A couple of years ago we wrote a number of blog posts about the complexity that the internet of things and the increasing use of connectivity technologies in various devices would introduce to patent licensing. This included discussion of topics such as whether FRAND licences should be offered to any company in the supply chain that asks for one, and whether the royalties due pursuant to a licence should be based upon the price of a component, the price of the end product, or even the use of the end product (see for example here, and here).
In the automotive sector, debate over these topics has moved from theoretical discussion to active litigation and competition investigation. Before looking at some of these cases, it is worth noting that the supply chain in the automotive industry is often described in the following terms:
- Tier 3 suppliers manufacture the baseband chips that offer wireless functionality;
- Tier 2 suppliers manufacture network access devices (NADs), which incorporate a baseband chip;
- Tier 1 suppliers incorporate NADs in the telematic control units (TCUs) that they manufacture;
- The TCU is a central component of the ‘infotainment’ systems offered in cars, i.e. the electronic system through which functions like navigation and diagnostics are controlled.
Typically, the terms upon which car manufacturers purchase TCUs from Tier 1 suppliers require the suppliers to warrant that the TCUs do not infringe any intellectual property rights. That means the Tier 1 suppliers have a responsibility to ensure that they (or suppliers further up the supply chain) have obtained a licence to any relevant patents. If they fail to do so, they will usually be required to indemnify the car manufacturer if it has to pay for a licence instead. However, SEP holders have been reluctant to offer licences to suppliers, typically preferring to license the car manufacturers instead.
This clash of approaches has prompted a wave of litigation, exposing some of the fault lines in the FRAND system. In particular, Nokia has launched a string of patent infringement cases against Daimler in Germany. Within the last few days, judgment on one of the cases (which had been expected this month) was deferred due to COVID-19. If Nokia succeeds in proving infringement of a standard essential patent, the question of whether it has fulfilled its FRAND obligations will fall to be considered, and the German courts’ willingness to grant an injunction prohibiting the sale of infringing German-manufactured cars would be tested.
Some car manufacturers have agreed to take licences themselves. For example Volkswagen, Audi and Porsche settled litigation with Broadcom in November 2018, and the Volkswagen and BMW groups have taken licences to the Avanci patent pool.
However, other car manufacturers have proved more resistant to approaches from SEP holders. In late 2018 Daimler, as well as a number of its Tier 1 suppliers, filed antitrust complaints with the European Commission, alleging that Nokia had abused a dominant position by refusing to offer licences on FRAND terms. We understand that this complaint was made at least partly on the grounds that Nokia should seek licence fees from Daimler’s suppliers rather than Daimler itself (see here). Continental has also pursued litigation against Avanci in the USA on similar grounds. (Nokia’s response to the complaints was to issue 10 patent infringement claims against Daimler in various courts in Germany in April 2019, as noted above.) Meanwhile, according to reports, Huawei has launched antitrust litigation against Nokia in Germany requiring it to make it a FRAND licence offer which would cover its cellular connectivity modules.
These complaints place the Commission in a difficult position. In its SEP Communication it avoided taking a position on whether FRAND requires SEP holders to offer licences to any company that asks for one. Daimler and Continental are now forcing the issue, and although the Commission’s inquiry was paused in early 2020 to enable mediation to take place (at Nokia’s proposal and encouraged by the Commission), after the mediation broke down in March 2020 the Commission resumed its inquiry, issuing RFIs to the involved parties (see here).
Reports from late 2019 indicated that Nokia had made an offer to license Tier 1 suppliers on what it says are FRAND terms (see here, subscription required). If Nokia has softened its stance and conceded that Daimler will not require a licence if its Tier 1 suppliers are licensed, then it may be that there is no longer any issue of principle between the parties for the Commission to grapple with. Instead, the debate could reduce to arguments over the amounts payable in any licence. However, it will be very interesting to see how the Commission’s investigation proceeds, as if it does take a decision on ‘licensing to all’, this would have a huge impact on the future of SEP licensing across many industries in Europe.