There's no question that the iPhone changed the broadband Internet. As opposed to the "dumb" phone that produced a dial tone and nothing else, the iPhone initiated a multidimensional cage match in which connectivity (Verizon), device (Apple), content (Facebook) and service (Amazon) providers compete for consumer allegiance. The result has been a torrent of innovation, generating growth, income and employment, and dramatic change in our daily lives.
But those dynamics are now challenged by a court case coming to a close in California, in which Apple is seeking a ban on the importation of new-generation Samsung phones and tablets, claiming patent infringement.
Apple claims — and previous courts have accepted — that Samsung infringed on five specific Apple patents for such features as "slide to open." But the remedy Apple proposes includes damages of $40 per new device sold; in a different case involving Motorola, Apple valued one of these patents at one-20th of the figure it now demands.
But Apple's bet is that it can get more from a jury than from a business negotiation, which raises important issues about the nature of patents, the evolution of the broadband Internet, and long-term economic performance.
The patent system was designed to achieve a difficult balance: provide incentives to innovators and ensure that their innovations spread throughout the economy. So it offered protections to the inventor of proverbial better mousetraps. But technological progress has changed the nature of invention — the iPhone itself was never patented. Instead, it rests on a mass of patents, as does virtually any modern product or process. Seeking outrageous settlements or an outright ban on the entire product in which an individual component plays a part ignores the balancing aspect of the patent system — the need to establish terms on which innovations are spread throughout the economy.
The judge in the case has essentially taken this view, arguing that an outright ban ignores the reality that the patents in question aren't the driving reason consumers may opt for a Samsung phone instead of an iPhone. In fact, she's more right than she imagines.
For many, smartphones are the best option for reaching the Internet. The people who catch the early bus don't have a computer at work, may rent their homes, and can meld their Internet access with their need for telephony. The advantages of Samsung products for many are not such patented features as "swipe to open," but a substantially lower price that allows consumers to participate in the digital world. Prohibiting these products or driving up their costs would harm consumers far more than any losses related to infringement.
The Apple-Samsung case brings to mind the many defects of the patent system. Patent "trolls" buy patents hoping to catch unsuspecting companies that are in violation. Damages too often relate to the value of the entire product, rather than the economic contributions of the component of the feature in question (much like Apple's $40 per phone proposal). And many analysts and industry participants contend that patents don't live up to the standard of something wholly new and innovative.
This confluence of issues is producing a business environment in which company strategies for competitiveness are premised on legal strategies rather than creating consumer value. It is the opposite of how a healthy business climate operates — the best legal framework is one that doesn't weigh on business decisions. Rather than perpetuating this environment, we need to recalibrate the system's balance between the rights of innovators and the economy's need for a stream of innovations that disseminate readily.
Apple and Samsung should be directed to resolve this issue out of court and, if necessary, be directed to go to simple, binding "best offer" arbitration.
We should take this case as a sign it is time for a revamping of patent policy.
Ev Ehrlich is president of ESC Co., an economics consulting firm, and former undersecretary of commerce in the Clinton administration.