The Role of SEPs in the Auto Industry – Episode 7


February 7, 2022

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  • Matthias Schneider, Audi

Matthias Schneider has been Chief Licensing Officer (patents) at Audi AG until end of 2021. Before he was the Vice President for IPR at Siemens Communication Devices and BenQ Mobile and Global Head of Defensive Licensing at Nokia Corp. Matthias knows both sides of the table working for telecommunication companies and for the automotive OEM Audi for several years. Matthias joined Audi to negotiate important SEP licensing deals. Here Matthias was one of the first to negotiate a contract with the license program of Avanci for Audi where some provisions of this contract are still used across the whole automotive sector.

Matthias believes: “Avanci will later this year launch the 5G patent program and my individual expectation would be an aggregate royalty for 2G, 3G, 4G and 5G probably in the low $20 range.”

However, the price will depend on having again most of the major SEP holders join Avanci so that the coverage of 5G SEPs is high enough to justify the price.

Matthias believes the problem was that the automotive suppliers did not take royalty payments for 2G, 3G and 4G SEPs into account when negotiating the supplier contract years ago, even signing indemnification clauses. Now OEM and the suppliers must negotiate who will pay the royalties and margins in the automotive supply chain are very low. Interestingly, in the past only the high-end brands have joined which may make sense given that royalties for a Fiat are at $15 the same as royalties for a Ferrari. The marginal costs of $15 are therefore much more relevant for certain automotive OEMs. Matthias however points out that it must depend on where in the car the patented technology, in this case the standard, creates value. Is the value higher for expensive cars compared to for cheaper cars? Matthias believes there is no reason why the $15 should not also be applicable to a small low-priced car such as a Fiat or Polo.

So where to license in the value chain? Well, Matthias points out that it is almost impossible to understand where the patented technology creates value when you go to the chip set manufacturer level. Here no one will know where the chip may end up because tracing chips through the supply chain is almost impossible and therefore the patent owner cannot verify if certain end products contain licensed chips. But as soon as you e.g. have (in the cellular communicate space) space an International Mobile Equipment Identifier (IMEI) number, the network access component and its license status becomes traceable. Therefore, licensing on the level of the manufacturer of a network access device (and afterwards) is possible. A SEP license for tier 1 suppliers is thus possible and Matthias also sees increasing willingness from SEP holders to go up at least one level in the value chain with their SEP license offers.

Finally, Matthias comments on the challenge that local courts establish global portfolio FRAND rates even if they set lower rates for certain jurisdictions (e.g. China) compared to Europe and the US. Licensees often prefer to negotiate and potentially litigate on individual patents in single jurisdictions. Matthias believes that courts such as the UK court who set a global FRAND rate for SEP portfolios are stepping a bit out of their comfort zone. Matthias would prefer a WIPO based arbitration body for FRAND rates. How that is managed remains to be seen.

Matthias’ take on 5G and SEP licensing for the IoT is that this will have to work very differently as the royalty income per IoT device manufacturer is expected not as high as for smartphone manufacturers. Even the automotive market is far less lucrative than the handset market, because the number of cars sold globally is only around 7% of the number of smartphones. The main target market for SEP owners thus will remain the handset manufacturers.

Matthias final comments is: The litigation situation is not as bad as many people believe it is. 90% of deals are done without litigation and I am not worried that this will change.

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