The auto sector has seen a sustained increase in IP activity in recent years. Here, experts from private practice share their thoughts on some of the patent forces shaping the industry
In IP terms there are few sectors right now that are as hot as the auto industry. Ongoing innovation from original equipment manufacturers (OEMs) and suppliers, together with the threat posed by new entrants and technological progress across a range of areas (eg, autonomous driving and electric vehicles), has led to many of the leading players expanding their patent portfolios and taking a more sophisticated approach to IP protection. But in an age of convergence there is also plenty of potential for friction in a sector that historically has been relatively light on litigation.
Against this backdrop, IAM invited leading voices from private practice to share their insights on the major IP trends that are reshaping an industry on the cusp of a new era of mobility. Supplying their expertise are Matthew Schmidt and William Kolakowski from Reising Ethington PC and Grünecker patent attorney Jens Koch.
Q: Tell us about your practice and your experience in the auto sector.
Jens Koch (JK): Grünecker was founded in 1924 in Munich as a patent law firm specialising in mechanical engineering. In the 1960s the firm expanded into the US and the Japanese markets. Since then the firm has steadily grown to its current size of roughly 500 members, including partners and staff. The firm’s main location is Munich, with branch offices in Paris, Berlin and Cologne. The firm has experts in all fields of technology and provides full service in all areas of intellectual property, including trademarks, litigation and licensing. As a result of having successfully represented OEMs and suppliers for decades in prosecution as well as litigation throughout Europe, the firm has extensive expertise in the automotive industry. It also has vast experience in the telecoms and electrical industry, which allows us to handle for our clients the change towards connected, shared, autonomous and electrified technology (commonly referred to as CASE).
William Kolakowski (WK): Reising Ethington PC began in 1865 as the first IP firm in Michigan. The firm served clients during the advent of the Detroit automotive industry and the rise of mass production, working with numerous historical figures in the industry, including Ransom E Olds (namesake of the Oldsmobile brand) and David D Buick (founder of the Buick Motor Company). Since its founding, the firm has continuously represented companies and individuals in all fields of the automotive industry, including both US and foreign OEMs, and suppliers at every level of the automotive supply chain.
The firm includes recognised leaders in every IP discipline and in every scientific background relevant to the automotive industry. Many of our past and present attorneys have held in-house positions with OEMs and suppliers as well. We can service every client need relating to innovations – from evaluating the protectability or risks of development and use to obtaining cost-effective and broad protection, and enforcing IP rights against infringers. With regard to the latter, the firm has significant experience and has enjoyed substantial success in litigation before the US federal and state courts, the International Trade Commission and the USPTO’s PTAB.
Q: What are some of the key technological changes currently shaping the auto industry?
WK: The most significant technological changes are the ongoing electrification of vehicle systems and the movement towards advanced driver assistance and even autonomous systems. Inventors are racing to develop more efficient batteries and refine the impact of interacting systems and novel control strategies. Similarly, attempts by non-traditional entities to enter the vehicle market with autonomous vehicles are helping to drive advances by OEMs and suppliers in assisted driving, autonomous driving and safety systems. Although less frequently publicised, material composition innovations have significantly affected vehicle design and safety systems. Finally, the interaction between the vehicle, passengers in the vehicle and people and structures outside of the vehicle are guiding advancements in vehicle and road safety systems, information delivery (including in-vehicle entertainment) and data mining.
JK: The sector is currently shifting towards electrical and software-related technologies and away from conventional combustion engines. The key areas now are electric mobility, including batteries, autonomous driving, connectivity and hydrogene technologies, including fuel cells.
Q: How have you seen IP strategies evolve among OEMs and suppliers?
WK: Among OEMs, strategies are shifting towards pursuing patents in areas of rapidly evolving technologies, including electric power systems, advanced driver assistance systems, vehicle safety systems and human-machine interfaces within the vehicle. Clients are increasingly emphasising control strategies for vehicle systems resulting in more claims directed to software and signal processing elements of innovations. Although suppliers continue to develop traditional mechanical systems, they are moving in the same direction as OEMs to capture the integration and inter-operation of those mechanical systems with other vehicle systems. Both OEMs and suppliers continue to strive to protect innovations cost-effectively in a global market – often by limiting pursuit of patent protection to key markets within a geographic region (eg, only Germany in Europe or only the United States in North America). Despite these limits, there are ever-increasing efforts to pursue broad protection in Asia – particularly in China and India – in addition to traditional automotive filing destinations such as Japan and South Korea. Finally, although suppliers continue to strongly guard innovations from competitive suppliers, OEMs are showing greater openness to open source developments and licensing of innovations in an attempt to both spur development and limit litigation.
JK: The new technologies require new expertise, which is seldom part of the conventional automotive technology. The industry tries to integrate this new expertise by forming new development partnerships – for instance, battery technology for electric vehicles has to be brought in from outside partners. As such, batteries are essential for the vehicle’s performance and form a significant part of its value, meaning that there is understandable interest on the part of the vehicle manufacturer in participating in the value generated by the battery. New technologies are also leading to more cooperation between vehicle manufacturers and suppliers in order to generate universal standards with regard to the exchange of data or compatibility with infrastructure such as charging stations. Further, new OEMs appearing on the market and disruptive technologies continue to challenge all market participants, terminating some relations and creating new ones.
Q: Many of the largest OEMs and suppliers have significantly grown their patent portfolios in recent years. To what extent does that represent a surge in innovation in the sector?
JK: Both OEMs and suppliers have had to be innovative in order to survive in this highly competitive industry. Several technologies are currently competing, including battery-driven electrical vehicles, fuel-cell vehicles and combustion engines. At present, battery-driven electrical vehicles have the largest share of vehicles that are intended to replace combustion engines. However, the energy balance of these, as well as environmental concerns about electrical vehicles, is stimulating research into other technologies (eg, fuel cells). The race for a new environmentally friendly technology thus remains open and the industry needs to carry out research in different technical areas in parallel, in order to avoid investing in the wrong technology.
WK: The growth of patent portfolios has primarily been driven by the increased amount and pace of innovation. Technological changes (eg, vehicle electrification, the embrace of advanced driver assistance systems and autonomous vehicles, improvements in vehicle safety systems and increased use of human-machine interfaces) have profoundly changed vehicle operation, the interactions of individual vehicle systems and passenger interactions with the vehicle. These transformations have in turn spurred a significant increase in the amount and pace of innovation. To a much lesser extent, the growth of patent portfolios is driven by the fear that existing competitors and potential new entrants may develop their own technology and disrupt the industry. In particular, both OEMs and suppliers are attempting to position themselves defensively to establish mutually assured destruction as a deterrent to patent litigation and to support cross-licensing arrangements (similar to those in the semi-conductor industry) and, in a worst-case scenario, to increase real and perceived value in potential mergers and acquisitions.
Q: While NPE litigation in the auto space is relatively rare compared with some other sectors, there are signs that it is on the rise. What steps can companies in the industry take to reduce their exposure to patent litigation risk?
Matthew Schmidt (MS): Today, few NPEs are independent inventors who feel wronged by a lack of attribution and remuneration from their life’s work; instead, they are increasingly sophisticated companies funded for the purpose of acquiring and asserting large patent portfolios. With sufficient resources to participate in and survive the rigours of USPTO inter partes reviews and other costly patent challenges, NPEs are at the forefront of litigation in the automotive industry, even if NPE litigation is less common here than in some other sectors.
To reduce their exposure, automotive companies should focus on early case assessment and identify all options for response. Careful review of defences and risk is essential, but often ignored until a lawsuit is well under way. By then it often is much more difficult to manoeuvre and some options may be lost. Instead of surface reviews and bluffs to stop NPE threats, a careful review can identify prior art that exposes the NPE’s portfolio to risk of significant loss such that the NPE would rather not continue the fight or do so elsewhere. Early work and assessment also facilitates offensive manoeuvres such as inter partes reviews and expedited discovery and key motions in litigation. This flips control away from the plaintiff, and being ready to do so early in a case will result in a more favourable outcome. Early assessment is also invaluable to other decisions, such as case value/settlement and whether to form or join a joint defence group.
JK: NPE litigation appears to be a problem in technical areas, where the vehicle manufacturer or its supplier has no expertise. They need to acquire this expertise in order to be able to assess and judge the IP situation. By moving to new fields of technology (eg, telecom-related technologies), they naturally encounter the same problems as other companies that already work in these fields. Of course, they need to secure their position and reduce risks of liability by drafting proper agreements with their suppliers.
Q: Some OEMs (eg, Toyota) have opened up parts of their portfolios for royalty-free use. For other companies that might be considering this approach, what are some of the key issues to bear in mind?
JK: One key issue would be the creation of a market for a product that requires high initial investments. For example, Toyota was the first manufacturer to offer a fuel-cell car. However, there is not yet a significant infrastructure available to refuel such cars, and a very small number of such cars in the market does not justify massive investments in infrastructure. On the other hand, the absence of such infrastructure would prevent the sale of these cars. By drawing other competitors into the market, the number of cars in the market may increase, which may justify or allow the sharing of investments in the infrastructure. A further aspect is acceptance of a new technology in the market in order to disseminate it. If several manufacturers were to offer this technology, it would be easier for customers to perceive it as a serious new trend rather than an exotic concept. Finally, technological leadership can be established by sharing the technology in a selective manner. Even though a competitor may be able to enter the market with a functioning vehicle, it may be denied access to the latest developments by the patent owner. The selection process needs to be conducted thoroughly in order for companies to stay ahead of competition.
MS: If we consider ‘royalty’ more broadly than just payment of money, then these portfolio programmes are not free – that is, they are not without cost to those wishing to use the portfolios offered under such programmes. In that vein, some key issues to thoroughly vet before offering such a programme are how your company will fare with the increased competition that might result and what to expect or require in return for use of the portfolio without monetary payment in return. For example, limiting or preventing litigation by users against the donor company is a worthwhile goal, but practising entities do not sue each other nearly as often as NPEs sue practising entities. Therefore, a broader view becomes necessary to reap real value from these programmes. For example, Toyota may well seek royalty-free licences to any developments made by the licensee, thereby expanding the options available to it as a way to extract value from its portfolio via further market adoption and expansion greater than Toyota can achieve by itself.
Q: Convergence and some other technology trends are making the licensing landscape for OEMs and suppliers far more complex, particularly when it comes to SEPs. How can those companies effectively manage a growing range of licensing demands?
MS: Licences in the automotive industry are usually vertically oriented and often stop short of the OEMs that pay for technology by buying products, rather than paying licence fees. Licences in communication and tech industries, on the other hand, tend to be focused on end-user products and thus on OEMs. Resulting royalty payments can be much higher as a function of end-user device price and prevalence. Royalties based on end-user product prices are difficult for automotive vehicles that cost tens of thousands of dollars. Automotive suppliers such as Continental have sought SEP licences for their components, the sale price of which is a small portion of the price of the vehicles in which the components are installed. They would in turn sell such licensed components to OEMs, in line with traditional automotive licensing and component sales practices. SEP licences have resulted in much litigation and, unfortunately, more litigation is certain, as these issues are brought to the forefront by the continuing and growing convergence of automotive and tech industries.
Beyond negotiating licence structures, convergence forces companies to rely on more outside intellectual property from larger numbers of third parties. Managing the larger numbers of licences and parties requires establishing guiding principles in negotiating licences and methodologies (eg, design arounds and other sources) to address difficult or overly demanding licensors, as well as personnel to oversee and manage the growing number of licences and manage royalty payments and renewal terms in order to avoid potential breaches or loss of rights.
JK: Without creating their own expertise, it would be difficult to react as needed and to sustain in the market. Finding IP experts and training them in these new technological trends is mandatory. Since the challenges are becoming more complex, it will also be necessary to extend a company’s network of highly specialised, outside IP experts. At the beginning of new technological trends, patents tend to have a rather broad scope of protection and competitors may block each other. More cooperation – similar to the telecom industry applying the FRAND concept – and more cross-licensing is to be expected.
Q: What are your tips for a chief IP officer in the industry trying to continue to deliver significant value for the business with a reduced budget?
JK: This depends on many factors, including the size of the company, its position in the market and its technological expertise. There cannot be a universal answer. Nevertheless, the increasing complexity of technical solutions for future vehicles and the uncertainty about which technology will prevail in the future will inevitably require more cooperation with and among suppliers and OEMs. The enormous investments necessary will lead to a concentration of the number of OEMs by mergers or simply by bankruptcy. With regard to IP portfolios, the use of Patent Cooperation Treaty (PCT) applications helps to defer the large investments necessary for patent protection in multiple countries and allows applicants to observe whether the invention has any chance of success in the market. It also helps to determine whether nationalising or regionalising the PCT application would lead to useful patent protection. The increased use of the patent prosecution highway system can also lower the costs for parallel prosecution in multiple countries.
MS: Continual and focused portfolio assessment is mandatory to ensure that the portfolio best covers present and future interests. Licensing, selling or outright culling commercially relevant patents in a portfolio – whether outdated or not – is an important part of cost containment. The cost of obtaining and maintaining patents in several countries is high and, if left unchecked, can take away from current and future technology protection. In portfolio assessments, we often see a disconnect between legal and technical personnel when technical personnel assume that IP protection is far broader than it actually is. This leads to intellectual property being overvalued and a strong reluctance to reduce the budget for it. Engineering managers often think that a patent covers an entire product – or at least a significant portion of it (eg, the 40mm pump) – when it in fact covers a specific implementation of a component of the product (eg, the shape of the blades of the pump’s impeller). A further disconnect occurs when future production does not utilise the actual intellectual property obtained, as those who understand the IP coverage do not have full knowledge of the products to be made and those making the products do not understand the scope of the intellectual property. Focused communication of the IP scope is essential to avoid this disconnect and to greatly reduce the burden of the portfolio assessment.
Q: What might be some of the key IP trends affecting the auto industry in five years’ time? How might your practice evolve to reflect those changes?
MS: Some key IP trends will involve continued movement away from combustion engines to electric and fuel-cell vehicles; increasing use of assisted and autonomous driving, which will involve intra- and inter-vehicle communication and control technologies; and increased shared vehicle platforms, which will involve logistic and infrastructure improvements.
Our practice will focus not only on electrical initiatives, but also on software, chemical and communications initiatives that will become increasingly prevalent in the auto industry to ensure that we continue to align our service offerings with our clients’ current and future technology.
JK: I would expect significant progress regarding autonomous driving. Increasing environmental demands may phase out the combustion engine entirely, while a shared economy of vehicles might lead to new concepts and designs of cars, and new materials will influence the production, design and shape of cars. The industry may move from the mere production of cars to a transportation service provider with integrated services regarding the use, maintenance, operation and managing of cars. In our practice, we are currently detecting a shift in technology required by clients in the industry from predominantly mechanical technologies towards more electrical and software-related technologies. We are catering to this shift by training our existing attorneys and by employing young engineers and patent attorneys with the relevant expertise.