Recently, the Chief Executive Officer of Ford Global Technologies, the intellectual property arm of Ford Motor Company, was quoted as saying that automakers will not repeat the patent wars conducted by the smartphones manufacturers. Whilst this is encouraging, it’s also noteworthy that patent applications filed by the automotive manufacturers has been on the rise.
In order to exploit newly developed technologies, manufacturers are said to be engaging in licensing agreements to access technologies covered by patents which could otherwise be asserted against them in court. The desire to learn from the smartphone patent wars is encouraging, but could the automotive sector learn yet more from these well publicised patent wars? Here, we look at how the licensing guidelines which have emerged since the smartphone patent wars could also benefit the automotive sector in the future and some of the issues that may also arise as the automotive sector brings about the introduction of the connected car.
The connected car
The notion of the connected car has been around since around 1996, when General Motors worked with Motorola Automotive to develop the OnStar technology, where the primary purpose was to get emergency help to a vehicle after an accident. This is a noble purpose, but since then, the notion of the connected car has developed into something much broader. A report by McKinsey in 2014 indicated that a connected car is a vehicle which is able to optimise its own operation and maintenance, as well as the convenience and comfort of passengers using a myriad of on-board sensors and internet connectivity. This is a step change from the original OnStar concept and brings with it technological development which could emulate the development in the mobile telecommunications sector during the 1990s and 2000s. Interoperability
The connected car will need to communicate with its surrounding environment. This will include other cars and buildings too. Such connection will require interoperability between the car and the surroundings to enable the technologies to work together. Inevitably this will drive the need for more and more standardisation, as cars are configured to communicate with other cars and buildings as they become more and more interoperable with their surroundings. This will signal a clamour to agree standards and be a ‘driver’ in the standardisation process — both from a technical and regulatory perspective — as any organisation wishing to be active in the field will need to interact with the organisation who owns the technology which implements the standard. Patents covering technology which implement a technical standard are known as Standard Essential Patents. Automotive manufacturers and other protagonists in the automotive sector will require access to so-called Standard Essential Patents which protect the technology necessary to implement the relevant standards, not just in their own sector but in other sectors such as telecommunications and the internet of things. A recent example of this is the tie-up between BMW and Avanci.
Licensing standard essential patents
In order to access technology covered by Standard Essential Patents (SEPs), licences will need to be negotiated with the owners of those patents. This is perhaps another part of the recent smartphone patent wars that could provide the automotive sector with insight as they seek to avoid the expense of patent litigation through the courts. SEPs are licensed based on Fair, Reasonable and Non-Discriminatory (FRAND) terms and following the smartphone patent wars, the European Commission (EC) have published guidelines on what they see as the correct approach to agreeing FRAND terms. These Guidelines broadly endorse recent court decisions in Unwired Planet vs Huawei  EWHC 711 (Pat) and Huawei vs ZTE C-170/13. A failure to agree FRAND terms is what usually ends in the expensive patent litigation which has been witnessed in the smartphone sector. What do the guidelines say?
In summary, the guidelines set out that licenses to SEPs should be governed by the following criteria:
- The possibility for efficiency savings such as reducing the transactional costs and cross-licensing
- The development of sectoral discussions to establish common licensing practices on a sector by sector basis
- The value added by the technology protected by the SEP
- The possibility of a single, worldwide license for the technology protected by the SEP
- Approaching the negotiation of a FRAND licensing rate with comparable licenses in mind for the same standard
- That discrimination between implementers that are ‘similarly situated’ should be avoided
One of the important things to note is that the EC wants licenses to SEPs to focus on efficiency and the value the technology protected by the SEP (or pool of SEPs) adds to the field. The guidelines specifically endorse the point that country by country licensing is inefficient and also the notion that there is no specific one-size-fits-all approach and that FRAND solutions can differ from sector to sector.
How can the automotive sector learn from this?
The automotive sector has already indicated its desire to use licensing as an alternative to expensive patent litigation and, as indicated by the arrangement between BMW and Avanci, some of the largest protagonists in the automotive sector are already looking at the requirement to license technology from other sectors so that they can develop connected cars whilst mitigating the risk of expensive patent litigation.
The guidelines provide helpful direction to licensing SEPs, based on the outcome of key recent cases in the smartphone patent wars, which is relevant for the automotive sector. Like the smartphone, connected cars will be distributed across the world and it is likely that SEPs protecting the relevant implementing technologies will be in force worldwide. The guidelines imply that in this commercial landscape, country by country licensing is not conducive to establishing FRAND terms. Also, like the smartphone, connected cars will encompass many patented products and processes and it is likely that licenses will not simply be for a single SEP but rather for a pool of SEPs. The Guidelines set out that in this (likely) situation, a reasonable royalty rate for the overall pool of SEPs needs to be established in order for the FRAND requirement to be satisfied. The overall added value generated by the patented technology (of the pool) needs to be assessed rather than indulging in a laborious determination of the value generated by each of the technologies protected by each of the patents. If the EC Guidelines are followed in the automotive sector as they negotiate licenses to SEPs, then they will surely benefit as the Guidelines set out a position which would likely enable owners of SEPs to avoid the penalties given to companies who abuse their dominant position with respect to an SEP.
The development of the connected car
As the connected car develops, more and more technologies will be introduced with, for example, artificial intelligence and digital healthcare likely playing a role as the car becomes a part of the internet-of-things and joins the rest of us in using the 5G network to communicate with our surroundings. Each of these industries will develop their own standards and will no doubt have their own pools of SEPs that protagonists in the automotive sector will need to access in order to further develop the connected car. Conversely, companies who are working in these industries will want to develop their own products with respect to the connected car and will themselves require access to SEPs in the automotive sector to achieve their own interoperability aims.
Blurring the sector boundaries
The guidelines published by the EC set out explicitly that there is no one-size-fits-all approach to establishing FRAND terms and that different sectors will likely have differing views on what is fair, reasonable and non-discriminatory. This is an explicit acknowledgment of the notion that the automotive sector reaching out to the artificial intelligence sector with an idea of FRAND (developed through the recommended sectoral discussions) may be surprised when the artificial intelligence sector set out quite a different view of FRAND, and vice versa. This is simply because companies across sectors very often employ different business models as a matter of commercial reality. However, it would mean that it’s difficult to license technology on FRAND terms — which would attract the attention of the competition authorities. That is to say, the development of common licensing principles within the automotive sector (as recommended by the EC guidelines) may not be helpful as the automotive sector starts to access SEPs from ever more diverse business models in other sectors. The boundaries between the sectors, in the context of the EC guidelines, would become blurred.
The problem with the blurring of the sector boundaries would be that it is then difficult for the automotive sector to determine an appropriate FRAND environment for licensing SEPs as it would not be clear what appropriate FRAND terms are. This could provide an obstacle to the development of the connected car as access to the technology required to fully develop the connected car would be restricted — which is an anathema to the FRAND principle and would likely attract the attention of the competition law authorities and the potential for heavy financial penalties.
We have looked at the meaning of the connected car and considered how the automotive sector could learn more from the smartphone wars than avoiding the expense of patent litigation, particularly during the development of the connected car and the necessary licensing of SEPs.
In light of the litigation in the smartphone sector, the EU has published a set of guidelines which set out how licensing of SEPs should be achieved.
The EU guidelines on licensing SEPs suggest that worldwide licensing and aggregated royalty rates are recommended if FRAND terms are to be determined in the automotive sector. Adopting FRAND terms will likely enable the owners of SEPs and their licensees to avoid the potentially expensive attention of the competition authorities.
However, there may be difficulties as the automotive sector reaches out to other sectors for access to technology as the connected car is developed. The difference between commercial sectors means that the view of what is a fair licensing rate may not be easy to agree.
Be that as it may, this should not discourage such negotiations from taking place, as licensing SEPs can often be the only way to progress a technology without incurring the expense of litigation.
The guidelines not only focus on achieving consistency across a sector but also encourage a focus on what the technology protected by the SEP adds in terms of economic value. A common sense interpretation of that would suggest a focus on how the technology protected by the SEP affects the value of the product sold (i.e. the value of the SEP to the licensee rather than the licensor).
However, this does not give carte blanche to licensees to seek to push down the value of an SEP, as the owner of an SEP can refuse to license if the proposed terms are not reasonable.