A years-long patent licensing struggle between auto original equipment manufacturers ("OEMs") and standard essential patent ("SEP") holders in the telecommunications industry has stabilized, at least temporarily, since 2022, when an SEP owner successfully forced OEMs to license its patent portfolio directly, instead of licensing through suppliers.
In Continental v. Avanci, Continental accused Avanci of antitrust violations for refusing to license its SEPs, covering 80% of the patents essential to the 4G standard, to tier one suppliers and offering licenses only to OEMs. But, in 2022, the Fifth Circuit affirmed the dismissal of Continental's antitrust suit. Since then, automotive OEMs have accepted Avanci's licensing terms for 4G technology, and 5G licensing is next. However, significant questions remain about SEP licensing in high-tech cars going forward.
This article discusses negotiation considerations for OEMs faced with requests to license patent pools.
Automotive Licenses to Avanci's SEPs
Consumers now expect modern cars to be high-tech, which requires the cars to use technical standards like 4G and 5G connectivity. Many of those technical standards are covered by countless SEPs, the owners of which may have an obligation to license the SEPs at a fair, reasonable, and nondiscriminatory ("FRAND") rate. There is no defined value for a license that would be FRAND. Rather, patent owners and licensees negotiate or litigate the rate for a license.
Before 2022, automotive OEMs resisted licensing patents, especially SEPs, preferring for auto suppliers to secure licensing. Last year, however, Avanci—which licenses SEPs for patent owners like Nokia, Ericsson, and Acer—reached a licensing agreement with virtually every automotive OEM for patents related to 4G connectivity. Avanci currently licenses all the 4G patents for a flat rate of $20 per vehicle—recently increased from $15 per vehicle.
In the wake of Avanci's licensing agreements and the Continental v. Avanci case that allowed Avanci to require OEMs to obtain licenses, there is growing uncertainty about how OEMs should approach further licensing. This uncertainty is amplified by the fact that Avanci's licensing program is a good example that the price setting by pools is a very unilateral exercise —when it can be increased from one price to another—which is arguably not fully FRAND under such circumstances.
More Licensing of Patent Pools
Despite the uncertainties, the benefit of licensing pools of SEPs from licensing entities like Avanci is that OEMs avoid having to negotiate or litigate with every SEP owner separately. In theory, if a pool represents enough SEP owners and enough patents, licensing the pool essentially secures the right to practice a given technical standard. In practice, however, patent pools rarely represent all SEP owners to allow OEMs to meaningfully avoid litigation. Indeed, patent owners with alleged standard essential patents, that have not joined Avanci, may still press SEP owners for more money. Another downside of licensing a pool of patents is the loss of control over the rate. Patent pools will likely offer the same rate to all entities in the industry.
Now that Continental v. Avanci has shown it is possible to secure licensing agreements with OEMs, licensing entities may look to license other standards used in high-tech vehicles. For instance, Avanci is already building a pool of patents related to 5G connectivity. However, it is unclear if the auto industry can continue to afford license rates like Avanci's as the number of licenses grows. The auto industry faces smaller profit margins than other industries like consumer electronics and telecommunications, where the SEPs relate to the core functionality of the products. So, OEMs may be unwilling or unable to pay multiple $20 per-vehicle license fees for technology that is unrelated to the vehicle's driving functionality.
Moreover, the possibility of a growing number of patent pools raises the question of whether Avanci and other patent pools offer truly FRAND license rates. Many would say that it does not. Indeed, even Avanci's current offering of a 4G license for $20 per vehicle may or may not be viewed as FRAND currently. And, as more patent pools are asserted and more licenses are demanded, auto manufacturers and the courts must continue to consider whether those rates are truly FRAND.
Negotiate or Litigate License Terms?
Instead of seeking a license, OEMs may choose to practice the technical standard and wait for the patent owner to request a license. This is often preferrable, as it puts the burden of identifying and asserting the relevant SEPs on the patent owners. The SEP owner is then obligated to negotiate a license on FRAND terms, either directly or through a licensing entity like Avanci. If an OEM does not negotiate in good faith, however, the patent owner may have better arguments for an injunction.
Meanwhile, if the parties cannot agree on a price that both consider to be FRAND, the parties can litigate license terms that are FRAND. This may be risky, however, depending on the court's willingness to evaluate a FRAND license. The court may credit one side's proposed rate, select a compromise rate, or grant an injunction without an analysis of appropriate FRAND rates. Many in the industry have a critical view on patent pools becoming a licensing option equal to individual licensing or even becoming the new normal. If patent pools become the norm, individual license seekers will be confronted with pools that concentrate enormous market power and unilaterally set rates that cannot be negotiated.
The considerations for litigation vary dramatically by jurisdiction. In the US, non-practicing entities are usually unable to obtain an injunction, and the court will instead decide on a FRAND royalty. EU courts, on the other hand, appear more willing to grant an injunction if OEMs do not negotiate in good faith. Therefore, forum selection may lead to negotiation leverage. Similarly, UK courts have recently shown a willingness to rule on global FRAND rates. But, these rates have not yet clearly favored OEMs or patent owners.
Additionally, prior licensing agreements and litigation of FRAND rates against one OEM serve as evidence and leverage against other OEMs, leading to a domino effect once the first manufacturer agrees to a license.
Regardless of the jurisdiction, evidence of a willingness to negotiate may help avoid an injunction. Some courts may reference a willingness to negotiate when deciding on an injunction, and some may even reference licensing history when deciding whether to enforce a FRAND obligation.
Determining FRAND Rates—Inside and Outside Litigation
Overall, litigation can provide an independent determination of a FRAND rate that may be less costly than the rate offered during negotiations or by licensing organizations. However, it also comes with the risk of injunction, especially in Europe, which can be harmful to an OEM with an inventory to sell.
The auto industry will have to determine FRAND rates across technologies, as the number of technical standards increases in high-tech cars.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
