The Good, the Bad, and the Ugly of Apple's Patent Victory

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Apple (NAS: AAPL) scored a huge victory last Friday. A jury of nine Californians found Samsung guilty of infringing several of Apple's mobile patents, resulting in a $1.05 billion legal bill to cover the damages. If judge Lucy Koh finds the infringement "willful," California law allows her to triple it to more than $3 billion. And in September, the court will determine whether the verdict supports restrictions on the sale and import of Samsung's offending gadgets, such as the Galaxy S2 smartphone line or the Galaxy Tab 10 tablet.

The case is sure to be appealed, just as Apple would have taken that next logical step if the jury had leaned the other way. But it already set a precedent in many ways. Here's how the courtroom drama's final act reshaped the business landscape.

The good
Obviously, Apple is a big winner. The company now has legal support for its claims that the iPhone and iPad are revolutionary, beautiful concepts that other companies could never come up with on their own.


By extension, this is great news for other companies that lean heavily on the patent system to protect or expand their business. On a generally lifeless Monday morning, patent wrangler InterDigital (NAS: IDCC) briefly jumped as much as 5.2% on Apple's weekend victory. Mobile-security technologist VirnetX (NYS: VHC) soared 5.6% as its litigation campaign gained fresh support. Even Eastman Kodak (NASDAQOTH: EKDKQ.PK) gained 7.6% as its efforts to sell imaging patents and pull itself out of bankruptcy suddenly looked reasonable again.

Patent sales and lawsuits were a big deal back in 2010 and 2011, but sinking bids and unsuccessful litigation had been bleeding that market dry in 2012. This verdict is another turning point in a long and twisty story.

The bad
Samsung obviously isn't happy, and the decision could be problematic for Android godfather Google in the long run. Sammy, HTC, and other handset builders may need to redesign some core elements of their smartphones to sell them in the crucial American market.

Universal Display (NAS: PANL) took a 13.6% haircut over the weekend. This might seem to run counter to what I said before, since the company makes a living out of licensing OLED display patents to others. But Universal's largest customer happens to be Samsung, so any gains around the patent-based bargaining table could be erased if Samsung cuts production volumes on its OLED-wielding smartphones. Universal investors are taking this threat very seriously today.

One analyst firm calls these concerns "overblown," but Mr. Market doesn't always listen to a lone voice of reason.

The ugly
If this verdict is allowed to stand, Apple contends that innovation has been properly defended. Other companies won't be able to simply copy someone else's brilliant leaps of insight and then make billions of dollars of profit on stolen ideas.

But that's a seriously skewed view (say that 10 times fast!).

In reality, the jury just told inventors and startups to tread very carefully. As Forbes publisher Rich Karlgaard puts it: "Do we want a patent system in which the strongest sue everyone else? Is this good for innovation?"

I don't think it is. Here's what the U.S. Constitution says about intellectual property:

"The Congress shall have Power ... To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries ..."

Patents fit that bill for a couple of centuries, but they have become toothless for their original purpose in many modern industries. That's certainly true in a fast-moving field like mobile computing, where cutting-edge smartphones become obsolete before the patent infringement lawsuits they sparked can be resolved.

Here, the free market does a commendable job of regulating itself. Consumers vote with their wallets. Make a better mousetrap, cover it in appropriate marketing efforts, and rest assured that the best product will win. The correct tools of the trade are ad blitzes, top-notch manufacturing, and, yes -- innovation. The first phone to sport a desirable new feature will have a unique selling point for months, until others can copy it or design equivalent workarounds. Lawsuits still belong in the innovator's toolbelt, but more to ensure truth in marketing than to enforce design concepts as most of Apple's patents do.

The patent system has outlived its original mandate in many ways. Patent laws rely on that pithy Constitutional passage, but they aren't articles of the Constitution in and of themselves. Don't expect Congress to fix this problem anytime soon, particularly in the face of verdicts like Apple's big win -- score one for the home team, right?

The Supreme Court could set some correct precedents in a hurry, and I hope Samsung takes its case that far. Settling with Apple before reaching the Justices might be good for Samsung, for Apple, and for the smartphone industry in the short run, but consumers and inventors deserve better. Don't take the easy way out, Sammy!

Whatever comes next in the patent-powered saga, Apple remains a heavyweight in the exploding smartphone industry. The stock is an active recommendation of -- count 'em -- four Foolish newsletter services. Learn why our analysts love Cupertino and what challenges the company is facing right here in our brand-new premium report on Apple. Sign up today and get 52 weeks of free updates at no additional cost!

The article The Good, the Bad, and the Ugly of Apple's Patent Victory originally appeared on Fool.com.

Fool contributorAnders Bylundowns shares in Google and Universal Display, but he holds no other position in any of the companies mentioned. Check outAnders' holdings and bio, or follow him onTwitterandGoogle+. The Motley Fool owns shares of Universal Display and Apple.Motley Fool newsletter serviceshave recommended buying shares of Apple, Google, and Universal Display and creating a bull call spread position in Apple. We Fools don't all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter servicesfree for 30 days. The Motley Fool has adisclosure policy.

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