Continental Makes a Big Splash in the Connected Car Patent Pool over OEM-Only Licensing Practices

In a bombshell 63-page complaint filed in the Northern District of California this month, Continental Automotive Systems (Continental) alleged that Avanci, Nokia and others operating patent pools in the connected car space refused to offer fair, reasonable, and non-discriminatory (FRAND) licenses to automotive component and system suppliers.

Here is a link to the complaint: https://images.law.com/contrib/content/uploads/documents/403/16984/Continental-v.-Avanci.Complaint.pdf

This is an exciting and noteworthy case for those practicing in this space because the patent pools ordinarily seek to license standard essential patents (“SEPs”) exclusively to Original Equipment Manufacturers (“OEM’s”), such as Ford and Toyota. Continental contends that these OEM’s are targeted because they sell high-price products, and thus can be subject to higher license fees. By this lawsuit, Continental, a Tier 1 supplier in the auto industry, is offering to pay lower FRAND rates for those SEP’s based upon Continental’s relatively lower-price telematics control unit (“TCU”) products. Under the doctrine of patent exhaustion, once the patent pools license the SEP’s to one entity in the supply chain (e.g., Continental), the same SEP’s cannot be licensed again to the OEM’s. Thus, if Continental were to prevail, Continental would pay relatively lower license fees on the same SEP’s, consequently lowering the overall costs of a connected car.

As described in the complaint, and by way of background, enabling cellular connectivity requires the use of widely adopted cellular standards, such as the second generation (“2G”), third generation (“3G”), and/or fourth generation (“4G”) cellular standards adopted by various standard setting organizations (“SSOs”). A car can provide cellular connectivity under those standards primarily through a telecommunications chipset, known as a baseband processor chipset, which is the core electronic component that allows it to transmit and receive information to and from a cellular communications network. Notably, the baseband processor chipset is the component that directly implements the 2G, 3G and 4G cellular standards. The baseband processor chipset is typically incorporated within a network access device (“NAD”), which is itself often a sub-system of the TCU. Continental is a leading provider of TCUs to various OEM’s. Continental sources its NADs primarily from Tier 2 suppliers, who in turn source the necessary baseband processor chipsets that enable cellular connectivity from Tier 3 suppliers that manufacture such chipsets.

The patent pools (e.g., Avanci and Nokia) acknowledge that they own or manage standard essential patents (“SEPs”) that have been declared essential to the cellular standards that are implemented in the components and/or subsystems supplied by Tier 1, Tier 2, and Tier 3 suppliers, including Continental. The patent pools are alleged to monetize the SEPs by exclusively targeting automotive OEMs that sell automobiles incorporating components that operate in compliance with the cellular standards.

Continental estimated that the patent pools sought a combined total of $30 per connected vehicle from each OEM. A royalty rate of $30 per vehicle would imply a royalty of as much as 40% for a TCU sold by Continental. Continental stated that because the Defendants could not justify such exorbitant royalties to the suppliers of components and subsystems in the supply chain, they colluded to maintain their exorbitant royalty rates—and thus their monopoly—by refusing to license Tier 1, Tier 2, or Tier 3 suppliers. Instead, they agreed to collectively license their SEPs only at the OEM level—where the optics of their non-FRAND licensing model would appear superficially less severe given the substantially higher price and margin of a car as compared to that of a baseband processor chipset, NAD, or TCU.

According to Continental, the Defendants are obligated to license Continental at FRAND rates because the SEPs at issue are the subject of express and voluntary promises made either directly by Defendant Licensors, or their predecessors-in-interest, to the relevant Standard Setting Organizations (“SSOs”) pursuant to those SSOs’ Intellectual Property Rights (“IPR”) Policies. Such IPR Policies all require Defendants to license the alleged SEPs to any user of the standard that requests a license, and do so on FRAND terms and conditions. The SSOs relied on such FRAND commitments when they purportedly incorporated Defendant Licensors’ proprietary technology into their standards.

As the basis for its standing to sue, Continental sought a license from each of the Defendants, and was met with either refusals to offer a direct license, or no response whatsoever. For example, when Continental sought a license from Avanci, Avanci informed Continental that, “as part of Avanci’s collective agreement with its members, Avanci is only authorized to license at the OEM level. Moreover, Avanci would only seek the additional authorization required to license Continental if Continental first agreed to be bound by Avanci’s inflated and non-FRAND royalty rates offered to the OEMs—a proposal Avanci knew Continental could not agree to.”

Stay tuned for the Defendants’ response to Continental’s complaint.