Nokia, Apple drag the world back to patent war

Gavel smart phoneOur present generation is most defined by the advent and rise of the smartphone, which brought technology from our desktops to our hands and further to our wrists. In a fray that saw technology companies like Apple grow to be world’s most valuable companies, the fight for market dominance has been fought as much in the marketplace as in patent courts — starting with Nokia attacking Apple in a series of lawsuits in 2009 and 2010.

Nokia filed its first patent case against Apple, igniting the so-called smartphone patent wars, on October 22, 2009 in the US District Court for Delaware. Nokia was visibly seething from the loss of its earlier prominence on the industry and as it became evident Nokia could not compete with the iPhone’s rise, it looked over to its huge patent portfolio to take as big a bite from the apple as it could. In this first complaint, Nokia accused Apple of infringing on 10 patents covering essentials of the GSM, UMTS and WLAN standards. In its complaint, Nokia stated that it has not only committed billions of dollars into research and development (including helping formulate industry standards) but also has been committed to licensing its standard essential patents under Fair, Reasonable And Non Discriminatory (FRAND) terms. Nokia had declared at least some of the ten patents as being essential to the GSM, UMTS and WLAN standards – all of which were implemented in the iPhone – and was entitled to royalties from Apple, even if under FRAND terms. The questions whether the ten patents were in fact standard-essential and whether Nokia was genuinely seeking fair and reasonable royalties were hotly debated and never fully answered.

As was expected, Apple responded to the first case in equal measure shortly afterward with its own patents – filing a one-up case covering 13 patents on December 11, 2009. What followed then was a series of tit-for-tat cases between Nokia and Apple – in all covering over 60 patents across 6 district cases, 2 ITC complaints and at least 3 cases in Europe, running concurrently and none betraying any sense of who had the better of the other.

While Nokia and Apple battled it out in the court, however, sales continued to grow for the iPhone as well as for Android phone manufacturers such as Samsung, Motorola and HTC – and Nokia slipped further behind. Torn between its own Symbian OS and Microsoft’s new Windows Phone OS, Nokia made one wrong decision after another – giving up market share to its rivals not only in the US and Europe but in the developing world as well.

Sensing rightly that marketplace competition from the new Android players was far greater threat than a patent war with Nokia, Apple shifted gears as well. Having already got a taste for battle from Nokia, Apple started targeting the major Android OEMs (HTC, Motorola and Samsung) with its own patent lawsuits in late 2010 and 2011 while simultaneously pursuing settlement negotiations with Nokia.

Nokia and Apple buried their disputes in June 2011 for an undisclosed (but presumably big) settlement including a one-time payment to Nokia – and Apple could then focus on the larger fight with HTC, Motorola and the even larger fight with Samsung, the new dominant player across the globe. The fight between Apple and Samsung would rage on in multiple courts for the next 5 years – and continues even today after the recent Supreme Court ruling vacating the damages calculation by lower courts in favor of Apple – and setting new precedent for calculating damages in design infringement cases.

Over the subsequent years, the smartphone patent wars drew swords from virtually every industry player – Apple, Microsoft, HTC, Motorola, Google, LG, ZTE, Ericsson, Qualcomm and Blackberry (RIM) individually as well as in cohorts like Rockstar Consortium and RPX Corporation which pumped billions of dollars in buying telecom and smartphone patents on behalf of the companies.

Nokia, while relatively absent from the fray after its settlement with Apple, had not been sitting idle. It sold its dwindling phone business rather richly to Microsoft in 2015 for $7.9 billion. The overpriced acquisition is seen by industry analysts as a $10 billion mistake by Microsoft. Regardless, it bought Microsoft a place in the smartphone roster that may have cost more had Microsoft chosen instead to enter the smartphone market from scratch.

Having lost its core competence, i.e. handsets, Nokia has no doubt been aching and preparing to get back into the fight. It seems to have taken two parallel approaches:

First, Nokia grew its patent portfolio by over a half in a merger with another telecom powerhouse Alcatel Lucent. While staying little more than a footnote in the smartphone marketplace, Alcatel Lucent is credited with a wide number of component technologies that make smartphones a reality – as well as a sizable number of standard essential patents.

Second, with its own patents, Nokia has allegedly been fighting a proxy war against Apple and Android manufacturers by transferring patent rights to multiple patent assertion entities (PAE) like Acacia Research and Conversant Property Management. These PAEs alone have sued Apple more than 12 times using former Nokia patents.

Being targeted by PAEs is nothing new for Apple — but in an anti-trust complaint dated December 20, 2016, Apple finally said enough was enough. Pulling no punches, Apple accused the PAEs of “conspiring with Nokia in a scheme to diffuse and abuse [standard essential patents] and, as the PAEs and Nokia fully intended, monetize those false promises by extracting exorbitant non-FRAND royalties in way Nokia could not”.

Using PAEs for direct attacks against Apple would be a smart, albeit sneaky, strategy for Nokia. Since PAEs do not themselves sell any products, there would be little risk of a countersuit from Apple – as well as a general lack of commitment to FRAND licensing terms that spell lower royalties.

Apple’s anti-trust complaint was exactly the flag Nokia had been waiting for. Over the very next couple of days, after five years of sitting on the sidelines, Nokia fired new shots directly at Apple – at least 12 new cases across the globe, covering 40 patents ranging from H.264 video encoding to RF and power management technologies used in Apple products.

  • Regional Court, Dusseldorf, Germany – 8 patents
  • Regional Court, Mannheim, Germany – 4 patents
  • Regional Court, Munich, Germany – 2 patents
  • Market Court, Helsinki, Finland – 3 patents
  • High Court, London, UK – 3 patents
  • Court of Turin, Italy – 4 patents
  • Patent and Market Court, Stockholm, Sweden – 3 patents
  • Commercial Courts, Barcelona, Spain – 1 patent
  • District Court, The Hague, Netherlands – 3 patents
  • High Court, Paris, France – 1 patent
  • High Court, Hong Kong – 1 patent
  • Tokyo District Court, Japan – 2 patents
  • International Trade Commission, US – 8 patents
  • US District Court for Eastern District of Texas – 18 patents

For at least some of these patents-in-suit, Nokia alleges that it has been trying to negotiate FRAND royalties with Apple – which Apple believes to be unreasonable and excessive. The timing and range of the cases two days after Apple’s anti-trust complaint show that Nokia was all but ready with a finger on the trigger to file the complaints that undoubtedly required months of due diligence and research beyond what Nokia would have performed as part of the FRAND negotiations.

Apple has so far not filed a countersuit against Nokia, but has pulled all Withings (owned by Nokia) products from its stores. A fresh slew of tit-for-tat cases are no doubt on the way as well, as these things usually go.

It seems unlikely that all of these different cases will reach trial and a wide-ranging settlement would be the most likely the endgame for both companies however long it takes. For its own sake however, Nokia will not only have to come out a winner in these cases but also manage public perception of its intentions – as a number of industry analysts start drawing parallels between Nokia (or what remains of it) and patent assertion entities. The proxy war approach if indeed it was a well thought-out strategy on Nokia’s part can undermine the otherwise respectable position Nokia has long held in the evolution of telecommunications technology across the world.

But tides can change quickly and public opinion has continued to shift against patent holders in the last few years. Whether that trend continues or reverses by the time Nokia and Apple get into the thick of these various cases remains to be seen. In the end, the human civilization is and always has been in a constant state of war with only intermittent periods of peace. The smartphone industry has had relative peace for the last year – the next few might not be as forgiving.


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Join the Discussion

7 comments so far.

  • [Avatar for ProHacVice]
    January 18, 2017 05:24 am

    Valuationguy – I see your point more clearly now, and agree!

  • [Avatar for Valuationguy]
    January 12, 2017 02:58 pm

    The issue I was trying to convey is that royalty rate owed to NPEs (who derive no value from cross-licensing….which reduces the nominal royalty rate) SHOULD typically be different (higher than) from a direct competitor which derives value from such a cross-license.

    The difference is in the type of currency used and how that affects the nominal royalty rate the licensee needs to pay. NPE’s get ZERO value from a cross-license while the a direct competitor typically will get SOME value (else they wouldn’t agree to reduce their royalty rate in exchange for such license.)

    Overall…the VALUE derived should be the same….but the licensor receives it in different currency. Royalty Rate(NPE) x volume EQUALS (Royalty Rate (Direct Comp) x volume) + Value of Cross License.

    If the direct competitor doesn’t see any reason to sign a cross-license…his royalty rate should be the same as that of an NPE.

    In my view, the courts have essentially ignored this basic value equation when examining the ‘in their words’, exorbitant rates which many NPE’s demand. Courts (lead by infringer’s lawyers) typically point toward royalty rates for “similar” portfolios which involve significant cross-licensing without adding back the value of the cross-license. Since the value of the cross-license is typically too opaque to objectively challenge….the courts have agreed with the defendants to keep damages low.

  • [Avatar for angry dude]
    angry dude
    January 12, 2017 11:32 am

    PatLit @4

    By this reasoning there are no NPEs at all – every patent holder has some other “business” outside of suing for patent infringement

    “NPE” used to mean that patent holder is not using particular patent he is suing for in some product/service on the market, but of course this whole NPE concept is a bunch of bs

    a patent is a patent – a private property with attached exclusive right no matter who currently owns it

  • [Avatar for PatLit]
    January 12, 2017 10:13 am

    How is Nokia an NPE with its Network Business, Withings and lot’s of other stuff?

  • [Avatar for ProHacVice]
    January 11, 2017 12:20 pm

    Valuationguy: That’s a great point re cross licensing – I hope the courts do not differentiate royalties owed to NPEs vs direct competitors.

    A patent is a patent regardless of who owns it. It would be akin to telling homeowners or housing rental companies they can only charge half the rent if the renter is a real estate agent.

    If the patents are disclosed as standard essential – then that’s a different quid pro quo, since a lower royalty would be offset by the larger market.

  • [Avatar for angry dude]
    angry dude
    January 11, 2017 12:12 pm

    If Nokia has trouble monetizing their patents they spent many years of R&D on then what about some little mom and pop workshop working out of garage ?
    Right now apples and googles and pretty much every other big (tech) company use USPTO database as a free public library…

    Something needs to change here – either shut down the USPTO and be done with patents once and for all OR start valuing patents with all attached rights of exclusivity

    To start valuing patents the USPTO should at the very least do proper examination in the first place – adjusting the threshold of novelty and unobviousness depending on the industry in question.
    (Hint: in smartphone industry that threshhold must be very high to avoid dealing with huge junk portfolios like Motorola patents and Nokia patents too – for the most part)

    What a mess!

    Just find me another planet…

  • [Avatar for Valuationguy]
    January 11, 2017 10:32 am

    While you are framing the dispute in terms of the public (or specifically the media) perception….the reality of this dispute is over valuation.

    Apple is unwilling to sign for a license at royalty rates much higher than its previous settlement even though the patent basket is changed and (more importantly and the key to the large differences in the two parties’ negotiating positions) Nokia receives NO VALUE BENEFIT currently from a cross-license of Apple’s patent portfolio. Because Nokia sees no value in a cross-license as an NPE (where before as a manufacturer, it did), it is now asking for a higher royalty than what Apple and Nokia agree upon in its settlement years ago when they directly competed against each other.

    This dispute is actually likely to be highly important in setting down the principals by which the courts can examine the legitimate differences in royalties owed to NPE’s vs. direct market competitors who are willing to accept value via a cross-license.

    Most patent owners overvalue their own patents (but don’t monetize them well) and undervalue others’ patents….which is why almost every direct competitor will demand to cross-license (as a way to keep royalty (and cash flow) expense low) with their competitors.