In a court filing that was revealed late last week, Samsung claimed that it could no longer pay Microsoft quarterly patent licensing royalties because the software giant purchased one of its competitors in Nokia's devices and services businesses. Thanks to this acquisition, Microsoft is now a competitor, not a partner, Samsung says, and it can no long share confidential business information as required by the royalty agreement.
Microsoft sued Samsung in August, alleging that the Korea-based consumer electronics giant had reneged on the 2011 patent licensing agreement, which covers the use of Microsoft patented technologies in Samsung's Android devices over a period of seven years. Samsung now owes Microsoft over $1 billion in license payments plus a growing pool of interest now valued at about $7 million.
According to Microsoft's original complaint, the only thing that changed over the course of the patent licensing deal was that Samsung's financial outlay has gotten dramatically bigger as the firm rose to become the biggest maker of smart phones. In 2011, Microsoft says, Samsung shipped 82 million Android-based smart phones, but that number had risen to 311 million by 2014.
"After becoming the leading player in the worldwide smartphone market, Samsung decided late last year to stop complying with its agreement with Microsoft," Microsoft general counsel David Howard wrote in the firm's August complaint. "In September 2013, after Microsoft announced it was acquiring the Nokia Devices and Services business, Samsung began using the acquisition as an excuse to breach its contract. Curiously, Samsung did not ask the court to decide whether the Nokia acquisition invalidated its contract with Microsoft, likely because it knew its position was meritless."
At the time, Microsoft said that Samsung told it that its purchase of Nokia's devices and services businesses was a "breach of contract" that absolved it from making patent royalty payments. But this week's filing offers a more cogent and detailed explanation for Samsung's decision.
The Samsung filing notes:
"By beginning talks with Nokia about merging [that firm's devices and services businesses] into Microsoft's existing business, and by later entering into the merger, Microsoft created a conflict of interest that breached the covenant of good faith and fair dealing: rather than fulfilling its contractual obligation to develop the Samsung Windows Phone platform under the [licensing agreements], Microsoft put its energies into merging with a smartphone business that competes directly with Samsung's."
"Thus, while Samsung entered into the [agreement] with the expectation that Microsoft would have the incentive to develop the Samsung Windows Phone platform, Microsoft's merger with Nokia's smartphone business destroyed those incentives. Microsoft is now a major Samsung competitor and is working to develop and promote its own smartphone business, not the Samsung Windows Phone platform. Microsoft therefore has a disincentive to promote Samsung's devices, because that promotion would come at the expense of Microsoft's own hardware offerings."
Samsung also argues that it can no longer provide Microsoft with the confidential business information required under the contract. Doing so would amount to "collusion" and would violate US antitrust laws, Samsung claims.
"The agreements were intended to embody a collaboration between a manufacturer and a supplier," the Samsung filing explains. "[But the Nokia acquisition] incentivized Microsoft to promote its own smartphones over those manufactured and sold by Samsung."
Few would claim that Samsung ever made more than a halfhearted effort to create and promote Windows Phone handsets, however. In fact, in the exact time period cited by the lawsuit—2011 to today—Samsung's production of Windows Phone devices has plummeted, and the firm has only occasionally repurposed old Android designs and not created any unique Windows Phone offerings. The notion of a "Samsung Windows Phone platform" is somewhat fanciful, and quite disingenuous.
Oddly, Samsung's filing also explains that the firm could have lowered its licensing payments to Microsoft had it met unstated sales goals for its Windows Phone handsets. It apparently decided that selling far more Android devices—and paying the resulting royalties to Microsoft—was preferable to pushing its "Samsung Windows Phone platform." And with Microsoft's acquisition of Nokia's devices and services businesses, it likewise apparently saw an out courtesy of a termination provision in the agreement.
Microsoft, for its part, notes that the Nokia acquisition was cleared by antitrust regulators in the US and abroad. "Our case is strong," a Microsoft statement notes.