An Ethical Analysis of the Samsung v Apple Patent Infringement Case
LES 305: Legal, Ethical, and Regulatory Issues in Business
Professor Lora Koretz, J.D, MBA
Summary of Available Facts
On April 15, 2011, Apple filed a lawsuit against Samsung for allegedly infringing on Apple’s ‘163, ‘381, and ‘915 utility patents and ‘087, ‘305, ‘677, ‘889 design patents. The two types of patents mentioned are: the utility patents, which manage the features a phone can have, and the design patents, which include the overall look of the product. Apple found that Samsung was indirectly using elements of their brand, as well as similarities in the core design of the Android operating system. Apple’s attorney, Harold McElhinny, claimed Samsung was having a crisis of design after the iPhone launched in 2007, and Samsung executives were hoping to illegally cash in on another company’s success (Fox News). Samsung’s attorney, William Price, denied violating any of Apple’s patents and argued that Samsung is simply giving consumers what they want, which is a smart phone with a large screen (Fox News).
In late August 2012, the jury decided that Samsung was guilty on three out of four counts of design patent infringements: patent ‘087, which protected the back design of the iPhone, patent ‘305 protected the iPhone menu icon, and patent ‘677, which protected the front design of the iPhone (Couts). The jury also declared Samsung was guilty of all three accounts of utility patent infringements: patent ‘163 protected “zoom in on document when tapped”, patent ‘381 protected screen bounce back when scrolling past the limit, and patent ‘915 protected the pinch-to-zoom capabilities (Couts). District Court Judge Lucy Koh sentenced Samsung to pay Apple $1.05 billion in damages. However, in December 2012, Judge Koh came to the conclusion that the jury had miscalculated $400 million on the 13 Samsung devices that were found to violate Apple’s patents and subsequently ordered a retrial. The second trial is currently in session to recalculate the damages Samsung will pay for the infringement of multiple patents.
Apple is seeking compensation and restrictions on the sales of Samsung products such as the Galaxy SIII and the Samsung Galaxy Tablet 10.1 on the grounds of eight separate patent infringements — including both design and utility infringements. Globally, there have been different verdicts with regards to the patent infringements, which have resulted in the restriction of certain products by both Samsung and Apple. A second Apple v. Samsung case is set to go to trial in March of 2014 for Samsung’s alleged infringement on utility patents in its newer products.
With regard to the allegations of infringement on utility (such as the one-finger scroll and double-tap to zoom functions), is the function that patented, or the code that was used to create that function? Which code was used in the creation of the features in question? For this analysis, we assumed that the development (source code) that Samsung used in the creation of their products differs from that of Apple (taking into consideration the different operating systems) even though it yielded the same or similar features.
Were the Samsung executives and designers aware of the patents when they used the designs and processes from the iPhone? For this analysis, we assumed that they were unaware of the specific patents, but had ample reasons to research them prior to launching the products that infringed on Apple’s patents.
How significantly did the iPhone line impact Samsung’s smartphone sales? What would be the costs associated with the research, design, and development of Samsung’s own original designs and processes instead of mimicking Apple’s? What were the costs associated with the research, design, and development of Apple’s iPhone? For this analysis, we assumed that because of the iPhone’s immediate popularity, it significantly impacted Samsung’s sales. We also assumed that the costs that would be associated with developing Samsung’s own original designs would be similar to the costs Apple incurred while developing the iPhone.
Stakeholders and Their Concerns
The consumer of Samsung products in the US and abroad will now face decreased access to products that were available before litigation began. Because Samsung and other smart phone companies will have to create new and innovate design and utility features in their phones in to avoid patent infringement litigation, universal features (for example scrolling and the zoom functions) will no longer be present. Rather, the user will now have to adapt to a new method of navigation within the mobile phone, or buy Apple products in order to maintain consistent features.
As a designer and developer for mobile phone companies in competition with Apple, there is an increased pressure to innovate methods both concerning the software and hardware of the phone or tablet. Congruent with this pressure is the anxiety of designing a product that may infringe on another company unintentionally, be it Apple or otherwise. Certain design characteristics (two finger zoom, etc.) have become commonplace, despite their patents (Williams). On the other hand, for the unauthorized use of those designs and features to go overlooked or unchecked, the IT designers at Apple are not being given due credit or compensation for the revenue their designs, ideas, and labor are generating.
Samsung is both gaining from the litigation and harming itself simultaneously. By being directly compared to Apple products such as the iPhone series, Apple has increased awareness and shifted the positioning of Samsung within the smartphone market to that of equal, and to an extent a “copycat” of successful Apple products. On the other hand, because Samsung has been found guilty of patent infringement and is involved in multiple international lawsuits with Apple, they have had to limit or stop selling specific phones and tablets globally (Williams).
Similar to the benefits and detriments faced by Samsung, Apple’s litigation strategy both helps and hinders their position within the market. One of the motives in these ongoing legal battles is to protect their intellectual property -- which is an investment made by Apple’s Research and Development team(s). However, at the same time as they are trying to protect their rights, they are also spending exorbitant amounts of money on the suits, and drawing media attention to one of their competitors. Additionally, Samsung may continue to “build upon” the success of Apple regardless of the outcome of litigation domestically and internationally.
It has already been proven that the results of litigation between Apple and Samsung have affected their stocks significantly (Stock Market). As Samsung’s stock plunged by over 7.5%, Apple’s stock increased to $680 per share after Samsung was found guilty of infringement (domestically) in six of the seven patent infringement allegations (Williams).
As an industry, the mobile phone market is both pushed to new innovations to overcome patent infringement, and hindered by it. Instead of being able to build off of the successes of another company’s popular features (for example, tap to zoom), the design team is required to invent other methods of performing the same functions. This is especially inconvenient for the consumer, as functions on most smart phones may prove not to be universal.
The retailers of both Samsung and Apple phones are directly affected by the patent infringements and suits filed between the two companies. Because of the restrictions of certain models of both Samsung and Apple products internationally, retailers may end up losing profits they may have otherwise had. Moreover, if injunctions are filed against the sale of Samsung products, retailers may be forced to pull those products off the shelves, and lose significant investments in their inventory.
The manufacturing plants and employees of Samsung are directly affected by the results of the litigation as well as the future business plans of Samsung. Thus far, Samsung has been required to pay Apple compensation for the patent infringements. If Samsung veers away from products mimicking Apple by attempting to design a new product, market shares may decrease if the products do not live up to the standards created by Samsung’s other Apple-inspired devices.
Ethical Test Analyses
Have you defined the problem accurately?
Apple cornered the smartphone industry with their release of the iPhone in 2007, and the seemingly overnight takeover left other phone manufacturers in a frenzy. Samsung was faced with the problem of finding a way to recapture the market’s consumers by either illegally mimicking Apple’s iPhone, or investing time and funds into developing their own designs and recreating their niche with significantly less assurance of success.
How would you define the problem if you stood on the other side of the fence?
Apple had made significant investments in the research and development of the iPhone line, and reaped the rewards of their hard work and ingenuity in the seemingly overnight success they experienced after the 2007 release of their first iPhone. Other smartphone manufacturers were threatened by Apple’s success, and tried to cut themselves in for a share of the profits and success without taking a risk or investing their own time and money.
How did this occur in the first place?
The competitive edge of the smartphones and tablets industry may have driven Samsung to mimic Apple’s products. The iPhone line took the market by storm, and other manufacturers were caught in a frenzy trying to give consumers the popular iPhone features in their own products, despite the over 200 patents filed by Steve Jobs prior to the release of the first iPhone (McDonald; Bielinis).
To whom and what do you give your loyalties as a person and as a member of the corporation?
In the perspective of a Samsung employee, I would be loyal to Samsung and to my immediate supervisor(s). For example, if I was a designer for a new device for Samsung and was asked to make design decisions that would make the device comparable to an Apple product, I would continue to design a product that mimicked Apple’s, while trying to circumnavigate the patents. As an employee, my objective is to further the success and profitability of Samsung in the manner that is determined by management.
As a person (and still a Samsung employee), I would be loyal to my family. If employment at Samsung hurts my economic status (which in turn harms the well-being of my family), then there would be a conflict and I would seek employment elsewhere. If mimicking Apple’s design would not harm my economic status, then the loyalty towards my family would be unaffected and I would continue my employment with Samsung.
However, if I were an official at Samsung, and given the task of determining how the company should respond to the iPhone’s launch and popularity, my loyalties would be to the company, employees, and shareholders. Patent infringement could negatively impact all of the groups to which I am loyal, so I would avoid it while trying to find other ways to give the consumers the popular features that they want.
What is your intention in making this decision?
Apple’s success revolutionized the smartphone and tablet industries. In addition to bringing new consumers into the market, Apple also “stole” consumers from other competing firms, including Samsung. Samsung’s goal is to recapture the smartphone consumers that Samsung lost to Apple after the debut of the iPhone.
How does this intention compare with the likely results?
If Samsung decides to take the easy route and mimic Apple’s iPhone, then the company will likely reclaim their previous niche in the smartphone industry, but only temporarily. The company will continue to lack the originality and ingenuity that allowed for Apple’s overnight success in the first place. Moreover, secrets seldom stay secret forever. So, it is only a matter of time before the world finds out that Samsung illegally used patented designs and utility functions from Apple’s iPhone in their own products -- thereby damaging Samsung’s reputation as a phone manufacturer, as well as employer and authority in the industry. So, while the short-term results will most likely be in-line with Samsung’s intention, the long-term consequences will be at complete odds with the original intention.
In contrast, if Samsung decides to take the more difficult road and invest time and funds in developing their own original designs, then the company will carve out a new and more permanent niche in the smartphone industry. The company will be able to compete with Apple through original designs and products (which is what was so attractive about the iPhone), rather than riding the shirttails of Apple’s success. This option allows for a more sustainable success, and both the long- and short-term results of this choice will be aligned with Samsung’s intentions.
Whom could your decision or action injure?
See Stakeholders and Concerns section on page two.
Can you engage the affected parties in a discussion of the problem before you make your decision?
Open conversation with a competitive firm is improbable, if not impossible. Moreover, since Apple already brought multiple suits against Samsung in the U.S. and other international forums, discussion will most likely be a moot issue. Hostility and mistrust have pervaded the relationship between Samsung and Apple to such an extent that discussion would prove futile.
Are you confident that your position will be as valid over a long period of time as it seems now?
If Samsung decides to take the more difficult road and invest time and funds in developing their own original designs, then the company will carve out a new and more permanent niche in the smartphone industry. This decision will be able to withstand the test of time, and remain valid in the long-run. However, if Samsung decides to mimic other companies’ successful products -- specifically Apple’s products -- then that decision cannot and will not remain valid for a significant period of time.
Could you disclose without qualm your decision or action to your boss, your CEO, the board of directors, your family, or society as a whole?
There is a greater chance that other company men will understand your dilemma from your perspective, and maybe even help you rationalize unethical options. However, you could not openly discuss the possibility of stealing Apple’s designs with family and society as a whole. Rationalizations can be easily seen through by people who are on the “outside” of the dilemma. So, most people would have trouble telling their families or communities that they intended to illegally knock-off someone else’s design because it would be quicker, easier, or less risky than putting in the time to come up with their own original design.
What is the symbolic potential of your actions if understood? If misunderstood?
In the perspective of Samsung, the stakeholders (consumers, stockholders, etc.) would be the audience that can symbolically interpret the actions of the company. If the design and utility patent infringements are seen as blatant copying of Apple and is reflected by a decrease in profits, then the purpose of the infringements would have been misunderstood.
If the stakeholders view Samsung’s design and utility functions similarity to Apple’s as a business decision to advance Samsung’s products, then the purpose of these decisions would have been understood.
Under what conditions would you allow exceptions to your stand?
Exceptions to honoring intellectual property rights would only be allowable if the patents or intangible property rights were either: a) so far-reaching that they legitimately left no possible avenues for free market competition, and thereby halted progress, or b) used in such a manner that competitors were made unreasonably disadvantaged.
Blanchard & Peale:
Is it legal?
Samsung’s decision was not legal because they infringed on Apple’s patents. Patents are granted by the government, and give the right to temporarily exclude other companies from using the patented design to make, use, or sell products. The patent protects the inventor or company who holds it. Samsung infringed on six of Apple’s utility and design patents. Since Samsung’s decision was blatantly illegal, further ethical analysis regarding the legality of their options is unnecessary.
Is it balanced?
This case hinges on the balance between protecting intangible property of a company and fostering free market competition. The rulings against Samsung may not seem balanced to Samsung and the other smartphone manufacturers, as Apple has a monopoly over most of the popular features in demand in today’s market. For example, Apple has a monopoly over popular zooming features, the shape of menu icons, and navigational features. Samsung and other manufacturers may feel the suit is inhibiting free enterprise by monopolizing design and utility aspects of smartphones and tablets, and subsequently creating roadblocks to new competition.
How does it make me feel?
The decisions made by Samsung were made in order to stay competitive with Apple as the cell phone market rapidly progresses. Rather than focusing on reinventing technology features that were already released to the market, Samsung focused on other areas of their products. Samsung feels frustrated by the courts’ verdicts because they feel it is a loss for the American consumer, and creates new roadblocks for competition. Instead the verdict will only lead to fewer choices, slower progress and higher market prices, further distinguishing a line between the other companies and Apple.
Wall Street Journal:
Am I in compliance with the law?
Samsung’s smartphones and tablets infringed on the ‘163, ‘381, ‘915, ‘087, ‘305, and ‘677 Apple patents. It is clear that Samsung is not in compliance with law in that their smartphone products used the same utility and design features. Samsung smartphones used the ability to zoom in on document when tapping the screen (‘163), the feature that allows the phone to bounce the screen back when scrolling beyond page limits (‘381), the pinch to zoom features and one finger scrolling (‘915), the similar design of the back of the iPhone and other apple devices, the rounded edge shape of the menu icons (‘305), and finally the design with attributes like the front of an iPhone (‘677) (Williams et al.).
What contribution does this choice of action make to the company, the shareholders, the community, and others?
Effect on Samsung
Samsung’s choice of actions have left Samsung to pay for $1 billion dollar worth of damages that need to be paid to Apple. Samsung’s choice affected shareholders because the share price dropped nearly 7.5% on the market in reaction to the $1 billion dollars awarded to Apple. The fall in prices erased over $12 billion dollars from the company’s market value (Voigt et al.).
Samsung must change their product designs so that they no longer infringe Apple’s patents. Samsung’s actions have dubbed them as “copy cats” that aren’t innovative. Consumers may feel that they don’t want to buy Samsung products in fear that there may be a Samsung recall or the devices may no longer be supported. The company must now work towards rebranding themselves and repairing their reputation (Louis).
Effect on the Community
On the bright side, Samsung’s infringement on multiple patents set the precedence for future court cases, and sent a message to Samsung and other companies. These companies will be more cautious when developing devices in the future in order to not infringe on any patents. As a part of the community, consumers can expect more innovation and creativity as the manufacturers find ways to not infringe on patents. These new innovations can attract more consumers than the initial devices that “copied” Apple had.
However, while there is room for innovation there is also room for increased prices of devices due to the cost of litigation. The consumers may have to pay the price of litigation faced by Samsung. There is a possibility that instead of innovating, Samsung and other companies will stabilize or increase their prices with little improvement to the product. Instead of innovating, companies may slow progress for fear that they may infringe on a patent. They may just create products that walk the line of infringement with little inspiration or improvements (Louis).
Another main effect that the Apple v. Samsung court case and the actions of Samsung have on the consumers is related to the variety of products offered. Consumers will have fewer options of Samsung devices to choose from until Samsung redesigns their products. While this does force Samsung to invent new devices, the speed at which they will offer new devices will decrease. This potentially leaves lengthy time periods in which consumers may tire of waiting and turn to Apple or other companies for device selection. The consumers will no longer have the benefit of a rapidly growing cell-phone market. As mentioned before, Samsung and other companies will be very cautious not to infringe on patents, which will lead to the slower introductions of new devices into the market (Williams, et al.).
Effect on others
Samsung’s actions also affect Patent Holders, Apple, Google, Microsoft, Nokia, and Android Supporters, both negatively and positively (Louis).
On the positive side, patents have now increased in value, which is a benefit for those, that hold patents related to smartphones. The patents involved in the court case now have a value of over $150 million dollars each. With the result of the court case there will be a larger influx of companies filing patents for even the minute details of a device. In regards to Apple, they are now going to receive (as mentioned before) $1 billion dollars for damages. One of the main pursuits of Apple is to go after Google, seeing as that is their direct competition. This case and the actions of Samsung have given Apple a path to do so since the Android OS is apart of the case, which is competitor against Apple’s iOS. The actions of Samsung also allow consumers to turn to Microsoft for their future purchases of cellphones. Since Microsoft is not an iOS, consumers looking for iOS alternatives can turn to Microsoft while Samsung redesigns and innovates. Nokia will impact because they decided to go with Microsoft rather than Google and Android and now have a chance to try and regain the market, however small of a chance it may be (Louis).
On the negative side, Google now has to deal with Android being perceived as a copycat of iOS. With the Apple vs. Samsung court case as precedence, other Android supporters such as HTC and Motorola have to be very cautious with their designs. Apple may choose to come after these companies as another way to get to Google for similar reasons as Samsung (Louis).
What are the short- and long-term consequences of this decision?
The short term consequences of this decision is that Samsung has to pay for the damages of infringing patents. Their stock prices have gone down and they have lost a lot of money with the fall of their market value. The long-term consequences of this decision is that Samsung now how as the face the consumer perception of being “copy cats” with no innovation. They will have to go back to the drawing board and redesign products that infringed the patents. This may cause an increase in device prices and a slower device introduction rate, which may lead to the lack of trust of consumers. Consumers may decide to seek out other companies like Microsoft for their future purchases.
Front Page of the Newspaper:
Contemplating any business act, an employee should ask himself whether he would be willing to see it immediately described by an informed and critical reporter on the front page of his local paper, there to be read by his spouse, children, and friends.
The acts of Samsung leave the newspaper headlines to say “Samsung Admits That it Infringed on Apple’s Patents” or that Samsung are “Copy Cats With No Innovation”. The fact that Samsung infringed on Apple’s patents draws question to whether Samsung can create designs of their own. Consumers are left feeling that Samsung is just another knock-off of Apple’s iOS, and may look to other companies for alternatives. If I was someone on the design team reading this article, I would feel as though my hard work didn’t pay off, and that people think I can’t do my job properly. I believe that the people around me would be disappointed in my lack of innovation and creativity. I would fear that I would lose my job and any credibility for my designs when searching for other jobs.
Primum non Nocere:
Primum non Nocere means Above all do no harm. As a part of the Samsung team I need to consider that if my choices and actions will affect others, most importantly the company at large. Is my choice to be less innovative and produce designs and utility features similar to Apple going to damage the reputation of the company for the long-term? The answer is yes. Samsung’s actions place harm on the shareholders, consumers and other companies involved. Consumers risk having to pay higher prices for products because of Samsung’s mistake. Other companies, like Google and Android supporters, have to be cautious as to whether Apple will legally pursue them next. The rest of the technology industry has to be very cautious when producing products to make sure they don’t infringe on Apple’s patents. This fear may lead to lack of innovation, profit and safety rather than being risky.
Resolutions’ Costs, Legalities, and Impact
If Apple continues to file suit against Samsung, it is only reinforcing the positioning of Samsung as a direct competitor with the Apple brand. If Apple drops suit or does not continue to file suit against Samsung, Samsung may continue to infringe upon Apple’s design and utility patents, which would increase Samsung’s market share of the mobile phone market. If Samsung continues to create products that may instigate a suit from Apple, it gains better product placement (comparison) but it loses revenue from settlements--the $1 billion dollar damage award--and authority as leaders in the industry. If Samsung does not continue to create products that utilize functions and designs similar to Apple products, then it may lose market share because it would no longer be the direct comparison of popular products such as the iPhone.
In order to maximize international and federal protection from patent infringement and reduce future liability, both organizations should register with all intellectual property protection agencies such as Berne Convention, European Community Trademark Registration, and World Intellectual Property Organization (Jennings). Additionally, any documents or information that could be used as evidence in the event of litigation should be retained until the statute of limitations has passed. Finally, establishing safeguards in the organization to prevent infringement would encourage ethical practices and reduce future liability.
Minor changes in managerial practice can also help prevent reoccurrence of patent infringement in the future. For instance, organizations should inform all employees about the nature of copyright and patent issues, and ensure that they fully understand the penalties of infringing on the intellectual property of others (Jennings). In addition to U.S. intellectual property laws, the company and employees should have a thorough understanding of differing international standards and intellectual property laws (Jennings). Business leaders need to emphasize the importance of creating an ethical business environment, and establish safeguards to ensure the practice of those values. For example, during the design process, it should be required that the design teams research any new features or designs to make sure they are not violating any patents.
The recommendations that are provided allow members of the organization to consider the ethical values that are practiced within the organization. As a result, members of the organization will consider the short- and long-term effects of their decisions, as well as who those decisions could affect, and the impact they would have on the organization.
The results of the Apple v Samsung case can serve as a precedent for other smartphone and tablet manufacturers. This case demonstrates that the penalties of infringing on intellectual property of others contain both short- and long-term consequences. Companies’ financial affairs and reputation will be damaged. Furthermore, during an ethical crisis, the company should manage the problem by gathering all the available information, taking account of who may be affected by the decision, and finally developing a solution that is most efficient and beneficial to the company. In the future, companies should make sure to search the various intellectual property protection programs such as, Berne Convention, European Community Trademark Registration, World Intellectual Property Organization, and have a comprehensive understanding of the differing international standards and intellectual property law to avoid similar situations as the Apple and Samsung case.
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