Connected-cars patent fight to explore legal gray area for licensing

As cars integrate ever more technology, a legal fight is brewing over whether the holders of connectivity-related patents should offer licenses to the makers of the relevant car parts, or of the cars as a whole.

Complaints against Nokia, by Daimler and parts makers Valeo and Continental, have fired the starting gun on a debate that will at times veer toward the philosophical: Is a modern car’s connectivity simply a feature like any other, or is it an integral part of the next generation of vehicles?

But the arguments will also be grounded in legal precedent, going back to historical judgments, decisions and policy guidelines directed at companies such as Motorola Mobility, Huawei and ZTE. Lawyers for all sides will be challenging the nuances of phrases such as “effective access to the standard” and “all interested third parties.”

The conflict between patent and competition law isn’t new. Earlier this decade, the makers of mobile handsets clashed with the holders of telecom standards in what were termed the “smartphone wars.” A struggle that played out in front of regulators and courts around the globe ended up with a rare EU-US compromise on how to limit injunctions.

The new battle is between a similar group of patent holders and makers of cars and components that integrate ever more connectivity technology. At its heart is a legal question left open at the end of the smartphone wars: Under EU law, does the holder of a tech standard have to license it to anyone who asks?

In short, does Nokia have to offer a license not just to the carmaker but anyone in the “value chain” — such as the makers of specific components? Licensing patents higher up the value chain may mean making less money on each license.

The legal answer to this question depends on how you interpret previous EU decisions that focused on patents essential to technology standards, such as 3G or 4G mobile communications.

It should be no surprise that there’s no slam-dunk reference that means Nokia, or indeed any other holder of a telecoms standard such as Ericsson or Qualcomm, would face a clear legal obligation to “license to all.” If the legal answer was clear, the industry wouldn’t be embroiled in its current dispute.

End user

The patent holders, led by Nokia and Ericsson, want to maintain their current licensing model, which sees them license to the "end user," such as smartphone makers.

Carmakers are defending a business model they’ve used for more than century: They buy products from suppliers that are clear of any obligations to license intellectual property. They argue that they’re in the car-assembly business and shouldn’t be involved in licensing patents for mobile communications, nor defending patent infringement lawsuit.

But patent holders say this model is outdated. Cars now include sophisticated technology that connects them to mobile networks, and the advent of self-driving vehicles is imminent. For them, the value of the patented technology should be based on the use of a car’s connectivity.

They argue that there is no antitrust abuse because the licenses for standard-essential patents are available. There is no prohibition in EU law from licensing to the end user. Moreover, an obligation to license to parts makers would be unmanageable and lead to licensing fragmentation.

They also insist on the “end-user” licensing model because the value of the technology is linked to what the device ultimately does. If a company is forced to license to a module maker or a chipset manufacturer, it wouldn’t know how to value the license because there’s no certainty about how the technology will be integrated into a final product. In any case, the value of the module or chipset should be based on the connectivity that the device brings, patent holders argue.

Component makers argue that the chipmakers are well known, and Nokia would have no trouble licensing to them. The issue is about fairness. A royalty rate must reflect only the value of the standard-essential patent, not the additional value stemming from its inclusion in a standard, they insist.

Owners of standard-essential patents have formed a patent platform called Avanci to license technology to car makers and manufacturers of “Internet of Things” devices at flat rates. These fees include about 70 percent of the patents needed, such as from Qualcomm, Nokia and Ericsson, but the platform doesn’t include technology from Huawei and Samsung.

Legal territory

In the pecking order of EU authority, you'll find nothing higher than the Court of Justice in Luxembourg. So, a reference in a 2015 judgment from the smartphone wars will be a significant battleground.

Giving guidance on a spat between Huawei and ZTE, EU judges said companies committing to offer fair, reasonable and non-discriminatory — or “Frand” — license terms created “legitimate expectations on the part of third parties” that a license would be granted.

But is that enough to say patent holders such as Nokia and Ericsson should have known all along that they needed to grant licenses to all makers of chips and widgets, rather than just the final maker of a car or smartphone?

For patent owners, the Huawei-ZTE case doesn’t offer any guidance on where in the value chain they must license their technology. The judgment refers to circumstances in which rivals are excluded from competition by patent holders that seek injunctions against them.

For the car industry, the technology is still available, but just at the end of the value chain.

But the car-parts makers say this argument turns patent licensing on its head. Carmakers aren’t implementing the patents in their products. That’s done by the module makers, which must have a license because they can’t sell products that don’t have a license for the intellectual property.

The concern is that patent holders are trying to extract the highest royalty fee possible by making it seem reasonable that Avanci’s $15 licensing fee is a small proportion of a $40,000 car. Patent holders would be obliged to lower the fee if they licensed to module makers whose products are worth hundreds rather than thousands of dollars.

Component makers are also concerned that the “end-user” licensing model will restrict their ability to sell modules to only carmakers — the only ones that can obtain licenses. This crimps their incentive to innovate and develop new uses for their modules outside of the automotive industry.

Motorola Mobility

If the Huawei-ZTE ruling isn’t clear enough, Nokia's opponents could argue that the European Commission has steadily been setting out the “license to all” stance in a series of other decisions. For example, an antitrust probe of Motorola Mobility's patents and the EU's approval of Google's acquisition of the same company.

In the first, the commission concluded that makers of products using Motorola’s intellectual property could “reasonably expect” the company would make “its SEPs available on Frand terms and conditions to all implementers.”

But this decision was never challenged before the courts and so it's not clear whether judges would have confirmed it.

Secondly, in its review of Google’s acquisition of Motorola Mobility in 2012, the commission said holders of tech standards were obliged to “make the patent in question available to all interested third parties.”

That wording echoes the commission’s policy for standard-setting organization's rules, as set out in its 2011 policy paper on Horizontal Co-Operation Agreements.

In that document, the commission said: “To ensure effective access to the standard, the IPR policy would need to require participants wishing to have their IPR included in the standard to provide an irrevocable commitment in writing to offer to license their essential IPR to all third parties on fair, reasonable and non-discriminatory terms.”

Patent holders argue that references “all implementers” and “all interested third parties’’ don’t mean that they have to license to any company in the value chain. This wording simply means that if there are different companies in the same level of the value chain — such as module makers that implement a patent — they can’t discriminate against a particular module maker.

Nokia case

Nokia's supporters might say that piecing together such slices of past EU decisions is wishful thinking. They don't amount to the kind of cast-iron obligation that is strong enough to override established patent law, and upend an entirely new industry in the process.

But detractors would say that Nokia itself was told as much four years ago when the commission cleared its acquisition of Alcatel-Lucent.

In that decision, the commission repeated the obligation on SEP holders to make their intellectual property “available to all interested third parties,” adding that such companies should not “discriminate between different licensees.”

“The merged entity is therefore obliged to license its SEPs to any interested party under such Frand terms,” the commission said.

Commission’s call

In this battle, the commission is confronted with the same problem it had in 2017, when it issued a policy paper on how companies can manage the licensing of technology to connect devices to the Internet.

Should it support a licensing model that some argue would grant access to technology for small companies? Or should it back its European technology champions Nokia and Ericsson, which are battling with China’s Huawei to roll out 5G networks?

The answer will have a profound effect on how Europe sees itself in a world in which more and more devices — from cars to refrigerators — will be connected.