Widely unnoticed by a broader audience (outside the IP community), in June 2024 the German competition watchdog (“Bundeskartellamt” or “BKA”) endorsed the German car industry’s plans to pool their standard essential patents (“SEP”) in-licensing efforts. The decision is based upon EU Commission Guidance to joint purchasing agreements between competitors, yet fails to touch upon any of the specifics of SEP licensing and litigation. To note that the decision coincides with the current unrest in the German car industry would not do justice to the Bundeskartellamt, an independent body known for being politically independent. However, the decision does raise interesting legal questions, some of which I intend to explore in more detail below. I conclude that ALNG is probably not the best precedent for other licensing negotiation group (“LNG”) initiatives to base their case on, for various reasons. 

The German ALNG case

The case presented to the BKA concerned the intention by Volkswagen, Mercedes-Benz, BMW and Thyssenkrupp to cooperate through an Automotive Licensing Negotiation Group (“ALNG”) when negotiating the terms and conditions of future SEP (mainly 4G, 5G, and 6G) licenses to valid and infringed patents held by third parties (SEP owners) and covering technologies essential to provide in-car connectivity, automated, and/or autonomous driving functionalities. Volkswagen, Mercedes-Benz, BMW and Thyssenkrupp are competitors not only in downstream product markets (Volkswagen, Mercedes-Benz, BMW) but, more importantly, in upstream purchasing markets, i.e., the SEP licensing markets (Volkswagen, Mercedes-Benz, BMW and Thyssenkrupp). 

Joint purchasing vs buyer cartel

As a result, the question for the BKA to answer was whether ALNG was a joint purchasing agreement that, if kept within the limits set by the EU Commission in its Horizontal Guidelines (“EU Commission Guidance”)², is legal or whether ALNG was in effect an illegal buyer cartel restrictive of competition within the meaning of Section 1 of the German Act against Restraints of Competition (“ARC”) and Article 101 of the Treaty on the Functioning of the European Union (“TFEU”). ³

The BKA opted for the earlier, noting that it would “tolerate” ALNG provided only that it would be and remain: ⁴

• Limited to “general mobile communication” standards such as 4G/LTE, 5G and 6G;
• Open to new joiners, notably automotive parts suppliers on upstream market levels (upstream of the OEMs) that the BKA alleges “may have a competition law claim for a license of their own, separately and independently of the OEMs”);
• Voluntary in that patent owners and pools can choose to negotiate with ALNG but are under no obligation to do so; and
• Safeguards are in place to avoid illegal information exchange between ALNG members beyond what is necessary to implement ALNG. 

When looking at these preconditions more closely, several observations are worth noting:

Market definition

First, and most importantly, the BKA’s stance is based on a very (not to say too) broad market definition. The BKA advocates one single licensing market for “SEP for general mobile communication” (vs automotive specific) technologies and standards. In doing so, effectively the BKA puts car makers into one bucket with, say, mobile handset, smartwatch, laptop, TV, lawn mower or any other manufacturer of connected devices (“IoT market”) – to then establish that on such an encompassing IoT market ALNG’s combined share of total demand is below 15% (i.e., the safe harbour defined by the EU Commission Guidance for joint purchasing agreements between competitors).⁵

While it is true that manufacturers of IoT devices (and modern cars are nothing but IoT devices) share a common demand for licenses to mobile communications SEPs (because the technology is the same, regardless of which device it is being implemented in), that does not necessarily mean that all IoT manufacturers form part of one single market. Market definition is a tool to identify and define the boundaries of competition between firms. The main purpose of market definition is to identify the competitive constraints that the undertakings involved face.⁶

Apart from the fact that the competitive constraints faced by lawn mower manufacturers, for example, are very different from those faced by car manufacturers in downstream product markets, upstream, on the SEP licensing markets, those very constraints are set in frame by the concept of FRAND-licensing.⁷ The undertakings involved are SEP owners (licensors) on the one hand and implementers (licensees) on the other. SEP owners who have given FRAND licensing commitments for their patents must be prepared to grant SEP licenses on FRAND terms, while implementers (IoT equipment vendors or manufacturers) wishing to benefit from such commitments must negotiate in good faith and accept licenses on FRAND terms. In other words: The competitive dynamics of SEP licensing differ from the sale and purchase of tangible goods and assets in that, validity and infringement assumed, purchasers/licensees cannot switch their demand in response to a SSNIP⁸ (but still FRAND) price increase. They are under an obligation to license on FRAND terms, but in return benefit from being able to use the patented technology even before the conclusion of a license on FRAND terms. 

It is therefore for good reason that in Huawei vs ZTE the Court of Justice of the EU (“CJEU”) relied heavily on “customary industry practices” to identify the FRAND terms and conditions. An encompassing SEP licensing market for any and all IoT devices is anything but customary industry practice. The industry’s practice is far more nuanced, distinguishing even within one and the same product (e.g., mobile handset) market between different groups of buyers/licensees (e.g., low volume/value vs high volume/value vendors, early movers etc.) and agreements (e.g. multi-element vs single license agreement, broader cooperation agreement or anchor client agreement). 

To justify its condition that ALNG must be open to new joiners, particularly automotive suppliers, the BKA itself references the concept of component level licensing i.e., suppliers “may have a competition claim to a license of their own”, suggesting thereby that market levels are to be kept separate. Whether or not you endorse the concept of component level licensing, establishing one overall SEP licensing market for IoT devices in the same breath appears inconsistent. Also, the value share of a mobile communication SEP implemented in a designated mobile communication device (take a mobile handset or in-car telematic control unit (“TCU”), for example) may be much higher, and so may be the relative⁹ range of FRAND fees available to the SEP owner, than the value share of the same SEP implemented in a complete car (i.e., when the car manufacturer and not the component manufacturer is the licensee). 

To determine the relative value of a SEP license is up to the SEP owner, on the one hand, and the implementer, on the other, in each individual case in free-market FRAND negotiations. The market definition applied by the BKA, however, bears the potential of deterring such free-market FRAND negotiations as it blurs market levels, allowing for the creation of one-sided market (i.e., buying) power by ALNG. The competitive concerns surrounding one-sided buyer power become even more prevalent where ALNG members do not feel bound to the rate collectively agreed through ALNG but retain the right to engage in individual follow-on negotiations to obtain a better deal. I will get back to this aspect further down below (see “imbalance of power”).

Reverse patent pool?

One could argue that buying power does no harm to competition, and is actually pro-competitive, where it serves to neutralize opposing market power by suppliers (licensors), as may be the case with large patent pools. However, on closer examination, the reverse patent pool argument seems flawed. 

Patent pools are considered pro-competitive because (and for so long as) the technologies bundled within the pool are complementary to each other i.e., when they are both or all required to produce the product or carry out the process to which the patented technologies relate¹⁰. LNGs, by contrast, bundle substitute rights of competing buyers (upstream on the SEP licensing market) as well as, to some extent, competing sellers (downstream on the market for, in the case of ALNG, the sale of connected new vehicles). 

Imbalance of powers

Another difference to bear in mind between patent pools and ALNG is that license negotiations with pools (such as, in the automotive field, e.g., Avanci) are binding in that they will lead to the conclusion of a license if successful. In contrast, negotiations with ALNG are non-binding on its members: they can sign up to the terms pre-negotiated between SEP owners and ALNG but do not have to do so. In fact, ALNG members expressly retain the right to individual follow-on negotiations, calling into question any alleged efficiencies of a “one-stop licensing shop” for SEP owners and opening the door for collective delay (“hold-out”). 

SEP owners, on the other hand, are required to waive their right to parallel negotiations with individual ALNG members as a condition to negotiating with ALNG, and they are barred from seeking injunctive relief in court against any one or more of its members for so long as the negotiations with ALNG continue.¹¹

Mindful of this imbalance of negotiation powers, it is difficult to imagine that ALNG members will have any incentive to progress the timely conclusion of a license on FRAND terms for as long as the negotiations with ALNG continue.

(No) efficiencies and hold-out 

ALNG will argue that FRAND is not a uniform tariff but rather a range of terms and conditions, and that one collective rate across market levels and industries is counter to customary industry practice as it would lead to low value users effectively subsidizing high value users (implementers). Right they are. However, in that case, why bundle substitute rights of competing buyers to begin with – other than to jointly and collectively set a ceiling on maximum rates from which to negotiate further rebates in individual follow-on negotiations? And doesn’t this only support the argument that there is no single market for the licensing of “general mobile communications SEPs” used in any and all IoT devices across various industries – in which case, likely, ALNG’s combined share of demand would be above the 15% threshold stipulated by EU Commission Guidance and referenced by the BKA?

It would have been interesting to see the BKA deal with these considerations. Unfortunately, none of them are being touched upon in the 10 June 2024 letter.¹²

Practical considerations

Instead, the BKA seems to rely heavily on the fact that ALNG is structured such that negotiations with ALNG are voluntary. SEP owners may choose to negotiate with ALNG (in which case they must not seek an injunction in court and must not start or continue parallel negotiations with individual ALNG members, see above) but they do not have to. In theory, this is true. However, in practice refusing to negotiate with ALNG will most certainly be held against SEP owners as an indicator of unwillingness to license in subsequent court proceedings. 

SEP owners, in return, may want to consider arguing unwillingness on the side of any ALNG member who chooses to refuse individual negotiations and point the SEP owner to ALNG. Moreover, SEP owners may have the BKA’s competitive assessment, including market definition, reviewed in court by arguing that the infringer cannot rely on a previous offer made by ALNG because any such offer is (or may be, subject to court review) based on an illegal buyer cartel. If the infringer then failed to make an individual offer, next to any potential ALNG offer, or refused to engage in individual negotiations from the outset, it risks losing on FRAND and being injuncted – demonstrating again that ALNG’s claim for exclusivity in license negotiations (if and once started with ALNG, see above) is probably not in its members own best interest. 

Concluding remarks

The German ALNG case has brought LNGs and how to deal with them back on the antitrust agenda. The discussion will continue. The EU Commission is currently reviewing its 2014 Technology Transfer Regulation and corresponding Guidelines.¹³ The current draft does not contain any reference to LNGs, but stakeholders around the globe have already voiced concerns, pushing for further guidance.¹⁴ Other law enforcers, including in the US,¹⁵ have taken a less favorable stance towards LNGs in the past, cautioning against potential anticompetitive risks, such as price-fixing or market allocation, and so likely the discussion will continue. For the time being, the German ALNG case stands on feet of clay, and other LNG initiatives, whether inside or outside Germany, should exercise caution when citing ALNG as a precedent. 

If you need more information or further guidance in this area, please contact Dr. Stephan Waldheim.

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¹ Stephan Waldheim is partner with Bird & Bird LLP, based in the firm’s Düsseldorf office. The views and opinions expressed in this article are solely those of the author and do not represent the views, opinions, or positions of Bird & Bird or any of the clients with which the author is affiliated. This article is intended for academic and informational purposes only and does not constitute legal advice. The author’s statements herein should not be used or relied upon in any legal proceeding or construed as binding in any court of law.

² Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, OJ C 259/1 at 273 et seqq.

³ Articles 1 and 2 of Council Regulation 1/2003, OJ 2003 L 1/1, provide that the cartel prohibition in Article 101 TFEU (and Section 1 ARC) takes direct effect within the Member States, no prior BKA decision to that effect being required. Formally, therefore, the BKA was under no obligation to review the case, and it did not consequently issue a formal and appealable decision. Antitrust compliance was and remains for ALNG members to assess (“self-assessment”). However, in line with best practices ALNG members sought guidance from the BKA on their antitrust assessment which led to an informal letter by the Head of Unit dated 10 June 2024 confirming the parties’ self-assessment. When this article speaks of “decision” it means the 10 June 204 comfort letter. A redacted version of the BKA’s comfort letter can be found here.

⁴ See BKA decision, loc. cit. at footnote 3.

⁵ See above, footnote 2.

⁶ EU Commission notice on the definition of relevant market for the purposes of Community competition law, OJ 1997 C 372/5.

⁷ FRAND meaning „fair, reasonable, and non-discriminatory” i.e., a framework of mutual duties and obligations as identified (mainly) by the CJEU in Huawei vs ZTE (C 170/13) as well as national court practice following Huawei vs ZTE.

⁸ Small but significant non-transitory increase in price.  

⁹ Relative to the overall sales price of the device at issue.

¹⁰ EU Commission, Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements, OJ 2014 C 89/3 at 244, 251.

¹¹ See BKA decision, loc. cit. at footnote 3.

¹² Above, footnote 3.

¹³ See https://competition-policy.ec.europa.eu/public-consultations/2023-technology-transfer_en 

¹⁴ See https://ieu-monitoring.com/editorial/eu-commission-unveils-evaluation-of-eu-competition-rules-for-technology-transfer/476991?utm_source=chatgpt.com 

¹⁵ See https://www.ftc.gov/sites/default/files/documents/public_events/joint-venture-hearings-antitrust-guidelines-collaboration-among-competitors/ftcdojguidelines-2.pdf?utm_source=chatgpt.com; also https://www.ftc.gov/news-events/news/press-releases/2024/12/ftc-doj-withdraw-guidelines-collaboration-among-competitors?utm_source=chatgpt.com