For all automobile manufacturers, connectivity has become a must-have feature, and not only a nice-to-have accessory. Connectivity features drive the consumers demand and more and more clients are willing to switch from a car brand to another for more connectivity (according to a Mc Kinsey study).

Connectivity however implies the implementation of technologies which are rather new for the automotive industry and, for most of it, subject to a long and complex standardisation process. The industry is hence facing licensing and economic issues in relation to the use of the patents covering such standardised technologies, the so-called standard-essential patents (“SEPs”).

Understanding how the landscape of the automotive industry is challenged by the SEPs, which may impact its business model and innovation, is crucial for all actors of the industry. Such impact and the related challenges and strategies of the automotive industry have been presented by Pauline Debré, Partner and Head of the IP/TMT department at Linklaters (Paris), and Sabine Thibault-Liger, Counsel within the Competition department at Linklaters (Paris), during the FT Future of the Cars Summit which took place in London on 14 and 15 May 2019. The content of their presentation is presented here.

What are standard-essential patents?

Many standards (i.e. agreed set of rules or requirements with respect to a technology) are implemented by the automotive industry for connectivity, entertainment (cloud/internet access), navigation (real time traffic, augmented reality), vehicle relationship management, maintenance, etc. Such standards include, for instance, WAVE (Wireless Access in Vehicular Environment), DSRC (Dedicated Short-Range Communications) and HaLow (Wireless technology).

SEPs are patents which are necessarily implemented in standard-compliant products. These patents are voluntarily declared as essential to standard-setting organizations (“SSO”) by their holder but their “essentiality” to the standard is not checked by anybody.

In consideration to this inclusion of the SEP in a standard, most SSOs require SEP holders to make their patents available to all implementers on Fair, Reasonable And Non-Discriminatory terms and conditions (the so-called FRAND terms), in order to support a wide adoption of the standards and ensure equivalent licensing terms to all willing licensees.

What is the legal framework

SEP-related issues are at the centre of the paradox between patent law, which aims at creating legal monopolies over technologies, and the need for all competitors to comply with the standard and implement the related SEPs to enter the market.

Such paradox raises antitrust risks related to the potential abuse of a dominant position (e.g. by refusing to grant a licence on a standardised technology or to propose a non-FRAND rates) and cartels (e.g. in the course of the standardisation process or by the creation of patent pools).

Lacking legal or regulatory rules governing the relationships between the SEP holders and the implementers, the stakeholders have no other choice than looking at the relevant case law.

In that respect, the landmark decision of the CJEU delivered in July 2015, Huawei v. ZTE , has defined a good-faith negotiation scheme (with obligations for both the patent holder and the alleged infringer) that needs to be followed to negotiate a FRAND license agreement, notably the needs for both parties to inform the other that it is willing to execute a license agreement and the presentation of FRAND license offers and counter-offers.

Several German decisions have clarified the scope of this negotiation scheme, in particular in relation to the timing of the parties’ FRAND offers and the information provided to the other party. UK courts have been the first European courts to set a FRAND royalty rate and to address the appropriate territory covered by a SEP license offer to be FRAND. In Unwired Planet v. Huawei , the UK Patent Court considered that FRAND licenses are necessarily granted worldwide and cannot be limited to a single territory. This finding is opposite to the one of the US District Court for the Eastern District of Texas in Panoptis v. Huawei , which refused to rule on the FRAND character of Panoptis' global license offer and limited its ruling to the FRAND nature of the offer with respect to the US patents only.

Uncertainties remain high, notably with respect to the availability of licenses to all actors on the manufacturing chain and to the calculation method of FRAND royalties. While a US court considered that a SEP holder cannot discriminate against users of its SEPs and exclude component manufacturers from the scope of its commitment to grant FRAND licenses, another US court stated that a SEP holder's commitment does not automatically require basing the royalties on the smallest saleable patent-practicing unit (i.e. generally the chipset enabling the telecommunication).

In France, the Paris Court of Appeal recently published a long-awaited decision which however provides less guidance than expected . The Court considered that the two patents invoked by the SEP holder were not essential to the standards since they only related to one of all the technical alternatives provided by the standard, and therefore not infringed. Consequently, relying on the fact that the patents-in-suit were not essential and therefore not proved infringed, the Court denied the claims of the SEP holder to set a FRAND royalty rate.

What are the challenges for the automotive industry

What are the challenges for the automotive industry? The implementation of SEPs by the automotive industry face widely opposed interests. Indeed, SEP holders need to obtain a fair compensation for their R&D investments while the widespread adoption of standards benefits consumers and the industry as a whole.

The business models of the automotive stakeholders at all levels of the manufacturing chain may also be jeopardized by costly SEP licenses.

SEP licensing negotiations are thus crucial, and the automotive stakeholders need not only to negotiate a FRAND royalty rate but also to deal with (i) the risk of setting a precedent within the industry as FRAND terms are often determined using comparable licenses and (ii) the injunction risk if no license is granted to the implementer.

Also, as many SEP holders insist on licensing at the end-user products level only, it is key for the automotive companies to manage the relationships between the car manufacturers and the component suppliers and to ensure the sustainability of the connectivity components and monitor the profitability level.

Another common practice of the SEPs holders may raise many challenges for the automotive industry: the concentration of the SEPs in the hand of patent pools, i.e. non-practising entities which are assigned or licensed SEPs related to a same standard from various SEPs holders in order to enforce them through licensing or litigation.

For instance, Avanci is a patent pool focused on licensing SEPs for IoT applications, notably connected cars. It gathers SEPs from companies such as Qualcomm, Nokia and Siemens, and claims to cover almost 50% of the SEPs relating to 2G, 3G and 4G standards.

While resorting to patent pools may be practical as a one-stop shop for implementers and provide more transparency and predictability, it raises serious concerns for the implementers, notably because such patent pools have no industrial risk and may insist on high rates and will likely never cover all the SEPs for a given standard (each standard is protected by thousands of SEPs).

What strategies may be implemented?

SEPs litigation threats have increased over the past years in the automotive sector leading the automotive companies to set up various strategies, whether as SEPs holders or as implementers.

Such strategies relate notably to (i) the contractual relationships between car manufacturers and component providers (warranties, liability cap, control of litigation), (ii) the determination of the best forum (choice of the national court, arbitration), (iii) litigation options (infringement action, tort action, revocation action, FRAND royalty determination action, competition action or complaints, etc.).

For instance, various litigation actions were recently filed in Germany against car manufacturers by SEPs holders. Broadcom reportedly sued Daimler and BMW regarding connectivity features based on SEPs while Nokia reportedly filed ten patent lawsuits before regional courts in Germany against Daimler, accused of infringing its SEPs. On the other hand, Daimler has filed a complaint against Nokia with the European Commission concerning Nokia’s licensing of its patents for vehicle connectivity (among which there are presumably SEPs). Since then, the automotive supplier Bury, German car parts maker Continental and its French competitor Valeo have joined Daimler to seek an EU antitrust investigation into Nokia’s patent licensing practices for connected cars.