing but “excrement.”

Then there is Samsung’s countersuing strategy, which is legal but unattractive. At the start of 2010, the shareholder letter from Samsung Electronics’ president and chief executive Geesung Choi glistened with good news. The previous 12 months had been an unprecedented success, Choi said. Despite stiff competition, Samsung had become the first company in the history of Korea to post sales greater than $86 billion, while simultaneously achieving some $9.4 billion in operating profits.

Choi trumpeted Samsung’s commitment to innovation. “We maintained second place in the number of our U.S. registered patents in 2009, exceeding 3,611, and solidified our foundation to strengthen our next generation technology.”

What Choi left out was that Samsung had just suffered a huge defeat, when a court in The Hague ruled that the company illegally copied intellectual property, infringing on patents related to L.C.D. flat-panel technology owned by Sharp, the Japanese electronics concern. In a blow to Samsung, the court ordered that the company halt all European imports of the products that violated the patents. Around the same time as Choi was delivering his upbeat message, the United States International Trade Commission began blocking the importation of Samsung flat-screen products that used the pilfered technology.

Samsung finally settled with Sharp.

It was the same old pattern: when caught red-handed, countersue, claiming Samsung actually owned the patent or another one that the plaintiff company had used. Then, as the litigation dragged on, snap up a greater share of the market and settle when Samsung imports were about to be barred. Sharp had filed its lawsuit in 2007; as the lawsuit played out, Samsung built up its flat-screen business until, by the end of 2009, it held 23.6 percent of the global market in TV sets, while Sharp had only 5.4 percent. All in all, not a bad outcome for Samsung.

The same thing happened with Pioneer, a Japanese multi-national that specializes in digital entertainment products, which holds patents related to plasma televisions. Samsung once again decided to use the technology without bothering to pay for it. In 2006, Pioneer sued in federal court in the Eastern District of Texas, so Samsung countersued. The Samsung claim was thrown out before trial, but one document revealed in the course of the litigation was particularly damaging—a memo from a Samsung engineer stating explicitly that the company was violating the Pioneer patent. A jury awarded Pioneer $59 million in 2008. But with appeals and continued battles looming, the financially troubled Pioneer agreed to settle with Samsung for an undisclosed amount in 2009. By then, it was too late. In 2010, Pioneer shut down its television operations, tossing 10,000 people out of work.

Even when other companies have honored competitors’ patents, Samsung has used the same technology for years without paying royalties. For example, a small Pennsylvania company named InterDigital developed and patented technology and was paid for its use under licensing agreements with such giant corporations as Apple and LG Electronics. But for years Samsung refused to cough up any cash, forcing InterDigital to go to court to enforce its patents. In 2008, shortly before the International Trade Commission was set to make a decision that could have banned the importation of some of Samsung’s most popular phones into the United States, Samsung settled, agreeing to pay $400 million to the tiny American company.

Around the same time, Kodak also got fed up with Samsung’s shenanigans. It filed suit against the Korean company, contending that it was stealing Kodak’s patented digital imaging technology to use in mobile phones. Once again, Samsung countersued and agreed to pay royalties only after the International Trade Commission found for Kodak.

It was a clever business model. But everything changed when Apple introduced the iPhone, because Samsung wasn’t ready for the technology to advance so dramatically, so quickly.

The Purple Dorm

The Purple Dorm smelled like pizza.

Occupying a building at Apple’s headquarters, in Cupertino, the Dorm—so named because the employees were there 24-7 amid the ever present odor of fast food—was the site of the company’s most secretive undertaking, code-named Project Purple. Under way since 2004, the effort constituted one of the biggest gambles in the history of the company: a cell phone with full Internet, e-mail functions, plus a host of unprecedented features.

 

 

Executives had pitched the idea of developing a phone to Jobs for years, but he had remained a skeptic. There were already so many mobile phones on the market, manufactured by companies with a lot of experience in the business—Motorola, Nokia, Samsung, Ericsson—that Apple would have to develop something revolutionary to win a seat at the table. Plus Apple was going to have to deal with carriers such as AT&;T, and Jobs did not want another company dictating what his company could and couldn’t do. And Jobs also doubted the existing phone chips and bandwidth allowed for sufficient speed to give users decent Internet access, which he considered a key to success.

With Apple’s development of multi-touch glass, everything changed. The phone would be revolutionary. Apple design director Jony Ive had come up with cutting-edge mock-ups for future iPods, and they could be used as the springboard for how an iPhone might look. In November 2004, Jobs gave the green light for Apple to set aside the tablet project and go full force into developing the iPhone.

Secrecy, Jobs ordered, was paramount. Apple was already known as a tight-lipped company, but this time the stakes were even higher. No competitor could know that Apple was about to venture into the phone market, because it would then undertake dramatic redesigns of its own phones. Jobs did not want to compete with a moving target. So he issued unusual marching orders: No one could be hired from outside the company for Project Purple. No one inside the company could be told that Apple was developing a mobile phone. All of the work—design, engineering, testing, everything—would have to be conducted in super-secure, locked-down offices. Scott Forstall, a senior vice president named by Jobs to head up software development for the new phone, was forced by the restrictions to persuade Apple employees to join Project Purple without even telling them what it was.

The new team moved into the Purple Dorm, at first a single floor, but the space quickly grew as more employees came on board. To reach certain computer labs, a person had to pass through four locked doors, which opened with badge readers. Cameras kept constant watch. And right on the front door, to remind everyone of the importance of secrecy, they hung a sign that said, FIGHT CLUB—a reference to the 1999 movie Fight Club. The first rule of Fight Club, a character in the film says, is that no one talks about Fight Club.

A group of about 15 employees, many of whom had worked together for more than a dozen years, made up the design team. For brainstorming sessions, they gathered around a kitchen table inside the Dorm, tossing out ideas and then drafting designs in sketchbooks, on loose-leaf paper, on computer printouts. The ideas that survived team-wide critiques were passed on to the computer-aided-design group, which sculpted the sketch data into a computer-based model. Then on to three-dimensional construction, with the rough product turned back over to the design team at their kitchen table.

The process was used hundreds of times; as many as 50 attempts were made on a single button for the phone, according to Christopher Stringer, an industrial designer on the team. They wrestled with the details for the edge of the phone, its corners, its height, its width. One of the earliest models, code-named the M68, had the word “iPod” imprinted on the back, in part to disguise what the product really was.

The software engineering was equally complicated. Forstall and his team were looking to create the illusion that the user could actually reach through the touch-screen glass to manipulate the content behind it. Finally, by January 2007, Jobs was set to announce the new Apple phone in his keynote for the annual Macworld trade conference, in San Francisco, and everyone was anticipating a huge announcement.

Crowds lined up outside the Moscone Center the night before Jobs’s speech and, when the doors finally opened, thousands filed in as music from Gnarls Barkley, Coldplay, and Gorillaz filled the room. At 9:14 A.M., a James Brown song started, and Jobs strode onto the stage, dressed in jeans. “We’re going to make some history together today!” he said enthusiastically amid wild applause. He talked about Macs, iPods, iTunes, and Apple TV, and took a couple of shots at Microsoft. At 9:40 he took a sip of water and cleared his throat. “This is a day I’ve been looking forward to for two and a half years,” he said.

The room grew silent. No one could miss that a big announcement was coming.

“Every once in a while a revolutionary product comes along that changes everything,” Jobs said. “Today, we’re introducing three revolutionary products of this class.” The first, he said, was a wide-screen iPod with touch controls. The second, a mobile phone. And the third, a breakthrough Internet communications device.

“An iPod, a phone, and an Internet communicator. An iPod, a phone … ” he said. “Are you getting it? These are NOT three separate devices—this is one device! And we are calling it iPhone.”

As the crowd cheered, the screen behind Jobs lit up with the word “iPhone.” Beneath that, it read, “Apple reinvents the phone.”

In the weeks that followed, techies around the world joined the hallelujah chorus, singing the praises of Apple’s new device. But that opinion wasn’t shared by many of the longtime cell-phone manufacturers, who scoffed at Apple’s attempts to play with the big boys. “It’s kind of one more entrant into an already very busy space with lots of choice for consumers,” Jim Balsillie, then the co-C.E.O. of the company that manufactures BlackBerry phones, said in a typical comment. Steve Ballmer, the C.E.O. of Microsoft at the time, was even blunter. “There’s no chance that the iPhone is going to get any significant market share. No chance.” And Richard Sprague, then a Microsoft senior marketing director, said that Apple would never meet Jobs’s prediction of 10 million units sold in 2008.

At first, it seemed they were right. In the first nine months of fiscal 2008, sales were under half of what Jobs had predicted. But then—blastoff. In the final quarter Apple introduced the second-generation model, called the iPhone 3G; demand was so huge, it could scarcely restock the shelves fast enough. Apple sold more phones in those three months—6.9 million units—than it had for the previous nine. By the end of the fourth quarter of fiscal 2009, the total number of iPhones sold since its introduction surpassed 30 million units. Apple, which three years before had been nothing, snagged 16 percent of the total market for smartphone sales worldwide in the fourth quarter of 2009, placing it as the third largest company in the business. Meanwhile, at Samsung, no one was popping champagne corks over the company’s smartphone sales. In that quarter, the company wasn’t even in the top five. In a report by I.D.C., an industry research firm, Samsung’s total smartphone sales were bundled under the category “Other.”

Galaxy Quest

Twenty-eight executives from Samsung’s mobile-communications division crowded into the Gold Conference Room on the 10th floor of the company’s headquarters. It was 9:40 A.M. on February 10, 2010, a Wednesday, and the meeting had been called to assess a near-crisis situation at Samsung. The company’s phones were losing favor, the user experience was poor, and the iPhone—after all those months of industry pooh-poohing—was blowing the doors off the barn. Samsung’s cell-phone business was strong, and it was continuing to churn out several designs every year. But the company was simply not competing with its smartphones, and Apple had now set a new direction for that business. According to an internal memo summarizing contemporaneous notes taken during the meeting, the head of the division took the floor. “[Our] quality isn’t good,” the memo quotes him as saying, “perhaps because the designers are chased along by our schedule as they get so many models done.”

Samsung was designing too many phones, the executive said, which simply didn’t make a lot of sense if the goal was to provide customers with top-notch equipment. “The path to improving Quality is to eliminate inefficient models and reduce the number of models overall,” he said. “Quantity isn’t what’s important, what’s important is putting on the market models with a high level of perfection, one to two Excellent ones….

“Influential figures outside the company come across the iPhone, and they point out that ‘Samsung is dozing off,’ ” the executive continued. “All this time, we’ve been paying all our attention to Nokia … yet when our [user experience] is compared to the unexpected competitor Apple’s iPhone, the difference is truly that of Heaven and Earth.”

 

 

Samsung was at a crossroads. “It’s a crisis of design,” the executive said.

Across Samsung, the message was heard: the company needed to come out with its own “iPhone”—something beautiful and easy to use with just that dollop of “cool”—and fast. Emergency teams were thrown together, and for three months designers and engineers worked under enormous pressure. For some employees, the work was so demanding they got only two to three hours of sleep a night.

By March 2, the company’s Product Engineering Team had completed a feature-by-feature analysis of the iPhone, comparing it to the Samsung smartphone under construction. The group assembled a 132-page report for their bosses, explaining in detail every way the Samsung phone fell short. A total of 126 instances were found where the Apple phone was better.

No feature was too small for comparison. A calculator image could be made bigger on the iPhone by rotating the device in any direction; not so with Samsung’s. On the iPhone, the calendar function for the day’s schedule was legible, the numbers on the image of the phone keypad were easy to see, ending a call was simple, the number of open Web pages was displayed on-screen, Wi-Fi connection was established on a single screen, new-e-mail notices were obvious, and so on. None of these were true for the Samsung phones, the engineers concluded.

Bit by bit, the new model for a Samsung smartphone began to look—and function—just like the iPhone. Icons on the home screen had similarly rounded corners, size, and false depth created by a reflective shine across the image. The icon for the phone function went from being a drawing of a keypad to a virtually identical reproduction of the iPhone’s image of a handset. The bezel with the rounded corners, the glass spreading out across the entire face of the phone, the home button at the bottom—all of it almost the same.

In fact, some industry executives worried about the similarities. Earlier, on February 15, a senior designer at Samsung told other employees about such observations from Google executives at a meeting with the Korean company—they suggested that changes be made in certain Galaxy devices, which they thought looked too much like Apple’s iPhone and iPad. The next day, a Samsung designer e-mailed others at the company about the Google comments. “Since it is too similar to Apple, make it noticeably different, starting with the front side,” the message said.

By late the following month, Samsung was ready to hold its own version of the Jobs press conference. On March 23, crowds at the Las Vegas Convention Center for the CTIA Wireless trade show gathered in the keynote hall. Lights bathed the stage in a sheet of blue as the attendees found their seats. Then J. K. Shin, the head of Samsung’s mobile-communications unit, came onto the stage. He spent some time talking about the new experiences expected by users of mobile phones—a not-too-subtle reference, it seemed, to the developments brought about by Apple.

“Of course, by now, you are probably thinking I must have a new device to show you that delivers all these new experiences,” Shin said. “And I do.”

He reached into the inside breast pocket of his jacket and brought out a phone. “Ladies and gentlemen, I present to you the Samsung Galaxy S!” Shin held up the device, displaying it for the applauding crowd.

Despite the previous month’s e-mail to change up the appearance of Samsung’s Galaxy products, it still looked almost identical to the iPhone. Except the name “Samsung” was emblazoned across the top.

‘We’ve been ripped off.”

Christopher Stringer, one of the iPhone designers, looked at the Galaxy S in near disbelief. All that time, he thought, all that effort trying out hundreds of designs, experimenting with the size of the glass, drawing different icons and buttons, and then these guys at Samsung just take it?

But at the time Apple had a lot of balls in the air to distract its executives from their concerns about the Samsung phone. At a San Francisco press conference on January 27, Jobs had introduced the iPad—the tablet that his team had been developing before they put it aside to work on the iPhone—and the product was already selling like gangbusters.

But about a month after the Galaxy S reached the market overseas, Jobs began focusing on what he considered to be the Korean company’s theft of Apple’s ideas. He wanted to play hardball with Samsung’s top executives, but Tim Cook, his chief operating officer and soon-to-be successor, cautioned against being too aggressive just yet. After all, Samsung was one of Apple’s biggest suppliers of processors, display screens, and other items. Alienating it might put Apple in the position of losing parts it needed for its products—including some for the iPhone and the iPad.

But after Samsung’s brush-off led to the tense August 4 meeting in Seoul, Apple attorney Chip Lutton told Ahn that he expected a response from Samsung about Apple’s concerns. “Steve Jobs wants to hear back and wants to hear back quickly,” he said. “And please don’t give us a general thing on patents.”

The Apple team returned to Cupertino. Bruce Sewell, Apple’s general counsel, briefed Jobs on what had happened. But Jobs could barely contain himself as the wait for Samsung’s response wore on.

“Where are they?” Jobs asked Lutton repeatedly as weeks passed without a reply from Samsung. “How is that going?”

Without much progress, new meetings were set up—one in Cupertino, one in Washington, D.C., and one more in Seoul. At the Washington meeting, Apple’s lawyers broached the possibility of a resolution, telling the Samsung team that Jobs would be willing to make a licensing deal under which the Korean company would pay royalties on intellectual property that didn’t play a role in making the iPhone distinctive, and would stop using those patented designs and features that were distinctive.

Conversations eventually broke off, and Jobs grew increasingly eager to take Samsung to court and fight. Cook continued counseling patience, arguing that it would be better to have a negotiated resolution than to duke it out with a company of such importance to Apple’s business.

Then, in late March 2011, Samsung introduced its latest tablet computer, this time with a 10-inch screen. It struck Apple executives as a knockoff of the company’s second version of its tablet, and they weren’t surprised: Samsung had already proclaimed that it would change its own model to rival the iPad 2.

Cook’s caution was shoved aside. On April 15, 2011, the company filed a federal lawsuit in California against Samsung for infringing on the patents of both the iPhone and the iPad. Samsung was apparently ready for Apple’s attack—it countersued days later in Korea, Japan, Germany, and the U.S., alleging that the American company had violated Samsung patents related to mobile-communication technologies. Eventually, a variety of suits and motions were filed by the companies in Britain, France, Italy, Spain, Australia, and the Netherlands, as well as in a federal court in Delaware, and with the U.S. International Trade Commission in Washington, D.C.

Phone Tag

One day in March 2011, cars carrying investigators from Korea’s anti-trust regulator pulled up outside a Samsung facility in Suwon, about 25 miles south of Seoul. They were there ready to raid the building, looking for evidence of possible collusion between the company and wireless operators to fix the prices of mobile phones.

Before the investigators could get inside, security guards approached and refused to let them through the door. A standoff ensued, and the investigators called the police, who finally got them inside after a 30-minute delay. Curious about what had been happening in the plant as they cooled their heels outside, the officials seized video from internal security cameras. What they saw was almost beyond belief.

Upon getting word that investigators were outside, employees at the plant began destroying documents and switching computers, replacing the ones that were being used—and might have damaging material on them—with others.

A year later, Korean newspapers reported that the government had fined Samsung for obstructing the investigation at the facility. At the time, a legal team representing Apple was in Seoul to take depositions in the Samsung case, and they read about the standoff. From what they heard, one of the Samsung employees there had even swallowed documents before the investigators were allowed in. That certainly didn’t bode well for Apple’s case; how, the Apple lawyers said half-jokingly among themselves, could they possibly compete in a legal forum with employees who were so loyal to the company that they were willing to eat incriminating evidence?

 

 

By the time they headed to court, Apple had questioned a series of engineers and designers whose names were on Samsung patents. Each confirmed that, yes, they had developed the technical item that was the subject of the patent. But when asked to explain the details of what had been patented, some of the employees couldn’t.

Accusations of deceit and trickery spilled out into the courtroom. Apple submitted a document to the court showing side-by-side versions of the iPhone and Galaxy S; Samsung later showed that the image of the Galaxy S had been resized to make the phones appear even more similar than they already were. After confidential license agreements with Nokia were turned over by Apple in discovery, Samsung used the information in its own negotiations with Nokia—a big no-no.

There have been moments that bordered on the absurd. One of the patents invoked by Apple is a single-sentence claim with diagrams for a rectangular device with rounded corners—not any particular device, just the rectangle itself, the shape used for the iPad. But then that seeming silliness was practically demonstrated to be important by Samsung’s own lawyers when federal judge Lucy Koh held up the iPad and Galaxy Tab 10.1 and asked a Samsung lawyer if she could identify which was which.

“Not at this distance, your honor,” said the lawyer, Kathleen Sullivan, who was standing about 10 feet away.

No one can claim a total victory in the global litigation wars. In South Korea, a court ruled that Apple had infringed two Samsung patents, while Samsung had violated one of Apple’s. In Tokyo, a court rejected an Apple patent claim and ordered it to pay Samsung’s court costs. In Germany, a court ordered a direct sales ban on the Galaxy Tab 10.1, ruling that it too closely resembled Apple’s iPad 2. In Britain, a court ruled in favor of Samsung, declaring that its tablets were “not as cool” as the iPad, and unlikely to confuse consumers. A California jury found that Samsung had violated Apple patents for the iPhone and iPad, awarding more than a billion dollars in damages—an amount that the judge later ruled had been miscalculated by the jury. In the debate over setting the damages, a Samsung lawyer said they were not disputing that the company had indeed taken “some elements of Apple’s property.”

One person close to Apple said that the endless fighting has been a drain on the company, both emotionally and financially.

Meanwhile, as has happened with other cases where Samsung violated a company’s patents, it has continued to develop new and better phones throughout the litigation to the point where even some people who have worked with Apple say the Korean company is now a strong competitor on the technology and not just a copycat anymore.

Despite his role in propelling the lawsuits forward, Jobs, who died in 2011, by now might have looked at the scorched earth left behind by the litigation and followed his own advice about recognizing when it is time to move on. “I have looked in the mirror every morning and asked myself: ‘If today were the last day of my life, would I want to do what I am about to do today?’ ” Jobs said in a now famous commencement speech he gave at Stanford University, in 2005. “And whenever the answer has been ‘no’ for too many days in a row, I know I need to change something.”

After more than 1,000 days of litigation, hopefully one morning soon executives at Samsung and Apple will look at their reflection and, at long last, hit their limit of “no”s.

[Author]

May 13, 2014 at 12:15 PM