The Connected Cars Disconnect:

Avanci, Unwired Planet, and the Comparable License Problem

By Jonathan Stroud, Chief IP Counsel, Unified Patents

To the automotive industry—ever cautious about liability—connected cars create a conundrum.  Consumers expect eCall, 3G, 4G, and soon 5G connectivity, along with Wi-Fi, Bluetooth, and other patent-heavy standard technologies to come with their cars, just as they do in phones.  But the auto industry does not work like the phone industry, and its reliance on suppliers to assume patent liability is legendary. So even if cars and phones use the exact same technologies, the different supply chains, providers, distribution channels and sale prices have created a great deal of uncertainty as to what is the Fair, Reasonable, and Nondiscriminatory (FRAND) rate is and who should pay.   Since there have been no recent decisions on FRAND involving automotive companies, the best they can do is look at decision from the phone wars.

Automakers see hope in an approach outlined in the recent decision in TCL v. Ericsson.  In December 2017, the Central District of California case suggested that for worldwide patent portfolios, a top-down analyses (which looks at the aggregate royalty rate of the technology and divides it among all known patent holders to arrive at royalty rates) should apply.  

But in Unwired Planet v. Huawei, the UK appeals court, in a lengthy opinion and in no uncertain terms, upheld a higher global Fair, Reasonable, and Nondiscriminatory (FRAND) rate against Huawei on Unwired’s portfolio of purportedly standard-essential patents (SEP) relying in part. on comparative licenses with others.  This signaled trouble as the court argued that “[j]ust as implementers need protection, so too do the SEP owners.”

Unfortunately, the UK Court also endorsed differential pricing, finding it can “be beneficial to consumer welfare.”  Despite finding a previously negotiated Samsung license both “equivalent” and “comparable”:

“Samsung was one of a handful of major licensees. The license was for the same portfolio and related to the same acts. It was contemporaneous. It was therefore, for the purposes of considering hard-edged non-discrimination, an equivalent or comparable transaction to the putative license under consideration between UP and Huawei.”  

Nevertheless, the Court decided that the worldwide FRAND rate that Huawei was ordered to pay can be higher than Samsung’s since an SEP holder should not be penalized by doing a deal lower than the FRAND rate.

This is bad news for the automotive industry.  The UK’s Unwired Planet approach means that patent pools and their participants can set a high price, seek licensees, and if successful with a few unique parties, litigate against others who believe the rate too high, using the few licenses they have obtained as a benchmark for the pool’s value and even potentially ask for more by arguing the rate is actually below the true FRAND rate.  And with differential pricing, there is no guarantee that licensors will not ask for more in litigation.

That is just what Avanci, the patent pool run by former Ericsson chief IP officer Kasim Alfalahi, is attempting. As the first patent pool to seek licenses in the connected car space, Avanci started in 2016 with Unwired Planet, Qualcomm, Ericsson, Sony, Panoptis, ZTE, Sharp, Panasonic, and Vodafone as licensors. But it was roughly 15 months in before Avanci announced their first public licensee, BMW, and an unnamed supplier. And it was four days later when they publicly announced for the first time their per-car royalty rates: $3 for eCall only, $9 for 3G, and $15 for 4G (i.e., LTE).

Without knowing BMW’s terms, it’s safe to assume the license was highly similar to (and likely provides support for) their announced rates. Unfortunately for Avanci, the TCL v. Ericsson decision issued two weeks later, suggesting that a top-down analysis should rule.

Since then, Avanci has added licensors such as NTT DOCOMO, Conversant, Siemens (all also a part of Via’s pool), Nokia, NEC, TNO, BT, BlackBerry, and IP Bridge.  But since BMW, Avanci has not announced another licensee. If Avanci were the only licensor it could be arguable this could make things easier, but there are at least 3 licensing entities focused on LTE and many other major SEP holders which have not joined any entity.  This has led to a lot of uncertainty as to not only the total cost to implement LTE for automakers, but also who to pay.

The game theory has become very interesting for Avanci and other licensors since they can use (the threat of) litigation to compel automotive manufacturers to negotiate.  Using their BMW license is a benchmark, Avanci is attempting to set its FRAND rate for the entire automotive industry. Unfortunately, automotive companies that feel like the rate is too high will face the threat of litigation with little certainty as to what the actual worldwide FRAND rate might be. That puts pressure on implementers to settle now to on unfavorable terms than take the risk.

This is not a unique situation though.  Broadcom recently threatened to enjoin Volkswagen from selling cars in multiple international jurisdictions if it did not pay over $1 billion.  That case settled for an undisclosed amount, but suggests that litigation works, and licensors can force the automakers to the table. While it remains to be seen if and how U.S. jurisdictions will react to the Unwired appeal decision, it is worth noting that the TCL v. Ericsson case is on appeal, therefore there is no certainty the top-down approach will prevail.

Luckily, Unwired Planet wasn’t all bad news for implementers.  The high court noted that, despite the hearty endorsement of worldwide comparative license damages model, “a FRAND license should not prevent a licensee from challenging the validity and essentiality of licensed patents.”  It seems validity and essentiality challenges go hand-in-hand with the future of licensing through patent pools.

Given all this uncertainty, what is needed now are tools that everyone, licensors and licensees can use to decrease uncertainty and break the type of logjam of licensing which currently exists. Tools which could provide a more objective way to calculate FRAND, and provide an independent assessment of a licensor’s validity, and essentiality which all could agree on. By providing transparency and a verifiable way to assess value, it might just be possible to get everyone on the same page. This will increase the flow of licenses and implementations by providing certainty as to cost.

Further reading:

Jorge Contreras, TCL v. Ericsson: The First Major U.S. Top-Down FRAND Royalty Decision, Patently-O.com (Dec. 27, 2017), available at https://patentlyo.com/patent/2017/12/contreras-ericsson-decision.html

Avanci.com, http://avanci.com/ (last visited Nov. 23, 2018)

Richard Lloyd, Deal With BMW Is First of Many With Automakers, Says Avanci Boss, IAM Magazine, Dec. 4, 2017, available at https://www.iam-media.com/litigation/deal-bmw-first-many-auto-makers-says-avanci-boss.

Richard Lloyd, Avanci Announces Pricing for Auto Sector – Range from $3 to $15 a Car, IAM Magazine, Dec. 14, 2017, available at https://www.iam-media.com/frandseps/avanci-announces-pricing-auto-sector-range-3-15-car.

Managing Intellectual Property & Gowling WLG, Special Report: IP and the Automotive Sector (2018)

Unwired Planet LLC v. Huawei Techs. Co., [2018] EWCA Civ 2344, available at https://www.bailii.org/ew/cases/EWCA/Civ/2018/2344.html

Richard Lloyd, Court of Appeals in London Upholds Unwired Planet v Huawei to Provide Big Boost to SEP Holders Globally, Oct. 23, 2018, available at https://www.iam-media.com/frandseps/unwired-planet-appeal