'Clash on the horizon' as tech and auto industries continue to merge

As tech and auto industries continue to merge, Greg DeGrazia of law firm Warner Norcross warns of a "clash on the horizon" with increasing risks of patent litigation. "We're running toward a major issue.. while suppliers are scared to sue someone like General Motors because they could go out of business without the orders, companies like Google and Apple are not intimidated by GM, Ford or anyone else," warns DeGrazia, adding that automakers are not the "biggest players in the room." Also, major tech companies such as Apple, Google and Microsoft are litigious in protecting their property with over 1,100 patent lawsuits under their belts already.

As the West Coast's largest technology companies jump deeper into the automotive landscape, fears of increased litigation are bubbling in Michigan.

In May, FCA US LLC and California's Google Inc. signed an agreement to jointly develop 100 autonomous Chrysler Pacifica minivans. Apple, and its Birmingham office, work to extend its Beats by Dre audio brand in FCA products. Ford Motor Co. and Google were rumored to be signing an agreement, but the deal fell through.

Greg DeGrazia, an intellectual property attorney at law firm Warner Norcross and Judd LLP in suburban Detroit, said that as the tech and auto industries continue to merge, a clash is on the horizon.

"We're running toward a major issue, frankly," DeGrazia said. "While suppliers are scared to sue someone like General Motors because they could go out of business without the orders, companies like Google and Apple are not intimidated by GM, Ford or anyone else."

Historically, automakers have always been the biggest player in the room in any negotiation.

Not anymore.

Google's parent company, Alphabet Inc., has a market value near $550 billion, and Apple's market value is more than $585 billion, compared to Ford and GM at less than $50 billion and FCA at less than $9 billion. Apple generated revenue of $233.7 billion in 2015, more than $80 billion more than Detroit's biggest automaker, GM, which reported revenue of $152.4 billion last year.

Google, for instance, has enough cash on hand -- more than $9 billion in the second quarter -- to buy FCA outright.

Patent litigation

Plus, the major U.S. tech players, including Google, Apple and Microsoft Inc., are litigious in protecting intellectual property. The trio has been involved in more than 1,100 patent lawsuits in the past 10 years, compared to the Detroit 3's 204, DeGrazia said.

"Look at the judgments coming out of the cellphone wars," DeGrazia said. "Imagine what the damages could be for 10 million cars."

In recent years, Apple has won more than $1 billion in damages in patent infringement cases against Korean cellphone maker Samsung Electronics Co. Ltd., which uses Google's Android operating system, though many of those cases have been appealed and some overturned.

"What if Google or Apple gets boxed out of the industry? Then they go on the offensive," DeGrazia said. "I fully anticipate patent infringement lawsuits in the pipeline."

Playing nice

Thus far, the two industries have played nice, largely because of the use of joint development agreements (JDAs), said Martin Sultana, partner and IP attorney at Brooks Kushman PC in suburban Detroit.

Agreements with partners within the traditional auto supply chain can save time and smooth development, especially where patents exist. Advantages are magnified when auto companies dive into areas in which engineers have little experience -- such as new software.

"The perception is always that the auto companies better be on the lookout because of Apple and Google," Sultana said. "What they fail to realize is that Silicon Valley needs the auto industry just as much as the auto industry needs Silicon Valley. Working together, nicely, provides a significant advantage to getting autonomous vehicles out in the marketplace."

Sultana said the JDAs are being driven by business decisions, and the auto companies realize Apple and Google are the enablers to get auto customers what they want and it behooves both industries to work toward fair deals.

Complicated deals

But those deals can be complicated, said Claudia Rast, partner at Butzel Long PC in Ann Arbor, Mich.

Dealing with huge tech companies presents a different dynamic for auto companies, which are used to dictating most of the terms of an agreement to their suppliers.

"It's very dynamic right now," Rast said. "The typical (automaker) model of buying tech and owning it doesn't work in this space. The big players out of California carry the big stick, so there's a lot of negotiating going on."

Sultana said the biggest hurdle in the negotiation process is determining the value of the IP.

"Not knowing the value, or future value, of the technology creates the biggest pitfalls," Sultana said. "But there's nothing in the legal framework that can't be overcome. If you've got two parties that want to engage in a joint development, they can make it happen."

M&A maneuvers

In some cases, auto companies are choosing to acquire outright advanced technologies instead of creating JDAs with the tech world's most powerful players.

In May, GM closed on a $1 billion acquisition of San Francisco startup Cruise Automation. Cruise manufactures an aftermarket, roof-mounted autonomous-driving kit.

For GM, the deal provides access to Cruise's "deep software talent and rapid development capability to further accelerate" GM's development of autonomous vehicles. The acquisition is likely to represent one of the largest automotive M&A deals of the year and a deal that shows auto companies' escalating approach to buy technology.

The total value of automotive supplier deals in 2015 and 2016 was $74.4 billion, according to data compiled by Bloomberg, with each of those years far exceeding the $17.7 billion annual average in the previous 10 years. The number of transactions valued at $500 million or more also skyrocketed to 18 last year, triple the level of the previous decade.

"Automotive bankers are definitely spending more time in places like Silicon Valley," Christian Kames, Citigroup Inc.'s head of investment banking for Germany, Austria and Switzerland, and the global co-head of automotive, told Automotive News earlier this month. "The focus areas are electronics, communications and software. In the past, most suppliers didn't really have that kind of technology, but they now know they need to have it to set the industry standards for the future."

Supplier acquisitions

Suppliers are also joining the fold of acquiring tech in lieu of signing JDAs.

Last year, supplier Lear Corp. acquired the intellectual property and technology of Santa Rosa, Calif.-based Autonet Mobile Inc., an internet-based telematics and app service provider for the automotive market, and Michigan-based Arada Systems Inc., which is bringing to market a completely integrated modular unit that connects vehicles to infrastructure, other vehicles and the cloud.

Connecting vehicles to infrastructure and other vehicles is designed to increase safety by enabling the ability to monitor traffic, push safety warnings or allow better traffic flow.

The unit will be modular enough to upgrade the hardware easily, focused on security and software capable of over-the-air updates. Lear has since renamed its electrical business segment E-Systems to better reflect the complexity of its automotive electrical systems.

"There's still plenty of room for the smaller tech companies to get into automotive," Rast said. "It's very disruptive. We're seeing medical device makers and companies designing 'wearables' technology looking to incorporate that tech in the car."

Sultana said, though, as more and more tech comes online, the winning formulas will result in more JDA agreements and less acquisition activity.

"Once the tech starts to mature, the concrete starts to dry, you may see more action down the road," Sultana said. "We'll see JDAs from either coast getting more action."

DeGrazia, however, warns that when the tech does mature, the problems escalate.

"It's a storm on the horizon," he said. "Google and the others are going to make money on their patent portfolio. There's no walking it back. Auto patent infringement lawsuits start rising as soon as autonomous vehicles hit the road."