Negotiation Final Project: Apple v. Samsung

Negotiation in the Smartphone Battles: Apple v. Samsung

Maria Voicu

Tim Wilson

Kelsey Giroux

Ross Ferris

Endicott College

For the past four years, Apple and Samsung have been the key players of an unprecedented legal war. It started in 2010 with Samsung’s launch of Galaxy S smartphone, which to Steve Job’s disbelief resembled and used similar technology to the iPhone, the breakthrough phone that his company launched three years before. Disputes over patents, technology, and innovation cost both companies tens of millions, spanned four continents, and five years later has seen little resolution.

Background

Samsung and Apple are both goliaths in the personal computing industry. Apple is an American prominent hardware and software company founded in 1976 by Steve Jobs, Stephen Wozniak, and Ronald Wayne. It designs, develops, and sells consumer electronics. Apple enjoys a high level of brand loyalty and is the one of the world's most valuable brand. Throughout the history of personal computing, Apple has been one of the most innovative influencers on industry practices and has continually been a driving force in the evolution of the personal computer with other companies trying to close the gap. Samsung, founded in 1938, is the largest multinational conglomerate company in South Korea. Over the next three decades, the company diversified into areas including food processing, textiles, insurance, securities and retail. Samsung entered the electronics industry in the late 1960s.  Samsung Electronics has been ranked as the world's largest information technology company measured by 2014 revenues, with a revenue of $189.5 billion whereas Apple has been ranked second with a revenue of $182.79 billions (List of Largest Companies, 2015).

The relationship between the two companies has been quite complicated. Samsung is an important supplier of parts for Apple products as highlighted by an article found in the Economist:

It [Samsung] provides some of the iPhone's most important components: the flash memory that holds the phone's apps, music and operating software; the working memory and the applications processor that makes the whole thing work. The two companies had a prosperous business relationship, Apple being one of Samsung's largest customers, and Samsung being one of Apple's biggest suppliers. (P.K., 2011).

On August 4, 2010 their working partnership took an abrupt turn for the worse when a small group of executives from Apple Inc. arrived in Seoul to the Samsung headquarters, ready to fire the first shot in what would become one of the bloodiest corporate wars in history (Eichenwald, 2014).  The conflict had been brewing since spring, when Samsung, launched the Galaxy S, a new entry into the smartphone market. It was only three years after Apple has launched its first generation of iPhones.  As Hoffelder recounts, “Apple designers studied it with growing disbelief. The Galaxy S, they thought, was pure piracy” (2014). In the article ‘The Great Smartphone War’ Eichenwald reveals:

Jobs and Tim Cook, his CEO, 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 around the problem, of smiling requests and impatient urgings, Jobs decided to take the gloves off. At this point the message was clear. If Apple pursued a claim against Samsung for stealing the iPhone, Samsung would come right back at them with a theft claim of its own. (2014)

Issues and Parties

Issues

Both companies felt they had patented key innovations and were seeking to protect their interests. In 2007, Steve Jobs stated “We’ve been innovating like crazy for the last few years on this...We filed for over 200 patents for all the inventions in iPhone, and we intend to protect them.” (Elmer-DeWitt, 2012). Samsung had an equally powerful arsenal of patents at its disposal, including many covering the fundamental technologies of cellular telephony that Apple relies upon but were not so easily deployed in a court of law (Elmer-DeWitt, 2012). Apple said Samsung asked, before the trial, for 2.4 percent of every iPhone and iPad sold to cover infringement of its patents. Apple said that even if it had to pay a royalty on some of Samsung’s patents, the 2.4 percent rate is too high given that the technology Samsung claims it owns is in an Intel chip that Apple buys for $6 to $10 each.

Apple first sued Samsung Electronics Company in April 2011, saying they “made a deliberate decision to copy Apple’s iPhone and iPad. The intellectual property that Apple has asserted against Samsung goes to the heart of the extraordinary success of the iPhone and the iPad.”  (Guglielmo, 2012). Apple then claimed that Samsung infringed four industrial design patents, covering the look and feel of the devices, and three utility patents, which cover how the gadgets work (Guglielmo, 2012).

Samsung, the world’s largest maker of smartphones, countersued Apple in June 2011, saying that Apple infringes on several of its patents having to do with wireless communications technology and camera phones. Samsung wrote in its trial brief: “Apple, which sold its first iPhone nearly 20 years after Samsung started developing mobile phone technology, could not have sold a single iPhone without the benefit of Samsung’s patented technology.” (Guglielmo, 2012). For every iPhone, Apple relies on Samsung for approximately 26% of the components (P.K., 2011).

Parties

The negotiations at times involved direct talks between CEOS but were more often represented by their council.  In May 2012, Apple CEO Tim Cook and Samsung CEO Gee-Sung Choi attempted to negotiate a settlement in a very high profile US patent case when they met with a judge in California (Staff, 2015). Many lawyers were involved on both sides with Apple being represented San Francisco-based Morrison Foerster and WilmerHale whereas Samsung is represented by Quinn Emanuel. Harold McElhinny is the lead counsel from Morrison Foerster and has previously sued Samsung and won $59 million damages for Pioneer in a patent dispute over plasma TV displays. From WilmerHale, William Lee has led a lot of the questioning over patents. For Samsung, John Quinn and Quinn Emananuel partner Charles Verhoeven have had most of the floor time (Sandoval & Lowensohn, 2012).

The following chronology of events has been compiled from the works of Duncan (2014), Osborne (2014), and The Guardian (2014).

Chronology of Events

August 2010	Apple believes that their partner, Samsung, has infringed on Apple patents and would like to work out a deal.
October  2010	Apple and Samsung meet to discuss Samsung resolving the issue by licensing rights, where as Samsung would pay Apple per each phone and tablet samsung made. Samsung declines.
April 2011	Apple files lawsuit against Samsung.  Samsung files International countersuit over 3G technology patents it says Apple has infringed on.
Aug/Sept 2011	Court orders Samsung tablets to be pulled from the shelves as they are deemed to too closely resemble the iPad.
Nov/Dec 2011	30 More lawsuits are filed focusing on specific aspects of the devices and their functions from both sides.
March – May 2012	Court orders the two parties to begin settlement talks which fail
July 2012	In the UK Apple is ordered to admit that Samsung did not copy the iPad design
July 22 2012	Jury trial begins in the U.S. with Apple seeking $2.5 billion in damages.
August 2012	Jury Awards Apple over $1 billion saying that 26 Samsung products infringed on Apple patents
Oct. – Nov. 2012	Galaxy Nexus ban lifted
Dec. 2012	Blow to Apple when U.S. Patent of Trademark Office tentatively denies patent of “pinch-to-zoom” feature calling into question other patented features
March 2013	Judge finds that the jury miscalculated the $1billion damages and orders retrial.
June 2013	The International Trade Commission rules older iPhones and iPads infringe on Samsung patents and should be barred in the U.S
Aug. 2013	ITC vetoes own ruling days before going into effect then blocks older Samsung phones stating they infringe on Apple devices.
Nov. 2013	Retrial held over the miscalculated damages of prior trial.  The damages awarded to Apple are now $929 million down from $1.05 billion.
March 2014	Samsung files a formal appeal after being required to pay the damages
April 2014	The second U.S. trial begins with Apple seeking $2 billion in damages for different infringements they claim Samsung products make.
May 2 2014	Jury rules that Samsung infringed on 2 Apple patents and awarded Apple $119 million in damages.  The jury also found that Apple had infringed on one of Samsung’s patents, awarding Samsung $158,400 in damages
August 2014	Apple and Samsung agree to settle all patent disputes outside of the U.S. between themselves.

Negotiation Tactics

Apple and Samsung share many common interests including the primary goal of both seeking to increase sales of their smart devices (inclusive of smartphones and tablets). Despite common interests, the patent wars escalated rapidly and spread internationally. In many cases, closed door negotiations were used on the path to litigation. However due to sealed records of these meetings, it is hard to uncover specific negotiation tactics used in those proceedings, therefore the focus will be placed on actions by both Apple and Samsung in the public sphere. Generally, both parties used tactics consistent with hard positional bargaining with a key exception in how the patent wars began.

In 2010, Apple started the patent wars with a first move being consistent with an interest based bargaining approach and were initially open about their interests (see appendix) (Spangler, 2003). They approached Samsung and proposed a licensing deal to Samsung. In their proposal they pointed out how “Samsung adopted, embraced and imitated the iPhone’s archetype” (Apple Inc., 2010, slide 9) however they recognized Samsung as a strategic partner and offered a solution that entailed Samsung paying a royalty fee for every device sold of that type. Apple’s proposal highlights a willingness to settle disagreement outside of court was based on shared interests. Instead of seeking further negotiation, Samsung refused Apple’s proposal and this action sparked the start of hard positional bargaining.

After that point, a number of hard positional negotiation tactics were used by both companies. Apple was the first to dig into their position (see appendix) by suing Samsung in the state of California for patent violations and trademark infringements (Mogg, 2011). Samsung’s immediate response was to dig into theirs by countersuing Apple in Germany, Korea, and Japan based on 3G patent violations (Duncan, 2014). The willingness to seek litigation instead of mediation or other similar processes highlights how both companies viewed their position in an uncompromising manner.  During the California (2012) litigation proceedings, both Apple and Samsung resorted to using underhanded tricks (see appendix) to undermine each other’s efforts in court. For instance, when Samsung was denied by the judge to make the argument that Apple’s iPhone design was derived from Sony ideas (to illustrate that Apple was just as much of a conceptual plagiarizer as Samsung) they released the information to the media (Paczkowski, 2012). Conversely, Apple submitted at the last minute a 75 page list of potential witnesses (Duncan, 2014) to potentially increase the duration of proceedings. In proceedings, Apple had the ability to look for win alone (see appendix) as they recognized their ability to exploit Samsung’s submission of their patents under FRAND terms:

… as long as Apple is willing to pay for the use of Samsung’s patents, Samsung is required to negotiate terms that are fair and reasonable and don’t try to unduly punish Apple. Apple is under no such obligation with regard to its patents. If it doesn’t want a competitor to use its proprietary technologies, it doesn’t have to license them under any terms. (Elmer-DeWitt, 2012)

Pursuant to that, some analysts suggested that Tim Cook’s statement “it’s very important that Apple not become the developer for the world. We need people to invent their own stuff” (2012)  was a declaration of how willing Apple is to protect what it sees as their innovations, highlighting Apple’s desire for a one sided victory. Apple and Samsung continued to view each as adversaries (see appendix) instead of joint problem solvers over the course of the next three years as Samsung and Apple filed suits against each other in 50 different countries entangling themselves in never ending litigation. Increasing the number of claims internationally highlights the dramatic extent to which both Apple and Samsung insisted on their position (see appendix). Hard positional tactics continued until a thaw in the summer of 2014, when Apple and Samsung mutually decided to drop patent lawsuits outside of the United States demonstrating a willingness to pursue some win-win opportunities (see appendix) and perhaps an indication of interest based negotiations to come.

Assuming that winning litigation is the desired outcome by either Apple or Samsung, their Best Alternative to a Negotiated Agreement (BATNA) differs slightly. From Apple’s point of view it is reasonable to assume that their BATNA would be to settle out of court and resume their partnership with Samsung as their iPhones and iPads are dependent on Samsung’s 3G patented technology. In Samsung’s case, their BATNA would be to continue litigation as they have potential to lose more than Apple in the patent wars. Additionally, for Samsung, continuation of litigation over the series of events has shown to have had little stop effect on the sales of Samsung devices that possibly infringed on Apple’s copyrights.

For both parties, a loss in the litigation proceedings would represent their Worst Alternative to a Negotiated Agreement (WATNA). Depending on the court orders, penalties stipulated by the judge and jury, could be expansive. Indeed, rulings awarded to Apple of one billion dollars, indicate the financial stakes are dramatic but not necessarily detrimental to companies who generate yearly profits in the tens of billions. For Samsung, a loss of litigation in which they are forced to recognize Apple’s intellectual property could be more damaging in long term expenses due to the necessity of investing in technological redesign or the imposition of royalty fees per device sold.

Conclusion

Is there a winner here? There has been, and continues to be, a huge following of this case which is not damaging the image or sales of the products that both of these technological giants produce. In fact, it could be said that the exposure has generated even more sales for both companies. Despite common interests, the patent wars escalated rapidly into litigation and spread internationally in what did not seem to be a pre-planned intention. Generally, both parties used tactics consistent with hard positional bargaining with a key exception being  how the patent wars began. In 2012, Tim Cook stated that Apple should not become the developer of the world and he stated that everyone needed to invent their own stuff. This was a declaration of how willing Apple is to protect what it sees as their innovations, highlighting Apple’s desire for a one sided victory. Intellectual property in this environment comes back to patents and interpretations of the components of each patent, who generated and owns this property, and what access others should have to this property without compensation. The most evident conclusion from this case is that hard positional tactics can be like a game of chicken and will never result in a win-win outcome. Planning a negotiation strategy with best and worst alternatives in mind with a view to possibly conceding a little to settle for something which may not be ideal, will be a smart strategy. If you arrive at an outcome that satisfies your objectives, with a small cost for a large perceived gain, you can move forward, although egos may need to be put aside to objectively negotiate a positive outcome.

References

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Appendix