Fighting Over Rectangles: Why Apple Can't Win The Patent War

| About: Apple Inc. (AAPL)

For us, it's unreasonable that we're fighting over rectangles, that that's being considered as an infringement, which is why we're defending ourselves. [...] it's defying common sense. We're all scratching our heads and saying, "How is this possible that we're actually having an industry-level debate and trying to stifle competition?" Consumers want rectangles and we're fighting over whether you can deliver a product in the shape of a rectangle.

Logically, as an engineering and manufacturing company, it makes more sense to focus on the things that are really relevant and we think are truly intellectual property. They are truly unique, and have come intrinsically out of the investments we made in R&D. A rectangle did not come out of R&D investment that we've made. Some of our products happen to be in the shape of a rectangle, but I wouldn't consider that to be an art or a science that we've created.

- Kevin Packingham, Chief Product Officer at Samsung, in an interview with Wired published 7/30/2012

Potential jurors are being quizzed for the patent trial between Apple (NASDAQ:AAPL) and Samsung, the latest in a slew of patent disputes that have many questioning sanity.

One of the main issues in the trial is the form factor of the iPhone, which, Apple is arguing, Samsung copied. And even if you throw out the fact that Apple borrowed the iPhone design from Sony and that Samsung had smartphone design plans predating the iPhone's launch, it still seems impossible for Apple to win this battle. Why?

Well, in short: it's very difficult to claim that any one person or company has exclusive intellectual property rights to a rectangle with a touchscreen on it. While individual features are subject to IPR claims due to extensive R&D, as Packingham expressed, it's slightly ludicrous to claim exclusive rights to a form factor. As evidenced by the history of the laptop, form factors quickly become standardized simply because consumers generally prefer a certain form factor. At one time, mainstream cell phones were flip phones with a keyboard. Now, they're all sort-of-rectangular devices with touchscreens. Undoubtedly, a new form factor will eventually emerge.

With up to 250,000 patents potentially affecting a single smartphone, it's literally impossible for a jury to be able to process every bit of technical information presented. At the end of the day, even if one company's patents technically grant it exclusive license to a specific feature, it's highly unlikely that the jury will completely side with one side or the other and determine that Samsung smartphones are an iPhone ripoff - or vice versa. This phenomenon of jury overload is aptly summed up by Wired in another article:

there's always a large chance that the two sides will settle before they go gambling important intellectual property in front of a jury that might be composed mostly of people who still use Microsoft's IE6 browser and who don't know how to text.

Implications for Investors

Fierce competition in the smartphone market has already done in Nokia (NYSE:NOK) and Research In Motion (RIMM). So, naturally, it's in the remaining companies' best interests to snuff out as much of the competition as possible, using any means necessary. And that's what's happening in the patent wars. Apple wants to take down Google (NASDAQ:GOOG) by trying to sue market leader Android out of existence. At first glance, it seems that all the companies involved in the patent battles, including Samsung, Google, Apple, and HTC, are at significant risk.

But after accounting for the fact that juries are comprised of common folk, it becomes clear that Apple's chances for victory are very limited. Courtroom delays are also bad for Apple, since by the time lawsuits are decided or settled, the technologies in question may be barely relevant. Innovation happens so fast in the smartphone arena that the notoriously slow judicial process can't keep up. For example:

On the interface front, Apple asserts Samsung infringes on patents covering the overscroll "bounce" above, as well as a scrolling API that controls the behaviors of frames in a screen. Apple also asserts Samsung is violating an Apple patent covering the use of taps to zoom and navigate content that Apple introduced with the first iPhone. It's worth noting that Samsung has already shifted away from some of these alleged infringements. For instance, when you overscroll on a current Samsung device, you just get a blue highlight. No bounce.

For all the reasons presented, investors on either side of the table shouldn't be particularly worried - or excited. Apple won't gain any significant market share by suing competitors, and competitors won't gain any significant market share by suing Apple. The whole thing is just one expensive wash.

While the patent war is thus largely irrelevant to the overall face of the smartphone/tablet market, one group will be winning big for sure: the lawyers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.