NOVEMBER/DECEMBER 2015

DEVOTED TO LEADERS IN THE INTELLECTUAL PROPERTY AND ENTERTAINMENT COMMUNITY

VOLUME 35 NUMBER 10

THE

Edited by Gregory J. Battersby and Charles W. Grimes

LicensingJournal

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Wars on Wheels: Are Patents the New Revenue Stream for the Car Industry?Wolrad Prinz zu Waldeck und Pyrmont and Justin Watts

Car makers have not traditionally seen patents as a revenue driver in the automotive industry. But as technology becomes more important to the value of a vehicle, new threats to the traditional original equip-ment manager (OEM) business model are emerging. Tech suppliers—well-versed in defending the value of their inventions—are now vital to the development of new cars, both from a connectivity and powertrain perspective. In response, OEMs are filing more and more patents to protect their position. So is the stage set for a more confrontational era in the automotive industry?

There are three main developments with regard to this situation that we believe the automotive sector needs to consider:

1. Technology is now a driver of vehicle value. • The number of tech-related patents filed by

auto businesses is on the rise.• OEMs and suppliers are acquiring and devel-

oping new technology.• Tech companies are entering the automotive

sector.2. A new battleground for patent litigation is

emerging.

Wolrad Prinz zu Waldeck und Pyrmont is a partner in the intellectual property group at

Freshfields Bruckhaus Deringer. His practice focuses on multijurisdictional patent litigation,

in particular in the IT and the pharma/biotechnology sectors. Prior to joining Freshfields, he worked at the Max Planck Institute for Intellectual Property,

Competition and Tax Law and as program director of the Munich Intellectual Property

Law Center (MIPLC). Wolrad remains a MIPLC faculty member where he teaches European

Patent Law.

Justin Watts is a partner in the intellectual property group at Freshfields Bruckhaus

Deringer. He is a PhD electrical engineer and formerly worked in satellite engineering.

His practice focuses on multijurisdictional patent litigation.

• We believe coordinated attempts to ensure cars talk to each other are likely to see increased patent litigation in the automotive sector.

• Connectivity technology and the human–machine interface are two areas of likely pat-ent litigation in the medium term.

• The patent risk to a premium car-maker could be as high as 10 percent of turnover.

3. Automotive companies must select experienced legal advisers to protect their technological edge.• Tech companies and trolls, with deep pockets

and experience in large-scale patent litiga-tion, are appraising car makers’ activities against telecom patent portfolios.

• It’s hard to predict when, and in relation to which particular technology, patent litigation will first strike.

It is therefore essential to understand the risk profile of your products, your patent portfolio, and your operations in relation to other patents, and to line up advisers including law firms with the experi-ence to guide you through this highly complex legal territory.

Car Manufacturers Are Seeking to Protect Their Innovations

Automotive is now the third most active sector for worldwide patent filings behind telecoms and computing—and the rate of growth is faster than in any other industry. (See Exhibit 1.) One of the principle drivers has been the push for greater fuel efficiency, which has resulted in a huge rise in patents relating to propulsion. But the evolution of autonomous cars also is boosting patent activity. Research from Thomson Reuters shows the num-ber of worldwide patents for autonomous vehicles rose from 73 in 2009 to more than 500 just four years later.1

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OEMs traditionally have not used patents as a revenue-driver, but as they invest more in developing their own technology they could recoup this through patent licensing. The convergence of the auto, tech, and telecoms markets has the potential to change the way that profits are distributed across the automotive value chain and has brought a new range of rivals into the space that are well versed in using patents to their advantage.

Standardization Bodies Look to Create a Common Language

As OEMs, tech companies and suppliers develop connected and self-driving systems, efforts are being made to ensure they all speak a common language. The European Union has invested more than €180m in research projects into co-operative intelligent transport systems (C-ITS),2 the results of which were used by the European Telecommunications Standards Institute (ETSI) and the European Committee for Standardization (CEN) to create a set of standards that allow connected cars to communi-cate with one another and roadside infrastructure. ETSI also is a member of the oneM2M alliance, a global group that brings together the world’s major standards development organizations (ARIB and TTC—Japan; ATIS and TIA—US; CCSA—China;, and TTA—Korea) to create international standards for connected devices.

ETSI’s Role in Mobile Standardization

ETSI was central to the development of mobile technology. Europe is characterized by its small coun-tries, dense urban populations, and high take-up of technology, creating a market where mobile phone signals were likely to overlap. ETSI coordinated efforts to develop a Europe-wide mobile telecom-munications standard—GSM—and its work was so successful that GSM has now been adopted globally. In the United States, a lack of central co-ordination saw several competing standards emerge after GSM, while Verizon, the United States’ most popular mobile provider, built its network on a rival protocol. ETSI has continued its work on the next generation of telecommunication standards—UMTS (3G) and LTE (4G).

Many analysts have noted that while there are coordinated attempts to create global standards for connected cars, there are some significant play-ers that are not involved in those discussions. This could result in competing standards being intro-duced, which would be a big problem for global car manufacturers. There is a big incentive for states to introduce standards that erect a barrier to foreign car manufacturers, but these are potentially a disguised barrier to trade.

New Battleground for Patent Litigation?

The question now is whether this activity will make the auto sector a new battleground for patent litiga-tion. Any company that owns patents that are essen-tial to a technical standard must license them on Fair, Reasonable and Non-Discriminatory (FRAND) terms. The mobile sector has seen a number of injunction proceedings launched by patent owners against those suspected of using their standard essential patents (SEPs) without a license. Traditional players in the telecommunications sector are now reaching out to car makers to license their SEPs. More concerning for the industry, patent trolls have been buying up portfolios from companies such as Nokia and Nortel and are now filing an increasing number of lawsuits against auto manufacturers. According to research from RPX Corp, trolls filed 107 cases against car mak-ers and suppliers in 2014—a six-fold increase in just five years.3

Given this climate, it is not difficult to envision a situation in which patent litigation risk for connected vehicles would add 10 percent to the price of a car.

Exhibit 1

Source: U.S. Patent and Trademark Officehttp://www.uspto.gov/web/offices/ac/ido/oeip/taf/tecasga/all_torg.htm

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Injunctions and Antitrust Law

Some methods of seeking injunctions based on SEPs have sparked antitrust investigations on both sides of the Atlantic. Under the recent decision of the EU’s Court of Justice in the Huawei v. ZTE Corp. case,4 owners of SEPs remain entitled to pursue injunctions, but only in certain circumstances. They will have to put alleged infringers on notice and make a license offer on FRAND Terms prior to initiating litigation. Where a competitor using an SEP takes a tactical or dilatory approach in negotiating a license, rejects an offer made by the SEP holder on FRAND terms, and does not make an appropriate good-faith counter offer, the SEP holder may seek an injunction. Furthermore, it will remain possible to seek (poten-tially limited) damages for a patent that was infringed before a license was agreed. But an SEP-owner may violate EU antitrust law if it seeks to enjoin a rival that made a counter-offer to enter a licensing deal on FRAND terms and provided appropriate security.

Arrival of the Tech Giants

Consumers want access to infotainment services at the wheel, and this demand has seen competing technologies emerge. Most car makers are working with Google and Apple to link their smartphones with the dashboard. Google’s Open Automotive Alliance has signed up Audi, GM, Honda, and Hyundai to a common platform for Android integra-tion (Google Android Auto), while Apple’s Web site reveals that more than 30 car makers are set to ship vehicles with its CarPlay technology in the coming years. Elsewhere, members of the Car Connectivity Consortium (who comprise over 80 percent of the auto market and 70 percent of the smartphone mar-ket) have collaborated to develop the device-neutral Mirrorlink standard.

Alongside smartphone integration, many OEMs are working on their own apps, which use cars’ embedded connectivity systems to bring telemetry data to the dashboard. The challenge for OEMs is to

Exhibit 2

Source: Thomson Reuters: The State of Innovation in the Automotive Industry 2015

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work with tech companies and content providers to ensure a seamless user experience. Significant work must be done to control the way different technolo-gies manage the arbitrage of streamed music, calls, and engine information without distracting the driver.

Patents and the Human Machine Interface

Control of the human machine interface is likely to yield the greatest profit potential for market par-ticipants and, therefore, raises significant litigation risk. In the words of McKinsey’s 2014 Connected Car report, “whoever controls [the] buttons, knobs, and touch pads [in a car] can massively influence the in-car user experience for driving, audio, and video. Currently, this control point is owned by carmakers, yet other players … such as Apple, are making a play for it.”5 (See Exhibit 3.)

Apple has been granted a number of patents linked to connected vehicles, including for a “tactile touch screen display … that improves vehicle instrumenta-tion and telematics.”6 OEMs including Cadillac and Ford are developing their own touch-screen HMIs, and with patents that control the graphical interface on mobile handsets a significant contributor to the recent “smartphone wars,” car makers could face significant litigation risk as they develop their own products.

In this space the patents are not standard essential—the owner has no obligation to license them and can pursue injunctions against any rival that it suspects of infringement without any restrictions.

Some take the view that the royalty rate has to be applied to the total sales value of the end product. Others have criticized this approach as inappropriate for products that embody tens or even hundreds of thousands of patents, such as smartphones or cars. (See Exhibit 4.)

Case Study: Tesla’s IP Strategy Tesla recently announced its intention not to

launch lawsuits against any company that uses its intellectual property in good faith. While an appar-ently counterintuitive strategy, the move could expand the market for electric vehicles and there-fore boost Tesla’s sales. It is, however, debatable whether Tesla’s rivals will use its technology. The highest number of patents filed in the auto sec-tor relate to electric powertrains—meaning many

OEMs with greater sales volumes have their own investments to protect. BMW, for example, said operating profit at its core automotive division fell 14 percent in the last three months of 2013 despite higher sales, due in part to its investment in fuel-efficient technology.

How Big Is the Patent Litigation Risk?

The size of the litigation risk that OEMs face is unclear, because no European case law exists to determine the appropriate FRAND royalty base for a telecoms patent. Many experts agree that there are a number of approaches you can take to deter-mine a royalty. Some take the view that the royalty rate has to be applied to the total sales value of the end product. Others have criticized this approach as inappropriate for products that embody tens or even hundreds of thousands of patents, such as smartphones or cars.

Some may push for a royalty base that is more closely tied to the actual value of the relevant pat-ented technology. For example, assuming that tele-communications functionality might add $2,000 to the value of a car, they may argue that this figure

Exhibit 3

Source: McKinsey & Company—Competing for the connected consumer, September 2015 at 38.

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is an appropriate royalty base to which the royalty rate should be applied. Others may point to the purchase price of the chip that provides the connec-tivity. Research from McKinsey claims connectivity features in a European premium model car com-prises 4 percent of its value—but that figure is set to rise to 7 percent by 2020. Opinions are divided right now, and there is a lack of clarity about where the industry in terms of these types of disputes will end up.

Additionally, many analysts note that there is a potentially enormous range of royalty obligations. Some parties will be arguing for a royalty base that is set at fractions of a percent, given the large number of patents likely to be implicated. Others will argue for much more in the case of key patents, particularly if the royalty is not applied to the whole end product. The result is a truly enormous range of potential roy-alty obligations, and we won’t know where we stand until those are fought out in court. How much of a

Exhibit 4

cost burden is this going to put on the industry? It’s difficult to say but it could be that the 7 percent figure is too conservative. It more likely may be a scenario

where the patent litigation risk for connected vehicles will, in the very near future, add as much as 10 per-cent to the consumer price of a car.

Copyright © 2015 CCH Incorporated. All Rights Reserved.Reprinted from The Licensing Journal, November/December 2015, Volume 35, Number 10, pages 8–13,

with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.wklawbusiness.com

1. http://www.ipwatchdog.com/2015/01/24/auto-sector-sees-dramatic-rise-in-worldwide-patent-acquisition/id=54102/.

2. http://europa.eu/rapid/press-release_IP-14-141_en.htm.3. “Patent ‘trolls’ target automakers, and Ford pushes back,” Automotive News,

February 11, 2015, available at http://www.autonews.com/article/20150211/OEM06/150219973/patent-trolls-target-automakers-and-ford-pushes-back.

4. Huawei v. ZTE Corp., CJEU, Decision of July 16, 2015, C-170.5. “Connected car, automotive value chain unbound,” McKinsey, September

2014, p. 31, available at http://www.sas.com/images/landingpage/docs/3_McKinsey_John_Newman_Connected_Car_Report.pdf.

6. U.S. Patent No. 8,482,535.