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Car makers don’t want to pay the likes of Qualcomm wireless patent royalties on leather seats: FTC v. Qualcomm amicus briefs

Earlier this year it became known that Qualcomm used to charge (and maybe still does, depending on the terms of the recent settlement) Apple a 5% wireless patent royalty on iPhone repairs. That’s bad enough, but imagine what would happen if all of us had to indirectly pay wireless patent royalties on vehicle repairs? Or on leather seats? The latter is an issue that two automotive industry bodies have raised in a filing with the United States Court of Appeals for the Ninth Circuit.

For a list of previous posts on amicus curiae briefs in FTC v. Qualcomm, and on the order scheduling the oral hearing for February 13, 2020, let me refer you to this post. I will now, finally, comment on the remaining two amicus briefs supporting the FTC.

The Association of Global Automakers (AGA) and the Alliance of Automobile Manufacturers (AAM) made a joint filing (this post continues below the document):

19-11-29 AGA and AAM (Autom… by Florian Mueller on Scribd

What lends their support of the FTC particular significance is that the AMA’s members include Ford and Fiat-Chrysler. Ford and Chrysler are American industrial icons.

That brief stresses the importance of patent exhaustion, which is so key to the automotive industry’s longstanding modus operandi. And here’s my preferred passage:

“If the Court ratifies Qualcomm’s behavior, then Qualcomm and its peers could demand a cut of the profits attributable to even a car’s leather seats.” (emphasis in original)

That just perfectly illustrates the importance of the royalty base.

What makes the refusal to extend exhaustive FRAND licenses to component makers even harder to justify in the automotive industry is that the telematics control units (TCUs) sold by Tier 1 suppliers (the ones that directly sell to the car makers) come with pretty much the same functionality as a phone, apart from the screen.

Two Tier 1 suppliers–Continental Automotive Systems (whose FRAND/antitrust lawsuit against Nokia this blog has been following for several months) and Japan’s DENSO–also filed a joint amicus curiae brief (this post continues below the document):

19-11-29 Continental and De… by Florian Mueller on Scribd

The automotive suppliers’ lead counsel in this matter is Orrick, Herrington & Sutcliffe’s Jay Jurata, who also spoke at my recent component-level licensing conference in Brussels. At the time–and even until I downloaded the above document–I had no idea he was going to make a filing in FTC v. Qualcomm.

What I finally learned from the brief is how Continental Automotive Systems, the Michigan-based U.S. entity suing Nokia in the Northern District of California, relates to Continental AG, the German group parent:

“Continental Automotive Systems, Inc. is wholly owned by Continental Automotive, Inc. Continental Automotive, Inc. is wholly-owned by Continental Automotive Holding Netherlands B.V., which is wholly-owned by CGH Holding B.V., which is wholly-owned by CAS-One Holdinggesellschaft mbH, which is wholly-owned by Continental Caoutchouc-Export-GmbH, which is owned 51% by Continental Automotive GmbH and 49% by Continental A.G.”

Complicated. Possibly even more tiers than an automotive supply chain. They probably need a navigation system to find their way around in that widespread network of subsidiaries.

The most interesting business information that the brief reveals is this:

“[…] Continental has forgone working with both MediaTek and Samsung—upstream manufacturers whose chipsets would allow Continental to upgrade its products to provide consumers with both superior prices and technical capabilities—because their chips come without licenses to SEPs that they practice.”

There’s already plenty of industry testimony in the evidentiary record of this case that proves this problem. What the Continental-Denso amicus brief adds, however, is an example from the automotive industry. There’s also a mentioning of an innovative product Continental would have liked to make, and could make if not for SEP licensing issues (“a single circuit board with cellular communications and high-end infotainment functions”).

The European Commission should also take note of those problems, as Continental is one of five EU antitrust complainants over Nokia’s Qualcomm-like refusal to license anyone but end-product makers.

I also like this passage:

“Although the cellular connectivity technology at issue in this case is only a small part of connected-vehicle technology, it is a necessary one. And so the inability of Western device companies to access licenses to SEPs on FRAND terms is hamstringing their ability to compete in this critical device-innovation race.”

The brief addresses–and practically destroys–Qualcomm’s “efficiency” argument for licensing only end-product makers. That part culminates in the following passage:

“And that is, in a nutshell, one of the fundamental problems with the SEP-holders’ rule: It takes a decision that should be sorted out naturally through market forces, and places it in solely the hands of the very party that stands to benefit most from inefficiency.”

The proposal is to ensure everyone in the supply chain (not just a patent holder’s “preferred link in the supply chain,” as the brief calls the patentee’s sweet spot) has access to an exhaustive license on FRAND terms, and to then let market forces decide what type of patents is best licensed at what level. But in order for market forces to come into play at all, access must be available to everyone. Otherwise it all just depends on a SEP holder’s opportunistic choice.

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