Cyber risk and project contracts
Cyber risk in projects has been rising up on the boardroom agenda.
Autonomous, connected driving is currently at the forefront of developments in business and technology. Not a week passes without new superlatives of developed technology coming to light, foreshadowing a shift in one of the most powerful businesses around the globe. Automated driving functionality is becoming an ever-increasing area of interest across the entire value chain of the automotive industry as a whole.
In Germany, the automotive industry continues to serve as a cornerstone of the German economy and home to more than 770,000 employees active across a broad spectrum of enterprises from OEMs to suppliers of different tier levels. More than 70 percent of all premium brand vehicles produced worldwide are manufactured by German OEMs serving all global markets.
While currently mainly concentrated in the premium brand sector, automated driving functions are continuously finding their way into new model launches.
Connectivity and communication technology – V2V as well as V2X communication – could be considered as the main foundation paving the way for the successful implementation of autonomous driving functions. The necessity to remit large amounts of data and information in real time, not only to other vehicles but also to relevant platforms such as data servers providing information regarding the weather, driving conditions or traffic, provides for specific requirements of the technology used.
While DSRC is widely regarded as the technological solution for the implementation of autonomous driving and the communication V2V and V2X in the US, in Germany as well as across the European Union, the technology identified of being capable to implement automated driving functions is the yet to come 5th generation mobile network (“5g”). DSRC technology in Germany is already in use for electronic road tolling systems such as Toll Collect for trucks on motorways.
In Germany, 5g is presumed to be the key technology capable of enhancing various aspects of smart industry including the internet of things as well as connected driving in the context of autonomous driving.
From an operational point of view 5g technology is, however, still in its infancy.
Various aspects of the technical implementation of a comprehensive 5g network still require a good amount of research and development. The absence of a specific regulatory framework for 5g can actually propel such development.
The potential advantages of 5g in comparison to the current technology are tremendous. 5g allows for an up to 1000 times higher transmission capacity, approximately 10 times higher speed and an expected 10 times lower latency period allowing for real-time transfer of information. This is accompanied by an envisaged full accessibility cover as well as a reduction of energy usage.
Proponents of DSRC argue that DSRC already today allows all desired and required V2V as well as V2X communication. However, the prominent technical opinion in Europe is that the technological capacities of 5g will – most likely – surpass DSRC technology and prevail.
The German government is actively facilitating the implementation of a 5g infrastructure with a clear focus on connected driving functions.
The German Federal Ministry of Transport and Digital Infrastructure (Bundesministerium für Verkehr und Digitale Infrastruktur – BMVI) announced a five-step plan towards the implementation of 5g in Germany including public funds in an amount of more than EUR 80 million. This five-step plan provides for:
According to the five-step plan, a comprehensive roll-out of 5g technology is envisaged to be finalized by 2020 the latest.
Particularly when applied in cross-border constellations, autonomous driving within the European Union will depend on common standards and regulations. In order to facilitate new technologies and secure the leading role of the European Union in the telecommunication sector, the EU has launched the Digital Single Market initiative in May 2015. This initiative aims to secure the seamless access and exercise of online activities provided for under the conditions of fair market competition as well as high levels of data protection. According to Andrus Ansip, the Vice-President for the Digital single market, the full implementation of such Digital single market belongs to the top priorities of the European Commission.
In this context, a “5g action plan” was introduced on September 14, 2016 which envisages supporting the implementation of a 5g infrastructure across the Digital Single Market by no later than 2020. This action plan provides for a roadmap for public and private investments in context of such 5g infrastructure. This is accompanied by the proposal regarding the EU directive establishing the European Electronic Communications Code (Recast) in September 2016.
This directive will provide for EU wide regulations and objectives regarding the telecommunication industries and will apply to providers of telecommunication networks as well as service providers.
In the following paragraphs we will provide a short overview update of the current legal landscape of autonomous driving in Germany. In particular, we will elaborate on anticipated regulatory changes aiming at further facilitating automated and highly automated driving functions. Furthermore, we will illustrate specific key legal areas which are of specific relevance with a view to autonomous driving.
In general, automated or even autonomous driving is mainly governed by the applicable road traffic regime in Germany. The latter is based on German national law but is also strongly influenced by European and international law. V2V and/or V2X communication is inextricably linked to the further development of autonomous driving functions. Its integration into the regulatory landscape of autonomous driving is therefore of utmost importance.
Whilst technology has already progressed quite far, the regulatory framework for automated driving as well as V2V and/or V2X in Germany still remains underdeveloped. This stems from the fact that the applicable road traffic regulations were of course not drafted with automated driving in mind.
The German government is well aware of the gaps in the current regulatory framework and is advocating reform on both national as well as international levels. Some of these reforms are likely to be already in effect.
In this context, the draft bill for a revised German Road Traffic Act (Straßenverkehrsgesetz) marks an important step towards a comprehensive legal framework allowing for various functions of automated driving in Germany.
Assisted driving (i.e., supportive tasks are performed by the vehicle’s system independently within certain limits) and partially automated driving functions (i.e., vehicle’s system automatically handles steering, braking and acceleration of the vehicle for a certain period of time or in specific situations) are to a certain degree admissible under the current regulatory framework in Germany and are thus already offered as technical features of vehicles in the market today.
There are no obstacles under the German Road Traffic Act or under the 1968 Vienna Convention on Road Traffic (Wiener Übereinkommen über den Straßenverkehr), as the concerned assisted driving and partially automated driving functions still require the driver to constantly monitor the vehicle’s systems. In other words, the aforementioned regulations still require the driver to have full control of the vehicle at all times.
Highly automated driving functions (the vehicle’s system no longer requires constant monitoring by the driver), fully automated driving functions (driver does not need to monitor the system) and autonomous driving (“driverless vehicles”) are inadmissible under the current regulatory framework in Germany. The primary addressee of the provisions of the German road traffic regulation is a human driver.
Highly automated driving functions or even autonomous drivingwill require substantial adaptation to the German Road Traffic Regulation.
A further step towards such adaption of the regulatory framework is the draft bill for a revised German Road Traffic Act. The draft bill was first initiated in 2015 by the BMVI and labeled the “Strategy for Automated and Connected Driving.”
In July 2016 the BMVI added drafting in relation to highly and fully automated driving functions (not autonomous driving). In December 2016 the Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz – BMJV) revised the aforementioned drafting regarding the amendment of the German Road Traffic Act.
The revised draft bill introduces, amongst others, the legislative basis, which needs to be implemented by the respective administrative authority, for autonomous (i.e., driverless) parking systems. Such driverless functionality will then be possible with low speed on certain parking spaces, which are separated from public roads.
Further autonomous driving functions are not addressed by the draft bill. However, the draft provides for the admissibility of highly automated driving functions and fully automated driving functions in Germany. These highly automated and fully automated functions, however, still require the driver to immediately resume control over the vehicle when (1) the system requests the driver’s control or (2) when the driver actually recognizes or had to recognize due to obvious circumstances, that the prerequisites for the intended use of the fully or highly automated driving functions are no longer fulfilled.
In addition, the draft bill provides for the permanent recording of data regarding the automated driving functions.
The draft bill is, however, a topic of an ongoing debate. In particular, the official statement provided by the Federal Council of Germany (Bundesrat) after its first reading of the draft bill addresses doubts whether the envisaged legislation will indeed provide a sufficient legal framework for the envisaged autonomous and automated driving functions. In particular, the statement criticizes that the draft bill does not provide legal certainty for the respective end-user as to when exactly they may rely upon the autonomous and automated driving functions. Furthermore, the Federal Council of Germany notes that additional pieces of legislation have to be amended in order to allow a full scaled implementation of autonomous and automated driving functions (e.g., the German regulations authorizing the use of vehicles for road traffic; laws on data processing and protection). In particular, the statement criticizes that the draft bill does not provide legal certainty for the respective end-user as to when exactly they may rely upon the autonomous and automated driving functions. Furthermore, the Federal Council of Germany notes that additional pieces of legislation have to be amended in order to allow a full scaled implementation of autonomous and automated driving functions (e.g., the German regulations authorizing the use of vehicles for road traffic; laws on data processing and protection).
On the “Digital Testfeld Autobahn” – the A9 motorway in Bavaria – various projects are carried out testing the digital infrastructure for V2V and V2X communication in real-time. This will include vehicles with automated driving functions as well as the testing of autonomous driving.
The A9 motorway will be a dedicated testing facility – in addition to being a testbed for automated and autonomous driving – for the new 5g technology and its applicable V2V and V2X functions.
In addition, Germany is currently cooperating with France regarding a combined digital testing facility for cross-border real-time traffic. The testing area will be between Merzig in Germany and Metz in France and will focus on the following areas:
The topic of autonomous vehicles cannot be looked at without considering the matter of data protection. As portrayed in further details below, automatized cars today and especially fully autonomous vehicles in the future operate by collecting and processing numerous data, which may be traced back to a specific individual. Several legal challenges, especially for the manufacturer of such vehicles, or the provider of connected services, arise from this situation. Hereafter we are trying to point out the main legal aspects and present the current status of legislation in the EU and Germany concerning this issue.
The data collected by autonomous vehicles (location data, sensor data, etc.) are regularly deemed as “personal data” according to the EU and German Data Protection Laws (now the German Federal Data Protection Act, (Bundesdatenschutzgesetz – BDSG) and as of May 2018 the EU General Data Protection Regulation (GDPR)), since these can be traced back to the owner, driver or passenger, information about personal or factual circumstances of a determinable person. Most data collected by modern cars is attributed to the vehicle identification number (“VIN”). Although one may argue that such data may not relate to a person but only to the car, it can quite easily be attributed to the owner and/or driver of the car. Car data attributed to the VIN or the license plate is considered personal data in Germany according to the Düsseldorf Working Party (Düsseldorfer Kreis), a joint conference of the data protection authorities of the Federal Republic and the “Länder” (the German federal states).
With autonomous vehicles, it is very likely that the vehicle will be online constantly and also generate data attributed to the vehicle’s IP address, which will also be considered personal data.
In detail, in order to assess whether the personal data is collected and who is the (responsible) controller, one has to distinguish between “online” and “offline” vehicles. In the case of cars with no internet connection, the data saved “inside” the vehicle will be collected by the person or organisation who reads it out, usually the car garage which then is considered to be the controller i.e., the responsible entity.
Today, vehicles are “learning machines”, which, in order to predict the behavior of traffic participants, must be able to “think” as a human being. This is done by collecting sensor data, which are stored and analyzed in order to recognize patterns of behavior from other traffic participants. An example of this would be that the autonomous vehicle must have the ability to recognize the movements and glances of playing children to determine if they are about to run onto the road. Thereby the enormous amounts of data accumulated cannot be stored locally.
On the other hand, a kind of “artificial swarm intelligence” can be created by networking the vehicles among themselves and with the manufacturer, in the course of which vehicles participate in the “learning progress” of the others. The “data collection” is then carried out at the time of transmission and those persons or companies that receive this data would be considered the responsible controllers. These could either be the vehicle manufacturers, or service providers such as network operators, portal operators or app providers. It remains to be seen to what extent classical car manufacturers will offer the underlying IT services, or if they will solely serve as hardware producers, while other companies build and operate the underlying IT system allowing for the “intelligence” to be installed into the vehicle. In each case, EU data protection laws require full transparency, which actor in this concert is responsible for what, and who has control over which data.
As a general principle, each company processing personal data as a controller needs a legal basis to do so. For selling and offering services around autonomous vehicles, this basis may include:
None of the above grounds apply in all cases. On the contrary, the legal situations of autonomous vehicles are complex with many different players involved with each having different purposes for the data collected. Given this complexity, setting up the data protection framework for services on autonomous vehicles requires a diligent legal review of the specific type of collection, storing, and processing of data that is in use.
The data processed for the transportation service itself usually fits under the legal permission performance of a contract. But it is necessary to analyse the contractual relationships between the owner of the car, the manufacturer, the service/platform providers on the one hand and the respective driver or passenger on the other. Particular importance could arise in cases of shared vehicle services or the offer of driving services.
Permission for data processing might also be provided by consent. The new EU-legislation states several requirements for such consent. First, it must be freely given and “informed,” which means that a person concerned must always exactly know what he agrees with. Consent is presumed not to be freely given, if the performance of a contract, including the provision of a service, is dependent on the consent despite such consent not being necessary for such performance. After all, a withdrawal of a given consent must be possible at any time. Car manufacturers and/or dealers could meet these requirements by informing the buyer of the exact data collection and processing procedures in their car. The required transparency and the possibility of withdrawal could be implemented in such a way that the current connection status of the vehicle is displayed to the driver or passenger by means of standardized symbols in the cockpit that allows him to activate or deactivate the connection at any time. Therefore it is recommended to draw as much data processing as possible upon contract purposes.
Finally, a company could most likely invoke the legal ground of legitimate interest in the case of service improvements or preemptive maintenance. However, it should consider technical measures like anonymization or pseudonymization.
Recently, the German Government made a proposal for an amendment to the German Road Traffic Act (Straßenverkehrsgesetz), to regulate the legal challenges resulting from automatized/autonomous vehicles. Concerning the matter of data protection, the proposal imposes an obligation for automatized vehicles to contain some kind of black box. This means that the manufacturer must implement a device which records whether the vehicle was controlled by its driver or by an automated driving function. Furthermore, the proposal states the legal grounds on which such collected data has to be submitted to the authorities or to third parties (for example, injured parties that want to enforce indemnity claims).
The automatization and autonomization of driving is a technical revolution, which facilitates our transportation habits. But it also challenges the road users’ constitutional right of privacy. Many of those challenges could be solved within the scope of the current European and German data protection legislation. Nevertheless the legislator is obliged to create more legal certainty for all parties concerned. The proposed amendment to the German Road Traffic Act, (referred to as “the World’s most modern Road Traffic Act” by German transport minister Alexander Dobrindt) is a first step in the right direction. However, it only regulates side issues arising from “autonomous driving” for the data protection.
In the future, autonomous vehicles will revolutionize our daily life. Already today, the technology allowing to implement autonomous driving is very much advanced, pushing its boundaries further every day. With the fast-paced development of technology and innovation regarding autonomous vehicles, the intellectual property landscape in the automobile industry is rapidly changing.
In essence, the technological innovation of autonomous vehicles lies in the combination of classical automotive technology, including mechanics and electronics, and the multi-faceted opportunities offered by telecommunication technology. Thanks to telecommunication technology, autonomously driving vehicles will be able to communicate with each other, the infrastructure and the environment surrounding them. The communication will either work via the standard wireless network of the 5g in Germany and Europe, or the communication channels of DSRC in the US. In view of the cross-over nature of the technology of autonomous driving, it is comprehensible why many players of the automobile and telecommunication industry are currently seeking and engaging in promising cooperation projects in order to mutually benefit from their respective knowledge and form powerful alliances.
The race for patents on any kind of technology related to autonomous vehicles has already begun. The increasing amount of patent applications in this sector shows the great economic and strategic importance of securing valuable IP rights. What is striking in this respect is the appearance of entirely new players on the automotive market which are keen on establishing a powerful market position on the basis of strong and far-reaching IP and patent portfolios. Due to the particularity of the new technology, many companies specialized on telecommunication are now investing in research and development projects regarding autonomous driving technology and focusing on fostering and expanding their patent portfolios. Thus, the traditional automobile manufacturers and OEMs are going to face competition from new players on the market, such as Qualcomm, Intel, Google, Apple and Tesla. Notably, new patent portfolios in the autonomous driving sector are also of great interest to non-practicing entities (“NPE”), which are highly interested to acquire such portfolios and gain a return on their investment on the basis of income generated by license fees.
The appearance of new players on the automotive market is likely to destabilize the balance that has existed in the automotive sector for decades in Germany and elsewhere. In the past, the major car manufacturers were rarely involved in patent litigation suits because they were benefitting from the simple fact that each competitor was aware of the size of each other’s patent portfolio and that starting a patent dispute would end in a never-ending and cost-intensive avalanche of reciprocal lawsuits. The car manufacturers and OEMs were aware that starting mutual infringement actions would not be beneficial to them, but eventually harm both parties on an economic, financial and reputational level. Thus, the automotive sector was guided by this kind of defensive patent strategy (so-called MAD strategy, based on the historic term “Mutual Assured Destruction” from the Cold War era), which consisted of the development of a large-scale and strategically effective patent portfolio. Further, large size patent portfolios also ensured that the parties could settle their patent disputes by way of cross-licensing agreements. Overall, the traditional automotive market was generally unaffected by patent litigation, because the players were keen to avoid a worthless “war” over patents and maintain the balance of interests.
However, with the appearance of new market players, the situation is going to change dramatically. The new players are a new kind of IP-owners who are likely to have a different mindset regarding the role, value and use of their patent portfolio. Therefore, they will not play by the former rules of defensive patent strategy. Rather, it is likely that they will play a more aggressive game. They will be interested in enforcing their patents and thereby obtain a financial compensation (e.g., license fees or damages) or at least a competitive advantage vis-à-vis their competitors. The big players will not be afraid to sue the car manufacturers, because they may not be a direct competitor and not be infringing any of the car manufacturers’ patents. Thus, the MAD strategy cannot prevail any more.
NPEs especially have a new set of interests and aims, which is incompatible with the defensive patent strategy on the automotive market. NPEs aim to maximize their profit with license fees, in order to receive a return on their investment when buying the patent portfolio. Therefore, they will not hesitate to enforce their patents fiercely. Suing patent users is a way of increasing the pressure on them and push them into a profitable license agreement. Thus, it is expected that the “peaceful balance” existing on the automotive market will soon be over.
It is probable that patent litigation regarding automotive inventions will increase especially in Germany. The German patent litigation system is very attractive and provides many advantages for companies seeking to enforce their patents effectively.
The German patent system is a bifurcated system, which means that the patent infringement and the patent validity are examined by different courts in completely separate proceedings. Consequently, the German infringement courts are able to decide quickly on the question of infringement, usually within a period of 9 to 15 months (depending on the respective court and the scope of the matter). Meanwhile, the nullity proceedings are usually still pending before the Federal Patent Court (Bundespatentgericht) and will be decided subsequently.
A clear advantage of patent litigation in Germany is the fact that injunctions are not a discretionary remedy. If the infringement court finds that the defendant infringes the patent, and unless it exceptionally stays the infringement proceedings until the decision on validity (only if there is a high likelihood that the patent will be invalidated by the Federal Patent Court in the parallel pending nullity proceedings), the infringement court will necessarily grant a preliminarily enforceable injunction.
Furthermore, the major German patent infringement courts, namely in Düsseldorf, Mannheim and Munich, are supported by judges which are usually specialized on patent law and provide high-quality and reliable decisions. The German courts are very experienced in patent litigation, as they decide a high number of patent cases every year. Patent litigation in Germany is also a very cost-effective way of enforcing patents, due to its relatively low costs for proceedings.
Finally, and especially in view of the automotive industry, the German market is of great importance in Europe and many automobile manufacturers and OEMs have their company seat in Germany. Successfully enforcing a patent in Germany can be a painful experience with far-reaching consequences for the defeated defendant, especially if the patent owner enforces a court order regarding injunction, recall and destruction of the infringing products, rendering of accounts and payment of damages. A patent owner having obtained such a German patent infringement judgment is very well placed to negotiate with the defendant, whatever his interests are.
Therefore it is expected that patent litigation regarding autonomous driving technology will be attracted to Germany, because patent owners would want to rely on an effective, quick, non-expensive and reliable way of enforcing their patents.
The implementation of autonomous vehicles will necessarily require particular standards in order to ensure interoperability. In particular the network that is used for communication of the vehicles will require the setting of a standard. While there is a general consensus that autonomous vehicles must be able to communicate over a standard wireless network, national divergences exist with respect to the practical way of implementation. While the US favors the use of wireless communication channels of DSRC, Germany and Europe promote the development of 5g.
In Germany and Europe the 5g technology will become one of the new standards relevant for the automobile industry. The European Telecommunications Standards Institute (“ETSI”), the standard selling organization, already started the dialogue on the development of a standard for 5g technology. ETSI produces globally-applicable standards for information and communications technologies, including mobile, radio, broadcast and internet technologies. ETSI is officially recognized by the EU as a European Standards Organization. It is a not-for-profit organization with more than 800 member organizations worldwide, including the world’s leading companies and innovative R&D organizations. The standards set by ETSI are produced by consensus and enable global technologies such as 3g and 4g.
The enforcement of Standard Essential Patents is new to the automotive industry, but it is something that is very well known in the telecommunication sector. Companies owning patents of relevance for a standard are in a privileged position because they have the power to prohibit and influence the access of the standard-users to the market by enforcing the patents against them. However, as SEP holders usually have a dominant position on the relevant market, they are not allowed to behave in an anti-competitive manner pursuant to European and German antitrust law. In general, a company which would like to use the standard can claim that the SEP holder must grant a license under FRAND conditions. More and more disputes arise because SEP users do not seek a license, or SEP holders and users cannot agree on the determination of the amount of the FRAND license rate. While SEP holders file patent infringement actions against SEP users, the latter usually invoke the antitrust defense and argue that the motions for injunction and recall must be dismissed because they are entitled to obtain a FRAND license.
In Germany, case law on this issue has been established by the German Courts since May 2009 with the major “Orange Book Standard” case decided by the Federal Court of Justice (BGH, judgment of May 6, 2009, file no. KZR 39/06) and which concerned a de facto standard for CD-Rs (Compact Disc-Recordable). The German Federal Court of Justice held that a potential licensee can raise a competition law defense against an application for an injunction in limited circumstances if it can show that it has made an unconditional offer to license under terms that cannot be refused by the patent holder without abusing its dominant position, and if the implementer behaved as if a license were in place by, for example, making royalty payments into an escrow account and waiving its right to challenge the patent.
On a European level, many of the frequent issues related to SEP and FRAND licenses were subsequently clarified by the Court of Justice of the European Union (Gerichtshof der Europäischen Union – CJEU) in a case opposing Huawei Technologies Co. Ltd. to ZTE Corp. and ZTE Deutschland GmbH regarding a standard on LTE, a 4g technology, set by ETSI (CJEU, judgment of July 17, 2015, file no. C-170/13). The CJEU took the opportunity to identify a number of specific guidelines for SEP patent licensing negotiations which include the steps that a SEP holder needs to comply with in order to prevent an application for an injunction being regarded as an abuse of dominance under Art. 102 TFEU. For instance, the SEP holder must alert the patent user in writing of the alleged infringement by noting the relevant SEP and how it is alleged to be infringed. The user must then express a willingness to conclude a licensing agreement on FRAND terms and the SEP holder must rovide a specific, written offer for a license on FRAND terms, specifying the amount of the royalty and how it is calculated. The user must “diligently” respond to that offer, which implies, in particular, that there are no delaying tactics. If the user does not accept the offer, a counter offer that corresponds to FRAND terms must be made promptly. If the SEP is implemented before a licensing agreement has been concluded, the implementer must provide appropriate security in respect of its past and future use of the SEP, for example, by deposit or bank guarantee for the amount of royalties. Where an agreement has not been reached on the details of the FRAND terms, the parties may agree that the amount of the royalty will be determined by an independent third party. Notably, the user is entitled to challenge, in parallel to negotiations for a grant of license, the validity of the SEP or the essential nature of the SEP.
At present, it remains to be seen how the case law will evolve and how the German Patent Courts will apply these criteria to future disputes. With the appearance of new standards in the autonomous driving sector, one can expect a rise in the number of disputes on SEP and FRAND license rates in the future.
In view of the fast-pace innovation regarding autonomous vehicles, the automobile industry faces an imminent revolution of technology which will also bring an overhaul of the traditional IP landscape in this sector. Traditional players on the automobile market should be aware of the fact that they will soon enter into competition with new market players with different interests, which will not be afraid of enforcing and monetarizing their patent portfolios and thereby disrupting the currently existing market balance. The future will see the rise of new important patent portfolios owned by new players, in particular aggressive NPEs, and increasing numbers of powerful SEPs, which can be enforced in a very effective way in a favorable patent litigation system like the one already highly exploited in Germany. Keeping this scenario in mind, it is advisable for any player on the automotive market to invest time and money in the development of a strategical patent portfolio, which may eventually turn out to be the key to its future success on the market for autonomous vehicles.
New emerging technologies, not only in the automotive field but also in the telecommunications sector, have been one of the main drivers of M&A activities in recent years.
The fast progression of an ever-evolving, digitalized world brings with it both opportunities and challenges. Businesses across all industries are becoming increasingly aware of the beginning of what is being described as a new industrial revolution defined by buzzwords such as “autonomous driving”, “artificial intelligence” and “the internet of things.”
It is today that automotive manufacturers and suppliers will need to make their businesses ready to participate economically in tomorrow’s new automotive world. This will also include various forms of inorganic growth via M&A.
There are a number of options available for businesses to grow inorganically. The wide variety of available structures varies from the acquisition of a company (whether as a whole or by acquiring parts of an existing business) to forms of cooperation like joint ventures. The respective structure of the transaction depends mainly on the existing corporate set-up of both the acquiring entity and the target as well as the motivation for such transaction.
There may be potentially conflicting interests between, on the one hand, the well-established company envisaging to benefit the new technology and, on the other hand, the innovation leader who is the main focus of the transaction. Any such conflicts have to be carefully balanced.
Therefore, any successful M&A transaction requires a diligent review of the existing corporate and financial know-how as well as determining the expectations and goals of each party in order to determine the feasible structure.
Generally speaking, for a strategic investment by an established player in the automotive industry, the acquisition of an entire business tends to be a preferable option to a cooperation. The acquisition of one or more businesses which are already researching into and developing various technological advancements in the autonomous driving sphere is an attractive prospect as, subject to the successful implementation of the target’s business into the acquiror’s operations, the target business could be operational from when the acquisition occurs. In addition, the know-how of the innovation leader, will be directly absorbed by the acquirer and can be utilized and integrated into its existing business and structure. This enables the acquiror to immediately benefit from the new technologies and to utilize the resulting synergies for its existing business. In comparison to other structures, an acquisition allows the acquiror to have more control over the running of the company and its assets and therefore has more discretion on how it uses the business to shape the future of its own company.
Furthermore, subject to anti-trust rules and regulations, the acquisition of an innovation leader would provide the market leading acquiror to strengthen its own market position. It also enables the acquiror to tailor the software and hardware used in its cars to create a new, exciting own-brand which is unique to the products that its competitors are offering on the market. Being equipped to keep up with the rapid technological advancements in the automotive sector allows an automotive player to keep its existing customers engaged in its business and provides the opportunity to secure new customers. Having a dynamic growth strategy in both its existing and new geographical markets also provides the opportunity for the business to expand its customer bases over a wider area, including overseas.
Joint ventures or other forms of cooperation will be utilized in scenarios where the motivation or interests of the involved parties provide for a transaction structure requiring a separation of corporate entities. In particular, an established company might not want to acquire potential risks or liabilities associated with an acquisition and therefore may seek a solution to mitigate any potential dangers for its existing business. Furthermore, particularly in regulated industries, such transaction forms allow the parties to participate in businesses without having to apply for required licenses or allowances by using those of the innovation leader.
If, for the reasons above or otherwise, an established company prefers to create a joint venture structure or other cooperation structure, all parties will need to understand how the structure will work in order to facilitate a successful combination. The main focus of such forms of cooperation lies with the careful shaping of the individual rights and obligations of the involved parties. From the perspective of the innovation leader, they may require a certain level of independence in order to develop or produce the new technology effectively. The parties will therefore need to carefully consider how the operation can remain beneficial for both parties without shackling the innovative output. Such cooperation structures therefore need to set out in advance how the structure will operate. This includes the allocation of voting rights in combineddecision-making bodies, the establishment of clear checks and balances to avoid one party going off on a frolic of their own at the expense of another party, how the funding structure will work, the shielding of potential liabilities and how long the cooperation is expected to last, with future exit or take-over strategies thought out in advance.
Cooperation vehicles are essential in the new age of rapid advancements in technology. If an established company is not willing to adapt its business model to new ways of driving and the expectations of more digitally-minded consumers, they are at risk of falling behind. Currently, there are key automotive players who have joined forces with other parties (such as suppliers, research companies and those in the telecommunications sector) to develop driving systems software to create new entrants in the autonomous driving market. This is a trend that we expect to see more of in the next coming months.
The success of any M&A transaction depends upon the effective integration of the acquired business or the new business partner into the existing corporate and business structures without compromising the current operations of the business.
This requires a diligent review of the current structures with a view to potential optimization possibilities in areas including tax, finance, personnel, as well as legal aspects (including protections to guard against potential liabilities or risk to the existing business). Examples for such post-acquisition tasks include the integration of an acquired business into existing compliance structures, the alignment of voting rights in the corporate entities, or the integration of cash-pooling systems.
Despite the potential legal and economic risks of transactions in the field of new technology, the potential benefits can be significant. The prospects of economic growth, the possible increase of business value and foremost the possibility to participate in a newly shaped future are just some aspects of the opportunities provided by investments in the new technologies and is an exciting prospect for the future of M&A in the autonomous driving market.
Autonomous driving intends to realize an increase in automotive safety, in flow of traffic and in the long-term reduction of damages. There are different degrees of automation which are technically classified as follows: assisted driving, partially automated driving functions, highly and fully automated driving functions and autonomous driving. In addition, there is tele-operated driving.
Even after the revision of the Vienna Convention on Road Traffic in March 2016, the regulatory framework does not yet permit vehicles without a “driver” on the road. Autonomous vehicles do not have any “driver” in the car; all persons in the car would be considered as passengers. Thus the regulatory framework would need to be amended in order to allow for autonomous driving; UNECE, a working group of the United Nations, is currently working on a further revision of the Vienna Convention on Road Traffic in order to permit autonomous driving. Currently, vehicles with assisted driving and automated driving functions are on the road, i.e., there are supporting functions, but the driver always needs to be in control of the motor vehicle and where necessary take over the operation of the motor vehicle from the supporting function. Prior to the introduction of autonomous vehicles, there may be tele-operated driving, especially with regard to buses. It is debated whether there will be a shift towards liability of the manufacturer or whether there will be any significant changes to the current liability scheme for accidents. The outcome of the discussion and potential change of the legal framework will have consequences on the type of insurance and policyholders for autonomous vehicles.
New technology always brings the potential for new opportunities and challenges. Although driverless cars will likely increase the safety of cars, the technology involved and its interactions with other innovation, components and people raise new challenges.
The current liability regime consists of a three-pillar-system: liability of the driver, the keeper (thereafter referred to as the “owner”) and manufacturer (including recourses and insurance). The purpose of this liability regime is to comprehensively protect any person injured in an accident with a motor vehicle and to adequately allocate the risks among the parties.
Liability of the driver and the owner is mainly governed by the applicable road traffic regime in Germany. The following liabilities of owner and driver of a motor vehicle are in addition to more extensive liabilities for negligence under general tort law (in particular sec. 823 of the German Civil Code (Bürgerliches Gesetzbuch), but which have higher or different burdens of proof.
Strict liability applies to the owner of a motor vehicle. Under the strict liability pursuant to sec. 7 of the German Road Traffic Act (Straßenverkehrsgesetz) an owner may be held strictly liable for any damages due to the death, personal injury (harm to the body or health) or property damage caused by the operated motor vehicle, irrespective of any fault. Operation of the motor vehicle is very broad and includes situations where the motor vehicle is not moving. The underlying reasoning of the strict liability of the owner is that the owner bears all risks of the operation of the motor vehicle (Betriebsgefahr).
In general, an owner of a motor vehicle can avoid strict liability in the event that an accident was caused by force majeure. This requires proof that there was an unforeseeable and unavoidable external cause. A defendant may try to argue that malfunction of a self-driving functionality may be qualified as a force majeure event. However, this would likely not qualify as an external cause. An external cause may be established in the event of accidents caused by hacker attacks or defects in telecommunications infrastructure. However, force majeure is more and more narrowly interpreted by the jurisprudence, e.g., literature argues that an earthquake in Germany would qualify as a force majeure event. Thus currently establishing the proof of a force majeure event is only possible in very narrow circumstances.
Provided that the driver is not also the owner of the motor vehicle, the driver may only be held liable for damages due to death, personal injury, owned property, etc. caused by negligence (and intent). In this context it needs to be pointed out that the burden of proof is reversed pursuant to sec. 18 of the German Road Traffic Act: a driver is held liable unless he establishes proof that she or he did not negligently (or intentionally) cause any damage.
The owner of a motor vehicle has to obtain mandatory third party liability insurance (Haftpflichtversicherung). A plaintiff injured in an accident can file a direct claim against the insurer of the driver’s compulsory insurance and the owner of the car. Upon payment by the insurer to the plaintiff, any claims the plaintiff may have against any party are automatically subrogated to the insurer.
The owner of a car also obtains comprehensive insurance (Kaskoversicherung). There is a distinction between full and partial comprehensive cover. Comprehensive insurance (full and partial) covers damages to the owner’s own car, e.g., caused by fire or theft. In the event of full comprehensive cover, the damage caused to oneself in an accident or in the event of a hit-and-run accident is also included in the cover. Full comprehensive cover is usually obtained when the car is relatively new.
OEMs, suppliers and/or manufacturers may be held liable under the strict liability regime of the German Product Liability Act (Produkthaftungsgesetz) for any damage occurring from a product defect, irrespective of any negligent behavior. Relevant defects are, for example, failures in design, manufacturing failures and instructional errors (e.g., omission of a warning). In the event of property damage, liability under the German Product Liability Act is limited to motor vehicles in private use. Property damage is only relevant and compensated when the property damaged is different from the defective product itself.
The more extensive liability based under general tort law (producer liability), which is in particular not subject to the caps of liability and other limitations under the Product Liability Act, may also be applicable to the drivers as well as the OEMs, suppliers and/or manufacturers. However, this requires proof of negligence of the OEM, supplier and/or manufacturer, e.g., culpable violations of organizational and/or instructional duties. The producers must at least maintain a state-of-the-art design, production and QC procedure mirroring the degree of possible risks resulting from a possible defect. Liability can be avoided under the producer liability pursuant to general tort law (but not under strict liability of the German Product Liability Act) when the defendant proves “unavoidable” outliers (Ausreißer) or defects that did not become apparent by using all reasonable risk reductions measures.
If negligence of the driver cannot be rebutted, the driver is jointly liable with the owner of the motor vehicle. The owner and the manufacturer/producer are also joint debtors, i.e., the injured plaintiff can seek full damage from either.
The joint debtors can claim recourse from each other. For example, the owner may claim recourse from the manufacturer in the event of accidents caused by technical failures. This could in practice significantly shift liability towards OEMs, suppliers and/or manufacturers.
In addition, upon payment by the insurer to the plaintiff, any claims the plaintiff may have against any party are automatically subrogated to the insurer. Thus, in practice, it is typically the insurer of the owner who would make the recourse claim against the manufacturer in the event of accidents caused by technical failures.
Due to a (at least preliminary) possible increase of accidents by autonomous vehicles caused by technical failures, it is likely that insurers will tend to make more recourse claims against manufacturers and service providers.
While technology has already progressed far, the German road traffic laws and regulations have not yet been adapted to autonomous driving (other than the Vienna Convention on Road Traffic). However, as already discussed, the draft bill regarding the amendment of the German Road Traffic Act introduces the legislative basis for autonomous parking systems as well as further automated driving functions.
That revised draft bill of the BMJV is significantly less far reaching. All parties remain liable: in particular the liability of the driver and liability of the owner remain even in the event of highly or fully automated driving.
It also predicts that there might be more cases determining whether the insurer of the owner or the insurer of the manufacturer will ultimately bear the costs for an accident. Contrary to the BMVI draft, the revised draft of the BMJV does not include exclusions and mitigations from the liability of the driver. In particular, it does not allow that the driver does not pay attention to driving while automated systems are used.
The draft bill includes significantly higher liability caps under the German Road Traffic Act (the draft bill provides for a 100per cent increase for losses caused by fully or highly automated functions due to lack of experience with accidents with fully or highly automated functions). In addition, it is set out when data of the motor vehicle and connected systems need to be permanently recorded (in particular whether the driver was in control of the motor vehicle at the time of an accident) and when such data may be transferred to relevant administrative authorities.
Currently it is discussed in connection with automated systems whether there will be a shift in liability for accidents to manufacturers. Similar arguments would apply to autonomous driving.
The Federal Council of Germany states with regard to its first reading of the draft bill of the BMJV that there should be to some extent a shift of liability to the manufacturer.
The Federation of German Consumer Organizations (Verbraucherzentrale Bundesverband – VZBV) states in a position paper that the liability should be shifted from the owner of a motor vehicle to the manufacturer of assistance systems.
In contrary, there is the opinion that the current liability scheme for accidents and types of insurances need not and should not be changed at all or at least not comprehensively.
In response to the position paper of VZBV the German Insurance Association (Deutsche Versicherungswirtschaft – GDV) warns against turning away from the liability of the owner of a motor vehicle. It argues that it is not the purpose of the strict liability of the manufacturer to effectively reimburse the party injured in an accident. The injured plaintiff should not be required to sue the manufacturer and establish proof of a product defect. Instead the current system should prevail where the injured plaintiff is comprehensively protected by strict liability of the owner of a motor vehicle, irrespective of whether the accident was caused by human error of the driver, product defect, non-functioning of an auto pilot or otherwise. In addition, the manufacturers are liable for defective products.
In the event of a product defect, it should remain the task of the automotive insurer (and not the insured) to take recourse against the manufacturer. This is also the position of the GDV in its most recent position paper commenting on the legislative statement of the Federal Council of Germany relating to the draft bill of the BMJV.
Mr. Müller, chairman of the board of directors of Allianz Versicherungs-AG, is of the opinion that “motor vehicle insurance will also be available in a long time from now.” He points out especially that the strict liability of the owner of a motor vehicle is an important element of the comprehensive liability regime for accidents, which protects the injured “irrespective of whether an accident was caused by a driver error or a defect in technology.” He is of the opinion that the liability and insurance system is ideal for autonomous driving and “if it did not already exist it should be invented as a legal framework for autonomous driving.” He even suggests that the German liability and insurance scheme for motor vehicles should be “a role model for a European liability model for accidents.”
Premium rates will likely need to be recalculated. The number of insured accidents might be reduced due to new technology of autonomous vehicles, i.e., driver errors might no longer be significant. In addition, the number of insured events may also be reduced due to reduced risked of thefts (other than cyber/IT risks).
Even though the number of insured events due to human errors may be reduced, there will be an increase of insured events due to technical failure. In addition, there are a number of factors which might increase the amount of damages. There are in particular some new nontraditional type of losses and new type of risks (cyber, IT and terror risks). There may in particular be new extensive damages to be paid due to the fact that entire car fleets may need to be repaired (cluster risk). The draft proposal for the revision of the German Road Traffic Act includes significantly higher liability caps than the current liability caps in sec. 12 of the German Road Traffic Act. Liability caps might be even higher in the future for autonomous vehicles.
While there is not yet full automation, damages may be increased due to severe accidents between autonomous and non-autonomous motor vehicles.
Insurers may soon become involved in testing and obtaining data in order to recalculate premiums. “There are also specific cooperation initiatives with scientific institutes, for example, in order to use the results of a testing facility for autonomous vehicles.”
Claims discounts will no longer be significant and may even no longer exist for autonomous vehicles in a few decades from now.
Currently individual owners obtain insurance cover. There may be a trend towards insurance of car fleets, for example, due to car sharing, and in particular insurance of many motor vehicles produced by one manufacturer on one or a few policies.
As the market for personal automobile insurance decreases, opportunities arise for insurers focusing on other customers and types of policies. Insurers interested in insuring autonomous vehicles should consider focusing on products targeted at manufacturers and insuring new technologies.
A shift of responsibility for accidents from drivers to manufacturers and service providers would likely result in additional lines of insurance with regard to manufacturers of motor vehicles. Instead of considering the costs of increased responsibility in the purchase price of autonomous vehicles, manufacturers might tend to be more likely to seek insurance coverage for car fleets in order to mitigate their liability for accidents.
Product liability insurance may cover the liability of car fleets of autonomous vehicles of a certain manufacturer or service provider.
As technology for autonomous vehicles is new and expensive, product recall policies are of increased importance. Product recall policies might be even more relevant due to the shift of responsibility for accidents from drivers to manufacturers.
As manufacturers and service providers might also be responsible for business interruption damages, business interruption policies might be of increased interest.
Autonomous vehicles might also be used to transport goods. Thus transport policies might also be of increased interest.
It might be possible that hackers can change the destination of the autonomous vehicles transporting goods in order to perpetrate theft. In that regard a combination with a cyber policy may be useful.
In general, autonomous vehicles will increase the automobile safety significantly. In addition, smart access to the autonomous vehicle will eliminate the risk that a car key will be stolen or lost. However, there is a new risk due to cyber risks. Manufacturers would need to ensure that there is proper prevention of cyber-attacks on their products.
Cybersecurity insurance is another nontraditional insurance product likely to grow as a result of autonomous vehicles. According to Munich Re, 55per cent of corporate managers surveyed believe cybersecurity is the biggest insurance concern related to autonomous vehicles. Cyber insurance coverage becomes of increased importance and is a growing market due to the increased risk of cyber-attacks and the increased digitalization, interconnection and relevance of smart products, e.g., such as smart homes or connected homes. The Allianz Risk Barometer 2016 shows that the members surveyed believe that the following three aspects of digitalization are of most concern for business corporations: cyber risks, data fraud and theft and failure of relevant infrastructure.
In general, there is concern that hackers might intentionally cause accidents or perpetrate theft of autonomous vehicles and potentially goods transported.
Future legal regulations will likely require that autonomous vehicles record data. An indication of that is the current draft legislation for highly and fully automated motor vehicles, which includes a requirement to record whether the automation was used when the technology has asked the driver to take control. Recording would also be of increased relevance with regard to technical failures.
Technology permits the sending of automatic messages to the manufacturer, who is liable for controlling its products. It may be considered that automatic messages of insured events and possibly data about the defect are also sent to the insurer. Additional facts could be provided shortly thereafter by the policyholder, e.g., to which policy the automated insurer notification related.
Another issue is who owns the collected data of the autonomous vehicle and whether and to what the extent the insurer can use such data in the event of an insured event.
Autonomous vehicles and connected driving also introduce new players into the automobile industry, in particular service providers who will seek out insurance in connection with mobility including for consequences of technical failures and cyber risks. Motor vehicles have not only safety electronics, but vehicles will also communicate constantly, e.g., with digital mapping providers, mobile communication and entertainment features. Autonomous vehicles will also communicate with other vehicles. Many data are collected and used. Thus thereis an increased relevance for non-traditional suppliers and service providers such as technology ompanies, software developers or start-ups in the sensor, mapping or similar industry. For example, HERE mapping business, a motor vehicle navigation supplier, was sold by Nokia to a consortium of car manufacturers including BMW, Audi and Daimler in 2015. Microsoft has extended its partnership with HERE at the end of 2016 and also entered into a new partnership with TomTom. Most recently Intel has agreed to purchase a 15 percent ownership stake in HERE.
For the testing part of the A9 Autobahn it is intended that 5g internet will be available and the telecommunications providers will also test their infrastructure, which is in particular relevant for connected driving. In addition, via the 5g internet, the autonomous vehicle may even communicate with a smart home and open the garage door for the autonomous vehicle.
Autonomous vehicles may also communicate via DSRC, which is a set of protocols and standards for dedicated vehicle-to-vehicle to roadside communications using wireless technology. Examples are the communication with other vehicles and traffic lights, warnings from other vehicles or roadside transmitters and platooning (organizing vehicles into closely spaced formations with synchronized controls). In case of ambiguous DSRC messages and misunderstandings with regard to the DSRC messages, the liability system for manufacturers set out above would apply likewise to senders of DSRC messages. The protocols and recording of the DSRC messages, received by autonomous vehicles would be relevant evidence. Cybersecurity is also in particular a concern for DSRC. DSRC needs a very low latency and DSRC even allows messages to be connected without the basic handshaking protocols to verify the other party. Thus hacking constitutes an increased risk for DSRC.
Autonomous vehicles will create opportunities for existing players to create new products, obtain additional policyholders, gain new expertise and service their customers in new ways. Cyber security and collection and use of data will also be of increased importance.
Welcome to the October 2019 edition of Legalseas: The tide is certainly turning
CSRC also formally announced its plan on October 11, 2019 to fully remove the foreign ownership restrictions in Chinese futures companies, fund management companies and securities companies respectively by January 1, 2020, April 1, 2020, and December 1, 2020.