You may have heard that Apple's on the hook for $862 million in potential penalties after a jury ruled that it infringed on a patent owned by the University of Wisconsin–Madison.
The university appears to be asking for roughly half that amount, about $400 million, but that is still a huge amount of money, particularly in relation to a) the size of the university's budget and b) how much Apple's spent on Washington lobbyists to head off just these types of lawsuits. And the stakes aren't limited to the fines: If Apple is forced to pay future royalties, it'll add to the production costs of future iPhones and iPads. While that won't necessarily lead to increased prices for consumers, it could drag down the company's profits over the long run even as it grapples with the reputational fallout of having copied someone else's work.
Apple is almost sure to appeal, and it could very well get the fines reduced further or eliminated, as it did with another recent patent case this year. Still, the ruling represents a stinging rebuke for a company that has spent years accusing its rival, Samsung, of essentially stealing its hardware designs.
There's one big difference between Apple's war with Samsung and its battle with the University of Wisconsin. While the former involves a fight with another tech giant, the latter pits Apple against a research institution, one that doesn't manufacture any products with its patents. As a result, the case falls smack into the middle of a debate on patent litigation reform that Congress has spent the last two years trying to resolve, at the behest of tech companies and retail businesses on the one side, and universities, pharmaceutical companies and biotech firms on the other.
What makes this court battle so interesting is that the nonprofit at the center of it, the Wisconsin Alumni Research Foundation, defies easy categorization. Officially, it's a technology-transfer institution that licenses patents out to other inventors. The patents in question are the result of hard work and research by scientists at the University of Wisconsin-Madison. And any royalties WARF earns go to support the original inventor and further university research, creating a positive feedback loop for innovation.
Even if you're not familiar with WARF, you're probably familiar with a drug it's famous for: Warfarin, a blood-thinner that helps prevent blood clots, heart attacks and strokes. WARF's interest in medical research goes all the way back to its origins; it began when a UW-Madison professor, Harry Steenbock, discovered in the 1920s that blasting food with ultraviolet light could increase its vitamin D content. Rather than sell his idea to Quaker Oats, which offered him $1 million for it, Steenbock helped found WARF instead and gave the proceeds back to the university.
Since then, WARF claims it's given more than $1.5 billion back to UW-Madison, an average contribution of $18 million a year. This academic year, WARF gave more than $72 million to the university, amounting to 2.5 percent of UW-Madison's $2.9 billion budget.
Now consider how much money Apple stands to lose to WARF as a result of this case. $400 million is enough to fuel WARF's gifts to the university for the next five years. And if Apple also loses a second patent lawsuit that UW-Madison has filed against the iPhone 6S, 6S Plus and the iPad Pro, WARF could be awarded even more.
Universities account for some of the biggest intellectual property holders in the United States. In 2013, WARF obtained 160 new patents, beating out all but five other universities worldwide. Two years earlier, WARF earned roughly $58 million in patent licensing fees alone, ranking 10th among U.S. universities. Northwestern University, the University of California, Columbia University, New York University and Princeton University all made more than $100 million in 2011 from patent licensing.
Accordingly, universities are responsible for filing between 45 and 50 new patent lawsuits every year, according to Reuters. In 2008, WARF sued Intel over the same microprocessor patent that it used to go after Apple. Carnegie Mellon University this year, meanwhile, won a $1.1 billion award from a jury against a company called Marvell Technology Group — a figure that was later reduced on appeal to $278 million. Many universities have targeted tech companies for infringement, including Apple.
In light of these and other patent suits filed by non-universities, it's easy to see why Apple has ramped up its spending in Washington so aggressively. Apple has spent more in the past four years lobbying the government than in the entire decade before Tim Cook became chief executive. Tech companies have been begging Congress for a bigger shield against what they view as abusive patent lawsuits — some of which may be valid, others not.
Pressure from the tech and retail sectors nearly led Congress to pass legislation last year that would've made it harder to bring patent lawsuits. Lawmakers again appear on the verge of a deal now, though progress has largely stalled. The bill targets abusive patent litigation via so-called "patent trolls," or patent holders that don't manufacture anything with the intellectual property they hold but who sue companies for infringement in hopes of winning some settlement money or damage awards.
Studies show that patent trolls behave opportunistically, targeting companies that are flush with cash. They take advantage of jury trials to win bigger awards (judges tend to be stingier). They aim for companies with high R&D budgets. They file in troll-friendly courts, such as the infamous Eastern District of Texas, and set up "offices" that are little more than P.O. boxes.
In some ways, WARF's behavior is consistent with trollery: Apple is among the wealthiest companies in the world. It convinced a jury to side with it. WARF doesn't manufacture anything with its patents. And it has an incentive to extract large awards to support its bottom line.
The heat is only building as states everywhere consider slashing funds for public education. Gov. Scott Walker, for instance, has proposed cutting $300 million from the University of Wisconsin system — a deep cut, especially when neighboring states already spend more than Wisconsin does on higher ed. Against the backdrop of this budgetary scrutiny, auxiliary outfits like WARF play a growing role in supporting universities.
Academics themselves have disagreed over the role this money plays in the university mission. There's a substantial literature on whether chasing patent fees shifts institutional incentives and distorts educational priorities for students. Some officials have justified the practice by telling researchers, "we just gotta write the correct press releases… we just have to tie it back to our mission."
Just because universities spin the patent licensing question by claiming it's part of their mission doesn't make it untrue. There are clear arguments for why WARF is not trolling or engaged in the kind of abusive litigation that the tech sector has implored Congress to act upon. WARF is a real thing, in the real world, and not an entity that merely exists on paper. Even though it doesn't make anything itself, the money WARF donates to UW-Madison indirectly produces new graduates, new facilities and sometimes directly to new breakthroughs in science, research and development. And importantly, in the case against Apple, it's not pushing for maximum damages.
But the strongest piece of evidence is that, according to Reuters, Apple tried and failed to convince the U.S. Patent and Trademark Office to invalidate WARF's patent. Here's why that matters.
A few years ago, the USPTO introduced a process by which a company could ask a particular patent to be reexamined. If the patent office concluded that the patent was weak, meaning it should never have been approved in the first place because it tried to lay claim to an obvious or old idea, then it could invalidate the patent's claims.
Why would anyone do this? Well, if you're Apple, and you're being sued, you can make the lawsuit go away if the patent that supports it suddenly gets revoked. No patent, no infringement.
This process is only trustworthy, obviously, if the patent office makes the right call in these reviews. Luckily for our purposes, the USPTO recently released a report showing, among other things, that its review decisions were upheld at a "very high rate" by a federal court when one party or another appealed its decisions.
Is it possible that the patent office got it wrong, and that WARF's patent should have been invalidated according to Apple's request? Perhaps. But the USPTO's track record — as defined by whether the Federal Circuit agrees with its calls — seems to suggest that the agency makes the right call most of the time.
Now, Apple didn't even get past the first step in the process, which is simply convincing the USPTO to take a look. WARF may therefore have been on relatively firm ground. Apple's defeat at trial, meanwhile, is also consistent with that thought.
After all that, the only thing that seems clear is how murky and confusing the nation's patent litigation system is. We know it favored UW-Madison this time. What we don't know is whether this brought out the good in the university, or if it encouraged its worst incentives.