The autotech and mobility sectors are experiencing nothing less than a revolution, a period of profound change that will transform the industry fundamentally. This change is brought about by three main drivers:
- Technological innovation: The convergence of digitalisation, communication technologies and engineering enables key technologies like connected and increasingly autonomous cars. Improvements in battery technology will remove some of the current constraints on the use of electric vehicles and facilitate their move into the mass market;
- Policy pressures: In response to global warming, the European Union has set ambitious goals to reduce CO2 The current target to be achieved by 2021 requires manufacturers to comply with a fleet emission average of no more than 95 grams of CO2 per kilometre. In March 2019, the European Parliament adopted a plan to reduce this limit further by an additional 37.5% by 2030, a goal that will probably not be achievable without the widespread adaptation of electric vehicles.
- Cultural and demographic changes: The consciousness of environmental change associated with global warming is supporting a new concept of individual mobility that may be less tied to ownership of a vehicle and more open to concepts of using shared transportation resources and purchasing mobility as a service.
These trends enable and amplify each other: Environmental issues influence cultural attitudes and technical innovation enables change by offering viable alternative transportation concepts such as shared mobility services, electrification and increasingly autonomous vehicles.
The changes in the sector are creating enormous challenges for incumbents to adapt their business models and defend their bottom line. They create opportunities for extremely well-funded challengers from the tech sector to leverage their competence in software, artificial intelligence and information technology to enter the market and take a leading role in new, technology-driven service offerings. Finally, they provide an opening for VC funded start-ups to establish themselves as first movers and quickly scale their businesses.
The scope of the changes does, however, challenge the capacity of individual corporations to tackle them all on their own. The sector has seen a flurry of alliances, co-operations and joint ventures in response to the disruption it is experiencing:
- Competitors are pooling resources in order to tackle the enormous capital requirements for investments in new technology and the transformation of the existing technological base. Examples include the joint acquisition of providers of map- and navigation data, plans for the establishment of European production capacities for batteries or joint ventures between tech companies and manufacturers to establish new mobility service providers;
- Incumbent manufacturers need to acquire cutting-edge technological know-how in fields where they have not traditionally focused their research and development efforts – or have not been active at all. They face a difficult strategic decision between accelerating their own technology acquisition efforts through in-house research and development, acquiring know-how and intellectual property rights through M&A activities or partnering with tech companies by forming joint ventures or entering into licensing arrangements;
- Likewise, tech companies expanding into the mobility sector must decide whether to become manufacturers themselves or to remain suppliers of technology for more traditional manufacturers, creating revenue through licensing and cooperation agreements;
- The provision of mobility services through own-operated vehicle fleets exhibits strong externalities (a network becomes more successful the bigger it gets). Given the high investment requirements, cooperation between competitors in the field can avoid a winner-takes-all competition for the market, provided it does not raise competition law concerns.
- Finally, regulatory requirements can also enforce cooperation between unusual partners. For example, providers of mobility services may have to team up with local transportation authorities in order to be allowed to provide transportation services that would otherwise be restricted to the local monopoly provider.
Cooperations between these players do require a sound legal framework, irrespective of the nature of the project. There are, of course, a myriad of different ways to structure R&D and license agreements. Experience does show that very similar issues tend to dominate the contract negotiations:
Ownership of IP: In the case of research and development cooperation, the generation of new know-how and protectable intellectual property assets is the main goal of the cooperation. The appropriate framework for the ownership of these assets will depend on the relationship of the parties:
- In the case of a vertical R&D agreement, the party commissioning the research will often wish to obtain full ownership and usage rights in the results. When working with academic institutions, the industry partner should be aware of the model agreements issued by the German Ministry of Economic Affairs and Energy that do play a substantial role in practice. Different templates for the full assignment of rights as well as an acquisition of licenses exist. Partners from outside continental Europe must be aware that the assignment of certain rights – in particular copyrights – from employees or freelancers employed in a project may be more complex than in common law jurisdictions. It is therefore recommended to obtain individual assignments of rights from all personnel involved. The R&D contract should provide for a template for such assignments.
- Particular attention must be paid to the careful definition of the parties’ background IP, in particular where horizontal research and development agreements are concerned. Because the parties may agree on joint ownership of any research results, no uncertainty should exist as to which part of the know-how and which intellectual property assets were owned by the parties prior to the cooperation. Where the research results are dependent on the use of IP held by either party, for example because they constitute an improvement of such IP, the parties should anticipate the need for future licenses to the background IP in order to exploit any such research results. The ownership of the IP and the right to register any intellectual property rights to the research results must be clearly defined. Where the parties contemplate a joint exploitation of the results, ownership by a consortium or a joint venture may be considered. Such a joint venture can then also bear the costs of registering and upholding the IP portfolio.
Liability regime: A point of contention is generally the liability for the infringement of third parties rights. Again, the clear definition of the background IP is important to allocate responsibilities for know-how and IP assets contributed to the cooperation. Regarding the research results itself, four models are often contemplated:
- full liability for the infringement of third parties rights;
- a best-of-knowledge warranty regarding the freedom of infringements of third party rights;
- an obligation by the research entity to notify the other party of any possible infringements it acquires knowledge of and
- an exclusion of liability for the infringement of third party rights.
Variations of these themes are of course possible. In the case of vertical R&D arrangements – either with research institutions or industry partners – the best-of-knowledge clause is often seen as a reasonable compromise, but a contracting party should not underestimate the obligations following from a best-efforts or best-of-knowledge clause in this context, for example with regard to research and clearance obligations.
Licensing: Where the required know-how is more readily available, companies can rely on license agreements to obtain the technology they need to adapt their products or mobility solutions. Here, a key issue will often be the access to and ultimate right to use (“ownership”) of the vast amount of data that can be generated through the operation of the service or the products. This has been discussed in more detail elsewhere, but both the terms of the license itself as well as the remuneration model for the agreement may need to address this point. It is an issue that is often difficult to solve, because the data will generally reflect both the use of the licensed solution as well as the product in which it is implemented. This raises difficult issues on the protection of trade secrets and will ultimately need to be solved on the technical level. As a practical example, the data about the movement both of users and vehicles throughout an urban area can be extremely valuable. Where an operator of transportation services licenses technology to guide its vehicles, it must be determined which level of detail of this data will be available to either party.
Finally, additional considerations apply where one of the parties involved is either a public entity or the holder of regulatory permits for the provision of transportation services (more details on the regulatory background can be found here ). Here, the permit holder will need to ensure that the operation of the licensed technology and/or the services it purchases from the industry partner comply with the terms of its own permit. Conversely, the industry partner will need to make sure that its solution can implement any such requirements. Further, it needs to be mindful of the special regulatory oversight that the permit holder may be subject to and the implications this may have for the protection of the industry partner’s trade secrets and its intellectual property. It may also need to take into account that it is operating in a sector governed by public procurement law and that following a competitive bidding process, the decision to award a contract may be constrained by and subject to procurement law rules and possibly challenges by competitors.
Licenses and cooperation in the autotech and mobility sectors are inherently international, as many of the cutting-edge players enter the European market from outside the EU. At the same time, Europe’s strong manufacturing base in the sector does lend itself well to cooperation with US tech companies in particular.
When negotiating in such a context, it is often helpful to agree on the applicable law from the outset and prepare the first draft of the agreement accordingly. Cultural differences in the way warranties, liability and indemnification rules work can otherwise lead to prolonged discussions about the compatibility of certain language with the applicable law. This may be less of a problem in the case of negotiations between large industrial partners or leading research institutions, but can be a substantial roadblock to getting the deal done with more local entities.
Overall, the dynamic of the sector is such that strategic alliances, cooperation and acquisitions of know-how and intellectual property in its various forms can be expected to play an ever greater role over the next years. The success or failure of such co-operations may well determine the shape of the industry and indeed the future of mobility.