[Author: Guangping Zhang]
Introduction
The new trends of motorization, intelligence, networking, and shared service of automobiles are leading to a global reform and becoming industrial technological highlands across the world. They are included in the strategic focus and also represent the innovation direction of China’s automotive industry.
Licensing of standard essential patents (SEP) in the field of intelligent connected vehicle is undergoing transformation worldwide. SEP issues in the field of conventional communication have extended to the field of intelligent connected vehicle, and triggered a patent war in countries or regions such as the Europe and the United States who are leading in the automotive industry. Currently, owners of patent rights in the field of communications and manufacturers of automobiles are gaming on the rules for SEP licensing, mainly focusing on the level of licensing in SEP licensing, the calculation of royalties, patent pool/licensing platform, and so on. This game not only affects SEP owners and implementers, but also concerns the innovation environment and competition order of automotive industry in various countries.
In this context, as the largest market for automobiles in the global range, China has been paid close attention of the practitioners in terms of the current state and the challenges in SEP licensing and the rules and methods implemented by the courts for determining reasonable SEP royalties.
I. Patterns and Latest Policy Tendency of SEP Licensing in the Field of Intelligent Connected Vehicle in China
1. Existing Patterns of SEP Licensing in the Field of Intelligent Connected Vehicle in China
Across the world, there are mainly two patterns of SEP licensing in the field of intelligent connected vehicle, namely (1) SEP licensing through the three major patent pools: Avanci, Via Licensing, and UTLP; (2) SEP licensing via one-on-one negotiation between enterprises.
License agreement reached via one-on-one negotiation between enterprises is the main manner of SEP licensing in China. For example, in May 2020, Huawei and 18 automobile enterprises including FAW Group, Changan Automobile, Dongfeng Motor Corporation, and SAIC Motor founded the “5G Automotive Ecosystem”, providing products and technologies of 5G on-board module MH5000 and 5G on-board terminal T-Box platform, etc. On July 7, 2021, Huawei reached patent license agreement with one supplier of Volkswagen Group.
By far, SEP license cases engaging in a Chinese automotive company through a patent pool are rarely seen in public media.
2. Latest Policy Tendency in SEP Licensing in the Field of Intelligent Connected Vehicle
On September 13, 2022, China Automotive Technology and Research Center Co., Ltd (CATARC) and China Academy of Information and Communications Technology (CAICT) jointly published Guidelines of Standard Essential Patent License for Automotive Industry (2022) (“the Guidelines” hereinafter), which is the first document in China for guiding SEP licensing negotiation in the field of intelligent connected vehicle. The Guidelines summarizes the major obstacles emerging in recent years in SEP licensing negotiation in the field of intelligent connected vehicle, proposes four core principles of Balancing of Interests, FRAND, Entitlement to Obtain Licenses at Any Level in the Industry Chain, and Handling of Differences Between Industries through Negotiation, and specifies the principles for calculating reasonable royalties, including SEP royalty basis, factors for calculating royalties, principle of limitation to aggregated royalty rates, and reasonable selection of royalty calculation method.
The level at which license is made has been of greatest dispute in SEP licensing in the field of intelligent connected vehicle. The principle of Entitlement to Obtain Licenses at Any Level in the Industry Chain set forth by the Guidelines will affect future SEP licensing negotiations in the field of intelligent connected vehicle in China.
Regarding the SEP royalty basis, the Guidelines stresses that: regardless of whether the basis is the parts of an automotive product or the whole vehicle, the actual value contributed by SEP technology to the Automotive Product should be taken into consideration; moreover, regardless of the license level, the SEP royalty for the same Automotive Product should be approximately the same, and the royalty should not differ significantly among various license levels.
There is no definite conclusion in the automotive industry whether the royalty basis should be the whole vehicle or the smallest sales unit. Judicial decisions in standard essential patent litigation in Europe and the U.S. relating to automobiles also demonstrated different tendencies and attitudes of different courts. In this context, the Guidelines recognizes the method for calculating the royalty rates with the smallest sales unit to be a calculating basis, and specifies that the royalty at different levels should be approximately the same, which demonstrates a specific and clear position of China’s automotive industry on this hot issue.
Further, the Guidelines propose methods for calculating royalty rates, recommending the “Top-down” method or the comparable license method for calculating SEP royalties. However, different from the field of communications, SEP licensing in the field of intelligent connected vehicle is at an early stage of development, with scarce license agreements suitable as a reference; and the application of the “Top-down” method also faces the difficulty of lacking royalty basis.
In general, the Guidelines is a relatively sketchy document. China’s automotive industry still need seek routes for SEP licensing under the Guidelines which agrees with the FRAND principle while fitting Chinese local situation.
II. Challenges for SEP Licensing in the Field of Intelligent Connected Vehicle in China
1. Top-down design of rules for intelligent connected vehicle SEP license urgently requires improvement.
Related government departments of Japan, the U.S., the EU and other countries or regions leading in the automotive industry have intensely introduced a series of guidance documents for SEP licensing negotiation or have updated the published policy documents for the same.
For example, Japan published a series of rules and guides. Following the Manual of “Hantei” (advisory opinion) for An Essentiality Check in 2017, the JPO released Guide to Licensing Negotiations involving Standard Essential Patents on June 5, 2018 to specify the procedure of licensing negotiations and the method for calculating royalties. Ministry of Economy Trade and Industry (METI) of Japan also attached high significance to SEP and published Guide to Fair Value Calculation of Standard Essential Patents for Multi-Component Products on April 21, 2020, specifying licensing object of SEP for multi-component products, the approach for calculating royalties, and the royalty basis.
The above policies to some extent affect the trend of SEP-related rules and judicial decisions globally and indirectly enhance the international influence and the discourse power in rule making of the afore-mentioned countries and regions.
As compared with major countries in Europe, Japan, and the U.S. leading in the automotive industry, China is featured by a huge number of whole vehicle manufacturers as well as an even larger number of automotive part suppliers. SEP licensing negotiations involve complex technical problems and complicated legal issues. Therefore, the Guidelines itself is apparently inadequate to cope with the complexity in China’s SEP licensing market in the field of intelligent connected vehicle.
2. Confrontations arise in SEP licensing in the field of intelligent connected vehicle due to the fusion with communications field for the automotive industry.
The industrial entities of China’s automotive industry have not yet reached consensus on the reasonable licensed object and the reasonable royalty rates in SEP licensing in the field of intelligent connected vehicle. Main disputes between patent owners in the field of communications and automotive manufacturers are set forth as below.
(1) Disputes over Patent License Level
Communications SEP owners often directly provide SEP licenses for end manufacturers or OEMs.
Whereas, in the automotive industry, it is often a part supplier who deals with issues concerning patent license relevant to the manufactured part; and the royalties will be calculated in the costs of the part, with IP warranty offered to the whole vehicle manufacturer upon sales of the part.
Communications SEP owners attempted to copy the successful licensing practice in the field of communications in the field of intelligent connected vehicle to gain higher royalties. This challenges the business convention of automotive manufacturers of the suppliers supplying the products while handling the risks involving intellectual property issues of the product, which has been formed through years of business practice.
Although China has not witnessed lawsuits over selection of level of patent license in the field of intelligent connected vehicle, as a key link of the global market, China’s automotive market deserves further observations on whether license at the component level or license at the whole vehicle level prevails or both are acceptable in the future.
(2) Methods for Determining Reasonable SEP Royalties
Major methods for determining reasonable SEP royalties in the field of communications include: (1) “Top-down” method, which requires first determining a total royalty rate (or aggregate royalty rate) of the entire industry for all the SEPs under a specific standard (e.g., 3G, 4G), and then determining the royalty based on the actual share of the SEPs held by the patent owner. However, application of this method to the automotive industry faces the challenge that the aggregate royalty rate of the industry is still blank. (2) Comparable license method, which is to determine the FRAND rate in a specific case based on an agreed SEP royalty rate in a comparable license. However, domestic differs greatly from foreign automotive enterprises in either sales volume or selling price, as well as in profit margin and sales scope in particular, which causes great difficulty in finding a comparable license as a reference. Therefore, the field of intelligent connected vehicle in China is confronted with the urgent problem of how to reasonably calculate SEP royalties.
Furthermore, in the field of communications, SEP owners and licensees are relatively concentrated and clear, the FRAND principle is honored, and cross license is prevalent. To the contrary, the automotive industry has a long industrial chain, SEP owners and licensees are isolated, traditional automotive manufacturers lack accumulation in IT-related SEPs and thus are unable to be inter-conditioned by means of cross license, generating more acute conflicts of interest.
3. Patent pool license challenges China’s existing SEP licensing rules in the field of intelligent connected vehicle.
Avanci, which is the largest patent pool of the automotive industry, and Daimler AG and Continental AG, the automotive giant and its part supplier, have been in confrontation for years with regard to SEP royalties. A major dispute between the two parties is whether the automotive industry should follow the SEP license pattern in the field of communications; that is, whether the royalties should be calculated based on the whole vehicle or based on the smallest sales unit module, and whether the royalties should be calculated by a fixed amount or a specific rate. As Avanci has successfully made European and American automotive enterprises yield by starting patent litigation war in Germany and the U.S., and included Japanese automotive enterprises in the patent pool based on negotiations, it can be foreseen that Avanci will continue its royalty strategy in China that is the largest automotive market in the world.
The licensing pattern of Avanci based on whole vehicle is also questioned and opposed by Chinese automotive manufacturers, in that Avanci’s license pattern of licensing only to whole vehicle while refusing licensing to suppliers violates the FRAND commitment made by the patent owner at the standard setting stage. In addition, Avanci’s license pattern of licensing only to whole vehicle may severely impact the existing SEP licensing conventions in China’s automotive industry, leading to new and uncontrollable risks to the automotive industrial chain.
However, it may be merely a matter of timing when Avanci enters China, though it is still uncertain whether Chinese automotive enterprises will join the patent pool, and how to cope with the Avanci’s license pattern to whole vehicle. For instance, Huawei has been an unfaltering supporter of license to non-whole vehicle, and strives for wide-ranged license to automotive manufacturers or the market by means of lower royalty rates or royalties. But Alan Fan, Head of Huawei's Intellectual Property Department, mentioned during an IAM interview in February, 2022 that the possibility of Huawei joining Avanci in the future could not be completely ruled out.
Either way, the licensing pattern via patent pools will significantly influence the reform of China’s SEP license in the field of intelligent connected vehicle.
4. Litigation involving SEP license may raise strategic risks concerning intellectual property rights in future development of Chinese automotive enterprises.
(1) China could become a new hot spot of litigation involving SEP in the field of intelligent connected vehicle.
In the context of globalized standards, market of patent implementers across multiple countries, and localized patents, disputes involving SEPs often lead to parallel lawsuits in a range of countries. China may become a new battle field of litigation involving SEP in the field of intelligent connected vehicle, specifically for the following reasons: (1) from the perspective of SEP implementation, China is a location of highest importance in the global range. Since 2009, China has always been the top one automotive market across the world. In 2021, China ranked first globally in terms of the sales of new energy vehicles for a seventh straight year, with a sales volume of 3.52 million units. (2) From the perspective of SEP owners, more than 210,000 SEPs for 5G are declared worldwide at present, involving almost 47,000 patent families. China has declared more than 18,000 patent families, accounting for nearly 40 percent of the world’s total, staying at the top of the world rankings. Among the top 15 patent applicants in the world, seven are Chinese companies. China has become the most important target market for 5G SEPs.
By far, in addition to Nokia siding with Avanci, domestic and foreign communication suppliers including Qualcomm, Ericsson, Huawei, ZTE, etc. are expecting a share in China’s intelligent connected vehicle market. It is certain that an increasing number of disputes over royalties for global SEPs in the field of intelligent connected vehicle will flood into China in the future.
(2) Chinese automotive enterprises face increasingly severe risks of litigation involving SEP.
Traditional automotive manufacturers in China usually do not participate in setting communications standards and lack understanding of communications technology and SEP. Nor do they have adequate practical experience and ability in handling issues involving SEP royalties, not to mention the ability to defend themselves and counterclaim in the event of a lawsuit, which increases the possibility of losing the lawsuit and yielding to unreasonable royalties.
In addition, the criteria for hearing cases involving SEPs vary from country to country and are susceptible to the influence of relevant policies. Also, disputes involving SEPs are often followed by counterclaims, administrative intervention, injunction and counter injunction, incurring extremely high costs of funding and time for the involved companies. Chinese automotive manufacturers will have to deal with the cost pressure arising from high SEP royalties, huge litigation pressure, and the pressure of injunctions emerging from oversea litigation.
1https://www.huawei.com/cn/news/2020/5/5g-car-eco
2https://www.huawei.com/cn/news/2021/7/license-agreement-volkswagen
3https://www.samr.gov.cn/jzxts/zcyj/202209/t20220916_350090.html
4in 2018, JPO published Guide to Licensing Negotiations Involving Standard Essential Patents; in 2019, JPO revised Manual for Essentiality Check of SEP; in 2021, KIPO released Guides to Standard Essential Patents 2.0, and USPTO published Draft Policy Statement on Licensing Negotiations and Remedies for Standard-Essential Patents; in 2022, EU launched Intellectual Property – New Framework for Standard-Essential Patents, and the METI of Japan published Good Faith Negotiation Guidelines for Standard Essential Patent Licenses.
5XIAO Yangao, ZOU Ya, TANG Miao. Research on Dilemma and Optimizing Mechanism of Royalties for Standard-essential Patents[J]. Bulletin of Chinese Academy of Sciences, 2018, 33(3): 256-264
6Working Guideline of Guangdong High People’s Court on the Trial of Standard Essential Patent Dispute Cases (for trial implementation) Article 18: Royalties for SEPs should be calculated based on (1) most comparable licenses; (2) market value analysis of the involved SEP; (3) license information in a comparable patent pool; (4) other approaches.
7http://www.gov.cn/xinwen/2022-01/12/content_5667834.htm
