What a Patent War Means for South Korea's Samsung

In 1977, when South Korea was a poor but industrializing country, an American business consultant named Ira Magaziner visited Samsung Electronics at its campus an hour's drive north of the capital Seoul. He was not impressed. "The research lab reminded me of a dilapidated high school science classroom," wrote the young professional, who later became a health care adviser to President Bill Clinton.
One brainstorming tactic, however, piqued his curiosity. "They'd gathered color televisions from every major company in the world — RCA, GE, Hitachi — and were using them to design a model of their own," he noted in his 1988 book, The Silent War: Inside the Global Business Battles Shaping America's Future. The strategy worked. When Magaziner returned to Suwon five years later, the site looked sharp, sophisticated and technologically on par with those of American corporations. And, in a break from industry tradition, the engineers were building both color televisions, along with the parts inside them. (Watch TIME's video on Samsung taking on the MacBook Air.)
Nearly three decades later, that obscure, family-run firm has grown into a global electronics colossus and is now the world's largest producer of televisions and second biggest maker of smart phones. That triumph, though, has brought the conglomerate into a raucous league of competitors that frequently sue each other over what they call patent infringements. Some say the litigation is designed to protect competition and innovation, while others claim it's a market trick to block challengers. This summer, Samsung has roused the fury of tech giant Apple, igniting a remarkable legal battle that spans across North America, Europe, Australia and Asia.
In an April filing and a subsequent update made to a northern California court, Apple says Samsung violated eight of its technology patents, seven of its design patents and six of its trademarks on computer icons, mainly when Samsung developed the Android-based Galaxy smart phones and tablet computers. The California-based giant claims it owns rights to the touch-screen gadgetry used on the iPad and iPhone, and, among other patents, the products' trade dress consisting of the color black and chamfered corners.
The South Korean firm has vowed to fight back. "Samsung's development of core technologies and strengthening our intellectual property portfolio are keys to our continued success," they said in a statement on the original April lawsuit. "Samsung will respond actively to this legal action taken against us through appropriate legal measures to protect our intellectual property." Since April, Samsung has countersued Apple in six countries, asserting that Apple copied 12 of its patents, primarily when it built its crown jewels, the iPhone and iPad. (See a photographic history of the computer.)
Though still in their early phases in most places, Apple's motions are swiftly escalating in the European Union. On Sept. 9, a court in Düsseldorf banned sales of the Galaxy 10.1 tablet in Germany, ruling that the "predominant overall impression" among "informed customers" was that the device looks like Apple's design. This followed a preliminary injunction issued by the same court on Sept. 2 that forced Samsung to pull its latest tablet, the Galaxy Tab 7.7, out of a Berlin electronics show and off the shelves throughout Germany. The sales barricades could do serious damage to Samsung's current generation of tablets because they'll lose precious sales time in a market where new products quickly become old news.
In Australia and the U.S., the process is moving more sluggishly. Because of legal proceedings in Sydney, Samsung has indefinitely postponed its Tab 10.1 launch event in Australia, originally set for Aug. 11. In early July, Apple filed for a preliminary injunction in a California court to stop Samsung from selling four of its new gadgets in the U.S., a proceeding that will be heard in mid-October. As part of its opposition to Apple's application, Samsung claims that the design for the iPad first appeared in the 1968 film 2001: A Space Odyssey, long before Steve Jobs garnered his celebrity.
In the mobile-computing arena, it's common practice for opponents to settle on deals before courts decide on sales cordons, allowing defendants to continue selling their products while paying royalties to accusers. But Apple is one important player that doesn't seek patent-licensing revenues, meaning that Samsung can't buy its way out of the dispute, says Florian Mueller, a popular blogger on intellectual-property disputes. "Samsung is innovative in certain areas, but its future as a maker of nameplate smart phones and tablet computers is uncertain," he says.
Samsung Electronics wants to be seen as an innovator. "We strongly believe that we have our own competitiveness," said Koh Dong Jin, a vice president in mobile-communications research and development at Samsung Electronics. "In terms of 3G and 4G telecommunications technologies, Samsung has built an enormous amount of know-how and patents." Last year the group was awarded 4,551 patents in the U.S., the second largest number after IBM. Apple, on the other hand, was awarded 563 last year.

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Samsung's current chairman and second-generation scion, Lee Kun-hee, made it his legacy to turn the company around from a seller of simple bargain pieces into a maker of fancy inventions. In 1995, he ordered his employees to smash and then set on fire a mountain of 140,000 mobile phones, fax machines and other electronics worth $50 million. Lee Ki-tae (no relation to the chairman), a reformer soon tasked with improving the quality of Samsung mobile phones, tested handsets by dropping them out of his window, hurling them at walls and running them over with cars.
That rigor helped the company grow speedily. By the mid-2000s, Samsung had surpassed its entrenched Japanese rival, Sony, both in yearly electronics sales and brand popularity, according to calculations by Interbrand, a New York City–based consultancy. The South Korean company has trumpeted the Galaxy as its latest innovation since it was first released in 2009 — making the lawsuit particularly vexing for managers starstruck by the group's new prominence. Apple spokeswoman Kristin Huguet would not comment on the litigation. (See if a tablet price war is coming.)
Some analysts reckon that Samsung has been pursuing a tougher match against Apple after it overtook Sony. Around the time the iPhone was released in 2007, Samsung was distracted by competition from Finnish handset maker Nokia, said one former Samsung mobile-phone designer who asked not to be named because Samsung is a customer of his current firm. "We were caught out of position," he told TIME in Seoul. "The mood at the office was, 'Oh my God, we're just playing catch-up with the iPhone.'"
Still, Samsung supporters contend the company is actually the victim of bureaucratic excesses in the U.S. Patent and Trademark Office and its counterparts in Europe and Australia. Those government agencies, they say, grant too many broad and absurd patents, opening up businesses to legal bullying that stifles innovation. Apple's exclusivity claims follow a similar line, covering an excessive swath of technologies and designs — even if the Galaxy line resembles the iPhone's look and feel, says Mueller.
Even if Samsung's smart-phone future is up in the air, the company can fall back on a hidden weapon: its semiconductor division. Samsung is the largest memory-chip maker and second-largest semiconductor supplier worldwide, a capability that earned it $9.4 billion last year, or one-quarter of its electronics profits. Rivals such as Apple and Sony, ironically, are some of its biggest customers for those chipsets, using them in the PlayStation 3 and the iPad. (See if Samsung can cure the 5-in. tablet's identity crisis.)
That dependency could create a dilemma for Apple, which has reportedly been trying to curb its reliance on Samsung semiconductors ever since it drafted the legal accusations and, thus, might be planning to source microchips for the unreleased iPhone 5 from a Taiwan company. Apple, however, will face hurdles finding the same quality chipsets at a similar price from non–South Korean manufacturers and could even face subtle vengeance from Samsung in this sector, warns Tony Michell, author of Samsung and the Battle for Leadership of the Electronics Industry. "Samsung could decide that when they have a new idea, they won't mention it to Apple for a year or so," he says, possibly catching the iPhone maker off guard with future products.
Nevertheless, Samsung can't rely too heavily on memory-chip sales in this year's bearish semiconductor market. Many makers of dynamic random-access memory (DRAM) chips are selling at a loss due to falling demand and low memory-chip prices. But even in a boom, chipsets simply don't build the nameplate stature that Samsung seeks. "The most important issue to Samsung here is that it wants to be a major consumer brand for wireless devices as opposed to a mere manufacturer of components," says Mueller, the patent blogger.
In a field where quarrels flare up and die unpredictably, Samsung's race to win technological prestige has run it into obstacles. "In the hurry to produce something like a smart phone or a smart pad," says Michell, "you're bound to, in this intellectual-property jungle where vines hang down across your path at every point, be in danger of a lawsuit from Apple." That poses particular hazards for an aggressive hardware maker like Samsung, which — innovating in a rush similar to what Magaziner observed 34 years ago — is bound to clash with the tech titans, even at the risk of being called a copycat.

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