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Automonomous cars and autonomous driving

Intellectual property: the new driver of value?

Technology is becoming ever more important to the value of a vehicle. So tech suppliers are now vital to the development of desirable new cars, both from a connectivity and powertrain perspective.

In response, manufacturers are filing more and more patents to protect their position. Might the stage be set for a more confrontational era in automotive?

IP protection – the auto way

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.

Automotive is now the third most active sector for worldwide patent filings behind telecoms and computing.

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 this increase in patent activity is also being boosted by the evolution of connected and autonomous vehicles (CAVs).

Manufacturers have not traditionally used patents to generate revenue. 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 who are well versed in using patents to their advantage.

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Standardisation bodies strive to create a common language

As manufacturers, tech companies and suppliers develop connected and self-driving systems, efforts are being made to ensure they all speak a common language. A number of umbrella organisation and initiatives have arisen, some with overlapping aims.

At a global level, the 5G Automotive Association (5GAA), which is made up of automotive, technology and telecoms players, works to develop connectivity solutions for mobility and transport solutions.

In Europe, the aim of the European Automotive-Telecom Alliance, which consists of six automotive and telecoms associations and 38 companies, is to promote the deployment of connectivity for CAVs in Europe. Set up in 2016 following a roundtable with the European Commissioner for digital economy and society, the alliance has since signed a memorandum of understanding with the 5GAA.

Elsewhere, the Amsterdam Group is an alliance of pan-European umbrella organisations that aims to facilitate the joint deployment of co-operative intelligent transport systems (C-ITS) in Europe. One of those organisations is the CAR 2 CAR Communication Consortium (C2C-CC), a non-profit industry organisation consisting of European vehicle manufacturers, equipment suppliers, research organisations among others. One of its stated aims is to create an open European standard for C-ITS.

The European Union has a stated aim of helping converge investments and regulatory frameworks across the EU to push the deployment of C-ITS services in Europe from 2019. Much of the C-ITS standardisation work in Europe is being done by the European Telecommunications Standards Institute (ETSI). But it is also a member of the oneM2M alliance, a global group that brings together the world’s major standards development organisations – ARIB and TTC (Japan), ATIS and TIA (US), CCSA (China), and TTA (South Korea) – to create international standards for connected devices.

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Arrival of the tech giants

The popularity of the smartphone means that consumers now want – and expect – their cars to be able to connect to their devices. So it’s no surprise that almost every major carmaker has partnered with Google and Apple to link Android and iOS smartphones to the dashboard. Meanwhile, the Car Connectivity Consortium – whose 75-plus members comprise over 70 per cent of the auto market and 60 per cent of the smartphone market – has developed the device-neutral Mirrorlink standard.

Alongside smartphone integration, many manufacturers are also working on their own apps and digital services, for which they can charge a fee. For example, BMW ConnectedDrive offers via a range of paid-for navigation, infotainment and remote services, a revenue stream previously unavailable to traditional manufacturers.

Freshfields partner Wolrad Prinz zu Waldeck und Pyrmont says: ‘While there are co-ordinated attempts to create global standards for connected cars, there are some significant players that are not involved in those discussions. This could result in competing standards being introduced, 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.’

A lack of technological co-ordination could result in competing standards being introduced, which would be a big problem for global car manufacturers.

Wolrad Prinz zu Waldeck und Pyrmont, Freshfields partner

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A new battleground for patent litigation?

The question now is whether this activity will make the auto sector a new battleground for patent litigation. Any company that owns patents that are essential to a technical standard – standard essential patents (SEPs) – must license them on fair, reasonable and non-discriminatory (FRAND) terms.

Automakers are having to build connectivity into their products. This means they are having to license technologies from the mobile sector, which has seen a number of injunction proceedings launched by patent owners against those suspected of using their SEPs without a licence. More worryingly for the auto industry, trolls have been buying patents covering apparently defunct technologies – and then filing lawsuits against manufacturers claiming that the technology now covers cars.

Trolls have been buying patents covering apparently defunct technologies – and then filing lawsuits against manufacturers claiming that the technology now covers cars.

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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 decision of the EU’s Court of Justice in the Huawei vs ZTE Corp case, owners of SEPs can pursue injunctions – but only in certain circumstances. They will have to put on notice alleged infringers and make a licence offer on FRAND terms prior to initiating litigation.

If a competitor using an SEP takes a tactical or dilatory approach in negotiating a licence, 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 (potentially limited) damages for a patent that was infringed before a licence 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.

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Patents and the human–machine interface

Control of the human–machine interface (HMI) is likely to yield the greatest profit potential for market participants – and therefore raises significant litigation risk.

Google and Apple have developed smartphone connectivity for most of makes of car. So while you might be driving a German or Japanese vehicle, the in-car experience may be closer to using a device running Android or iOS. Indeed, Apple has been granted a number of patents linked to connected vehicles, including for a ‘tactile touch screen display… that improves vehicle instrumentation and telematics’.

Meanwhile, manufacturers such as 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 ones – the owner has no obligation to license them and can pursue injunctions against any rival that it suspects of infringement without any restrictions.

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How big is the patent litigation risk?

The size of the litigation risk that manufacturers face is unclear, because no European case law exists to determine the appropriate FRAND royalty base for a telecoms patent.

Wolrad Prinz zu Waldeck und Pyrmont, who was involved in the first European rate-setting litigation in the telecoms sector, says: ‘Conceptually there are a number of approaches you can take to determine 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 criticised this approach as inappropriate for products that embody tens or even hundreds of thousands of patents, like smartphones or cars.

‘Some may push for a royalty base that is more closely tied to the actual value of the relevant patented technology. For example, assuming that telecommunications functionality might add $2,000 to the value of a car, they may argue that this figure 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 connectivity.’

Research from McKinsey claims connectivity features in a European premium model car comprise 4 per cent of its value – but that figure is set to rise to 7 per cent by 2020.

‘Opinions are divided right now, and there’s a lack of clarity about where we will end up,’ Wolrad says.

‘Some parties will be arguing for a royalty base that’s set at fractions of a per cent, 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 royalty obligations, and we won’t know where we stand until those are fought out in court. How much of a cost burden is this going to put on the industry? It’s difficult to say but it could be that McKinsey’s 7 per cent figure is too conservative. It’s not difficult to envisage a situation where patent litigation risk for connected vehicles adds 10 per cent to the price of a car.’

The value of connectivity

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Prevention and dispensation – not litigation

There are a number of ways that industry players are trying to reduce the risk of patent litigation.

The Fair Standards Alliance advocates ‘a more modern, open and collaborative approach’ to SEP licensing, believing that unfair licence terms ‘pose a significant risk to the innovation eco-system’. Meanwhile, RPX Corporation and the LOT Network seeks to eliminate the threat of litigation for members by buying up patents and selling patents to non-practising entities respectively. Another collaborative route is to use patent pools, where licensees can access a large number of patents via a single licensor.

Then there is using open-source (OS) standards. Tesla led the way by announcing in 2014 that it would not launch lawsuits against any company that uses its intellectual property in good faith. While an apparently counterintuitive strategy, the move perhaps aimed to expand the market for electric vehicles and therefore boost Tesla’s sales.

It’s not clear to what extent Tesla’s rivals adopted its technology. But Elon Musk’s announcement heralded a more open era for automotive IP. Toyota has since shared more than 5,600 royalty-free patents related to hydrogen fuel cell cars while Ford is allowing competitors to use its patents for electric vehicle, albeit for a fee. At an industry-wide level, in 2017 the Chinese tech company Baidu launched its Apollo project, an ‘open, reliable and secure’ software platform that members can use to develop their own autonomous driving systems.

Adopting OS technology is of course tempting but still carries risks. The enforcement of rights around OS solutions is growing, including the interoperability between OS and proprietary code. Manufacturers need to consider how the two might interact before jumping in.

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