Daimler reloaded: another automotive company takes patent license from Nokia, which consistently insists on end-product-level licensing

There's a big "See I told ya so" waiting for you toward the end of this post as far as patent licensing to car makers is concerned, but let's look at this news in a logical sequence of steps:

Nokia just sent out its earnings release for the second quarter (and the first half) of 2021. Irrespectively of how strongly I've sometimes disagreed with their positions in litigation, I always read their statements and have an active subscription to their news releases. What immediately struck my attention in today's announcement is this passage:

"Nokia Technologies continues to scale with two licensing agreements with automotive manufacturers including Daimler." (emphasis added)

That "including" part suggests they're not going to disclose the name of the other party than Daimler. Nokia's victory over Daimler--getting the Mercedes maker to take a car-level license after more than two years of litigation and nearly three years after Daimler's EU antitrust complaint over the question of where in the supply chain standard-essential patents (SEPs) should be licensed--was announced in early June.

The following part of Nokia's "Q2 2021 Investor presentation" (PDF) doesn't state the second name either, so unless someone leaks something, or whenever it gets mentioned in open court (because of the non-discrimination part of FRAND), we're not going to know (click on the image to enlarge):

It's not just highly unlikely but even unthinkable that Nokia, despite getting its way in the largest-scale and highest-profile automotive SEP dispute ever, would have changed course and granted an exhaustive and otherwise unrestricted license to an automotive supplier. The most plausible scenario is that after Daimler's defeat someone else decided that hold-out was just going to cost a ton of legal fees, for nothing.

You can't argue with success. Or, as investors often say, the trend is your friend.

If it were up to me, I'd prefer Avanci and all of its members (as some do) to offer an exhaustive component-level license at the chipset, network access device (NAD), and telecommunications control unit (TCU) level. But I don't get to decide. Marconi, the company behind Avanci, can do only what its members are able to agree upon. Apart from a few hold-outs, car-level patent licensing is now uncontroversial. It's a fact of life.

I doubt that those automotive patent deals are large enough to be a key factor behind this bullet point of today's earnings release:

"Considering our strong start to 2021, we revise our full year 2021 Outlook, including net sales expected to be EUR 21.7bn to 22.7bn (previously EUR 20.6bn to EUR 21.8bn) with comparable operating margin in the range of 10-12% (previously 7-10%)."

However, patent licensing in general seems to be working out well for them. The Daimler dispute cost a lot of money, but appears to effectively dissuade others from picking that kind of fight. By contrast, Daimler wasted tens of millions of euros--and the result is just that anyone else can sue them now and force them to take a car-level license, which sooner or later will make an Avanci license look cheap.

What does Nokia's announcement of not one but two automotive patent license deals mean for the wider automotive patent licensing debate?

"See, I told ya so." Joint licensing negotiation groups (LNGs) are not necessary to work out license agreements between cellular SEP holders and automotive companies. No matter how hard Volkswagen and some of its allies may be pushing for the legalization of otherwise highly anticompetitive buyers' cartels, the market keeps proving them wrong. Today's announcement doubly debunks Volkswagen's LNG story:

• Deals keep falling into place without LNGs, so the plot is thickening that the real issue is a group boycott by unwilling licensees (from which more and more companies are defecting).

• Avanci members like Nokia are not only contractually and theoretically, but in every practical sense, free to enter into direct license agreement with automotive industry players. That means Avanci is truly just one additional option, a one-stop option for more than three dozen portfolios, but not a licensors' conspiracy.

As a regulatory authority or policy maker, I would find it a very clear case to politely decline any invitation to authorize a buyers' cartel likely to slow down the licensing process and organize group boycott (as the Japanese government noted earlier this week) when there is not only a Business Review Letter by the USDOJ but also hard real-world evidence--actions speak louder than words--of there being no licensors' cartel that would have to be counterbalanced (apart from the fact that two wrongs don't make a right, so even if there were a sellers' cartel, the solution would not be to allow a buyers' cartel). Who would want to turn antitrust law on its head against all the empirical evidence from the market--and knowing that it takes only one major jurisdiction to break up a cartel?

It always feels good to see one's analysis validated. It feels even better when it happens so quickly. It's just one deal with an unnamed car maker, but previously BMW had taken an Avanci license in 2017, Volkswagen had taken a limited one (and has otherwise continued to infringe, so I wonder when they'll get sued), Tesla according to rumor settled multiple parallel lawsuits by means of an Avanci license, and Daimler took a car-level license from Nokia. And now another deal happened, without litigation because otherwise we'd know.

I'll ask around to find out more and will do a follow-up post if and when warranted. But there may already be news deals and/or new lawsuits by the time I find out the licensee's name. Also, I guess Huawei will continue to make headway with its automotive patent licensing efforts.

One thing I try hard not to be is obtuse. Opinionated I am, but that's another word starting with the same letter. Rationality forces me to recognize what has happened and where things are going. This is an unstoppable wave. Licensing--not lobbying--is the answer.

If you haven't previously read my thoughts on collective licensing negotiation groups, here are the links to all parts of my recent trilogy:

1. SEP Licensing Negotiation Groups -- Part I: analogy to patent pools entails false symmetry between facilitating and complicating automotive patent licenses

2. SEP Licensing Negotiation Groups -- Part II: justice delayed is justice denied when unwilling licensees can hide behind a consensus-building effort

3. SEP Licensing Negotiation Groups -- Part III: legalization of buyers' cartels would invite group boycott and collective hold-out

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SEP Licensing Negotiation Groups -- Part II: justice delayed is justice denied when unwilling licensees can hide behind a consensus-building effort

This is the second part of a trilogy on licensing negotiation groups (LNGs): automotive industry cartels that would collectively negotiate standard-essential patent (SEP) licenses with major patent holders and pools. In the first part, I outlined some of the issues and cautioned against a false symmetry between patent pools and buyers' cartels named LNGs.

There isn't any such thing as a conventional supply-and-demand mechanism in SEP licensing. For example, patent holders can't reduce output: if they abandoned some of their patents, they'd just reduce the value of a portfolio. By contrast, if the likes of Continental, Dunlop, Bridgestone and Firestone ganged up on car makers, they could drive up the price--which is why competition authorities wouldn't allow such a cartel.

As double patenting isn't possible (if it happens, only one of the patents survives), SEP portfolios are by definition complementary to each other. One SEP--or one portfolio--can't substitute for another. As an implementer, you can't "threaten" Huawei with the alternative of taking a SEP license from Ericsson instead (unless Huawei gives you a better deal). You need a license from both.

SEP holders have an obligation to grant licenses on a fair, reasonable, and non-discriminatory (FRAND) basis. Comparable licenses go into the FRAND analysis, but comparability and substitutability are separate things.

Where you do have a supply-and-demand mechanism is when one standard competes with another. After the industry has chosen a standard, the terms of individual license deals are effectively set by the courts, directly (in the event of infringement litigation) or indirectly (SEP licensing negotiations amount to a simplified simulation of what would happen if the patent holder went to court).

Let's talk about tires again. A Conti or a Bridgestone can't force anyone to buy their tires. But customers--even if they're as advanced as Tesla--will need some tires. The fact that cars can't move without them ensures demand. Cars do move without a SEP license, though. The sad reality is that most cars are rolling and infringing at the same time.

In SEP licensing, there is no demand without the prospect of losing infringement cases and, if it comes to worst, being enjoined. Apple's 2019 policy statement on FRAND-pledged SEPs is instructive. It postulates that "[b]oth SEP licensors and licensees should negotiate transparently and willingly based on an exchange of relevant information." Apple is a net licensee, but has acquired a sizable SEP portfolio (from Intel in no small part). There's probably no smartphone maker who negotiates SEP licenses as hard as Apple. Still, Apple stresses symmetry with respect to the willingness to reach an agreement.

That symmetry is merely consistent with the guidance the European Court of Justice provided in Huawei v. ZTE, and the way it is now applied by the German courts after Sisvel v. Haier I & II. Unwilling licensees incur the risk of SEP injunctions. Otherwise there isn't sufficient deterrence in certain jurisdictions, and infringement would be profitable.

Licensing negotiation groups don't mix with Huawei v. ZTE and Sisvel v. Haier. How can a court of law identify an individual company's unwillingness to take a license on FRAND terms if it can hide behind its LNG?

Currently, there are various ways in which courts can arrive at an unwillingness finding as the result of a multifactorial analysis. Just a few examples:

• slow response times to infringement notices and licensing offers

• noncommittal expressions of an interest in taking a license

• sub-FRAND royalty rates

• contract clauses that may give rise to subsequent litigation based on a flimsy patent exhaustion argument

All of the above examples would no longer be workable criteria if lawmakers and/or regulators were to endorse LNGs. Those licensee cartels would presumably move slowly, and they could blame it on the time it takes to build internal consensus within a group. Their offers might fall far short of a FRAND rate, but how could the patentee prove that a particular defendant was responsible?

LNGs could take extreme positions in negotiations. Individual members could not be held responsible.

Volkswagen's chief patent counsel explained (in the presentation I mentioned in Part I) that the LNG would appoint someone who would organize the internal process and would be neutral with respect to the LGN's members, but would clearly have a mandate to vigorously defend the group's interests vis-à-vis patent holders. For example, Mr. Wiesner tossed out the idea that an official from German automotive industry association VDA could do the job. It's another question whether such an official would truly be neutral within the group, given that large members typically have disproportionate influence over such organizations. But even according to Mr. Wiesner's presentation, the LNG's appointed negotiator would have to defend implementers' interests against those of licensors.

In order to discharge his or her duties, the LNG's representative would have to optimize the licensing terms for the LNG's members. That means to minimize royalties, but SEP holders would have no leverage over the representative: they couldn't sue her or him. And if they sued individual members of the group, those would argue they can't be held responsible for group decisions or a "neutral" representative.

It's a safe assumption that LNGs would often assert that a particular tier of the supply chain is where the license should be granted. If an implementer takes the position in infringement litigation that someone else should take the license, the courts will not be impressed and may just order an injunction. Not so when each implementer is shielded by an LNG. According to Volkswagen's presentation, the members should be free to negotiate with SEP holders independently, but it seems they would only do that if they could get an even better deal that way.

Should the plan to be make LNGs optional, SEP holders would be free to sue individual implementers, who would in turn make their own counteroffers. In that case, LNGs would cease to serve their purpose.

In the absence of a convincing plan for how to make patent enforcement work even after LNGs have been blessed by regulators, there won't be good-faith licensing negotiations.

In the next and final part of this trilogy (though there will likely be posts further down the road to discuss the topic in light of future developments), I'll take an antitrust angle and explain why a buyers' cartel would likely lead to collective hold-out. LNGs would complicate, not facilitate, SEP licensing in the automotive industry--and they'd have the same negative effect on SEP enforcement and the judicial decision-making process.

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SEP Licensing Negotiation Groups -- Part I: analogy to patent pools entails false symmetry between facilitating and complicating automotive patent licenses

This is the first part of a trilogy on licensing negotiation groups: automotive industry cartels that would collectively negotiate standard-essential patent (SEP) licenses with major patent holders and pools.

Earlier this month, the European Commission levied a € 875 million fine on Volkswagen (that company has to pay more than half a billion euros alone) and BMW--Daimler got away unscathed only because it had blown the whistle--for restricting competition in emission cleaning for new diesel passenger cars. That decision stands in the tradition of regulatory findings of cartel law violations by car makers and their suppliers. Just a few recent examples from the EU that beg the question of whether such conduct is deeply ingrained in that industry's DNA:

• Commission fines car safety equipment suppliers € 368 million in cartel settlement (2019)

• Commission fines three companies € 68 million for car battery recycling cartel (2017)

• Commission fines car parts producers € 137 789 000 in cartel settlement (2016)

• Commission fines producers of wire harnesses € 141 million in cartel settlement (2013)

One of my core principles in competition policy is that even the worst offender might have a valid concern or bring a meritorious complaint. There was a time when Microsoft was synonymous with antitrust violations in the technology industry (over issues that were not even 1% as serious as what Apple has been doing for more than a decade). Prior to Microsoft, IBM had that reputation. IBM was then behind efforts to instigate investigations against Microsoft, and Microsoft later did the same against Google. Par for the course.

But when a company that just got slapped with a half-billion-euro fine over a cartel keeps lobbying the European Commission, the U.S. Department of Justice, and possibly other regulators to obtain permission for forming another automotive cartel, its proposals and its arguments need to be closely scrutinized.

I've looked at this topic from multiple angles: whether the issues Volkswagen has identified are real; whether the proposed measures are necessary and proportionate; whether licensing negotiation groups would be more or less constructive than individual parties; whether SEP holders would still be reasonably capable of enforcing their rights; and whether the upside would outweigh the downside in competition policy terms.

Unfortunately, it turns out that this is not only a solution in search of a problem but--far worse--a kind of Pandora's box.

If it's as bad an idea as I say it is, how come it is being talked about at all? Well, that's a mystery to me, but I have a plausible explanation: policy makers' predilection for redressing the balance and for bringing about symmetry. In this case, however, it's a fallacy. A false symmetry.

Pooling patent portfolios that belong to different licensors is fundamentally different from "pooling" licensees. The asymmetry begins with respect to transparency:

• A whole lot is publicly known about Avanci, a cellular SEP pool that contains patents from more than three dozen holders and provides a one-stop licensing option to car makers (which the U.S. DOJ approved last year).

• The proposal of forming licensing negotiation groups ("LNGs") is largely being kept under wraps, the sole exception amounting to a couple of slides in a presentation delivered by Volkswagen's chief patent counsel Uwe Wiesner as part of a mid-April European Commission webinar.

Mr. Wiesner is undoubtedly the thought leader in the automotive sector when it comes to patent policy. But that doesn't mean his ideas are better than those of organizations who were dealing with cellular SEP licensing issues even before Mr. Wiesner joined the patent bar.

BMW, Volkswagen, and--unconfirmed rumor has it--Tesla have taken Avanci licenses at the car level. By now there's empirical evidence that Avanci's existence does not foreclose all sorts of bilateral license deals:

• Daimler took a car-level patent license from Nokia, settling their pending infringement litigation after striking similar (but presumably much smaller) deals with Conversant and Sharp.

• Huawei previously entered into a component-level license deal with Sharp covering tiers 1 (telematics control units), 2 (network access devices), and 3 (baseband chips).

• Huawei also secured a component-level license (covering at least one tier of the automotive supply chain, if not more) from Conversant.

• And most recently Huawei signed a 4G patent license agreement with tier 2 supplier Rolling Wireless (according to media reports) relating to components that will be incorporated into many millions of Volkswagen cars.

Those are just some publicly-known examples. There are other license deals that have been signed but not announced--at the car level as well as at the component level. If major smartphone makers held out as long as automotive companies (even Volkswagen's limited Avanci license falls far short of what it actually needs), there'd be dozens of large-scale disputes (like Nokia v. Oppo) pending. But Daimler's about-face (taking a car-level license after years of arguing that its suppliers should take the prerequisite licenses) marks a turning point, and it's too important for me to ignore. I stand by my advocacy of component-level license deals, and I celebrated the ones that were announced. That said, I recognize market realities. With the three German car makers (representing well over a dozen brands in the aggregate) and--if true--Tesla having taken car-level licenses, neither they nor their competitors can claim anymore that there's anything wrong with licensing cellular SEPs at the end-product level, just like the mobile handset industry has been doing it for ages.

In the aforementioned presentation, Volkswagen criticized the fact that Avanci's per-car license fee doesn't differentiate between, for example, a Tesla and a low-cost compact car. But the connectivity provided is essentially the same. Car makers are free to content themselves with 3G network access to save a few dollars in license fees (whether that makes sense is, of course, another question). Also, that argument is a slippery slope as automotive companies would rather pay the same per-unit royalties as the makers of the cheapest smartphones. Volkswagen's criticism of a consistent rate directly contradicts the arguments Apple always makes in its SEP licensing negotiations and in policy debates. The iPhone maker has put a lot more effort into the devaluation (just using the terminology of an Apple-internal document that surfaced in its Qualcomm litigation) of cellular SEPs than the entire automotive industry.

Volkswagen also raises the concern of double-dipping. Actually, if everyone consistently licensed SEPs at the car level, there wouldn't be any double-dipping issue--and cars could even contain more than one component implementing the covered standards and pay only a single license fee. The only risk remaining here would be that you might have a SEP holder in the supply chain, such as LG providing a network access device. True, the first authorized sale has an exhaustive effect, though that one may also be territorially limited anyway (patent exhaustion across borders is complicated, and German courts are particularly disinclined to recognize it). Also, the amount in question would not be huge even if a Huawei, Samsung or LG provided a component. And the problem could always be solved through good-faith negotiations.

It is hard to see what problem(s) licensing negotiation groups would be in a better position to solve than individual parties.

What is clear, though, is that a patent pool like Avanci making an optional one-stop licensing offer doesn't result in a concentration of market power or in coordinated misconduct. Deals of all sorts happen, and more often than not, an Avanci contributor is involved.

If Volkswagen's LNG proposal became mandatory in the sense that SEP holders facing a licensee group couldn't insist on a bilateral deal (and, if necessary, bring infringement actions to accelerate the process), it would be a recipe for disaster. It would invite group boycott. "LNG" would then mean "Licensing Never Group" until SEP holders do business on the implementers' preferred terms.

If SEP holders could bypass the LNG as they please, I guess they would and there'd be an additional layer of bureaucracy that would add no value to anyone (unless one considers it "valuable" to create an opportunity for parties to legally organize collective hold-out).

It's a misconception that the share of the patents declared essential to a standard and being contributed to a single pool has anything to do with market power. As an expert witness for then-Google-owned Motorola Mobility once famously wrote, "it only takes one bullet to kill." A single truly essential patent (meaning that it can't be worked around) confers gatekeeper-like market power on its owner. Any additional bullets would just hit a body that's already dead. In reality, the larger a pool is, the more likely it is to discipline other SEP holders by dissuading them from trying to charge more on a per-patent basis. The "market share" of the pool does, of course, have a bearing on transaction costs. But that's a potential efficiency gain that, in an idealized economic scenario, would be split fairly between licensors and licensees.

What's key is to have reasonably balanced SEP enforcement. Whether a pool holds one patent out of 10,000, or even all 10,000 that read on a standard, is a non-issue if SEP enforcement works. In the next part of this trilogy, I'll look at the implications of the LNG proposal for enforcement in more detail. The third and final part will then focus on antitrust and cartel considerations (which are so serious that even the much less radical "Proposal 75" of the European Commission's SEP Expert Group Report comes with a variety of caveats), and I'll summarize the key reasons for which I believe regulators and policy makers should flatly reject the LNG proposal and prioritize more workable and less problematic approaches.

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