Context: Automotive supplier (tires and electronics) Continental (“Conti”) is a vocal participant in the debate over the proposed EU regulation on standard-essential patents (SEPs). With respect to how the EU SEP Regulation could help small and medium-sized enterprises (SMEs), such as IoT startups, ip fray made a proposal three days ago (February 10, 2024 ip fray article). Previous articles already clarified that ip fray agrees that the current case law, particularly in Germany, should be fixed (and if necessary overriden) in some areas, and proposes a process that would make it affordable and efficient for SMEs to take licenses that provide legal certainty.
What’s new: Yesterday (February 12, 2024), Politico published an opinion piece authored by Continental and sponsored by the Fair Standards Alliance, arguing that more innovation in connected devices would happen if the proposal was adopted.
Direct impact & wider ramifications: There is a risk of Members of the European Parliament (MEPs) being misled. The risk of the members of the relevant working group of the EU Council being gaslighted is significantly lower, as they are patent experts. In this short article, ip fray explains why Conti’s positions can’t be reconciled with shortsighted if not irresponsible business decision the organization made. Conti is complaining of issues that are overwhelmingly of its own making.
The objective laid out in the first paragraph of Conti’s CTO’s opinion piece is to “help European industry develop new, innovative smart and sustainable products and services.” Up to that point, no one could disagree. While the focus in the context of the EU SEP Regulation is on Europe, the same would apply everywhere else on this planet.
The formula, however, is not simply to devalue SEPs, complicate their enforcement, create an additional bureaucracy, or encourage hold-out. In the end, successful standards depend on a healthy resource allocation between those who invest in standards-related innovation and those who invest in innovative implementations. While ip fray doesn’t agree with the way some SEP holders (especially in litigation) portray themselves as the only innovators, it’s also incorrect to suggest that all of the innovation happens on the implementers’ side. Balance, please.
Having said that, whatever Conti’s article says about great visisions for the future with smart cities and autonomous driving doesn’t support the arguments of one side or the other. It just means that there must be a reasonable basis for the two sides to work out deals with each other: SEP license agreements.
Each of the following sections now raises one serious issue about Conti’s claims and arguments by contrasting them with Conti’s commercial realities.
Transparency à géométrie variable?
Conti says: “This will bring much-needed transparency to the market.” Let’s ask ourselves: how transparent is Conti itself in this field?
How about Conti making information publicly available (in a way that doesn’t violate an NDA with any particular company) about its interactions with certain categories of licensors (e.g. large operating companies, small and medium-sized operating companies, large NPEs, small NPEs). How many of them did Conti approach? How many made Conti a licensing offer, and if and when it happened, why didn’t that lead to an agreement? Did any SEP holders approach Conti about licensing before Conti itself ever reached out to them? If so, how did it go?
When German courts with their behavioral approach to SEP licensing negotiations redact their rulings, the public versions still provide an indication as to how long negotiations took and on what basis a party at some point argued it needed more time to respond. How about Conti providing an abstract record of its SEP licensing discussions, if any ever took place?
The “transparency” argument is overleveraged (January 29, 2024 ip fray article). More oftne than not, the implementers themselves insist on confidential treatment, which may even be legitimate in some cases, yet means one can’t just blame licensors. Nokia announced six of the seven names of companies with which it concluded major license deals during its just-concluded renewal cycle (February 8, 2024 ip fray article). That ratio shows Nokia absolutely wanted the world to know, but one of the seven licensees apparently didn’t consent to such publicity.
Unless and until Conti comes clean about its own license deals and attempts by them or by third parties to strike such agreements, not by disclosing entire contracts but by being about as transparent as Nokia, they have to question their own opacity first.
Conti is beneficiary of its customers’ have-made rights
Conti says: “Anyone who wants to develop networked applications needs fair access to standardized technology.” Actually, access is not an issue here if it’s just about developing automotive components and selling them to car makers. All or most of Conti’s customers (the automakers) have a license to the Avanci 4G pool, and several companies (presumably including actual, at least potential Conti customers) have already upgraded to 5G.
Conti benefits from the Avanci license as well: its customers have “have-made rights” enabling them to use a supplier like Conti.
The fact that no one ever denied Conti a license only to then be able to sue them out of business is why the United States District Court for the Northern District of Texas and the United States Court of Appeals for the Fifth Circuit found Conti had serious issues at least on the merits if not even basic standing.
So what is the problem that Conti really has? Why are they lobbying for the EU SEP Regulation?
Two of Conti’s own fundamental business decisions are the root cause of the real problem:
- In order to get as many “design wins” as possible, Conti offered car makers prices for components that involved IP indemnification that just weren’t realistic in light of the actual market value of the SEPs involved. If you do that and your customers then have to pay market rates, they come back to you and want you to indemnify them. That’s the normal course of business. Conti was so aggressive that it undercut even companies that hold a large number of SEPs themselves!
- Conti has a competitiveness problem with companies that hold SEPs, such as Samsung and LG (both of whom are huge implementers of SEPs, but also Avanci licensors) and, until geopolitical dynamics came into play, Huawei. In 2007, Conti, which was essentially just a tire maker at the time, acquired a division from Siemens that subsequently became Continental Automotive Systems, it paid €11.4 billion (which adjusted for inflation would now be a lot more already) (2007 press release by Continental). But how many billions did Conti invest in innovation related to standards? So far, presumably just a few million euros. If Conti had decided to invest more in standards, it would not be in a position to offset its own licensing costs to some extent with licensing income from others.
Faced with the choice between investing in the high-risk business of standards-related innovation and spending money on lobbying for political intervention, Conti chose the low road and it’s not going to serve them well. It wouldn’t really solve Conti’s problems even if the EU SEP Regulation was adopted in any way, shape or form similar to the current proposal.