Connected Cars and the Clash of Two Patent Regimes

The auto industry has not experienced rampant patent litigation among key players. Patent litigation takes a backseat to well-entrenched business relationships. Car makers and multiple tiers of suppliers have for decades managed patent rights through licensing agreements. Original equipment manufacturers (OEMs) of cars have traditionally let their suppliers handle the licensing of patents. Thus, royalties are assessed at the component or subassembly level.

Smartphone manufacturers, on the other hand, generally pay licensing royalties at the end-product level. When it comes to the connected car using technology originally developed for the Smartphone, the jury is still out as to which of these two patent protocols will prevail. The outcome is important because a royalty assessed as a percentage of the price of a $35,000 car will be significantly different from one assessed as a percentage of a $100 subassembly.

The connected car is at a crossroads. Two distinct sets of industry practices have come together by the funneling of technologies into the car of the future. For stakeholders in the nascent connected car industry, the outcome of ongoing litigation — pitting patent owners of cellular technology against car OEMs and their traditional suppliers — may provide some defining guideposts for the industry. The initial licensing agreements executed by these parties also stand to play a role in shaping the future of the industry because, in the world of patent damages, comparable licenses are generally accepted as evidence of industry practice.