Cars or Car-tels?

In high tech, famous OEMs have a long history of playing fast and loose with the antitrust laws while complaining about SEP owners’ alleged antitrust abuse. The trend has expanded to include Amazon, Uber and others with regulators appearing to be at a loss of what to do. One interesting aspect of the debate is how stale it has become; there really aren’t many new arguments being made that were not first presented over ten years ago.

Given Big Tech’s ability to bend regulators to their will, it is no surprise that companies feel that there are no limits to anything so long as they get more. Now in the automotive sector, an industry similarly has been at the center of many antitrust issues over the years and whose business model is premised on squeezing suppliers to ever tighter margins while OEMs pocket huge markups, it is perhaps  no surprise that at a recent webinar organized by the European Commission, Uwe Wiesner, head of intellectual property at Volkswagen, one of the “Circle of Five,” proposed monopsony as a way to cut their patent royalty “burdens.” This is despite the fact that the Avanci patent platform offers a license to the 2G, 3G, and 4G SEPs owned by 41 patent owners (including Qualcomm) for a low one-time payment of just $15 per 4G connected vehicle. The “burden” of an Avanci license is in reality a bargain – a review of the value of connectivity in the automotive sector from 2019 estimated an average revenue forecast of about $593 worldwide per vehicle for the OEMs.

Yet, despite this bargain, from (p53-64) Mr. Wiesner offers only the typical implementer obfuscation.  As can be expected, he trots out the usual SSPPU and component level licensing smoke and mirrors.  And then he goes further. Mr. Wiesner argues that the TCU is just like the circuit card that controls fuel injection; claiming there is no difference between the two.  This latest twist on the SSPPU sophistry ignores the fact that the latter circuit cards do not connect with anything outside the car, they only connect with internal components like fuel injection, braking, and air bags.  The TCU, on the other hand, is what enables the vehicle to interact with the external mobile network and earn the car company the revenue discussed in the preceding paragraph.

As well as speaking as if wireless SEPs read only on the baseband processor (they do not), Mr. Wiesner complains that a fixed per vehicle royalty is unfair because premium cars are charged the same as lower end cars and large companies the same as small. But this comparison is false – the patents read on communication functionality not the overall quality of the car. For this complaint to even make sense, one would have to argue that there is a material and qualitative difference in the fundamental connectivity technology underlying premium versus mass market connected cars and large companies’ connected cars versus small company connected cars. This complex and nuanced point is not mentioned.

There is a fair point to be made (that was not made), which is that the value of an SEP license for $80,000 Tesla Model S with self-driving capability and full-blown navigation and infotainment systems is perhaps not the same value enjoyed all vehicles with 4G connectivity. But as observers of SEP licensing know all too well, the non-discrimination part of FRAND in the hands of implementers is a race to the bottom. The standard implementer argument always boils down to: the lowest royalty rate achieved by any licensee from an SEP licensor must always control. The circumstances under which any particular license was negotiated in this view are irrelevant. Whether an SEP license was negotiated after six months of litigation or imposed by the court after years, upon years of fruitless negotiation and litigation, it does not matter. Non-discrimination always drives the rate lower. Accordingly, demands from implementers that SEP owners adjust their rates by licensee is really code to initiate a race to the bottom, free-for-all.

At this point in his presentation, Mr. Wiesner is following the standard implementer script. But an interesting “tell” as to the Circle of Five position emerges when he conflates the legal situation of wireless SEPs with SEPs for other technologies and with all other royalties and imply that there should be a single royalty cap for all IP. For better or worse, courts have adopted a maximum cumulative royalty approach to wireless SEPs based on a number of, mostly ambiguous, press statements from ten-plus years ago. There are no analogous rulings for other technical standards relevant to connected cars, let alone for non-standardized IP, so why does the automobile industry merit a single aggregate royalty cap? To understand where the Circle of Five is really coming from, it makes sense to quote from the middle of Mr. Wiesner’s talk. It probably passed over its audience as filler, but when you think about it really is the height of chutzpah.

“What we need in automotive is legal certainty at the earliest possible moment and that is something we have also to consider. We have different legal aspects, and we need clarification of this at a very early stage. We have purchase contracts, we have all these regulation things with the national authorities and we have also the IP aspects and all those things should be done because of our vulnerable business model at a very, very early stage.”

(emphasis added).

Since when has the automobile industry become “vulnerable”? It has been one of the global growth engines for over a hundred years. What this means is that VW and some other car manufacturers are feeling economic pressure and want special protection. This pressure has nothing to do with IP and everything to do with the rise of electric cars; increased environmental regulation; changing generational tastes in car ownership; global trade and political issues; and frankly, poor business judgment by the automobile industry. Such a demand is a shocking in the extreme. But then again, the auto sector has long been used to getting their way with governments.

The most shameless demand was at the end of the presentation: a licensees’ cartel that will negotiate on behalf of the auto industry. Here he states (p8):

“So, we think this licensing negotiation group should consist of automobile manufacturers and component suppliers. What we also think is that this licensing negotiation group needs a neutral representative. Neutral means that it is neutral to the participants of the licensing negotiation group, but not neutral to the licensors, because they should do the best on behalf of the members of the licensing negotiation group in the negotiations with the licensors. So, what we also are thinking at the moment is that the appointment of such a neutral representative should be done by an agency which is configured as a non-profit entity and the representative is operating on a day-to-day basis and what we also see is that the members should be free to negotiate with the pools independently, that was also an aspect which some speakers had mentioned before.”

If this monopsonistic approach to SEP licensing were legal (something that is not in the least bit clear) and being proposed in good faith, it might work. Indeed, many of the arguments used to justify hold-out if made in good faith, might work.  But as I have argued time and again, these arguments are almost always designed to scuttle licensing programs, not lead to more fair outcomes.  Indeed, an important “tell” that these arguments are simply the hold-out flavor of the day, can be seen when  Mr. Wiesner claims to be “one of the fathers of Avanci” (p6). One must wonder, why he did not try to engage with Avanci to give his inputs? The answer to us, having become quite cynical about implementer skullduggery, is obvious. The licensee pool has no obligation on its members to take any license negotiated. They can simply try their luck separately. Yet, when they do so, it seems clear that if, having tried separately to get a “better deal” they can still always take the licensee pool’s license. So, what is the point? Very simply, the licensee pool envisioned is just another implementer attempt to create an SEP licensing free-for-all where licensees have multiple attempts over the course of many, many years to try to achieve a license, and will always have licensee’s pool “Get out of jail” card to avoid any possible business disruptions.  In other words, more hold-out.