Navigating the legal landscape: standards, patents and the connected car

The buzz of expectation around the market potential of the connected car is rapidly reaching a crescendo, with predictions of annual revenues in the region of €40 billion by 2018. Having seen the mobile phone market overtaken by sales of the more powerful smartphones within only a decade, it is likely that cars without integrated intelligence may suffer a similar fate within the next 10-15 years. Now that the standard of entry level vehicles as to automotive power and performance is more than adequate for most users’ purposes, these will no longer be the essential characteristics sought by new car buyers. Rather, enhanced navigation, interface quality and app availability will influence consumer choices towards one brand or another. Insurers, too, are likely to have an impact as the use of remote communications to monitor driver behaviour and charge appropriate premiums becomes the norm.

Two things stand out for an observer of the mobile handset market over that last decade: the battle for dominance between the various operating systems in use, and the patent wars which have raged between all the major players, and between players and patent assertion entities, for the revenues from the use of the underlying technologies. It seems likely that similar conflicts may now emerge around connected cars, not least because smartphone veterans Google and Apple are already working their ways into the automotive IT space. Ford’s 2013 purchase of software start-up Livio to help promote its method of connecting smartphones with the vehicle as an industry standard, thereby speeding the pace of app development, illustrates the industry gearing up for the fight.

Although in every industry patents are used to protect new technology and maintain market share, the mobile phone wars have gone far beyond the norm and show little sign of concluding. One reason is that mobile phones necessarily incorporate a complex set of technologies, many of which have to be standardised to enable the phones to communicate with different network operators. Standards of this complexity are negotiated among the various companies with a hand in developing the technology, each of which may own hundreds of patents over various aspects as well as numerous patents over non-standardised features. Although patents over essential components must be declared by all members of the standard-setting body (for mobiles, the European Telecommunications Standards Institute ETSI) and made available for license to all, the terms of those licences are left to be negotiated between each patent holder and would-be licensee. What with uncertainties as to: whether or not a given patent really does cover an aspect of the standard; whether or not the other party has actually implemented that part of the standard; and whether the patent is vulnerable to a validity challenge, such negotiations leave plenty of scope for dispute. Further, ETSI’s imposition of a requirement that any licence must be fair, reasonable and non-discriminatory (FRAND) can also lead to disagreement, since the parties on either side of the table may have materially different views as to what terms would be FRAND on the facts specific to their negotiation.

Courts in both the United Kingdom and Germany have had to grapple with some of the issues arising from these disputes, and their approaches can shed light on how similar disputes relating to the technology – both hardware and software – underlying the connected car will be handled. This has led to the development of a number of interesting strategies by the parties to these conflicts. Unfortunately, however, at the moment the two countries’ courts have brought different approaches to bear on the key issue of whether, or when, an alleged infringer which declares itself willing to take a FRAND licence once those terms have been settled, can be subject to an injunction to prevent any further sales.

In the English court, the law governing the grant of an injunction is that of equity, strongly focussed on achieving a fair outcome between the parties. An injunction is therefore always a matter of the judge’s discretion, although in patent cases for many years an injunction was invariably granted once a valid claim had been found to infringe. But in a case between Nokia and IPCom in 2012, the judge went back to first principles in order to consider whether Nokia, who had agreed to take a licence, should be prohibited from further sales pending a determination of what terms should apply. Relying on a case from the 19th century, Shelfer v City of London Electric Lighting Co., he accepted that as a “general working rule”, damages may be awarded in substitution for an injunction when:

  • The injury to the claimant’s legal right is small
  • The injury is one capable of being estimated in money
  • The injury is one which can be adequately compensated by a small money payment, and
  • The case is one in which it would be oppressive to the defendant to grant an injunction.

Applying this analysis to the specific situation before him – in which Nokia’s ability to pay any royalty awarded was not in doubt, and IPCom were subject to a an obligation under ETSI’s rules to grant a FRAND licence – he concluded that there was no basis for awarding an injunction, and IPCom withdrew their application. He reached this decision even though Nokia’s commitment to take a licence was conditional upon a finding that the patents in issue were both valid and infringed, matters which can take several years to reach a final determination. It has been accepted in subsequent cases that injunctions are unlikely to be available, in such circumstances. Further, in Vringo v ZTE last year the court ruled that a defendant is entitled to challenge the patent’s infringement and validity before any FRAND licence is settled since the court needs to know the basis on which the hypothetical negotiation would have taken place: in the knowledge that the patent is indeed valid and infringed, or on the pragmatic basis that it is worth paying something to eliminate the risk.

The German courts, on the other hand, have taken a position much more favourable to the patentee, ruling (in the famous Orange Book decision) that an alleged infringer can be subject to an injunction even if willing to take a licence, unless it has conducted itself in every way as a dutiful licensee should do, including paying royalties (into escrow if necessary) and abiding by other terms of a regular commercial licence. As a result, a company accused of infringing a standard-essential patent in Germany has considerable difficulty avoiding an injunction, once found to infringe. However, in a case between HTC and ZTE in 2013 the Dusseldorf Higher Regional Court appears to have reconsidered this approach, and has referred several questions to the Court of Justice of the European Union as to the circumstances in which an injunction must be granted, or otherwise. Meanwhile another German court, the Karlsruhe Higher Regional Court has stated in a judgement of 19 February 2014 that irrespective of the decision made by the European Court of Justice it is to be expected that an injunction would in any case still require that the claimant has made an acceptable offer for a license and has conducted the respective accounting for the past. It goes without saying, that the eyes of many in both mobile telephony and automotive industries, will be watching anxiously to learn whether this prediction of the European Court of Justice’s ruling will become true and generally what conditions the court will set for these matters.

As to what terms, including royalties, would be appropriate under such a licence, no English court has yet ruled. Although decisions now being handed down in the US courts may be persuasive, the European courts have their own approaches to calculating damages. Even after a decade of FRAND litigation in mobiles, important questions still remain to be decided.

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