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IP Threats and Collaboration in the Auto Industry

George Selden driving an automobile circa 1905.

George Selden driving an automobile circa 1905.

In 1903, Henry Ford was hit with a patent lawsuit while watching his first automobiles get loaded into boxcars. IP issues have plagued the auto industry every since.

Author Richard Snow tells the story of “the father of all patent trolls” in his book I Invented the Modern Age: The Rise of Henry Ford. A New York patent attorney named George Selden submitted a patent application in 1879 for a drawing of a “a horseless carriage powered by an internal combustion engine.” At the time, this vision was technologically out of reach, so Selden regularly made minor amendments to his patent application to keep it alive. In 1895, he was issued U.S. patent No. 549,160 for “the production of a safe, simple and cheap road locomotive light in weight, easy to control, and possessed of sufficient power to overcome any ordinary inclination.”

However, Selden did not have the resources to do anything with this patent, and so sold it in 1899 to financier William Whitney. Shortly thereafter, Whitney’s lawyers began sending out letters to American carmakers: “Our clients inform us that you are manufacturing and advertising for sale vehicles which embody the invention of the Selden patent. . .  We notify you of this infringement, and request that you desist from the same and make suitable compensation to the owner thereof.” Ford was the only automaker to fight the lawsuit, and he won.

Today, over 110 years later, automakers still deal with IP threats on a regular basis. The number of lawsuits filed against automakers by patent trolls rose from 17 in 2009 to 107 in 2014. These lawsuits often result in six and seven-figure settlements, and represent a serious drain on the automotive industry. With this spectre hanging over their heads, automakers can’t fully innovate, grow and prosper. It is time for the industry to band together and fight back.

Accelerating IP threats

The number of patent assertion lawsuits has grown exponentially over the past ten years, and the auto industry is one of the hardest hit. Cars have evolved to the point where they are essentially computers on wheels. The auto industry is becoming more about “technology” than “engines and tires” as car manufacturers integrate high-tech innovations from other sectors, including WiFi, cellular technology, audio technology, networking technology, security, connectivity, voice commands, video technology, mapping, GPS, and more.

These technologies were not invented by the auto industry, which means car makers do not own the original IP. They also represent historical hotbeds of NPE interest, and by incorporating these technologies, automakers essentially put targets on their foreheads. For instance, one European automaker has been hit with 119 NPE lawsuits for technology, such as “digital data processing.” A troll doesn’t care if its technology is used in a phone, PC, camera, or automobile. Money is money.

Further complicating the issue is the fact that car makers generally do not develop these technologies themselves, but rather rely on hundreds of small suppliers that operate in a highly competitive and price sensitive environment. Suppliers are vulnerable because of their working relationships with automakers. This also makes them dangerous because they have insight into the inner workings of car manufacturers and use this knowledge to file patents that will be relevant to their buyers. Their patents are potent.

In the face of price pressure and consolidation, some suppliers have started selling off patents to NPEs; NPEs are also approaching suppliers to entice them to sell. Selling patents to an NPE amounts to shooting a torpedo in the water — you lose control over the patents and who gets sued by them. To an NPE, suppliers are small fry, and they are interested in the big fish.

NPEs do not want to sue a supplier’s competitors because the amounts they can collect are based on the value of the price of the accused product. NPEs would rather sue an automaker selling a $30,000 car than the company that makes a $500 engine controller for the car. They target deep pockets, and suppliers serve as the IP gateway.

Hitting the brakes on trolls

Most battles against NPEs are fought on a defensive, case-by-case basis. An automaker gets slapped with a suit and reacts, generally by settling. However, this response just fuels NPE activity because they survive based on settlements. Protecting your business, curbing trolls, and strengthening the auto industry requires a proactive, collaborative approach.

The first step of an offensive strategy is to forge a strong bond with suppliers. Carmakers want and need deep technical relationships with their suppliers, as well as a stable supply chain. The best way to establish that trust is to participate together in a community that bands against NPEs. This makes trust more than a “gentlemen’s agreement” that could crumble under the pressures of competition and consolidation.

As discussed above, NPEs prey on vulnerability. Joining a community makes a clear statement that an automaker is a) backed by heavy hitting supporters and resources and b) committed to combating NPEs. NPEs will be less likely to go after a company that is a member of an anti-troll network.

In addition, collaborating with other private sector businesses helps weed out the causes of NPE activity, rather than just addressing the symptoms. For example, more than 80 percent of patents litigated by NPEs are acquired from operating companies. If operating companies collectively pledge not to sell patents to NPEs, they effectively cut off NPEs’ feedlines.

There are a number of communities out there today, backed by nonprofit and for profit organizations, that fight trolls through collaboration. Some for-profit companies that help companies lower their risk of patent litigation through “defensive acquisitions;” Our company is a member of LOT Network, a non-profit community that operates through a membership agreement, whereby all members are granted a license to patents in the membership portfolio should they be transferred to a PAE, thus permanently immunizing members from PAE litigation against those patents.

Community cooperation has benefits for automakers and suppliers alike. Reducing what we spend on PAE litigation means that we can put those funds toward innovation.

In a PAE-safe ecosystem, auto makers can be more comfortable sharing confidential information with suppliers because they don’t have to worry about suppliers selling to PAEs. The resulting more stable supply chain is good for customers and good for business.

For suppliers, community membership gives them access to a vast and valuable library of IP assets that they would not otherwise have access to, without limiting their ability to sell IP when necessary. As a result, they have more freedom to incorporate a broader range of technology into their products. Collaboration also lowers the risk of litigation from other suppliers that sell to PAEs and suppliers will have fewer indemnification obligations to their customers, which enables them to enjoy lower litigation costs that they can pass on to customers (or offer broader indemnification).

By collaborating, everyone in the auto ecosystem enjoys the benefit of a more stable supply chain and can develop deeper technical relationships. They also serve as better corporate citizens. Cooperation will lead to more cost-effective innovation, better technology and better products. Everybody wins… except the trolls.


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Join the Discussion

4 comments so far.

  • [Avatar for Dan]
    February 17, 2016 11:04 am

    Very smart article. It would benefit, however, from at least some mention of the risk of antitrust liability for collaborating with competitors — especially when agreeing among themselves “not to sell patents to NPEs.” The FTC and DOJ provides guidance on how intellectual property owners can collaborate without violating antitrust law. One such document is here: http://www.justice.gov/atr/chapter-3-antitrust-analysis-portfolio-cross-licensing-agreements-and-patent-pools

  • [Avatar for Tony]
    February 18, 2016 08:40 am

    Indeed interesting, but it ignores the OEM strategy of collecting multiple design patents on each component to prevent competition for aftermarket parts, which drives up the cost of ownership for the consumer.

  • [Avatar for Bob Taylor]
    Bob Taylor
    February 18, 2016 12:45 pm

    Mr. Nakajima, an executive of a multi-billion dollar enterprise, is telling us that the automobile industry would make more money if the companies that comprise it could avoid paying for the use of technology that – by his own admission – they did not invent. In this respect, his complaint is indistinguishable from those of large American corporations who conjure up the “patent troll” boogeyman to deplore the fact that their use of technology owned by others may require some form of payment. A “troll,” in this verbal construct, is any owner who expects to be paid for the use of technology covered by a patent.
    Lost in this discussion is a critical point: we have a patent system for the very reason that some companies – automobiles may be an example – are better at implementing and marketing new technology than they are in developing it. The patent system allows smaller companies and inventors willing to take the enormous risks associated with creating new technologies to share in the value of doing so, even when they do not have the skills or resources of multinational corporations to develop and market what they invent. That this point is being lost on the business world is unfortunate indeed.
    More problematic still is the suggestion that an entire industry band together collusively to refuse to deal with those they perceive as trolls. Mr. Nakajima needs antitrust advice – BADLY. The decision of the Fourth Circuit last year in a case entitled SD3 and Saw Stop v. Black & Decker et al should give considerable pause to anyone who thinks that concerted refusals to boycott licensors of technology is a good idea.

  • [Avatar for Sandi]
    February 18, 2016 07:35 pm

    Concerns about competition have been vetted by well-respected experts in the US; the DoJ and FTC have well established that patent holders are free to license their patents if they choose in the interest of reducing the risks of litigation. LOT membership is voluntary and open to everyone, including individual inventors, universities, PAEs, and companies of any size or industry. Everyone is treated equally and signs the exact same agreement. LOT is pro-competition; signing the agreement does not prevent companies from pursuing the traditional defensive use of patents in the way that they were intended; it just protects companies against unnecessary patent troll litigation.