Patents and standards in the auto industry
The increasing integration of information and communication technologies in vehicles is creating new challenges for licensing patents in general and for negotiating royalty payments for standard-essential patents in particular
Most market experts predict dramatic changes in the auto industry as a result of shifting consumer preferences, new business models and industry players and emerging markets. The sector also looks set to be heavily affected by new sustainability and environmental policy changes, as well as by upcoming regulations on security issues. These forces are predicted to give rise to disruptive technology trends, such as driverless vehicles, electrification and interconnectivity.
Forecast studies posit that the smart car of the near future will be constantly exchanging information with its environment. Car-to-X or car-to-car communication systems will enable communication between cars, roadsides and infrastructure; while mechanical elements will soon be embedded into computing systems within the internet infrastructure (Figure 1). The future auto industry could be one of the first sectors to rely on Internet of Things (IoT) technologies, which connect devices, machines, buildings and other items with electronics, software or sensors.
Interconnectivity across multiple devices and units relies on the specification of technology standards. These establish a common language for technologies, ensuring compatibility and cross-functionality of complex technology systems. Standards often frame innovative technologies (eg, Universal Mobile Telecommunications System (UMTS), Long-Term Evolution (LTE), WiFi, Advanced Video Coding (AVC), Digital Video Broadcasting (DVB) and Near Field Communication (NFC)), and are subject to an increasing number of standard-essential patents (SEPs). The integration of highly patented standardised technologies creates economic risks for vehicle manufacturers. Royalty rates – for example, for SEPs in cellular communications standards such as Global System for Mobile Communications (GSM), UMTS and LTE – can easily mount up to hundreds of millions of dollars a year. Such standards will also be essential for any application whereby vehicles communicate with their environment.
ICT versus auto industry
Standard setting in the auto industry is mostly associated with either setting de facto standards within the manufacturers’ production lines or ratifying safety standards set by legislation. However, in the information and communication technology (ICT) sector, standard setting goes beyond the specification of compatibility standards and can be described as the joint development of sophisticated technologies. Companies meet in standard-setting working groups and present their innovative technology proposals for selection and incorporation in highly complex standardised systems. While at present most of these technologies are limited to use in devices such as smartphones, tablets and notebooks, they could soon be integrated into buildings, infrastructure and vehicles.
Not only do development and use of standards differ between the auto and ICT industries; so too do the patent licensing mechanisms. Patents in the automotive industry are usually licensed on vertical levels. A Tier 1 manufacturer would not usually request licensing fees from an original equipment manufacturer (OEM), but would rather incorporate these costs into its component prices. This allows suppliers to ensure that their components are free of third-party rights. When it comes to licence negotiations, royalties are mostly based on a single part improved by an invention – licensing costs have thus had only a marginal influence on vehicle prices so far. The licensing of patents in the ICT industry, by contrast, focuses on the device and thus targets OEMs, with royalties based on the average selling price of a device. Consequently, royalties are much higher by comparison, especially for manufacturers which do not own a patent portfolio to cross-license.
Bylaws of standard-setting organisations, such as the European Telecommunications Standards Institute’s (ETSI) IP policy, do not explicitly set out how royalty rates for SEPs should be calculated. However, royalty expectations between SEP holders from the ICT industry and the car manufacturing industry sometimes diverge drastically. While double-digit royalty rates based on whole product market sales are common in the ICT industry, they would be inconceivable in the auto industry, where marginal profits are comparably low. However, going forward, licensing calculations based on modules instead of whole components or products could lead to steep costs for vehicle manufacturers, since vehicles often integrate multiple modules, which could lead to royalties having to be paid several times over. There are fears that such a licensing model would not be economically feasible for car manufacturers.
Many SEP owners are used to arguing that the value of a standard should be based on the use of a particular product. At present, automotive connectivity is mostly used only in exceptional cases, such as emergency calls, which are sometimes even enforced by regulatory actions (eg, eCall). In the course of licensing negotiations for SEPs, it is thus frequently argued that royalty rates should be based on the smallest saleable patent-practising unit – mostly referred to as the baseband chip. However, this ignores the incremental value of a device’s interconnectivity. While this is especially high for smartphones, when it comes to cars, the situation is not so clear-cut.
Right now, connectivity functionalities such as LTE and WiFi do not significantly influence buying decisions for a new car. However, this could well change if such standardised technologies introduce new smart and connected services (eg, traffic light recognition, accident prevention or driverless vehicles) (Figure 2).
This prospect is already sparking interest among SEP owners with regard to asserting their SEPs against auto manufacturers, as companies from the telecommunications industry watch to see what happens next.
While the European Court of Justice (ECJ) and the US Department of Justice (DoJ) have set clear rules for SEP licensing and the use of injunctive relief, there are no concrete guidelines on how to calculate fair, reasonable and non-discriminatory (FRAND) licensing terms for SEPs. The interpretation of existing case law differs radically between jurisdictions ‒ meaning that while injunctive relief is out of the question in some countries, it is entirely possible in others, such as Germany, where infringing manufacturers are often obliged to provide appropriate security payments even before the initiation of court proceedings. This has created legal uncertainty and unpredictable costs for many car manufacturers.
Auto industry gears up
As a consequence, several car manufacturers and SEP owners have launched initiatives to fight back against aggressive patent owners which try to assert excessive royalties.
One of these is the Fair Standards Alliance (FSA), which was launched in November 2015 based in Europe, and according to its position paper, seeks to promote the licensing of SEPs on FRAND terms. The FSA claims that innovative industries are threatened by unfair and unreasonable SEP licensing practices, which can create barriers to market entry and thus cut the potential for economic growth across important sectors. Its members include Volkswagen, Daimler, BMW, Google, AirTies, Cisco, Dell, Fairphone, HP, Intel, ip.acess, Juniper Networks, Lenovo, Micromax, peiker acustic, Sierra Wireless, Telit and u-blox, among others.
Another initiative is the Europe-based CAR 2 CAR Communication Consortium, the main purpose of which is to agree on the harmonised implementation and deployment of a cooperative intelligent transport system (ITS) in Europe. The consortium achieved a royalty-free frequency band in the 5.9 gigahertz range for safety-related services aligned with a similar spectrum allocation in the United States, Canada, Mexico and Australia. It encourages cooperation between vehicle manufacturers, infrastructure providers and telecoms operators. Its members include car manufacturers such as Volkswagen, Daimler, BMW, Audi, Toyota, Honda and Renault; automotive suppliers such as Delphi, Denso, Continental, Valeo, Kapsch and Bosch; and suppliers from the telecommunications sector such as Qualcomm, LG and Huawei.
A third consortium is the Car Connectivity Consortium, which is developing an open standard for smartphone-centric car connectivity solutions called MirrorLink. Members include car manufacturers such as Chevrolet, Volkswagen, Honda and Toyota, as well as cellular communication manufacturers such as Samsung, Sony and HTC.
Further, a new patent pool – Avanci – has been formed. The joint licensing initiative has already attracted large SEP owners from the cellular communication industry, such as Ericsson, Qualcomm, InterDigital, KPN, Sony and ZTE, and has as its goal the creation of a single agreement for licensors and licensees. As a result, instead of approaching each technology owner to request, negotiate and pay for a licence, manufacturers should soon be able to rely on a single marketplace to license-in connectivity technologies. This one-stop shop principle does not yet cover 100% of all SEPs (eg, LTE is not included) and it remains to be seen whether such coverage will ever materialise. However, a SEP patent pool could still increase transparency with regard to ownership distributions, while unit prices of the Avanci patent pool could potentially be quoted as a reference in SEP negotiations. In this regard, patent pools may play an important role when it comes to solving the multiple or double marginalisation problem, which could reduce overall SEP royalty rates. ‘Multiple marginalisation’ describes a situation where patent ownership is not transparent and licensors may overestimate the share and value of their SEP portfolio. A cumulative licence from multiple SEP owners may consequently go beyond what is economically optimal and feasible in the market. A patent pool that, for instance, covers about 60% of all LTE SEPs and sets certain unit prices will help to create transparency in that regard, even though SEPs outside the pool may still be licensed for higher prices.
In order to better understand the volume of declared SEPs which may soon become relevant to the auto industry – as illustrated in Figure 2 – we have run several search queries using the IPlytics Platform tool. These focused on a particular standard project or standard specification number and took into account only granted and active patents. To identify GSM, UMTS and LTE declared SEPs, we made use of specific technical specification lists to get a more accurate picture of the overall numbers of declared SEPs. However, the empirical investigation made no attempt to verify the accuracy of the declaration in a legal sense – a declaration that a patent is essential is based on the assessment of the declaring rights holders only. Figure 3 shows all declared SEPs for the three generations of the cellular telecommunications standards GSM, UMTS and LTE which are still active and have been granted. The numbers show the immense volume of declared SEPs. Owning large portfolios of declared SEPs can be extremely lucrative – not only in terms of royalty income, but also in terms of having strong bargaining power in cross-licensing negotiations. Car manufacturers own no SEPs for cellular telecommunications standards and are thus in a weak position when it comes to negotiating royalties.
Figure 4 shows the number of declared active and granted SEPs for other technology standards, which will likely become relevant for the connectivity of vehicles – as illustrated in Figure 2. Among the largest standard projects subject to declared SEPs are:
- video coding technologies, such as AVC and High-Efficiency Video Coding (HEVC);
- broadcasting standards, such as DVB, DVB-Terrestrial and DVB-Second-Generation Terrestrial; and
- wireless technology standards, such as WiFi (802.11a/b/g/n), Worldwide Interoperability for Microwave Access (802.16), HaLow (802.11ah), Wireless Access in Vehicular Environments (WAVE) (802.11p) and Dedicated Short-Range Communications (DSRC) (IEEE 1609).
The wireless standards HaLow, WAVE and DSRC are new, making it likely that the number of associated SEPs will increase in the coming years.
The numbers shown in Figure 4 represent specific SEP declarations only. Especially in the case of standards issued by the Institute of Electrical and Electronic Engineers (IEEE), SEPs are often declared as so-called blanket declarations, where patent owners do not reveal the identity of the patents. In this regard, a US court has accepted testimony that there are possibly thousands of patents (approximately 3,000) essential to the 802.11 family of standards, even though this number is not reflected in the SEP declaration data of IEEE. This example shows that the actual number of, for instance, WiFi-related SEPs is likely much larger, as reported in Figure 4. The lack of transparency of declared SEPs increases the legal uncertainty facing car manufacturers, making it extremely difficult to estimate the actual number of overall SEPs which claim an invention for a technology standard integrated in a car.
Relevant standards for connected cars
Future technologies will allow machines or cars to exchange information, directly integrating the physical world into computer-based systems. Interconnectivity of these different systems and communication across multiple devices rely on the common specification of standards. Thus, standardisation also needs to keep up with the technological pace. As a consequence, new working groups are being formed to deal with the standardisation of the latest technological achievements. Again, we ran keyword queries in the IPlytics Platform database to identify standard organisations and working groups that publish connected car-related technology standards. Figures 5 to 7 illustrate the main working groups active for DSRC, ITS and WAVE.
Figure 5 illustrates that the Society of Automotive Engineers (SAE) – a US-based, globally active standards association – has released most standards documents for DSRC, followed by several working groups at ETSI, the American Section of the International Association for Testing Materials (ASTM), IEEE, the International Telecommunications Union (ITU), the European Committee for Standardisation (CEN) and the International Organisation for Standardisation. In total, about 36 standards documents have been officially released by these organisations.
By way of comparison, Figure 6 shows that with regard to ITS, over 600 standards documents have been published, with the most active organisations being working groups at ETSI, CEN, IEEE, ITU-R and ASTM. Of these documents, 90% have been published over the past three years.
Figure 7 represents the working groups which have published standards for WAVE. This technology – which is mostly represented by the IEEE 802.11p standard – is so far being developed by IEEE and its partner organisations, including the American National Standards Institute (ANSI) and the SAE.
Due to considerable differences in the IP policies of different standards organisations, the forum in which technologies are standardised is crucial. Standard-setting organisations set rules on how to declare SEPs and establish guidelines for how their members should license and enforce these. IEEE has just recently changed its IP policy ‒ a process which has been subject to lively debate among policy makers, industry experts and decision makers in standard-setting companies. Under the new policy:
- patent owners must submit a letter of assurance waiving their right to seek an injunction against an infringer;
- SEP owners may seek injunctions only after having litigated through the appeals stage;
- SEP holders are precluded from so-called ‘reciprocal access’ to non-SEP patents held by implementers; and
- royalty negotiations must be based on the smallest saleable compliant implementation which practises the essential patent claim.
Some companies active at IEEE believe that the new policy weakens their position when it comes to seeking royalty payments: policy debates frequently get caught up in discussions of so-called ‘hold-up’ and ‘hold-out’ situations. ‘Patent hold-up’ refers to situations where the owner of an SEP requires the payment of more than FRAND royalties from implementers of a standard (eg, when a patent owner sues a company after it has implemented a technology and it is too late to interrupt the technology development process). ‘Patent hold-out’ is when implementing companies ignore royalty demands from SEP owners, thus escaping or delaying reasonable payments to the patent holder. IP policies of standard-setting organisations may influence such situations and may thus alter the bargaining power in licensing negotiations, as well as options for enforcing royalty payments.
Main patent owners for connected cars standards
In order to get a better understanding of current market participants which develop technologies around newly standardised technologies important to the auto industry, we conducted another search using the IPlytics Platform tool for patents which reference a specific standards document number (eg, IEEE 802.11p) in the patent document. Figure 8 shows the top 15 patent owners and portfolios which reference the IEEE 802.11p standard. The most significant include car suppliers such as Continental and Kapsch; car manufacturers such as General Motors, Volkswagen and BMW; and component manufacturers such as NXP, Broadcom and Siemens. The number of cellular telecommunications manufacturers (eg, Qualcomm or LG) is lower than might be expected when compared to Figure 9.
Figure 9 shows the top 15 patent owners which reference IEEE 802.11ah in their patent portfolio. The most significant include Qualcomm, LG, Marvell and InterDigital. In comparison to the IEEE 802.11p related patents, all patent owners for IEEE 802.11ah are from the ICT industry.
The IEEE 802.11ah standard offers longer ranges and lower power usage. The HaLow standard extends into the 900 megahertz band and was originally designed for wearables and low-power sensors. This is nearly twice the range of the well-established WiFi standard and is more robust in challenging environments (eg, streets, roadsides, buildings and walls). Also, IEEE 802.11p was designed to meet many car-to-X application requirements, with the most stringent performance specifications, but for shorter distances. Therefore, the use case for these two standards may differ when it comes to application.
The analysis in Figures 8 and 9 hints at a changing landscape of technology providers where the auto industry overlaps with the ICT world. Car manufacturers and car suppliers must not only monitor, but also engage in developing new inventions in the connected car space in order to maintain their competitive position.
Similar to the mobile phone industry ‒ where we observed a transition from feature phones to smartphones, and where new business models, platforms and market participants changed the way that profits were distributed among companies ‒ we will most likely soon observe shifts and profit redistributions within the auto industry. The current trajectory points towards ever-greater connectivity, from currently used internet-based infotainment systems to more advanced driver assistance systems to fully driverless technologies. Connectivity in cars has the potential to fundamentally change the automotive value chain.
In order to cope with these challenges, vehicle manufacturers need to face the complex licensing world of the ICT industry and ensure that they have the right IP strategy in place. This includes more comprehensive monitoring of IP activities beyond the known environment of competitors and suppliers in the auto industry. The IP analysis of car manufacturers should also consider an understanding of ICT standardisation activities. Standards which are developed and set today may well become the fundamental technology platform for emerging technologies and applications in the future.
Meanwhile, the telecommunications industry needs to recognise that it may be unable to impose its practices with regard to royalty calculations onto the auto industry. Instead, it needs to better understand the value chain of car manufacturers. In this regard, all market players must establish economically feasible mechanisms to cope with the shared use of intellectual property in order to create incentives for innovation and ensure a level playing field which allows new businesses and models to enter the market.
The licensing of SEPs looks set to become a major issue for the whole auto industry. Senior managers and directors of car manufacturers and car suppliers should bear in mind some key considerations:
- Future technologies that enable connectivity will increasingly rely on patented technology standards such as LTE, WiFi and HEVC.
- The number of declared SEPs is constantly rising – IP directors should consider royalty costs and appropriate security payments in advance.
- IP directors should not only consider information retrieved from patent filing data, but also monitor standardisation activities and declarations of SEPs – analysing the interplay of patents and standards could help to quantify the IP risk potential.
- Senior managers should bear in mind the dynamic market of SEPs, where patent assertion entities often acquire SEP portfolios to assert extensive royalty payments.
- Car manufacturers should pursue a common strategy for patenting and standardisation to ensure that they are fully engaged in developing future connectivity technologies.