The Market Effects of Smartphone Patent War

Tian Zou
Advisor: James L. Powell

Professor of Economics; Department Chair
University of California, Berkeley
The Market Effects of Smartphone Patent War
AN EVENT STUDY OF PATENT LAWSUITS ON SMARTPHONE PLAYERS
PERFORMANCES IN THE PUBLIC MARKET

The Market Effects of Smartphone Patent War Tian Zou
1

Abstract

The objective of this project is to explore the relationship between patent lawsuits among
smartphone players and their performances in the public market.

Since June 2007, when the first generation iPhone was released to the market, the
telecommunication market has dramatically changed. Its an increasingly competitive industry
with greater demand for constant innovations from the public, and worldwide market share of
smartphone manufacturers has changed quite drastically over the past seven years. In this rapidly
growing industry, patents are an indispensable component of smartphone participants business
assets. It is therefore crucial for us to examine how patent lawsuits will affect companies stock
performances.

The purpose of this paper is fourfold. First of all, the patent ecosystem is evaluated to identify
industry-wide trends using data from USPTO. Second, the author created a database of 59 patent
lawsuit cases that were filed among top smartphone players. These litigation cases took place
from May 2005 to May 2014 in all 94 U.S. district courts, and individual characteristics for each
lawsuit were collected and analyzed. Third, in order to understand how the market reacts to legal
actions and court decisions, with the use of CRSP database, the author tracked firms historical
stock prices to examine their impacts on involved parties. Companies performances in the
public market were then gauged using cumulative abnormal returns and their significances were
tested using cross sectional t-test.

This research would allow smartphone rivals to have a better understanding of the market effects
of their litigation actions, so they can make better decisions using our research results.

Keywords: patent litigation, smartphone players, market impact, abnormal returns

2

Table of Content

Introduction ......................................................................................................................................3

Industry Overview ...........................................................................................................................6

Methodology ....................................................................................................................................7

The Players.....................................................................................................................................10

Cases ..............................................................................................................................................13

Empirical Findings and Analyses ..................................................................................................16

Conclusion .....................................................................................................................................31

Reference .......................................................................................................................................33

3

Introduction

On August 24, 2014, Apple won a decisive victory in its patent lawsuit asserting against
Samsung. July found Samsung infringed six Apples smartphone related patents, awarding Apple
nearly $1.05 billion in damage awards. Patent infringement occurs when a party makes, uses,
offers to sell, or sells patented invention without authorization from the patent owner. Apple and
Samsung have been going head to head in courts not just in the U.S., but have filed in total more
than 50 lawsuits in more than 10 different countries.

And they are not alone. An all-out smartphone patent war has unfolded in the past several years;
there have been many major legal actions among Apple, Samsung, Motorola, Nokia, HTC,
Microsoft, etc., and many times a party that has been sued would countersue back to the plaintiff,
making the patent war even more tangled up together and interrelated. Firms have committed
humongous amount of money and energy into litigations; sometimes the damage awards can be
at the scale of millions and even billions of dollars.

These massively-escalated disputes exist for a reason. Apple, as a technology pioneer, started the
smartphone market in June 2007, and triggered more and more competitors to join this
lucratively huge market. At the same time, smartphone market is experiencing radical
technological changes. Many greatly influential mega firms have failed when they simply cannot
keep up with the pace of innovation, and the list includes: Research In Motion (the manufacturer
of Blackberry), Nokia, and Motorola.
4

Firms are making every effort possible to continue innovating in order to maintain their market
positions, but this is not the only thing they are doing. Meanwhile, there is a trend that companies
start to use patent lawsuits and countersuits as ways to:
- Protect intellectual capital for their technological innovations
- Secure their technology leadership and increase market share
- Obtain proper licensing agreements and justified damage awards for infringed patents
- Slow down competitors research and development process

What are these legal lawsuits trying to achieve? In general, there are three results the plaintiff is
seeking for:
1. Damages:
Plaintiffs can get financial awards for the claimed profit loss due to patent infringement.
2. Injunction:
If patents found to be infringed, the court can order injunction against the defendant who
manufactures the infringed products, which is essentially ceasing the defendant to
produce the infringed products.
One example is Apple won an injunction in German court against Samsung over Galaxy
Tab products in August 2011, banned sales of Samsung Galaxy Tab 10.1 in the entire
European Union except for the Netherlands.
3. Licensing:
Last but not least, the defendant can pay ongoing royalties to the plaintiff for having used
and continue using the infringed patented technologies. Its arguably mutually beneficial
for both parties. Its obvious that the party who is licensing out the technologies can
5

enjoy justified financial awards; for the party who is paying for using the technology, it
now not only has access to the competitors intellectual property, but it can also primarily
focuses on innovating its products rather than spending time and money on lawsuits. This
strategy of enforcing licensing has been largely used by Microsoft in recent years.

However, with more than 250,000 patents in play in the smartphone ecosystem, it is virtually
impossible for either company to achieve a decisive victory. And it appears that there is no
significant influence on brand loyalties regardless of the courts rulings. Firms are using
litigations more as a strategic move to slow down the competition while enjoying dominating the
market sales. The question we need to ask is does winning a patent infringement lawsuit have
any material impact on companies stock performances? Should companies put more thoughts
and considerations into their legal actions in courts?

In this study, we focus on the litigations filled in U.S. district courts, particularly those among
top smartphone rivals. By collecting, analyzing and interpreting patent litigation cases, court
filings and rulings, as well as stock price fluctuations, the author hopes to explore the impact of
patent lawsuits on involved parties stock market performances. This study will be helpful for
directing players in the smartphone ecosystem to make careful and proper decisions, and take
effective and necessary steps regarding patent litigations.

6

Industry Overview

Using data fetched from United States Patent and Trademark Office (USPTO), we analyzed the
trends of patent filings over year, and paid close attention to the telecommunication industry. The
analysis of USPTO data yielded us some valuable insights.

It appears that there is a rise of patents granted for telecommunication sector in terms of both
number and percentage. The number of patents granted grew by 335.55% during the period from
1999 to 2012, and the percentage of patents granted for telecommunications sector grew from
5.12% to 10.42%.

Figure 1. Number and Percentage of Telecommunication Patents Granted
(Data source: USPTO, All Technologies Utility Patents Report, 2013)
We also notice significant increases on numbers of patents granted for computer and electronic
products, electrical equipment, appliances and components. Specifically, in 2012, 55.84% of
patents granted were from the above sectors.
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
0
5,000
10,000
15,000
20,000
25,000
30,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Number of Telecommunication Patents Granted
% of Telecommunication Patents Granted
7

Figure 2. Number and Percentage of Telecommunication Patents Granted
(Data source: USPTO, Breakout By NAICS Industry Classification, 2013)

Methodology

In order to derive insights on the relationship between the patent lawsuits and the companies
performances in the public market, the author collected patent lawsuit cases that that took place
from May 2005 to May 2014 in all 94 U.S. district courts, as well as financial market reactions to
8

patent lawsuit cases. Three databases were mainly used for researching and collecting data on
patent infringement lawsuit cases: Docket Navigator, Lex Machina, and PACER.
1. Docket Navigator is an independent database and research tool for U.S. patent litigation.
It tracks significant events through every cases from all 94 different district courts, the
International Trade Commission, and the Patent Trial and Appeal Board.
2. Lex Machina is another independent database that provides intellectual property litigation
data and predictive analytics for users. Its data source comes from Central Public Access
to Court Electronic Records, the International Trade Commission's Electronic Document
Information System, and patent Information from the USPTO.
3. PACER, acronym for Public Access to Court Electronic Records, is an electronic public
access service of United States federal court documents. It allows users to obtain case and
docket information from the United States district courts, United States courts of appeals,
and United States bankruptcy courts.

By collecting cases using the aforementioned databases, a dataset of some 59 patent litigation
cases among top ten smartphone competitors from May 2005 to May 2014 were collected, and
326 important court actions and decisions were selected and recorded by manually going through
all the court filings for each and every case.

Next, stock prices were retrieved from The Center for Research in Security Prices (CRSP).
Cumulative abnormal returns (CARs) for each event were calculated and analyzed using 7-day,
5-day and 3-day event windows; they were then recorded respectively using Value-Weighted
Return-excl. dividends and Equal-Weighted Return-excl. dividends market indices. Due to the
9

limitation of the database that CRSP only provides daily stock prices for U.S. stocks, the author
did not collect stock prices for companies that are listed overseas.

A number of court decisions were intentionally removed from the dataset due to the fact that they
were not expected by the author to have material impact on companies public market
performances. These decisions include:
- Transfer to another venue
- Transfer to another judge
- Cases closed administratively or statistically
- Stipulation or joint motion to dismiss after news of settlement came out
- Court orders of staying pursuant
Elimination of above stated court decisions reduced the number of court events in the dataset to
248. These court actions and determinations include:
- Initial filings and amendments of complaints
- Counterclaims and amendments of counterclaims
- Filings of and courts rulings on preliminary injunctions and permanent injunctions
- Courts rulings on sanctions
- Courts rulings on damage awards
- Court's rulings on patent infringements
- Filings and courts rulings on appeals to the Federal Circuit Court
- Consolidations of cases
- Settlements
- Dismissals
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- Cases closed administratively or statistically, and cases that got reopened

The Players

Competition in the smartphone industry is fierce as the top players are fighting for maintaining
and gaining additional market share. Companies have been using their patent portfolios as both
defensive and proactive moves, asserting them all across the globe.

To navigate through the smartphone patent war, we need to identify who are the top participants
in the smartphone industry. There are at least four categories of companies involved with
smartphones: the operating system (OS) designers, the smartphone manufacturers, the wireless
carriers, and the app developers these categories are not mutually exclusive. The following
influential participants are therefore identified according to our criteria:
- Apple: an American corporation that designs, develops, and sells consumer electronics,
computer software and personal computers.
- Samsung Electronics: a South Korean electronics company that manufactures electronic
components and consumer electronics.
- Nokia: a Finnish communications and information technology corporation that provides
internet services, and telecommunications network equipment and services.
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- Motorola: an American telecommunications company that designed and sold wireless
network infrastructure equipment. The company was divided into two independent
companies, Motorola Mobility and Motorola Solutions on January 4, 2011.
- Research In Motion: now known as BlackBerry Limited, is a Canadian
telecommunication and wireless equipment company best known as the developer of the
BlackBerry brand of smartphones and tablets.
- HTC: a Taiwanese manufacturer of smartphones and tablets. HTC expanded its focus in
2009 to devices based on the Android, and in 2010 to Windows Phone.
- LG: a South Korean corporation that makes electronics, chemicals, and
telecommunication products.
- Sony: a Japanese corporation with its diversified business primarily focused on the
electronics, game, entertainment and financial services sectors.
- Huawei: a Chinese networking and telecommunications equipment and services
company.
- Qualcomm: an American global semiconductor company that designs and markets
wireless telecommunications products and services.
- Microsoft: an American corporation that develops and manufactures computer software,
consumer electronics and personal computers and services.
- Google: an American corporation specializing in Internet-related services and products.
The company leads the development of the Android mobile operating system.

For these smartphone participants, Figure 3 shows their 2013 market shares by number of units
sold to end users, and Figure 4 shows their rankings by number of patents owned.
12

Figure 3. Worldwide Mobile Phone Sales to End Users by Vendor in 2013
(Date source: Gartner, Market Shares of Top Smartphone Manufacturers, February 2014)

Figure 4. Number of Patents Owned By Top Smartphone Players
(Date source: USPTO, Ranked List of Organizations with 20 or More Patents, 2013)

25%
14%
8%
4% 3%
3%
3%
2%
2%
2%
34%
Samsung
Nokia
Apple
LG Electronics
ZTE
Huawei
TCL Communication
Lenovo
Sony Mobile Communications
Yulong
Others
0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000
HTC
ZTE
Motorola
Nokia
Huawei
Research in Motion
Apple
Google
LG
Qualcomm
Microsoft
Sony
Samsung
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Cases

For the 59 cases we studied, there are ten different sets of plaintiffs and defendants:
Table 1. Summary of Litigation Case Counterparties
Plaintiff Defendant Number
Apple Samsung 2
Samsung Apple 2
Apple Motorola 4
Motorola Apple 7
Apple HTC 2
HTC Apple 2
Nokia Apple 6
Nokia HTC 4
Qualcomm Nokia 4
Motorola RIM 6
RIM Motorola 2
Motorola Microsoft 7
Microsoft Motorola 1
Motorola HTC 1
Sony LG 7
LG Sony 2
LG
Toshiba Samsung
Storage Tech
1
Total 59

1. Apple and Samsung
Apple and Samsung have a series of ongoing lawsuits across the globe. On August 24, 2012 the
jury ruled favorable to Apple and awarded it roughly $1.049 billion dollars in damage. However,
the ruling slashed the amount Samsung is obligated to pay to Apple by about $450.5 million, or
nearly 43%, to $598.9 million on March 1, 2013. On November 21, 2013, a jury ruled that
Samsung has to pay an additional $290 million to Apple in damages for patent infringement.
14

Apple won U.S. preliminary injunction against the Samsung Galaxy Tab 10.1 tablet in June
2012, but it was later dissolved in October the same year.

2. Apple and Motorola
There have been 10 court decisions on patent infringements. Six of them found Motorola did not
infringe Apples patents, three other decisions found the assertion on patent infringement to be
invalid, and the other one found the case on one Apples allegedly infringed patent to be not
invalid. Some cases were dismissed either by court, closed administratively, or dismissed by the
plaintiff Apple with no agreements, written or oral, express or implied, reached.

3. Apple and HTC
On November 10, 2012, Apple announced that HTC and Apple have reached a global settlement
that includes the dismissal of all current lawsuits and a ten-year license agreement. The license
extends to current and future patents held by both parties. The terms of the settlement are
confidential. Even if what both agreed is of cross-licensing nature, observers believe given
Apples market strength and its stronger patent portfolio, Apple is probably benefiting more than
HTC in the deal.

4. Apple and Nokia
Nokia announced on June 14, 2011 that it has signed a patent license agreement with Apple. The
agreement settles all the current ongoing patent lawsuits between these two parties. The financial
structure of the agreement consists of a one-time payment payable by Apple and on-going
royalties to be paid by Apple to Nokia for the term of the agreement. The specific terms of the
15

contract are confidential. Nokias second quarterly earnings statement in 2011 suggests the one-
time payment is likely to be around $600 million dollars.

5. Nokia and Qualcomm
Qualcomm and Nokia said they have agreed to end their legal battles. The agreement ends a
three-year legal battle over royalties for use of chips in cellphones. Qualcomm will receive about
$2.3 billion as part of a royalty-fight settlement with Nokia, as indicated from Nokias third
quarter financial results in 2008. Its a15-year agreement that includes the up-front payment as
well as on-going royalties to Qualcomm.

6. Motorola and RIM
On June 11, 2010, Research In Motion and Motorola issued a joint press release announcing that
they have reached settlements by entering a cross-licensing agreement. This would end all
outstanding worldwide litigations between these two firms. RIM will make an up-front payment
to Motorola, as well as pay ongoing royalties. Financial terms are not released.

7. Sony and LG
On August 11, 2011, Sony and LG announced that they have resolved patent-infringement
disputes, and agreed to enter a cross-licensing deal that they would license each others patents
covering the electronic devices. These two firms had been locked in a series of 24 patent lawsuits
worldwide. Details of the detail are not disclosed.

16

Figure 5. Patent Lawsuits Among Top Smartphone Players

Empirical Findings and Analyses

1. Summary of case characteristics
Here is an overview of the characteristics of the patent litigation cases we studied.
Table 2. Case Characteristics
Average case duration 432.44 days
Average number of patents 9.21
Most active case Apple Inc. v. Samsung, 3110 filings
Most active court DED Wilmington
Top plaintiff Apple, 17 lawsuits
Top defendant Motorola, 21 lawsuits
Largest granted damage award $1.049 billion
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Counteractions being taken by
the defendant
64.41%
Damage awarded 1.69%
Case settled 49.15%

Figure 6. Case Determination by Types

2. Are smartphone patent litigations comparable to other legal activities?
Patent litigations in the U.S. in general are filed in the following courts, because either they rule
more favorably to patent holders, with shorter time-to-trial durations, have higher success rates,
or grant larger median damages awards:
- East Texas
- Delaware
- Northern district of California
Below is a comparison between the average duration for the 59 litigation cases we studied and
the overall average duration for each U.S. district court.
27%
15%
13%
12%
10%
7%
7%
7%
2% Settle: defendant pay
Transferred
Ongoing
Settle: cross-licensing
Dismissed
Closed administratively
Consolidated
Settle: plaintiff pay
Damage rewards granted
18

Figure 7. Average Duration for Cases Studied vs. Overall Average Duration for Each Court

3. Do patent litigation cases impact stock prices? If so, how?
Through this study, we are trying to answer the following questions:
1. Do patent litigation cases impact the stock price?
2. Do all court decisions have the same impact on the stock prices?
3. If not, how do their influences differ?

Stock prices fluctuations were collected to see the impact of patent lawsuit related actions and
decisions on stock performances. We utilized one major U.S. stock research database, CRSP, for
stock price tracking and cumulative abnormal return analysis. Center for Research in Security
Prices (CRSP) is a provider of historical stock market data. It was used to collect cumulative
abnormal returns (CARs). Abnormal return is the difference between the expected return of a
security and the actual return (1), (2). Sometimes, abnormal return can be triggered by events. In
0 100 200 300 400 500 600 700 800
CACD Los Angeles
ILND Chicago
CASD San Diego
WIWD Madison
TXED Marshall
DED Wilmington
CAND San Jose
FLSD Miami
TXND Dallas
WAWD Seattle
Duration for Cases Studied Overall Duration
19

our case, we expect to see some abnormal returns on businesss stock around the time frame
when patent lawsuit related events happened.
) (
, ., t mkt t i
t
t
R R CAR =
=
=

) 1 ( ) 1 (
, ., t mkt
t
t
t i
t
t
R R CAR + + =
=
=
=
=

Where
Ri ,t = daily return for event firm i on day t
A common t window is 3-day window around the event day. i.e., (-1, 0, +1), where day 0 is the
event day
Rmkt ,t = daily return for the specific market index on day t

CRSP has multiple market indices as market benchmarks. For this study, we used equally-
weighted and value-weighted indices. As these tables show below, the CARs of three different
time windows were collected: 3-day window, 5-day window, and 7-day window.
- The Equal-Weighted Index is an Equal-Weighted Portfolio built each calendar period
from all issues listed on the selected exchanges with valid prices on the current and
previous periods.
- The Value-Weighted Index is a Value-Weighted Portfolio built each calendar period
using all issues listed on the selected exchanges with available shares outstanding and
valid prices in the current and previous periods.

(2)
(1)
20

We expected the market to react positively to favorable events such that:
H0: CAR > 0
H1: CAR < = 0
We expected the market to react negatively to unfavorable events such that:
H0: CAR < 0
H1: CAR > = 0

Cross sectional CAAR t-Test was conducted to test the statistical significance of CARs and
provide insights on the entire population under study. One-tail t-test was performed for the
reason that we formed the null hypotheses in particular ways based on our expectations of
potential market reactions:

Where
N = sample size
d = degree of freedom
CAR = Cumulative Abnormal Return
CAAR = Cumulative Average Abnormal Return
T1 = event window lower bound
T2 = event window upper bound

(
,
)
=
1
( )
(
=
(
)

21

Table 3. CAR for category plaintiff filings
Plaintiff
P File Value-weighted Equal-weighted
7-day 5-day 3-day 7-day 5-day 3-day
CAAR 0.70% 0.55% 0.57% 0.78% 0.63% 0.58%
Cross t-test 1.298 1.160 1.556* 1.377 1.249 1.529*

Defendant
Value-weighted Equal-weighted
CAAR 1.17% 0.80% 0.01% 1.51% 1.16% 0.29%
Cross t-test 2.117** 1.664* 0.028 2.531*** 2.258** 0.704
* denotes statistical significance at 0.10 using one-tail test
** denotes statistical significance at 0.05 using one-tail test
** denotes statistical significance at 0.01 using one-tail test

The category plaintiff filings is comprised of the following events:
- Initial filings and amendments of complaints
- Counterclaim by the plaintiff
- Appeals to and transmission of appeals by the plaintiff to the Federal Circuit Court
- Filings for preliminary injunctions and permanent injunctions
- Motion to reopen administratively closed cases by the plaintiff
We can see that whenever the plaintiff proactively files for a legal action against the defendant, it
will increase the stock price by 0.57% to 0.58% at 90% significance level within the 3-day event
window, which is expected since the firm is taking legal actions to protect its intellectual
properties, and they can generate additional revenues for the firm.

22

Strangely, there is a positive return for the defendant of 1.17% to 1.51% return at 99%
significance level, which is not expected by the author. Going through the cases we collected, it
appears that there are a few cases with Apple being the defendant had relatively high positive
CARs responding to plaintiffs filings.

This could be due to companys individual characteristics. One possible explanation is that given
Apples strong market position and good patent portfolio, observers are expecting counteractions
brought by Apple, which could then generate additional revenue for Apple.

Another possible explanation is that for these particular incidents with Apple being the defendant
and having relatively high positive CARs in response to plaintiffs filings, the defendant Apple is
already involved in ongoing lawsuits with a number of plaintiffs, and in these cases, Apple is
actually the party who brought the legal action to the court against the other party. So these legal
cases are viewed as counteractions from the other party, and they are only a fraction of the big
picture of a series of patent lawsuits.

Another possible reason is that companies events are not accounted. So release of new products,
earning statements, dividends, courts decisions in other lawsuits have currently not been taken
into consideration for our dataset, but they might have material influences on the defendants
stock performances in additional to influences from the events of filings by the plaintiffs.

23

Table 4. CAR for category defendant counteractions
Plaintiff
D counter Value-weighted Equal-weighted
CAAR -1.17% -1.14% -0.77% -1.33% -1.26% -0.84%
Cross t-test -1.425* -1.59* -1.139 -1.663* -1.745** -1.236

Defendant
CAAR 0.62% 0.24% 0.01% 1.02% 0.69% 0.24%
Cross t-test 1.113 0.444 0.033 1.539** 1.047 0.471
The category defendant counteractions is comprised of the following events:
- Counterclaims and amendments of counterclaims
- Appeals to and transmission of appeals by the plaintiff to the Federal Circuit Court
In the CAR table, we can see that on average, counteractions will cause negative return from -
1.14% to -1.33% to the plaintiff. As for the defendant, market will react to its counteractions
positively; stock is estimated to go up by 1.02% at 95% significance level. Its understandable
that the market actually reacts stronger for the plaintiff rather than for the defendant, since the
plaintiff loses its competitive edges on the lawsuit when the defendant rebuts the plaintiffs claim
with evidences.

Table 5. CAR for category favorable court decisions for the plaintiff
Plaintiff
P+ all Value-weighted Equal-weighted
CAAR 2.17% 2.16% 1.51% 2.09% 2.08% 1.90%
Cross t-test 1.265 1.34 0.733 1.287 1.347 0.919

Defendant
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CAAR -0.05% 1.14% 1.62% -0.17% 0.52% 1.26%
Cross t-test -0.04 1.145 0.937 -0.133 0.673 0.843
The category favorable court decisions for the plaintiff is comprised of the following events:
- Court orders granting preliminary injunctions
- Court orders granting sanctions
- Court filings and decisions granting damage awards
- Court rulings that plaintiff won on patent infringement
o Patent infringed
o Patent found not invalid
o Patent found not unenforceable
- Settlements: defendant to pay one-time fees and/or ongoing loyalties
It appears that in general, favorable court decisions for the plaintiff do not have material
influences on neither the plaintiffs nor the defendants market returns. Its possible that because
some courts determinations are implied or can be inferred from previous courts activities.

Therefore, we will break these decisions down to a few major categories and analyze them
independently.

Table 6. CAR for category settlements: defendant to pay
Plaintiff
Settle D
pay
CAAR 5.13% 4.36% 5.12% 5.78% 5.22% 6.72%
Cross t-test 0.977 0.812 0.791 1.262 1.086 1.110

25

Defendant
CAAR 0.34% 1.85% 2.33% 0.18% 1.17% 1.90%
Cross t-test 0.219 1.885 1.047 0.103 1.936* 0.996
The category settlements: defendant to pay is comprised of the following events:
- Settlements: defendant to pay one-time fees and/or ongoing loyalties
Even though it appears that there is a positive influence of settlements of which the defendant
has to pay on the plaintiffs market performance that the CAAR is from 4.36% to 6.72%, the
return, however, is not statistically significant. Therefore, we cannot generalize that settlements
with defendants payments have material influence on the plaintiffs stock performance.

Looking at the defendants side, even though the defendant has to pay one-time fee and/or
ongoing royalties, the market is actually reacting positively with 1.17% abnormal return for a 5-
day window to the event, and it is significant at 90% level. It makes sense if we interpret the
settlement as now that there is less uncertainty on the defendants position, and the defendant can
focus on innovations with better access to competitors patent portfolio rather than expensive
litigations.

Table 7. CAR for category damage awards
Plaintiff
Damage Value-weighted Equal-weighted
CAAR 1.62% 1.81% 0.19% 1.26% 1.76% 0.17%
Cross t-test 17.770** 1.401 0.171 14.951** 1.415 0.161

Defendant
26

CAAR N/A
Cross t-test N/A
The category damage awards is comprised of the following events:
- Court filings and decisions granting damage awards
From the table, we can see that being granted damage awards has a positive return of 1.26% to
1.62% on a 7-day window, and it is statistically significant at 95% confidence level.

There is not enough data to study the influence of damage awards on the defendant since the
prices of foreign stocks were not collected.

Table 8. CAR for category sanctions
Plaintiff
Sanction Value-weighted Equal-weighted
CAAR -1.85% -0.53% -3.38% -2.07% -0.92% -3.74%
Cross t-test -0.887 -0.458 -2.108* -0.996 -0.818 -2.271*

Defendant
CAAR N/A
Cross t-test N/A
The category sanctions is comprised of the following events:
- Court orders granting sanctions
Surprisingly, sanctions actually have a negative influence on the plaintiffs stock performance
that it causes -3.74% to -3.38% abnormal return on a 3-day window. This is possibly because of
the nature of the cases we studied. For the sanction cases, the plaintiff actually both received
27

from and had to pay for sanctions to the other party, so this complicated the situation and market
might reacted differently from what we expected.

There is not enough data to study the influence of sanctions on the defendant since the prices of
foreign stocks were not collected.

Table 9. CAR for category injunctions granted
Plaintiff
Inj granted Value-weighted Equal-weighted
CAAR 2.53% 2.37% 1.28% 2.10% 1.96% 1.33%
Cross t-test 1.596* 1.643* 0.921 1.22 1.2 0.971

Defendant
CAAR N/A
Cross t-test N/A
The category injunctions granted is comprised of the following events:
- Court orders granting preliminary injunctions
The market reacted positively towards injunctions granted to the plaintiff. Abnormal return for a
7-day window is 2.53% and for a 5-day window is 2.37%; both are significant at 90% level.

There is not enough data to study the influence of injunctions on the defendant since the prices of
foreign stocks were not collected.

28

Table 10. CAR for category unfavorable court decisions for the plaintiff
Plaintiff
P- all Value-weighted Equal-weighted
CAAR 0.65% 0.57% -0.25% 0.68% 0.55% -0.39%
Cross t-test 0.705 0.748 -0.353 0.776 0.772 -0.565

Defendant
CAAR 0.62% 0.71% 0.04% 0.96% 1.38% 1.08%
Cross t-test 0.547 0.65 0.067 0.773 1.081 1.058
The category unfavorable court decisions for the plaintiff is comprised of the following events:
- Court orders denying or dissolving preliminary injunctions or permanent injunctions
- Court filings and decisions reducing damage awards
- Court rulings that defendant won on patent infringement
o Patent non-infringement
o Patent invalidity
o Patent unenforceability
- Settlements: plaintiff to pay one-time fees and/or ongoing loyalties
- Settlements: cross-licensing
- Dismissals: voluntarily dismissed by plaintiff with no agreements reached, or dismissed
by court
Similar to our previous study of favorable court decisions, unfavorable court decisions for the
plaintiff do not have material influences on neither the plaintiffs nor the defendants market
returns. Again, it could be due to the fact that some courts determinations are implied or can be
inferred from previous courts activities.

29

Therefore, we will again break these unfavorable court decisions to the plaintiff down to a few
major categories and analyze them independently.

Table 11. CAR for category dismissals
Plaintiff
Dismiss Value-weighted Equal-weighted
CAAR -0.70% 0.12% 0.36% -1.08% -0.37% -0.07%
Cross t-test -2.333* 0.556 1.796 -2.061* -1.268 -0.534

Defendant
CAAR -1.01% -0.81% 0.41% -1.08% -1.07% 0.20%
Cross t-test -0.416 -0.416 0.265 -0.425 -0.556 0.135
The category dismissals is comprised of the following events:
- Dismissals: voluntary dismissals by plaintiff with no agreements reached, with or without
prejudice
- Dismissals: dismissals by court, with or without prejudice
Dismissals have negative impact on the plaintiffs market performance; abnormal return for a 7-
day window is between -0.7% to -1.08%, and its significant at 90% significance level. A
negative impact is expected since the plaintiff has put substantial amount of time and energy to
pursue the lawsuit but has not succeeded in asserting against the defendant.

Table 12. CAR for category injunctions denied
Plaintiff
Inj denied Value-weighted Equal-weighted
CAAR -1.00% -0.74% -0.55% -0.64% -0.55% -0.75%
30

Cross t-test -0.822 -1.777 -0.391 -0.676 -0.951 -0.56

Defendant
CAAR -1.01% -0.81% 0.41% -1.08% -1.07% 0.20%
Cross t-test -0.416 -0.416 0.265 -0.425 -0.556 0.135
The category injunctions denied is comprised of the following events:
- Court orders denying or dissolving preliminary injunctions or permanent injunctions
The market is neutral when either motions to injunctions got denied or previously granted
injunctions got dissolved. It could be that the public understands the nature of the game that
injunction is rarely granted and less likely to sustain.

Table 13. CAR for category settlements: plaintiff to pay
Plaintiff
Settle P
pay
CAAR -1.31% -1.40% -3.23% -0.38% -1.32% -3.39%
Cross t-test -0.342 -0.398 -1.184 -0.101 -0.405 -1.298

Defendant
CAAR 0.81% 0.41% 0.57% 3.17% 4.02% 5.59%
Cross t-test 1.747 20.25*** 8.41*** 13.035*** 2.143* 2.166*
The category settlements: plaintiff to pay is comprised of the following events:
- Settlements: plaintiff to pay one-time fees and/or ongoing loyalties
- Settlements: cross-licensing
From the table, we can see that there is actually a strong positive market reaction to settlement
situations when plaintiff is the party to pay for fees and/or royalties. Since in general the market
31

would assume defendant is the party who is more likely to pay for damages caused due to
unauthorized uses of patented technologies, having plaintiff to be the party ending up paying for
settlements is expected by the author to induce positive reaction for the defendant.

Conclusion

The battle over smartphone patents has been going on for the past seven years, and its very
likely to continue in the future as long as there is a great demand in the market. We do agree that
it is necessary for players to take legal actions to defend themselves, but what would be the costs
for them to do so?

We used event study method to identify and understand the impact of legal actions taken by the
plaintiff and the defendant as well as courts rulings on involved parties performances in the
public market. After taking into considerations of the capability of generalization over the
number of cases we studied as well as adjusting to their nature, we find that the following events
do have statistically significant influences on the plaintiffs stock performances:
Positive abnormal returns:
- category plaintiff filings
- category damage awards
- category injunctions granted
Negative abnormal returns:
- category defendant counteractions
32

- category dismissals
And these events have statistically significant influences on the defendants stock performances:
Positive abnormal returns:
- category defendant counteractions
- category settlements: defendant to pay
- category settlements: plaintiff to pay
These results show that the plaintiff is actually more likely to be negatively affected by legal
actions. The study results confirmed that smartphone patent war does have significant effects on
involved parties market performances. Our findings are important even outside of the litigation
context. Firms need to be more careful in order to manage their brand recognition and recognize
that their litigations have material impacts on investors expectations.

We found that litigations have unavoidable and significant influences as well as business costs to
companies, but at the same time, they do offer firms opportunities to generate additional revenue
through damage awards and ongoing loyalties. And the goal for many smartphone participants is
experiencing better sales and dominating the market by slowing down competitors in a series of
lawsuits. Intuitively, however, these litigations would reduce smartphone players incentives to
innovate. The smartphone industry is extremely dynamics and is subject to rapid changes. As far
as we are concerned, there is no clear winners or losers in the patent war, but we are glad to see
that companies are becoming more willing to settle cases. We hope that with time, firms will
focus more on research and development rather than litigations.

33

Reference

Gartner:
http://www.gartner.com/newsroom/id/2665715

CRSP:
http://www.crsp.chicagobooth.edu/products/documentation/stock-file-indexes-0

Online articles:
http://www.metrocorpcounsel.com/articles/21011/smartphone-patent-wars-us-perspective
http://www.eventstudytools.com/significance-tests

Papers:
http://lipas.uwasa.fi/~sjp/articles/sp_acta_wasaensia_143_327-354.pdf
http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=1554&context=facpubs
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2340899
http://www.scirp.org/journal/PaperDownload.aspx?paperID=28079
http://object.cato.org/sites/cato.org/files/serials/files/regulation/2012/5/v34n4-1.pdf
http://www.hbs.edu/faculty/Publication%20Files/14-015_8483575c-1f96-4a34-bcbf-
c83d99da8959.pdf
http://www.simon.rochester.edu/fac/warner/jerry%20papers/jfe-september%2080.pdf

Research:
34

http://www.pwc.com/en_us/us/forensic-services/publications/assets/2013-patent-litigation-
study.pdf
http://www.whitehouse.gov/sites/default/files/docs/patent_report.pdf
http://www.gao.gov/assets/660/657103.pdf
http://www.ambercite.com/downloads/The%20Smartphone%20Patent%20Wars%20whitepaper_
March%202011.pdf
http://www.rpxcorp.com/wp-
content/uploads/2014/01/2A01E1CD29DA06AB8C95399AE5D04919.pdf

USPTO:
http://www.uspto.gov/web/offices/ac/ido/oeip/taf/naics/stc_naics_wgall/all_stc_naics_wg.htm
http://www.uspto.gov/web/offices/ac/ido/oeip/taf/telecomm.htm#PartB
http://www.uspto.gov/web/offices/ac/ido/oeip/taf/h_at.htm

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The Market Effects of Smartphone Patent War

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Tian Zou

Advisor: James L. Powell

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