Under a newly minted deal between the world's top smartphone maker -- South Korea's Samsung Electronics Comp., Ltd. (KSC:005930) and Nokia Oyj. (HEX:NOK1V)), Samsung agrees to pay Nokia royalties on its Android smartphones, beginning in January 2014.
I. Nokia Scores Licensing Payments From World's Largest Smartphone Maker
The deal is another crucial coup for the Finland-based Nokia, who recently opted to sell its recovering devices division to ally Microsoft Corp. (MSFT) and focus its efforts on the telecommunications equipment market. Nokia already owns a major licensing deal with Apple, Inc. (AAPL). Apple - widely known in the smartphone "patent wars" as an aggressor -- ironically enough was on the receiving end of Nokia litigation back in 2009, which culminated in an agreement from Apple to pay licensing fees.
Apple's licensing rates (i.e. how much Apple pays Nokia per
iPhone to "borrow" its "innovations" -- intellectual property) interestingly may have played a key role in the Nokia-Samsung negotiations and are also the subject of a growing controversy.
Apple and Samsung are currently locked in a second round of suits-countersuits, which will be tried in March 2014 in the U.S. District Court for the Northern District of California with Judge Paul S. Grewal presiding over the trial. Ironically, that case only involves the Galaxy SII, Galaxy S3, and Galaxy Note 2 -- aging Androids which Samsung will likely have largely have stopped making by the time the case wraps up. Apple tried to tack on Samsung's current flagship smartphone, the
Galaxy S4, but Judge Grewal denied that motion, forcing Apple to have to likely wait for a third trial in mid-to-late 2015 on that, and possibly other devices.
Overseas Samsung has faced some minor losses, seeing brief bans of its "Galaxy Tab" product line, but has been successful in convincing foreign regulators that its workarounds eliminate Apple's infringement claims. Notably in the UK Samsung actually was found completely innocent -- illustrating the diverse range of opinions regarding software patents and their scope.
In the U.S., Samsung lost the first round of the battle, with a hometown Californian jury -- who included jurors who had family members who were Apple shareholders -- deciding that Apple was innocent of infringement, but Samsung was guilty. A jury ordered roughly $1B USD in damages, but $450M USD of that was awarded under improper instructions; so it's being recalculated (likely lower) at a special damages trial in November -- also in the USDC for Northern California, under the trial judge for the first case, Judge Lucy Koh.
II. Did Leaks Help Samsung Illicitly Score a Deal? Apple, Nokia Claim So
The controversy regarding the Apple-Nokia licensing stems from the fact that Apple handed over confidential documents to Samsung's lawyers -- which were only allowed to prepare a defense for the case. Those documents admittedly were not stamped with the appropriate confidential steal ("Attorney Eyes' Only"), due to what Samsung's lawyers claim is a "mistake". They were also uploaded to an FTP, which Apple's law team contends was access by 223 unauthorized individuals -- including Samsung lawyers and executives involved in the Nokia investigation.
Apple cites a deposition from Nokia's chief intellectual property officer, Paul Melin who at a June 4 settlement talk with Samsung was reportedly surprised when Samsung executive Dr. Seungho Ahn knew of the secret terms of the Apple license, and reportedly use that for leverage, telling Mr. Melin "all information leaks".
Quinn Emanuel Urquhart & Sullivan, LLP -- the outside counsel representing Samsung admits that it made "missteps" in the case, which they "deeply regret". But they deny that Dr. Ahn knew of the agreement, arguing that Mr. Melin misunderstood Dr. Ahn due to a language barrier (English is a second language for Dr. Ahn).
If Apple is able to nail the lawyers at Quinn Emanuel with sanctions it would be a major blow and set a difficult initial hurdle for Samsung to overcome image-wise in the second trial. It could also seriously impact Dr. Ahn, who happens to have J.D. legal credentials from the State Bar of California.
Fortunately for the Samsung team, Judge Grewal so far has remained unconvinced of Apple's argument for lack of complete information. He commented in a recent hearing, "I am not yet satisfied that sanctions are warranted in this matter."
It's pretty clear based on Quinn Emanuel's defense testimony from the hearing, that Samsung did something at least mildly illegal, in failing to stamp the documents appropriately and uploading them to a potentially shared FTP. How serious a breach this was may be difficult for Apple and Nokia to definitively prove -- as most of the critical details happened behind the veil of Samsung's servers. In terms of image, the account is mildly damaging to Samsung although at this point the battlelines are drawn; its detractors will largely view this as another instance of "Samsung stealing", while its proponents will view it as a merry rogue, perhaps flexing the bounds of legality to battle the patent aggression of Apple and Nokia.
II. Samsung -- Profitable, but Not Safe as the Vultures Circle
With that in mind, at the end of the day Nokia did decide -- whether it was due to knowing what Samsung (illicitly) knew with respect to its Apple arrangement, or something else -- to four months later accept Samsung's licensing settlement offer. The pair are still have a bit of negotiating to do, though as the "damages" for the bind arbitration (i.e. per unit licensing fees) will be decided sometime in 2015 (and retroactively applied to 2014 sales).
It is unclear whether Nokia will offer any special exemptions for Samsung's Windows Phone handsets. Nokia did not spare the Radar 4G
Windows Phone from HTC Corp. (TPE:2498) in the pair's recent ongoing legal strife. However,
Microsoft has since received a confidential licensing agreement for Windows Phone as part of the Nokia Devices deal -- leaving it unclear whether or not Windows Phone (as a platform) has received licensing from Nokia (meaning all Windows Phones released from Q3 2013 on would likely be protected), or if the licensing only applies to
Nokia Devices' Windows Phones. The licensing pact, like the deal between Apple and Nokia, is sealed, so we may never know (given that
Samsung has already settled with Nokia and
HTC is likely to settle).
Nokia says it currently receives patent licensing fees from a whopping 50 OEMs. It quite possibly may have the strongest smartphone patent portfolio in that its pioneering work in smartphones allowed it to describe in patents the basic software setup of the modern smartphone, with sufficient ambiguity in the language to broadly cover most current devices. Better still, most of these patents weren't part of any standard, and thus aren't bound by any sort of obligatory licensing.
Samsung now is safe from Nokia, but it's still reeling from being sued by Rockstar Consortium -- a group of tech firms that includes Apple and Microsoft -- and even fellow Android OEM Sony Corp. (TYO:6758). The suit is controversial as Apple and Microsoft had promised to the use these patents -- which come from a 6,000 patent portfolio from bankrupt telecommunications firm Nortel -- in a peaceful manner, at the time of their $4.4B USD purchase approval in Feb. 2012.
The suit is also controversial as Samsung has a licensing agreeement with Microsoft for Android, and is rumored to pay one of the highest rates of any OEM (nearly $15 USD per device). Samsung may have paid Microsoft over $3B USD in 2012 in licensing fees on the 215 million smartphones it sold, most of which ran Android. Given that Samsung is already paying Microsoft, it seems rather unethical that Microsoft would turn around and try to troll this cash cow for even more via shell company.
About the only good news for Samsung is that even with the new "Nokia tax", Samsung will likely remain the most profitable Android OEM in the industry, given its current large quarterly smartphone profits.
