LNGs vs. SEPs – German Federal Cartel Office says yes to negotiating communities – an opportunity for medium-sized companies?

Standard essential patents, or SEPs for short, are essential for the implementation of certain technology standards in products such as smartphones and vehicles. SEP holders are obliged to grant licenses on fair, reasonable and non-discriminatory (so-called “FRAND”) terms. It is therefore not surprising that for years there have been frequent legal disputes regarding the licensing obligation and, in particular, the conditions, i.e. the amount of the license fees. As a result, a middle ground has been sought for years to find an amicable and satisfying solution for both sides, i.e. licensor and licensee.

As early as 2022, there was a proposal to form so-called LNGs, Licensing Negotiating Groups, which can be seen as a kind of cooperative purchasing group for licenses from SEPs, in order to make license negotiations more efficient by reducing the number of necessary negotiations and thus lowering transaction costs.

After the European Commission had in principle endorsed the proposal of these LNGs as a possible approach and issued corresponding guidelines for them, the German Federal Cartel Office (FCO) has now officially accepted the establishment of the ‘Automotive Licensing Negotiation Group’ (ALNG). The ALNG is a cooperation initiative between BMW, Mercedes-Benz, Thyssenkrupp and VW. The aim is to enable the participating companies to jointly negotiate licenses for standard-essential patents (SEP) required for the implementation of technologies such as 4G or 5G in vehicles.

The FCO came to this conclusion after examining the proposal in accordance with §§ 1, 2 GWB in conjunction with § 32c(2) GWB and Article 101 TFEU. Andreas Mundt, the President of the FCO, emphasized that the cooperation is breaking new ground in terms of antitrust law and that the toleration of the ALNG is subject to the following conditions (see FCO press release dated June 10, 2024):

• Market shares: For joint procurement measures (e.g. joint license negotiations), European competition law sets a threshold of 15% for the joint market share. If this threshold is not exceeded, it is assumed that the members of the purchasing group do not have so much market power that their efforts restrict competition. It is important to note that the threshold applies to both the purchasing/licensing market and the downstream market for the sale of end products.
  In the case of ALNG, the FCO assumed that the combined market share of the (current and potential future) participants in the licensing of general mobile communications technologies will not exceed 15%, while this threshold may be exceeded in the licensing of automotive-specific SEPs. Accordingly, the ALNG is explicitly limited to the licensing of non-automotive standards, in this case specifically general mobile SEPs.
  As regards the downstream markets for the sale of final products (motor vehicles), the FCO considers the threshold at least partially to be exceeded. However, since the costs for licensing SEPs in the area of general mobile communications technologies are comparatively low (regularly less than 1% of the total production costs of a motor vehicle), the FCO concluded that a restriction of competition is also unlikely in these markets.
• Openness: The FCO also considered it necessary and therefore required that the ALNG remain open to providers that could also be entitled to and interested in licensing the respective SEPs.
• Voluntary negotiations: The FCO required the ALNG members to also offer bilateral negotiations with SEP holders and patent pools in order to further mitigate the possible effects of bundling of buyer power.
• Measures to limit information exchange: In order to prevent the exchange of competitively sensitive information between ALNG members, the FCO required the implementation of precautionary organizational measures, which the ALNG had offered earlier. These measures are designed to limit the exchange of information to what is strictly necessary for the joint licensing efforts.
• Notification of future changes: Finally, the FCO required the ALNG to notify it of any future expansion of the scope of activities and any other material changes.

The establishment of licensing negotiation groups (LNGs) such as the ALNG is a relatively new development in the market. While the ALNG emphasizes the advantages of such cooperation, licensors express concerns that such groups could shift bargaining power to their disadvantage. However, the FCO has decided that the ALNG in its planned form does not raise any serious competition concerns as long as the established framework conditions are adhered to.

So far, the ALNG appears to be the only “buying syndicate” for FRAND licenses. In the future, however, smaller SMEs could also join forces to form such LNGs in order to negotiate more cost-efficiently lower-priced FRAND licenses with SEP holders or SEP pools, not only in the 4G/5G/6G area, but in all areas in which standards have been developed, such as IoT, robotics, coding, etc.

However, it remains to be seen whether further LNGs will be formed, following the example of the ALNG and relying on its toleration by the FCO. Critical voices see the FCO’s market definition as too broad, for example, or see a loss of time and efficiency due to the possibility of (downstream) bilateral negotiations between individual ALNG members and SEP holders.