connected cars

Guest Author: Ruth Knox, Managing Associate, Linklaters LLP

Given the pace of change in the automotive industry and related technologies, combined with increasing regulatory scrutiny, there are several risks and challenges the global automotive industry can expect to deal with in 2018 and beyond across Europe, China, and the United States.

On April 10, 2018, Foley & Lardner LLP and Linklaters LLP, a global law firm based in the U.K., held a roundtable on the “Future of the Automotive Sector in Europe, China and the United States.” The group covered four major points during the roundtable. They are summarized below.

Major recent cartel claims with respect to automotive parts in Europe

Participants discussed the increasing scrutiny of the automotive sector in recent years by the European Commission with respect to: (i) potential cartel activities (after the historic Carglass case); and (ii) sector mergers. The discussion also centered on the risk that industry standardization of components – while achieving compliance with regulatory and technical standards, developing synergies, and potentially bringing down costs – might run afoul of competition law. With European merger control scrutiny focusing more on production facility locations and car models than type and innovation capabilities, participants suggested that merging companies in this sector must consider antitrust law at an early stage. They also said that additional attention must be paid to the national security reviews that many deals are now subject to, such as those being conducted by the Committee on Foreign Investment in the United States (CFIUS). And they pointed out that the costs of developing connected, autonomous and electric vehicles and components are putting enormous financial pressures on market members to the extent that consolidation in the sector is anticipated.

Key cooperation models emerging in tech M&A around the world

The discussion then turned to recent developments in M&A, as well as the pricing and structuring of incentives to retain startup talent and how startups must ensure proper protection of their IP rights and the inventions that such talent creates. Linklaters Partner Pierre Tourres of Paris said that the development of restrictions on foreign investment is coupled with a strong drive on the part of OEMs to invest in technology companies, some of which are in their infancy.

Linklaters Partner Pauline Debré of Paris pointed out that the EU General Data Protection Regulation will bring sanctions akin to competition law sanctions in scale. She also noted that personal data generated in the EU but processed outside of the EU will also be subject to the regulation, with those subject to the regime being required to prove compliance at any given moment.

Participants also discussed the cybersecurity law enacted in China last year, which requires that personal information and important data that is stored locally be subject to an impact assessment if there is a need to export such information out of the country. They also noted that the valuation of technology companies in China is currently very high, and that the government is strongly focused on developing this market, which is now dominated by local players. And they suggested that CFIUS remains the biggest concern in China with respect to target companies with sizeable operations in the U.S.

Participants also considered the M&A perspective in the U.S., noting that the M&A outlook in the automotive sector remains strong as the market continues to outperform other markets on a relative basis. They noted some headwinds, however, given how long the current positive cycle has lasted and the current rise in interest rates, which they suggested will lower debt capacity and – all else being equal – purchase prices. They also discussed the recent Trump administration decision to review certain environmental and fuel economy standards, and how that decision might impact the continuing imperative towards lightweighting, which will remain a commercial objective.

Foley Partner Steve Hilfinger pointed out that the 2017 Tax Act has provided a boost to disposition activity, given that it offers an opportunity to take accelerated depreciation on certain fixed assets. He also noted that the tech sector continues to be a strong part of automotive M&A, with two transactions alone generating aggregate enterprise value of $23 billion (Mobileye and Harman).

Licensing challenges related to standardized technologies for connected vehicles

A hot topic in telecoms for many years and now of key relevance to connected cars, participants discussed standardization to enable interoperability of equipment. Historically, they noted, the automotive sector has not experienced the same level of litigation as the telecom sector. But with technological development rising, they suggested that a strong licensing strategy will be a key issue for market players. Standards can take years to develop and are achieved when industry players choose one technology over another, after which those that hold the patents over the relevant technology must commit to license to any willing licensee on fair, reasonable and non-discriminatory terms (FRAND or RAND in the U.S.), they pointed out.

The discussion highlighted the risk of an entity abusing its dominant position and of a licensee using contract law to challenge a Standard Essential Patent (SEP) owner to license a technology. Debré noted the right of SEP owners to obtain an injunction in European courts, a powerful enforcement tool that is not generally available in the U.S. She also touched on the basis for calculating royalties, which can be paid as a percentage or as a lump sum.

The trend has been for those seeking to implement the standard to prioritize the SEP owners that hold the biggest portfolio in terms of patents, participants said. Legal and technical assessments also need to be made to review what the standards are, which patents are captured and who the owners are. Because all indications point to a new wave of patent litigation pending, sector members should take a close look at their litigation and licensing strategy, they agreed.

Development of law and policies on electric and autonomous vehicles across the globe

Key insights on the development of the law governing autonomous vehicles in the U.S. were provided by Foley Special Counsel Nick Englund, formerly with the National Highway Traffic Safety Administration (NHTSA). Englund briefed the audience on the role of NHTSA’s Federal Motor Vehicle Safety Standards and its authority over safety-related defects. He also expounded on the U.S. Department of Transportation and NHTSA’s Automated Driving Systems: a Vision for Safety (ADS 2.0). ADS 2.0 emphasizes the importance of (among other things) developing and maintaining a robust product safety validation process (with simulations coupled with testing on tracks and public roads), defining the operational design domain of the vehicle, designing fallback conditions in case of malfunctions, protecting cybersecurity, and educating users on the appropriate uses and limitations of highly autonomous vehicles (those rated on the SAE automation levels 3 through 5). Englund also spoke about pending legislation in the U.S. – the SELF DRIVE Act, which passed the House in September 2017, and the proposed AV START Act in the Senate. Both bills would: create additional exemptions to safety standards for highly autonomous vehicles; preempt state laws related to design, construction, and performance; and address cybersecurity and data privacy concerns.

An overview of developments on AVs across Europe, including several policy and legislative instruments that effectively extend the pre-existing liability rules to incidents involving driverless vehicles, was provided by Ruth Knox, Managing Associate of Linklaters. Legislative and policy activity has progressed more at the national level than at the EU level, she said, and there is consensus that, in due course, there will be movement toward a product liability-based regime that may be unified across the EU. With the increasing importance of incident data recorded in a vehicle’s black box, she suggested that component manufacturers need to think about their insurance coverage in a world where courtrooms have become more proficient in tracing the computer evidence of the operative causes of traffic incidents.

Richard Gu, a Linklaters Senior Consultant in Shanghai, pointed out that the regulatory position on liability for AV incidents is unchanged in China, with several regions enabling testing of AVs. He also highlighted the importance of EV rollout in China, providing an overview of the credit system that incentivizes production of these vehicles.

Whether U.S. liability law for autonomous vehicles will follow the European and China models, or take a different path, participants agreed, remains to be seen.