Stephen Korniczky, Sheppard Mullin partner Stephen Korniczky, Sheppard Mullin partner

The war over standard-essential patents for connected cars is coming to Silicon Valley.

Telematics supplier Continental Automotive Systems Inc. this morning sued three large holders of patents essential to practicing the 2G, 3G and 4G cellular standards, accusing them of colluding via patent pool Avanci LLC to artificially inflate royalties.

The suit alleges that Avanci, Nokia Corp., Conversant Wireless Licensing SARL and Optis UP Holdings LLC have refused to bargain with suppliers like Continental, in breach of commitments to license its standard-essential patents (SEPs) on fair, reasonable and non-discriminatory (FRAND) terms. Instead, Avanci will negotiate only with automobile manufacturers, Continental alleges, because a $15 royalty on a $30,000 auto will seem more reasonable than on the $100 unit that implements the patented technology.

“Because Defendants could not justify such exorbitant royalties to the suppliers of components and subsystems in the supply chain, they colluded to maintain their exorbitant royalty rates—and thus their monopoly—by refusing to license Tier 1, Tier 2 or Tier 3 suppliers,” Continental argues in a 63-page complaint signed by Sheppard, Mullin, Richter & Hampton partner Stephen Korniczky.

Continental v. Avanci echoes a FRAND/antitrust suit the same Sheppard Mullin team brought earlier this year on behalf of cellular module maker u-blox against InterDigital Inc. in San Diego federal court. In each case they contend that patent holders have “locked in” their technology by including it in connectivity standards, but then reneged on their promises to standard-setting organizations (SSOs) to license on FRAND terms.

But Continental has launched a broader attack that targets multiple patent holders and Avanci, which bills itself as a one-stop solution for licensing Internet of Things technology. Plus Continental is suing in the Northern District of California and requesting an assignment to the San Jose Division, ostensibly on the basis that it operates a large R&D center nearby.

Last fall, U.S. District Judge Lucy Koh of San Jose ruled that Qualcomm’s promise to license on FRAND terms obliged it to license other chip suppliers—not just smartphone makers like Apple. “It has been judicially determined,” Continental’s complaint notes, that patent holder contracts with SSOs require them to license “on FRAND terms and conditions to any implementer within a given supply chain that uses the standards, and not merely to the manufacturers of ‘end-products.’”

“Continental’s lawsuit is meritless and will not deter us from streamlining licensing for the Internet of Things,” a spokeswoman for Avanci said. “Supported by more than 30 licensors and licensees, we will continue to build upon our unprecedented success in creating a one-stop licensing solution for the auto industry.”

Friday’s suit comes as automotive innovation and the role of antitrust have become flash points in SEP licensing. Avanci announced a deal with Volkswagen this week and has now licensed two of Germany’s three biggest automakers. Meanwhile, the Justice Department in December withdrew its 2013 guidance that using injunctions to enforce standard-essential patents may be anticompetitive.

Continental, Ford Motor Co., Toyota Motor Corp. and Volkswagen Group of America Inc. signed onto an April 22 letter from numerous technology companies last month urging the Patent and Trademark Office not to follow DOJ’s lead. PTO Director Andrei Iancu told a House subcommittee Thursday that the PTO is studying the issue and hasn’t made a decision yet.

Avanci was founded by former Ericsson executive Kasim Alfalahi in 2016, promising to bring convenience, predictability and speed to the licensing process for autos, smart meters and connected homes. Ericsson, Qualcomm, Siemens, BlackBerry and Sony are among the companies that have contributed standard-essential patents to the platform.

“Our transparent, open marketplace is accessible to everyone,” Avanci states on its website, “ensuring those companies contributing technologies get a fair return on their investment, and that those using the technologies get a fair price, enabling them to continue developing the future of connected products.”

Continental is a division of Germany-based Continental AG. Known originally for tires, it also supplies products that integrate mobile communications, including GPS, in vehicles and other connected devices. A typical telematics control unit can sell for anywhere from $75 to $100, according to Continental’s complaint. Avanci demands “as much as $15 per vehicle” for a license, which Continental says would wipe out its entire profit margin.

The auto industry expects suppliers to clear the IP rights to their products. If auto makers are forced to pay the license, they’ll push the cost down on suppliers, Continental contends.

Continental alleges that it’s sought licenses from each of the defendants, but they’ve either refused to offer direct licenses or not responded. Avanci allegedly told Continental it’s allowed to license only at the auto manufacturer level, and would seek authorization to license Continental only if Continental agreed in advance to accept Avanci’s “inflated and non-FRAND royalty rates.”

Continental contends that Avanci has not behaved consistently with the principles on its website. “Because it will not license all companies who make standard-compliant products, its pricing methodology is not transparent, and the cost of an Avanci license is not at ‘a fair price.’”

Sheppard Mullin’s team also includes partners Martin Bader, Matthew Holder and Michael Scarborough.