The automotive industry is facing a learning curve with respect to standard-essential patent (SEP) licensing. Given what I heard at yesterday's IAM Auto IP Europe conference in Munich, I see partial progress--such as Avanci's announcement of 4G patent license agreements with three more automotive brands--while some automotive industry players appear to be learning too slowly for their own good. As a result, we're going to see more litigation, such as the cases recently brought by Intellectual Ventures (not an Avanci licensor) over a mix of three SEPs and even more non-SEPs.
In my previous post I reported on a Qualcomm executive's perspective on the illegality of licensing negotiation groups. In this post I'll discuss some of the other things that were said.
The IAM conference took place in the aftermath of two strategic defeats for automotive holdouts:
Daimler had wasted millions and millions of euros as it ultimately took a car-level SEP license from Nokia anyway. Last year, Daimler was slapped with four German SEP injunctions over the course of less than three months. It settled two of those disputes rather quickly, and finally caved to Nokia.
After the Daimler-Nokia settlement I researched the state of affairs in that dispute, and found out that Daimler was losing to a far greater extent than it initially appeared. The stage was set for two or three more Nokia injunctions, and one of the two that were already in place was going to become enforceable without collateral in a matter of months. Daimler's last hope would then have been a so-called § 315 offer: a declaration of one's willingness to take a license on terms that, if need be, can be adjusted by a court of law. Whether that defense would have succeeded is another question, as Daimler's overall conduct was typical of an unwilling licensee, and it's very hard to imagine that a § 315 royalty determination would have resulted in any lower rate than Nokia's share of the Avanci pool license. There just is no comparable in automotive SEP licensing that would be more likely to be recognized by the courts. So even if the § 315 defense had dissuaded the appeals court from allowing the enforcement of an injunction, Daimler would have lost.
Nokia probably managed its litigation costs more intelligently, and in any event, Nokia's benefit from having demonstrated its preparedness to enforce patents against car makers will lead to deals with companies who'd rather not lose in court. In retrospect, Daimler was the perfect target for Nokia because the dispute even ended up hardening some of Nokia's patents, which will help Nokia in other industries, above all in disputes with smartphone makers. By contrast, Daimler is not going to get better deals from other patent holders after its poor results in litigation so far.
Automotive companies lobbied very hard for a reform of Germany's patent injunction statute, but all levels of the judiciary have already made it clear that the availability of patent injunctions has not been compromised on the bottom line.
In this environment, the "licensing > litigation" inequation should be a no-brainer. Licensing executives from companies such as Avanci and Philips did make a compelling case. Avanci Sr. VP Laurie Fitzgerald explained that Avanci doesn't prevent its licensors from direct agreements with automotive licensees. It's an offer, a one-stop solution for access to dozens of SEP portfolios, but it's optional. It already works for some. But some others display defiance even after Nokia v. Daimler.
Automotive supplier Continental is still fighting the war that Daimler has already lost. Sitting next to Conti's IP chief Roman Bonn, U.S. trial lawyer Ed Haug said that it always depends on someone's business goals, but generally he'd not advise clients to litigate SEP matters in the United States. But that is what Conti is still trying, with the Fifth Circuit recently having heard its appeal of Continental v. Avanci (with Conti on the losing track) and a somewhat duplicative case against Nokia pending in Delaware. It's probably too late for Mr. Bonn to heed Mr. Haug's advice. Conti will likely continue to throw good money after bad.
Mr. Bonn also sounded like a visitor from a parallel universe when he was discussing the recent amendment of the German Patent Act. He suggested that automotive defendants would benefit from it, but Meissner Bolte's Philipp Rastemborski, a German patent litigator, set the record straight and explained that Germany would remain just as attractive a jurisdiction to patentees as before.
In my view, Mr. Bonn and some others don't make the proper distinction between whether a statute applies to a case pattern and whether it actually makes a difference. The revised patent injunction statute doesn't come with a carve-out for SEPs, so defendants are not precluded from raising a proportionality defense in a SEP case. However, an unwilling licensee will simply be told to take a license as neither the defendant nor any third parties will be harmed then.
More recently, Continental also appears to be obsessed with China. Mr. Bonn expressed the view that the recently-updated Chinese Patent Law was going to be applied in ways that favor Chinese companies. And like in a recent German media interview, he used Huawei for a bogeyman, saying that Huawei (and ZTE) would place greater emphasis now on revenue generation from patent licenses. I'd just like to note that Huawei is not new to outbound patent licensing. Ten years ago, in the famous EU Huawei v. ZTE, they were already a plaintiff. Now, by the standards of the automotive industry a decade may just be like a year (or less) in tech...
Matthias Schneider, who is in charge of patent licensing at almost-wholly-owned Volkswagen subsidiary Audi, used to praise "the beauty of the Avanci model" on earlier occasions. This time around, however, he made it clear that he was just expressing his own views and not necessarily those of his company, though in reality he appeared to be his master's voice, parroting Volkswagen's talking points.
The most insightful thing he said was that currently some cars cannot be made because of a shortage in supply affecting a $1 chip, and that fact had more of an impact on the automotive ecosystem than a $15 (that's Avanci's 4G rate) or $20 patent royalty, whether levied on a $10K or $80K car.
Two of Mr. Schneider's statements left me speechless though:
He questioned the value of the Avanci license because it wouldn't "solve [his] problem": there are SEP holders outside the Avanci pool. "Why should I take an Avanci license for $15?", he asked. That's an argument I had never heard in the automotive context. There's no legal or other obligation that pools are only allowed to exist if they offer 100% coverage of a standard. Mr. Schneider would like some sort of insurance policy, but I just don't think anyone can hold Avanci responsible for what others do (or choose not to do) outside that pool any more than one could complain to Audi about a warranty issue with a Tesla. The question is whether the $15 deal streamlines the licensing process and obviates litigation--and whether the Volkswagen Group (including its Audi subsidiary) likes it or not, the case law in various major jurisdictions favors SEP holders as different speakers (other than Conti's Mr. Bonn) explained yesterday.
Mr. Schneider still believes companies can get better deals by means of holdout. He likened patent licensing to a pick-up sticks game: the first one to move loses; if you wait longer, it gets cheaper, he said.
Even though he disclaimed speaking for his company, this was an "intelligent infringement" argument in favor of being an unwilling licensee. One may question the wisdom of going on the record with that kind of statement.
That attitude neither helps to avoid litigation nor are policy makers going to be inclined to support holdout. A conference like yesterday's IAM Auto IP Europe isn't a dealmaking or peace-making event. But it is a chance for constructive discussions, and neither Conti nor Audi made it sound like amicable solutions were in sight. There will be more deals, but SEP holders will have to take car makers to court again and again and again.
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