Today's smartphone is more powerful than a supercomputer of just 20 years ago. It is an immensely complex device. In fact, more than one in six (16%) of all active U.S. patents are smartphone-related. Because of this complexity, smartphones for the last several years have been the epicenter of intellectual property disputes in high technology. Nearly every mobile, software, chip and Internet firm has been involved in some legal battle.
Our intellectual property laws and regulatory agencies, however, are in many ways not suited to the realities of the modern smartphone world. Our rules never contemplated anything so complicated. In some cases, reform of the old institutions is in order. In other cases, merely a little common sense will do.
In the latest bout, Nvidia, a leading supplier of graphics processing units (GPU) is suing Qualcomm, the top maker of processors for mobile phones, and Samsung, whose popular smartphones and tablets contain Qualcomm chips. Nvidia claims that Qualcomm's mobile processors violate some of its graphics patents. These are highly technical questions of silicon and algorithm design, and courts are sorting through them now. In the meantime, Nvidia is demanding royalties for use of the technology, and the three firms are said to be negotiating terms of a license.
Nvidia, however, is taking its case a big step further. It has asked the International Trade Commission for an "exclusion order" of Samsung smartphones and tablets. An exclusion order is an import ban, an extraordinarily blunt tool that, in this case, could plunge the U.S. mobile ecosystem into utter chaos.
In 2014, according to Gartner, consumers purchased an astounding 308 million Samsung smartphones, or 25% of the world total. ComScore says 30% of the 184 million mobile users in the U.S. own a Samsung. And Samsung also sells millions of tablets every year in the U.S.
An exclusion order by the ITC would thus blow a huge hole in the U.S. mobile market, which by some estimates accounts for 3% of GDP. Nearly a third of the American mobile supply, which already suffers shortages because of overwhelming consumer demand, would vanish. Mobile service providers, app developers, Web content creators, and, most importantly, consumers would all be hurt.
So, how does a relatively minor patent dispute transform into a trade war? In part, because the original 1930 ITC law didn't contemplate the smartphone. How could it have? The ITC provisions in question today were designed to discourage the importation of simple counterfeit items, not to adjudicate hyper-technical questions, and certainly not in ways that could threaten an entire ecosystem.
The problem is that in intellectual property cases, the ITC's tool is singular and blunt. If it finds an IP violation, it can ban the infringing product, or not. There is no other remedy. But as the courts have previously ruled, the ITC is "fundamentally a trade forum, not an intellectual property forum." And in our modern digital economy, the ITC is less well suited than ever to make granular IP determinations -- and hand down sledgehammer penalties.
The firms in question are negotiating royalty rates. And the petition to the ITC asking for extraordinary measures appears to be a way to gain leverage.
For now, the ITC should exercise common sense and not blow up the American mobile market. In the future, we should reconsider the broader policy of asking the ITC to perform delicate IP surgery with a sledgehammer.
Bret Swanson, a visiting fellow at the American Enterprise Institute's Center for Internet, Communications, and Technology Policy, is president of Entropy Economics LLC.