FRAND Licensing of SEPs in the age of connected cars

Cars are developing more and more into computerized mobile platforms. They relieve the driver of many tasks and provide enhanced functionality and convenience functions, like internet access, music streaming, and also security functions like traffic and road condition information. All these new functions require the car to be a part of the Internet of Things (IOT). This means being connected to the internet, OEM servers, surrounding automobiles and other road users. Such standard connectivity is nothing new per se, and has been part of everyday life for a long time now. But the automobile industry only recently started to feel that there are players in the connectivity world that do not behave as was common in the automotive industry, when it comes to protecting their technology.

Interoperability of communication devices requires that all communication partners use the same standard for communicating. These standards are devised by standard setting bodies, like ETSI (the European Telecommunications Standards Institute), that define the technology and agree on the specifics of such a standard. Companies involved regularly protect their contribution to the standard by applying for patent protection, eventually obtaining a patent covering a certain aspect of the standardized technology, a so-called Standard Essential Patent (SEP). These patents are essential to the extent that an implementer cannot provide the functionality that the standard promises without infringing the SEP. Since every market player that wants to implement the standard has to license the patent, the concept of FRAND patent licensing for SEPs has developed.  FRAND is the acronym for Fair, Reasonable And Non-Discriminatory, meaning that every party seeking a license has to be granted one at comparable terms.

However, since there is no legally binding definition for FRAND, every company involved has a (more or less) diverging view of what actually is FRAND. The European Union Commission has provided its view on what constitutes FRAND in the past and a new communication giving guidance on that topic is expected shortly. Two groups of companies have recently formed, issuing official guidelines on what they consider FRAND.

On the one side is IP Europe, most noteworthy due to its corporate members Nokia and Ericsson, as well as a growing number of SMEs. On the other side is the Fair Standards Alliance with high-calibre members from the automotive industry like BMW, Daimler, Honda, Ford, Tesla, Toyota and VW, but also mobile device companies like Apple, mobile communication providers like Telekom and various Tier 1 suppliers.

Both groups outline a set of principles that define the cornerstones of their view on FRAND.

IP Europe (IPE) core principles:

  1. SEP patent owners should allow access to that patented technology for implementing and using the standard.
  2. Both the SEP owner and a potential licensee should act in good faith and work on the agreement in a timely and efficient manner.
  3. Both parties shall produce information that is reasonably necessary to conclude the license.
  4. The compensation should be based on the value of the patented standardised technology to its users.
  5. An SEP owner should not discriminate between similarly situated competitors.
  6. If a FRAND licence agreement cannot be concluded within a reasonable timeframe the parties involved should seek to agree either by court proceedings or through binding arbitration.

Fair Standards Alliance (FSA) principles:

  1. A FRAND SEP holder must not threaten, seek or enforce an injunction except in exceptional circumstances […]. Parties should seek to negotiate FRAND terms without any unfair “hold up” leverage associated with injunctions or other de facto market exclusion processes.
  2. A FRAND license should be made available to anybody that wants a license to implement the relevant standard.
  3. SEPs should be valued based on their own technical merits and scope, not based on downstream values or uses. In many cases this will involve focusing on the smallest component that directly or indirectly infringes the SEP, not the end product incorporating additional technologies.
  4. No party should withhold a FRAND license to patents that are agreed to be essential based on disagreements regarding other patents within a portfolio.
  5. Neither party to a FRAND negotiation should seek to force the other party into overbroad secrecy arrangements.
  6. FRAND obligations shall remain undisturbed despite patent transfers.

At first glance, both sets of principles aim in the same direction, however, Fair Standards Alliance’s principles clearly show the handprint of OEMs/implementers, while IP Europe’s principles show the handprint of patent owners.

Most noteworthy, and the source of much recent conflict, is the differing view on who should actually (be allowed to) take a license and what the value base should be for determining the appropriate FRAND license rate. A lot of patent owners and patent pools, e.g. Avanci, a patent pool specifically licensing connectivity for IoE and connected car applications, consider the end product sold to the consumer to be the right base. In the context of a connected car, this would mean that the license rate would be based on the value of the car sold. Major brand OEMs do not agree with this view. They consider that most of the value of a car is generated by them internally and not by the incorporation of a piece of SEP protected hardware, like a baseband chip or a communications module in an AV or navigation unit, and consequently the sales price of a car is not the right basis to which a license rate is applied. One can easily imagine that a certain percentage of a car price is significantly higher than the price of an on-board navigation unit, or even the chipset used within.

Avanci is easing this point of conflict by offering a flat-fee pricing per vehicle that is not related to the actual sales price. Whether the Avanci license rate actually is FRAND has not been tested however. Also, while a certain flat fee pricing in the context of a premium vehicle might be fair and reasonable, it raises some concerns in a volume model environment with a significantly different profitability structure.

The second issue of who should take a license seems easier at first but has serious conflict potential in an OEM environment. Historically, OEMs expected their suppliers to take care of IP issues, and only intervened as a last resort when absolutely necessary. IP Litigation between OEMs were rare to non-existent. Now, they are directly involved, forcefully, and simply don’t like the situation. Daimler for example has not yet taken an Avanci license, much for the reason that it expects its suppliers to take a license, and is now confronted with a series of law suits by Avanci licensor Nokia.

A solution to this predicament was presented by Dr. Thomas Kühnen, Presiding Judge of the Higher Regional court of Düsseldorf, and one of the most prolific patent judges in Europe, during a recent SEP strategy conference in Brussels that I attended, According to Judge Kühnen, a FRAND commitment puts an SEP holder under the obligation to license to every party that requests a licence, with the usual effect of exhaustion of the patent right along the value chain. As this could potentially lead to the situation that an SEP owner loses out on proceeds further down the value chain, it is only just, contrary to normal licensing negotiations, where a licensor can freely choose to whom a license is granted, to base the license fee of an SEP on the economic value of the invention as expressed in the sales proceeds of the consumer goods that uses the SEP at the end of the value chain.

This view, if instated, would definitely pose new challenges for tracking licenses along the value chain, in order to determine and prove with reasonable certainty that a license had been taken upstream. In any case, it represents a new approach to the FRAND issue, possibly resulting in a new definition to the concept of fair and non-discriminatory. One obstacle remains however, which is to make every party involved agree on the appropriate point in the value chain as the basis for the value from which a license fee is determined. In the end, it is about nothing more or less than finding the right definition of "reasonable".