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ARC: HOW TO CONTEND WITH EMERGING RISKS AS THE ECONOMY CONTINUES TO RECOVER

Apple's patent victory puts focus on intellectual property risks

Apple Patent Victory
Photo by REUTERS Apple's patent infringement verdict over Samsung puts a spotlight on intellectual property risks that high-tech companies face.

The landmark $1.05 billion patent infringement verdict that Apple recently won against Samsung won't stop innovation, but it is likely to draw more attention to intellectual property risks.

The ruling also could cause companies to rethink whether they try to deal amicably with competitors during product development, instead of litigating once a product is put on the market, experts say.

In its verdict in late August, a federal court jury in San Jose, Calif., hit South Korea-based Samsung Electronics Co. Ltd. with a $1.05 billion judgment for violating Apple's patents by “willfully” copying the Apple iPhone and iPad in devising and marketing Samsung products.

Last week, Apple asked U.S. District Court Judge Lucy Koh to order Samsung to pull eight products from U.S. shelves. The judge will rule on Apple's request at a Dec. 6 hearing.

In a prepared statement, Samsung said it plans to appeal. “This is not the final word in this case or in battles being waged in courts and tribunals around the world, some of which have already rejected many of Apple's claims. Samsung will continue to innovate and offer choices for the consumer.” Samsung declined to comment beyond its statement.

Indeed, a Tokyo court ruled Friday that Samsung's mobile devices did not violate an Apple patent used in synching mobile devices and computers.

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While many experts expect “ripple effects” from the U.S. verdict, the real unknown at this point is the scope of any injunction. If it is broad, it could force major product redesigns,” said Mark A. Lemley, the William H. Neukom professor at Stanford Law School at Stanford University in California. “It certainly raises the legal risk, but I don't think it will stop innovation.”

Edward J. Larson, professor and Hugh & Hazel Darling Chair in Law at the Pepperdine University School of Law in Malibu, Calif., said he thinks the breadth of the patent rights afforded Apple in the “powerful decision” may prompt more caution in research and development of new products.

He said he could see other companies try to take advantage of similarly broad patent protections. For example, “I can see people using it more broadly in patenting medical procedures,” Mr. Larson said.

Richard S. Betterly, president of Betterly Risk Consultants Inc. in Sterling, Mass., said he thinks companies likely will pay more attention to intellectual property issues as a result of the landmark U.S. ruling against Samsung.

Patent attorneys' influence on research and development and design also might increase, although Mr. Betterly said he was uncertain about the role of risk managers.

“I don't know how many risk managers get involved in intellectual property activities,” he said. “My experience is not so much.”

But Roger L. Andrews, director of risk management at E.D. Bullard Co. in Provo, Utah, and a former president of the Risk & Insurance Management Society Inc., said he thinks the Apple-Samsung case could add patent infringement issues to risk management duties at many companies.

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“These ancillary matters that traditionally wouldn't concern risk management, increasingly these things seem to become risk management issues,” Mr. Andrews said. “If you're into enterprise risk management, your focus should be on managing the risks whatever they are.

“I work for a manufacturer and always had some interface with research and development, new product development, especially when it gets to the point of labeling, warnings that kind of thing,” Mr. Andrews said.

“It would be a rare risk manager who might be able to see the distinctions between what you're developing and the patents already in place,” he said. “But at least there should be a process by which they're reviewed by the appropriate people.”

Andrea M. Matwyshyn, assistant professor of legal studies and business ethics at the Wharton School of the University of Pennsylvania in Philadelphia, said many industries face similar issues.

“There's a bit of an innovator's dilemma that happens in situations particularly in high R&D industries where it's expected, and almost inevitable, that there will be some design overlap, even among products that were independently designed,” she said.

At many companies, the strategy is to “tell the R&D people, "Don't do any patent research. Just invent ... we'll clean up the legal later,'” Ms. Matwyshyn said. “That approach allows a more fertile space for development, but inevitably it leads to more inefficiencies down the road.”

A “broader risk management dynamic” at many companies involves whether the company should try to work with competitors on licensing or other contractual arrangements before products come to market, she said. While there were such discussions between Apple and Samsung, the companies couldn't come to terms.

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“Had they struck a deal in the licensing negotiations, it's entirely possible that much of this litigation could have been avoided,” she said.

The decision whether to try to be conciliatory with a rival in the product development process and achieve predictability or to be more adversarial and “roll the dice” with litigation later is a “major risk management decision,” she said.

That decision also depends on an organization's culture. “For some companies, unfortunately, they don't recognize that it is a business decision,” ultimately taking the litigation route by default, Ms. Matwyshyn said.

“I think some participants, particularly in the technology ecosystem, will be more likely to consider all possible strategies for handling infringing (intellectual property),” she said. “Whether that will result in a change in strategy is unknown, of course, but at least for some companies it will open the conversation.”

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