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Connected and Autonomous Vehicles: The emerging legal challenges April 2016 Freedom to Succeed

Freedom to Succeed - Pinsent Masons to Succeed/Pinse… · Freedom to Succeed. 02. 04Introduction 05Road Traffic Law – the journey from testing to commercialisation 08Industry Perspectives

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Page 1: Freedom to Succeed - Pinsent Masons to Succeed/Pinse… · Freedom to Succeed. 02. 04Introduction 05Road Traffic Law – the journey from testing to commercialisation 08Industry Perspectives

Connected and Autonomous Vehicles:

The emerging legal challenges

April 2016

Freedom to Succeed

Page 2: Freedom to Succeed - Pinsent Masons to Succeed/Pinse… · Freedom to Succeed. 02. 04Introduction 05Road Traffic Law – the journey from testing to commercialisation 08Industry Perspectives

02

Page 3: Freedom to Succeed - Pinsent Masons to Succeed/Pinse… · Freedom to Succeed. 02. 04Introduction 05Road Traffic Law – the journey from testing to commercialisation 08Industry Perspectives

04 Introduction

05 Road Traffic Law – the journey from testing to commercialisation

08 Industry Perspectives Chris Reeves, Alastair Ruddle, HORIBA MIRA

Connected and autonomous vehicles – opportunities and pitfalls

10 The shifting nature of liability

12 A new world for insurers

14 Industry Perspectives Professor Neville Jackson, Ricardo

Steering through the hype to secure the benefits of automated vehicles

16 Managing a new world of data management, privacy and ownership

20 The importance of telecommunications to the development of connected vehicles

24 Industry Perspectives Dr Nick Reed, TRL

Creating public trust and confidence in autonomous vehicles

26 The effect of connected and autonomous cars will be felt across the supply chain

30 Industry Perspectives Professor Paul Jennings, Warwick Manufacturing Group

Transforming mobility through autonomous vehicles

32 Protecting Intellectual Property in a world of connected vehicles

34 A new world for the automotive industry: standard-essential patents and FRAND licences

37 Connected Cars are driving increasing mergers and acquisitions activity

03

Contents

Connected and Autonomous vehicles: the emerging legal challenges

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Introduction

04

The emergence of connected and autonomous vehicles is creating many new legal challenges.

From personal computers to smartphones, we have become accustomed to technology transforming our everyday activities. The effects of these changes have been dramatic and far reaching. Business models have been disrupted, customers’ behaviour has changed and regulators and law makers have struggled to keep up with the pace of change in relationships and responsibilities among those they regulate.

We are now facing another potentially dramatic transformation in a familiar aspect of our lives with the development of connected and autonomous vehicles. This will not only bring significant practical changes but also profound cultural and social change as the whole nature of driving and car ownership is transformed.

As well as disrupting car manufacturers’ business models and revenue streams, autonomous vehicles, and the shift in liability they bring, could require a wholesale rewriting of road traffic law, insurance provisions and contractual relationships across the supply chain. All this brings potentially complex legal changes and challenges, as well as a great deal of uncertainty.

Until recently, it has been easy to see these debates as theoretical and assume that the self-driving car is still in the realm of science fiction.

However, that is changing rapidly and connected and autonomous vehicles are now a reality, being tested in real conditions. The remaining obstacles to their emergence as viable options on our roads are political, social and regulatory. Whilst motor enthusiasts argue that autonomous cars will never become socially acceptable, our view is that society will ultimately embrace connected and autonomous cars if they enhance quality of life, productivity and our wider environment.

As a result, we may have to deal with a messy transitional period as regulatory and legal frameworks may not match the new technological realities. That means that all of those involved – manufacturers, service providers, suppliers and insurers – will need to keep up with changes and engage in the debate, and ensure they understand the impact of existing legislation and be prepared when it changes.

In this edition our lawyers across Europe consider some of the key issues, together with the regulatory and legal implications, that the development of connected and autonomous vehicles will bring, to help those involved navigate through a fast changing and uncertain world.

We are fortunate to have further insight from HORIBA-MIRA, Ricardo, Transport Research Laboratory and Warwick Manufacturing Group. We are very grateful for all of their contributions and insights.

We hope you enjoy this edition.

Stephan Appt & Nicole Livesey

Stephan ApptRechtsanwalt, Partner

Nicole LiveseyPartner

All stakeholders will need to keep up with changes,

engage in the debate, ensure

they understand the impact of

existing legislation and be prepared when it changes.

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The challenge for manufacturers will be to influence what future legislation might look like.

While most manufacturers are taking a phased approach, initially developing partially and highly autonomous vehicles rather than fully autonomous vehicles, there will still be real challenges in interpreting existing laws and how they might apply to an emerging technology. This will undoubtedly be complex as current legislation is unlikely to fit the particular circumstances of every new vehicle and is likely to vary across jurisdictions.

The challenge for manufacturers will be to influence what future legislation might look like, perhaps by using the information they have gained through testing to achieve clarity. In particular, they will need to make sure that any technology they adopt in their vehicles is not ruled illegal and that they can manage what may be a phased process to change the law.

Governments are beginning to review legislationThe UK Government has acknowledged that these issues need to be addressed and its publication, The Pathway to Driverless Cars, has promised that it will review and amend domestic regulations by summer 2017 to accommodate driverless vehicle technology. It is our view that this is an ambitious target.

In addition to this, in September 2015, the Transport Ministers of the G7 States and the European Commissioner for Transport also approved a declaration on automated and connected driving which emphasised the need to take steps to put in place a harmonised regulatory framework which could apply across borders.

Several European Member States have also been taking action to address the regulatory challenges posed by autonomous vehicles. Sweden, Finland, France and the Netherlands are known to be considering what legislative changes may be needed in their jurisdictions, whilst Germany has already conducted an initial review of the legal situation in respect of autonomous vehicles.This underlines that all those involved in developing connected and autonomous vehicles will need to keep a close watch on any changes to road traffic laws and understand how such changes affect the development, testing and commercialisation of connected and autonomous vehicles globally.

Indeed, before connected and autonomous vehicles can go on sale they will need to be tested in real road conditions and traditional manufacturers and new entrants to the automotive sector are now moving into that stage of development.

Connected and Autonomous vehicles: the emerging legal challenges

Continued on page 06 >

Road Traffic Law – the journey from testing to commercialisationThe rapid development of technology in many sectors has left regulatory regimes struggling to keep up and any move to commercialise fully autonomous cars is likely to require a wholesale redrafting of road traffic laws in a number of jurisdictions.

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The UK approach to testingHowever, one of the key challenges they face is that governments are taking different views on testing regulations or have yet to develop their testing regimes altogether. Notwithstanding this, some governments are moving quickly. In July 2015, the UK government, which has taken a clear position in supporting autonomous vehicles, published a code of practice for the testing of driverless vehicle technology.

The starting point of the UK’s approach is that those wishing to test will not be required to obtain permits or provide surety bonds, as is the case in other jurisdictions such as the USA. Equally, acknowledging that developing a detailed legally binding regulatory framework for testing could take years and so deter development, the UK has taken a “light touch” approach to regulation and the code of practice is relatively short and high level in its requirements.

Whilst the code itself has no legal status, it is likely that a failure to comply with its provisions could be taken into account by the courts in the event of an accident, so it will be important for those testing vehicles to be aware of its requirements. In broad terms, the code allows driverless vehicles to be tested, provided a test driver is present and takes responsibility for the safe operation of the vehicle. The vehicle also needs to have successfully completed testing on closed roads or test tracks and testers should keep a complete and accurate audit trail of their findings during testing. In the event of a future collision or dispute this could be vital in showing that the testing organisation has acted reasonably.

The code also applies the same traffic rules to autonomous vehicles as to conventional ones. So test drivers must hold a valid driving licence, even if the vehicle is entirely in automated mode. It is “strongly recommended” that the driver also has several years’ experience of driving the relevant

category of vehicle. In addition to this, the driver must always be capable of implementing a “manual override” at any time. The question of whether this kind of manual override will be required if fully autonomous cars go on sale to the public raises a number of complex practical and liability issues which are not addressed by the testing regime.

Importantly, as it stands, any autonomous vehicles being tested will also have to comply with general road traffic law and testers should familiarise themselves with the detailed requirements regarding the construction, use and operation of vehicles on the UK road network. These requirements are relatively lengthy, detailed and may not be easy for a new entrant to the UK automotive industry to locate, understand and comply with.

Obstacles already overcomeOne challenge that has been overcome is the Vienna Convention on Road Traffic which was developed to set international traffic rules and which stipulates that every car should have a driver. However, an amendment has now been agreed which allows for autonomous operations, as long as there is a manual override option available in the vehicle. Although this can be seen as a positive development, further amendments to the Convention will be required to permit fully autonomous vehicles where the user is not in a position to manually override the vehicle’s autonomous operation.

Additionally, the vehicles will also need to be insured. It is not clear whether specific insurance policies covering the testing of fully autonomous vehicles will become available, although it is likely that bespoke insurance products could be obtained from specialist providers. The consortiums which are due to start testing driverless vehicles in the UK in 2016 each contain an insurer (such as RSA and AXA)

Autonomous vehicles being tested will have to comply with general road traffic law.

06

> Continued from page 05

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and we expect these tests to be covered by these insurers who will be keen to assess how they can offer insurance products which are tailored to suit connected and autonomous vehicles going forward.

It is clear that the UK government is very keen to make the UK a centre of excellence for driverless vehicle technology. £20 million of government investment has been allocated to research and development into driverless cars and three separate consortiums have plans to start testing imminently. Further research and development collaborations have recently received further funding from the UK government which also have the objective of further developing the UK’s position as a leader in the field of connected and autonomous vehicles.

Developments in France and GermanyThe French government is able to authorise particular testing activities as long as stringent protocols are in place, and a driverless Peugeot Citroen vehicle recently travelled from Paris to Bordeaux on the motorway. The government has also issued an initial document on measures to facilitate testing and it is expected to set out a legal framework that will enable the testing of autonomous vehicles on public roads from August 2016.1

In Germany the government has enabled what it calls a “digital motorway test bed.” This permits the testing of autonomous vehicles on the A9 motorway and is open to manufacturers and digital service providers. The testing to date has been of both highly automated and fully automated vehicles as well as car-to-car infrastructure and communications.

In addition to this the German government has committed to review road traffic laws so that they can be adapted and reformed to enable the use of autonomous vehicles. Manufacturers clearly want this to happen quickly, with Daimler pressing for approval to test semi-autonomous lorries on the motorway in early 2016.2

With different jurisdictions being at varying stages of implementation and potentially adopting inconsistent testing regimes, running legally compliant tests will be a challenge for companies wishing to trial their driverless technology in a country where they are not domiciled or lack legal expertise. As a result, it will be important to have access to expert guidance on the latest codes of practice, issues that have emerged from early testing and any risks they will need to manage in order to ensure that they comply with local legislation.

Connected and Autonomous vehicles: the emerging legal challenges

1 http://www.connexionfrance.com/Driverless-cars-robot-Citroen-17203-view-article.html#sthash.836pw1JN.dpuf 2 http://www.reuters.com/article/2015/07/25/us-daimler-autonomousdriving-idUSKCN0PZ0KH20150725

Running legally compliant tests will be a challenge for companies wishing to trial their driverless technology in a country where they are not domiciled or lack legal expertise.

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Developing effective testingThere are a number of essential elements in the effective testing of more autonomous vehicles. These include ensuring that any new autonomous capability is ‘fit for purpose’, that it meets regulatory requirements and has realistic use cases. This is not straightforward as there is still considerable discussion about how best to test and validate systems to provide the necessary assurance to meet each of these aims. Equally, there are challenges around ensuring that the testing regime is commercially viable, given that manufacturers will potentially have to undertake a million kilometre drivecycle to test the systems.It is important to recognise that while a great deal of progress has been made in developing the technology to enable increased vehicle automation, this work is not yet complete. More research and development will be needed before we have the technology in place that can be

fully effective and safe in all circumstances. In particular, manufacturers will need to be able to demonstrate that they are managing risk effectively and that the new types of vehicle can provide real safety benefits.

There are also some particular technical issues still to be addressed, not least cyber security. This is at the top of all developers’ agenda as they know it is critical that this vulnerability is addressed. It is essential that vehicle components can trust each other and that only the authorised users of autonomous vehicles can give the car instructions, without being vulnerable to hackers. A range of research and collaboration is underway to tackle this issue and develop effective cyber security measures that can be designed into the vehicles from the start but it will require constant attention as attackers continue to seek out vulnerabilities.

HORIBA MIRA is working on a range of testing and development to secure the advantages of more connected and autonomous vehicles, including as part of the “UK Autodrive” and “UK CITE” consortium which will evaluate vehicles on the roads in Milton Keynes and Coventry. This work will build on existing research, such as that drawn from the use of unmanned vehicles in defence and security contexts and in particular the role of dedicated short range communications between vehicles. This type of communication has a key role to play in developing advanced braking systems and more efficient use of road space through better management of traffic lights and intersections.

More research and development needed before we have the technology in place that can be fully effective and safe.

Industry Perspectives

Chris Reeves, Alastair Ruddle, HORIBA MIRA

Connected and autonomous vehicles – opportunities and pitfalls

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Connected and Autonomous vehicles: the emerging legal challenges

Dealing with regulatory uncertaintyThe next challenge for the developers of autonomous vehicles lies in the fact that regulators are not keeping up with developments. There is a lot of work and discussion going on but this has not yet produced real certainty about both the applications of existing regulatory regimes and the direction future regimes may take. This lack of clarity may well prove an obstacle to new developments and so it will be important to engage with regulators and underline the need for clarity about the approach they plan to take.

This should include addressing the particular complexity that is arising as a result of the existence of different rules for each aspect of connected and autonomous vehicles and the different interpretations of those rules. We have a situation where the protocols that apply to dedicated short range communications are not the same globally creating a pressing need to harmonise regulations.

Alongside the need to engage with external bodies like regulators, the automotive industry is also going to have to understand the implications for its own supply chain. In particular, the development of autonomous vehicles is going to change the economics of car manufacturing. By end of the decade 40% of the costs of a vehicle will arise from its embedded electronic systems. So the automotive supply chain will need to welcome new entrants and new providers to supply those systems in a cost effective way. Vehicle manufacturers are responding to those pressures by forming ventures and partnerships with smaller

companies and start-ups that have the relevant expertise, but they will need to maintain and build those relationships if they are to be able to develop connected and autonomous vehicles at prices that will be attractive to customers.

An uncertain road aheadAll these factors mean there is still considerable uncertainty about how autonomous vehicles will evolve. We may see incremental development in which vehicles gradually become increasingly automated. So we could see capabilities like self-parking and automated driving on key strategic routes emerge initially. At the same time, road authorities could use the increased communication with vehicles to improve traffic flow and safety.

If effective testing and validation is put in place, this first phase of autonomy could be widely available within five years. However, the move to fully autonomous vehicles could take more time because of the need to secure public acceptance, new regulatory regimes, and a clear demonstration that the risks are being managed and mitigated. Yet, this is not the only plausible scenario. Disruptors like Google and Tesla clearly want to see things move much more quickly to full automation, and if they can demonstrate that their approach is safe and commercially viable, we might see autonomous cars on the roads within a few years.

All of this adds up to a great deal of uncertainty and some significant obstacles to overcome, but equally exciting opportunities to make real improvements in our mobility.

By end of the decade 40% of the costs of a vehicle will arise from its embedded electronic systems.

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The shifting nature of liabilityThe changing nature of where liability lies is perhaps one of the most significant issues surrounding the development of connected and autonomous vehicles. At the moment, in almost every jurisdiction, if a vehicle is involved in an accident the liability will lie with the driver if they can be shown to be negligent in some way.

The more autonomous the car, the less scope there is for negligence liability to be placed on the driver within existing legal frameworks. If the car is truly driverless then those sitting in it are (all things being equal) unlikely to be held liable for an accident and the liability is more likely to be an issue of product safety or efficacy such that it will, in many cases, shift to the manufacturer which is responsible for designing a safe product. Of course, if fully autonomous vehicles fulfil the promise of more controlled and safer driving then that shift in liability exposure could be seen as one which manufacturers will, in practice, be willing to accept and able to limit via reliable software and mechanical engineering. This may be the reasoning behind Volvo’s announcement that they will, in certain circumstances, take full liability for any accidents caused by their autonomous vehicles – although causation will no doubt remain an issue as long as some cars are driven by humans.

New responsibilities for manufacturersNonetheless, the stakes for manufacturers are potentially high. Failures in design or manufacture that result in road accidents, injuries or fatalities will carry serious reputational risk. The industry will not want perceptions to develop of a flawed technology which could lead to a stifling regulatory backlash. Also failures to undertake exhaustive testing or to address suspected issues could risk serious criminal action such as corporate manslaughter or homicide offences in some jurisdictions.

If liability is assumed to lie with the vehicle manufacturer, determining the exact nature of any accident and who is responsible will become very important for the manufacturer. That is why some form of event data recorders (black boxes) are likely to be standard in autonomous vehicles which, in most cases, should be able to demonstrate the cause of any incident. This can be seen as merely an extension of the increasing use (and indeed encouragement by insurers) of the use of “dashcams”.

However, the deployment of event data recorders raises concerns around the use and recording of what may be considered “personal data”. This will raise concerns around a culture of surveillance societies and may conflict with the requirements of data privacy laws in some jurisdictions, particularly if there is any real-time or manufacturer triggered downloading of data not involving a defined law enforcement information gathering process. There will also be questions of whether third parties, such as a vehicle not involved in the accident or an infrastructure provider, would be obliged to provide data which might have a bearing on what happened.

Manufacturers will also need to be clear about maintenance and servicing requirements as well as ways to limit their liability, for example, in ensuring that they have given effective instructions to users so that they can operate their vehicles safely. Products which do not have adequate explanatory guidance are normally regarded as unsafe under existing laws in some jurisdictions. As a result this may even require specific operator training unless the operation of the vehicle can be made failsafe. However, the level of digital embedding in new vehicles may enable training to be delivered via video “walk throughs” and even driver comprehension testing.

An increasingly complex set of liabilities The further challenge is that even though the shift in liability is initially to the manufacturer, the number of players involved in creating connected and autonomous cars means that liability could affect many organisations. These could range from suppliers, software providers, software developers, and telecoms service providers, so liability will get passed through the supply chain and each of those companies will need to be aware of their potential exposure to liability claims.

In terms of the specific question of product liability, it is likely that the overall legislative approach will be the same as now. The challenge lies in the

The more autonomous the car, the less scope there is for negligence liability to be placed on the driver.

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Connected and Autonomous vehicles: the emerging legal challenges

potential for this legislation to be deployed on a much larger scale and the risk that manufacturers may need to manage more frequent product recalls because defects have been identified that could cause accidents.

As a result manufacturers will need to be very clear about their mandatory product liability obligations towards end users and ensure they have the operating procedures, risk management and contractual arrangements with suppliers to manage these obligations effectively. They should also explore ways to limit liability through their agreements with automotive customers.

Managing liabilityHowever, in the UK there are also implications relating to obligations under consumer protection legislation which places strict requirements on manufacturers to ensure that a product is safe. In a connected world where car manufacturers have more direct and on-going contact with customers they will need to ensure they are equipped to address these stricter requirements.

It will not just be manufacturers who will have to review their approach to managing liability issues. Employers will need to ensure compliance with health and safety legislation where the vehicles are being used by employees. That means ensuring that the appropriate vehicles are provided and that the training is suitable and complies with existing policies regarding safe use. More work still needed to clarify the rulesIt is clear that there are many gaps in current liability rules in relation to connected and autonomous vehicles and there will need to be more thinking about these regulations. For example, it is accepted that software can have bugs in it and that the supplier is not necessarily liable for any subsequent problems caused by the bug. However, in an autonomous vehicle where the stakes are higher, that approach may not be acceptable. Furthermore, the possibility for data collection direct from vehicles during testing and once on the market will make the scope for latitude due to “undiscoverable” software faults limited. Indeed, in the EU and under English law, the tendency is to hold manufacturers of products (even with embedded software) strictly liable if they prove to be unsafe or unsatisfactory.

Indeed the liability of software developers is a particular challenge not least in the way they are

being drawn into profound ethical questions about how they programme vehicles to deal with the dilemmas that have, until now, been the stuff of philosophers’ thought experiments. For example, if the vehicle has to decide who to crash into when an accident is about to happen, should it be programmed to swerve into the path of whoever can best survive the collision, so the cyclist wearing the helmet rather than the baby in the pram? Should it be programmed to put the life of the occupant at risk rather than the passer-by?

At the moment, there is no clear legal guidance for programmers on how to design crash algorithms. This raises the question of whether there would be any criminal law responsibility on the programmer in these scenarios. Some companies have drafted in philosophy professors to address these dilemmas but we may well end up with a view that the choices are so difficult to resolve that programmes will be designed to make a random choice in these “no win” situations.3

These issues do not only arise if all cars are fully autonomous. In the more likely scenario of a mixed system with some autonomous and non-autonomous vehicles being driven, the picture will be even more complicated. Should the driver still have responsibility even if the car is in autonomous mode? Should they be obliged to deploy a manual override in the event of an emergency and would they be deemed negligent if they did not react quickly enough? Many of the civil liability problems will simply be whitewashed by insurance, but there may for a time be litigation between the insurers of “drivers” and manufacturers to determine respective responsibilities.

If autonomous vehicles are to be attractive to end customers it will be vital to develop sensible and practical ways to deal with these liability issues. This will include the development of a sensible legal framework which will apportion financial responsibility without creating rafts of distracting litigation. Large countries and groups of countries (like the EU) have an opportunity to lead the development of a rational framework which could act as a model more widely and facilitate uptake and trade. Manufacturers need to start leading the debate in these areas as well as ensuring that they are fully aware of the implications of current legislation and how it applies to their emerging technology.

If autonomous vehicles are to

be attractive to end customers

it will be vital to develop sensible

and practical ways to deal with

liability issues.

3 https://www.timeshighereducation.com/opinion/philosophy-and-driverless-cars-kant-is-my-my-co-driver

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A new world for insurersConnected vehicles and, especially fully autonomous vehicles, are going to profoundly change the nature of car insurance. Given that more than 90% of car accidents result from human error4, the optimistic scenario is that the number of accidents will decrease dramatically reducing risk all round.

At the moment the personal traits and behaviours of customers are critical factors when companies set premiums. They use a wide range of data, such as the customer’s age, where they live and their history of accidents. Increasingly insurers are also able to use information about individual usage gained through telematics or “black box” technology. This provides insurers with a more accurate assessment of the risk although it requires that they have systems and processes in place that are able to interrogate and manage high volumes of data. As a result of this, insurers are also having to develop their understanding of the legal implications around data ownership and data privacy in relation to the information they gain from telematics systems.

New ways of assessing risk are neededIt is expected that the use of autonomous vehicles on public roads will force insurers to change the way they assess risk and how they set premiums. If we move to fully autonomous vehicles the fundamental question is likely to become whether a driver who has no control over the vehicle will need insurance at all. It will be possible to argue that all the liability will transfer to the manufacturer if an accident is caused by, for example, failures in the design of the vehicle.

As we have seen, some manufacturers are now saying they will take full liability for any accidents caused by their autonomous vehicles. This may be a smart move in helping to gain public acceptability for autonomous vehicles but it could also make sense in economic terms.

If the risk of accidents is significantly lower for autonomous vehicles, and some calculations suggest it could be 50 times lower than for conventional cars, manufacturers would only have to make a very modest increase in the purchase price to cover the cost of the risk they are taking on. These liabilities may be capable of being covered by traditional product liability insurance policies, with some adaptation. This development could also have the side effect of eliminating the need for traditional motor liability insurance and a move towards some form of compensation scheme funded by vehicle users.

Yet even this scenario is not straightforward. Claims could still be brought by one manufacturer against another, or against their suppliers. Traditional professional indemnity policies may cover design failures but often exclude liability for inherent design defects.

Drivers or owners will also not be completely out of the picture. The more likely scenario is that drivers will retain existing obligations to maintain their vehicles and keep them in good repair. We can also envisage new areas of risk and liability around maintenance. Would a driver be liable if they did not download a software update? If the owner of the vehicle did not service the vehicle in line with manufacturer’s recommendation then they could be liable for any failures.

For the moment though, insurance is being used in traditional ways even when the vehicle’s connected features are involved. So if

Some manufacturers are saying they will take full liability for any accidents caused by their autonomous vehicles.

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Connected and Autonomous vehicles: the emerging legal challenges

a self-parking car bumps into another vehicle, the driver or car owner would be held liable and would need to claim on their insurance; currently insurers appear to view a failure of connected car technology as no different to a failure of an ABS or cruise control system.

Alexander Vollert, a Board Member of the insurer Allianz Deutschland, has said, “We do not believe that there is a need for new liability regulations for autonomous cars to be brought into effect. The German insurance model already includes protection for the traffic accident victim if damage is caused by partly- and fully-automated vehicles.”5

In Germany, the position is that the car owner is liable towards the party that incurred damage regardless of whether the accident happened because of a driver error or because of a vehicle fault (strict liability). The driver is liable unless he can prove that he did not cause the damage caused (presumed fault). Yet that position may not hold as we enter a transition period where there is a mixture of fully autonomous vehicles, highly autonomous vehicles with manual overrides, and conventional vehicles, resulting in greater complexity about the extent and nature of the risk being insured.

New opportunities for insurers All this underlines that eventually there will need to be a new framework for dividing responsibilities and both manufacturers and insurers need to be part of that debate. Given that product liability insurers are likely to have an increasingly prominent role to play it will be important that those insurers take expert advice to ensure their policy wordings reflect any changes in the liability regime.

However, once there is a critical mass of fully autonomous cars on the road, the insurance industry is likely to move quickly. Insurers are currently cash rich and more innovation-focused than in the past. So once the technology becomes clearer, they will probably start looking at the potential of partnerships with vehicle manufacturers to manage the new liabilities and risks.

If manufacturers do, as they say, agree to accept liability for road traffic accidents then the potential end to traditional motor liability insurance will amount to a significant and wholesale change to the existing insurance regime. However, in our view, such insurance is likely to exist in some shape or form for the foreseeable future so, long as there is some degree of responsibility on the driver, however diminished that responsibility may be.

4 http://www-nrd.nhtsa.dot.gov/pubs/812115.pdf5 https://www.allianz.com/en/press/news/studies/150929_car-of-the-future/

Traditional motor insurance is likely to exist in some shape or form for the foreseeable future, so long as there is some degree of responsibility on the driver.

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Industry Perspectives

Professor Neville Jackson, Ricardo

Steering through the hype to secure the benefits of automated vehicles

A good starting point in understanding the evolutionary process which will take us from the current limited automation to driverless cars is the SAE scale. This sets out five levels, starting with today’s driver assistance systems, moving through to level 2 where there is partial automation through more sophisticated parking assistance and automated driving in traffic jams but where the driver remains in full control. Level 3, conditional automation, extends automation to areas such as motorway driving with scenarios where the automated system monitors the road but the human driver can intervene if necessary. Level 4, high automation, sees the implementation of applications such as fully automated garage parking, motorway driving, and platooning for lorries, in a scenario where the automated system is in full control. Level 5, full automation, is where the vehicle can manage all the driving without any input from the passenger.

By understanding these developments and how they will evolve, all stakeholders will be better able to identify the challenges and

the technological, legislative, and regulatory issues that need to be addressed to make fully automated vehicles a reality.

Technical challenges remainIt is important to recognise that to move through these levels will require further technical developments and that these will not be straightforward. Fully automated cars will be the most complex commercial product available, requiring an estimated 350 million lines of computer code compared with the 6.5 million lines required for the Dreamliner aeroplane. For example, the technology is not yet available to allow automated cars to join a line of moving traffic. A human driver will make a judgement about a gap and the reaction of other road users and generally merge into the traffic efficiently. An automated vehicle has to build in a much greater safety margin, highlighting the real challenge that automated cars will always err on the side of caution in a mixed environment and so could end up driving more slowly than human drivers and make less efficient use of road space.

There is a great deal of hype in the media about the arrival of driverless vehicles, with much of the speculation running well ahead of the technical capabilities. While highly and fully automated vehicles will eventually become a reality, and will bring real improvements in road safety, there is still much work to be done to address the technical, economic and safety challenges associated with them.

Fully automated cars will be the most complex commercial product available.

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Connected and Autonomous vehicles: the emerging legal challenges

This underlines that navigating the transition to full automation will be difficult. A mixed environment where there are vehicles with varied levels of automation will be very difficult to manage and it will require careful thought from all stakeholders to get through this period to where we want to be.

Dealing with dataAlongside the technical challenges of automation there are a wide range of other issues to address, many of which have not yet received much attention. One of these is the question of data ownership. A key feature of connected and automated vehicles is the amount of data they will generate and the fact that this data will need to be shared with third parties if they are to work effectively. Yet the data owner, probably the vehicle manufacturer, will not necessarily want to share that data, or at the very least will want to charge for its use. This will create the need for a number of potentially complex contractual relationships that will have to establish who owns the data, the situations where that data can be handed over and the payment that will be made for that use.

Another critical problem that still needs to be solved is that of cybersecurity. It is vital to prevent critical safety systems being hacked and the best way to achieve this is to ensure that the system is not connected to external systems and can operate in isolation. A connected system where, for example, updates are provided raises the risk of a cyberattack considerably. Vehicle manufacturers will need to tackle this question and determine how they are going to guarantee the safety of their systems and how they will limit their connectivity.

It is clear that none of this will happen if the economics do not make sense, if manufacturers cannot be sure that there will be a market for automated vehicles and that they will be able to

produce these vehicles at a price that purchasers find attractive. They will need to consider very different business models to their traditional approaches and sources of revenue and it may take some time to develop those business cases.

The opportunities aheadHowever, there are a number of areas where there is clear potential for automated vehicles to drive significant efficiencies. One of those lies in the platooning of lorries, where goods vehicles travel at a set distance from each other, enabled by automated brake and engine control without the need for driver intervention. This could offer fuel efficiency savings of 10-15% and if the timing of the platoons could be coordinated with driver rest periods then this could deliver further economies.

We are also likely to see a number of different business models emerge where car ownership reduces and companies provide on demand vehicles and the distinction between private and public transport reduces. All of these developments will mean manufacturers will have to understand and adapt to very different types of revenue streams.

So while there are many uncertainties and challenges to overcome, what we are likely to see is an increasing range of technological assistance in cars that can stop drivers doing stupid things. These incremental changes will mean that, over time, we get to a point where it will only be a small step to move to fully autonomous vehicles. There is clearly a huge benefit in removing the potential for human error on the roads and so reducing the terrible toll of road accident casualties across the world. However, it is important to be realistic about the pace of change and the very real challenges of navigating through the transition period to where we want to be.

A key feature of connected and automated vehicles is the amount of data they will generate and the fact that this data will need to be shared with third parties if they are to work effectively.

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Managing a new world of data management, privacy and ownership Traditionally most vehicle manufacturers have had very limited information about their customers and managing customer data has not been a key priority. This is all going to change with the development of connected vehicles which depend on the collection and use of a wide range of data. This brings significant new challenges and obligations relating to the collection, use and protection of such data.

Some of these obligations are very manageable but others go to the very heart of national political debates. For example, in France, legislation is being developed in response to recent terrorist attacks which would give government agencies significantly more access to personal data. So a car manufacturer could find themselves drawn into a scenario where law enforcement agencies could demand access to a vehicle’s data to help them track a terrorist’s location. Connected cars mean everyone’s location and journey history is potentially available to a third party. This places the vehicle manufacturer at the centre of far reaching questions about civil liberties and the role of the state.

Even away from these high level debates about privacy, it is clear that connected vehicles will bring significant new legal responsibilities for vehicle manufacturers, distributors, providers of connected services, and software providers. Every organisation in the chain needs a clear understanding that the handling of personal data raises legal issues such as: who owns the data; who is entitled to access and use it; what are the terms for sharing it; what security measures need to be adopted to keep it safe?

Data ownershipSome jurisdictions, e.g. Germany’s civil law code, does not recognise ownership of personal data, only the ownership of data carriers. English lawyers are also debating the concept of ownership of personal data, which is not clearly

recognised under English Law. If manufacturers are not able to achieve the contractual ownership of certain data carriers, the rightful ownership of the vehicle as a data carrier would entitle the owner to prevent third party access to vehicle data and to demand access to technically locked data memories in the vehicle. Because of this, external access is usually subject to a contract or declaration of consent.

There will be a whole range of different ways data can be acquired ranging from infotainment systems, event data recorders and diagnostic systems, the cameras and the safety sensors on the car and embedded SIM cards. Those involved will need to manage and secure high volumes of data, most of which will in many jurisdictions be considered to be personal data and so governed by data protection legislation (across Europe and the rest of the world). Manufacturers and service providers must also manage risks posed by any third-party IT suppliers who process data on their behalf. If they collaborate with a tech company to provide connected services and that partner breaches data protection regulation, then manufacturers and service providers themselves may also be liable. Due diligence and contractual assurances will be ever more important.

The nature of connected cars and the interdependency that is at the heart of their operation means that data is required to be passed on to a range of other parties. Every element in that connectivity chain will need to

Data protection regulations

have not been developed to

deal with the specific

implications of connected and

autonomous cars.

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Connected and Autonomous vehicles: the emerging legal challenges

understand and manage their data protection obligations, including security requirements. Clarity is required around the data that may be generated, stored, and used and where required consents secured from owners, drivers and even passengers. This is even more complicated where the vehicle is shared amongst various users or when it is sold. Users of connected data may need to set up procedures to establish contact and obtain consent to the use of the new owner/users’ data.

Data security will be criticalData security, including cyber security, is a critical issue. Whether the data is stored in the car or in a cloud database, effective security measures will need to be in place to protect the data. Manufacturers of connected cars will also have to plan for data loss incidents, including implementing appropriate crisis management procedures to ensure the cause of the data loss can be analysed without undue delay, to minimise the impact of a data breach and to comply with reporting obligations to the authorities and affected individuals.

Legislative frameworks are still being developed in the area of cyber security, with the EU Commission having drawn up a proposal for a directive on network and information security. Regulatory authorities are expected to pay particular attention to vehicle IT, and the role of encryption, program code signatures, hacking tests as well as the practical implementation of principles of data

protection law including data economy, privacy by design and privacy by default. It will be important to keep up to date with the changing requirements.

In most jurisdictions, data protection regulations have not been developed to deal with the specific implications of connected and autonomous cars. Different countries within the EU and outside of the EU have differing regulatory requirements. This raises the question of what happens when the vehicle crosses a border? Can collected data be sent across borders e.g. in order to establish a centralized connected car data centre, and if so, under what restrictions? The EU General Data Protection Regulation (GDPR) (a legal framework applicable for all EU member states will come into force in 2018) will provide some comfort by providing a common set of laws for all the EU Member States.

However, challenges remain with regard to data transfers to recipients outside the EU. Non-European car manufacturers or service providers will actually be subject to the GDPR as it applies to the processing of personal data of data subjects who are in the EU by a controller or processor not established in the EU in many cases. This will, however, be difficult to enforce. Apart from mandatory privacy impact assessments, the use of privacy by design and privacy by default, and the question around data portability, a further significant change coming with the GDPR will be the threat of fines for non-compliance of up to 4% of the total worldwide annual turnover. Continued on page 18 >

Whether the data is stored in the car or in a cloud database, effective security measures will need to be in place to protect the data.

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Developing new regulationsIndividual countries are beginning to address the data related issues associated with connected cars. In the UK, the government, whilst applying existing data protection laws, is committed to participating in EU working parties to produce a standard for data recording in connected vehicles.

In France the Data Protection Authority’s most recent annual report highlighted that connected vehicles will be an emerging issue that they will need to address. The French approach is to focus on setting professional standards where the parties involved agree the principles which govern data management and that these standards then become binding. This collaborative industry approach is seen as the first step, but if agreement cannot be reached then the government is likely to step in. In Germany, the Data Protection Authorities consider that even pure technical, vehicle-related data, e.g. something as simple as the information about the fact that a windscreen wiper has been operating at a given time, might be considered personal data because it could be linked back to an individual through the vehicle identification number or through it being linkable to a profile on the recently emerging customer portals of OEMs where customers can customize the connectivity functionalities of their cars. As a result, connected car data will in most cases be deemed personal data, unless data processing has been designed to avoid data becoming personally identifiable, e.g. where sensors and other data generating items have been designed to generate anonymous data only.

These restrictions will make it harder for manufacturers to monetise any personal data they collect so we are likely to see more owners’ portals where manufacturers ask owners to register and provide consent for the use of their vehicle data. Transparency about the intended use of such data will be key.

Legal risks could be reduced if data could be anonymised (privacy by design) by incorporating this functionality at the product and process development stage, as the data protection law obligations will not then apply. However, in the age of Big Data, anonymisation is often not reliable. In their latest joint statement, the European Supervisory Authorities go so far as to say that in the Internet of Things, in case of any doubt, a relation to a person should be presumed to always exist.

Further data challenges may arise from the use of information from event data recorders, black boxes or cameras in the event of an accident. The data will belong to the car owner, but manufacturers, insurers and law enforcement agencies may want access to it, especially if manufacturers have taken on the liability for accidents caused by their autonomously operated product. In some jurisdictions the mere use of cameras and generated footage might be challengeable under privacy laws. If there is an argument that big data analytics can help ensure vehicle safety, carmakers might be required to use such data from a product liability law perspective,

The use of data is going to be a complex issue for the developers of connected and autonomous vehicles.

> Continued from page 17

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Connected and Autonomous vehicles: the emerging legal challenges

but then how will they deal with the general requirement of data minimisation under privacy law regimes? As data protection legislation does not specifically address these issues, there is potential for confusion and dispute about the obligations of anyone involved.

In the US, the Global Automakers organisation has tried to shape the debate by issuing its own privacy principles. They say there is implicit consent to the responsible and reasonable use of data from the usage of services and technologies as long as that data is only used for the performance of vehicle technologies and services. While these principles fall short of what European data protection authorities would be able to accept, they underline that the industry has a role in leading the debate on data usage.

Similarly, the European Automobile Manufacturers Association (ACEA) and the German Association of the Automotive Industry (VDA), together with the German data protection authority, have each developed principles of data protection in relation to connected vehicles and services, although these are more high level than the Global Automaker’s principles.

Managing data effectively is a critical business issue Significant potential revenue streams and manufacturer and customer benefits risk being lost if the data from connected cars cannot be widely used, in particular for Big Data analytics. More information about the use and operation of vehicles can improve customer satisfaction; allow for predictive maintenance; enable more personalised insurance products; make more effective use of road space and improve safety.

The use of data is going to be a complex issue for the developers of connected and autonomous vehicles. It will require careful management and a detailed understanding of the different approaches in different countries and their changing requirements. Manufacturers need to consider the concept of “privacy by design” from the very beginning. If data regulation is not considered from the start of the design phase for a new vehicle, car makers may not be able to use the vehicles in particular countries without unplanned adjustments which are costly and have a potential to disturb any uniform sales as well as maintenance processes. Wherever the applicable regulation is unclear manufacturers would be well advised to consider the potential for deactivation of certain features in order to avoid, in a worst case, product recalls if the car does not comply with privacy laws in a particular jurisdiction.

On the other hand, where more or less any car data qualifies as personal data and if, in many cases, the users have a right to opt out of sharing, for example, location data this will undermine connected and autonomous car safety features, like the ones based on the ability of connecting all cars and their location. Careful assessment will be needed to determine in which instances a public good, like avoiding collisions, can override privacy concerns, i.e. can a driver opt-out of the use of personal data for a feature that warns drivers of slippery roads or obstacles lying ahead? In this context some argue that European privacy concerns could potentially stand in the path of connected and autonomous car collision avoidance strategies, making it clear that these complex and profound issues will need to be addressed at an early stage.

Significant potential revenue streams and manufacturer and customer benefits risk being lost if the data from connected cars cannot be widely used.

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The importance of telecommunications to the development of connected vehiclesWhile many of the regulatory issues relating to connected and autonomous vehicles apply to cars that are not yet on sale, managing the impact of telecommunications legislation is a much more pressing issue. Both manufacturers and telecommunications service providers are developing a wide range of products, from entertainment to navigation systems, many of which are available and which present significant opportunities to develop new revenue streams.

Some recent examples include Orange’s partnership with Tesla Motors to give drivers of its Model S vehicle access to Orange’s 4G network. They also have a collaboration with Renault on a number of research and development projects and Bouygues Telecom are working with Peugeot to implement Peugeot Connect Apps in their cars, while Vodafone is working with BMW to supply connectivity for their ConnectedDrive system.

Managing new relationshipsA wide range of new technology is needed to enable these services and automotive businesses are having to work with many new suppliers from sectors they have not traditionally worked with. They will therefore need to ensure the contractual arrangements with those new providers are effective.

The most significant of these new relationships is likely to be with telecommunications providers which brings a number of technical issues for manufacturers to address, as the connected car has to be compatible with the type of mobile network it is using. The challenge is that, unlike a mobile phone, it may not be possible or

cost-effective to upgrade an in-built telecoms system later in the car’s life to take advantage of advances in the technology or service. To deal with this issue, we are likely to see more hybrid solutions being developed which allow the user’s smartphone to work with the in car system. That potentially creates the need for a complex set of arrangements and contracts between the smartphone service provider, the smartphone owner, and the vehicle manufacturer.

As they develop more connected services, manufacturers will also need to manage a number of legal issues. These start with the different ways they may procure services from telecommunications providers, whether that is through licensing models, joint ventures or other types of contracts. At the moment these tend to be service contracts but are likely to develop into more complex arrangements as the range of services car manufacturers wish to provide increases. The challenge is that these arrangements are likely to be very different to those car makers have traditionally had with their suppliers and they will need to ensure these agreements are clear and enforceable.

Automotive businesses are having to work with many new suppliers from sectors they have not traditionally worked with.

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Connected and Autonomous vehicles: the emerging legal challenges

Manufacturers need to understand telecommunications regulationsThe next issue to consider is the extent to which manufacturers themselves will acquire obligations under telecommunications regulation. These include the obligations of lawful interception; know your customer rules; the obligation to use automated means when reporting to the authorities; the obligation of having a local entity in the country when providing telecom services, as well as certain specific requirements for consumer contracts, many of which are likely to come as a surprise to manufacturers.

In addition, in Europe manufacturers might be qualified as provider of electronic communication services under national telecommunication laws and/or the EU Framework Directive 2002/21/EC. Legislation in this area is extensive but has not been designed to deal with the particular services which will be provided by connected cars and so there is a lack of clarity about the exact obligations and requirements manufacturers will face. Such requirements include notification obligations, data protection and data retention requirements, certain limitations on end user contract terms, or obligations to collect end user data for the purpose of making available to security authorities (sometimes even through using interfaces that allow automatic and direct access to the data). The latter obligation then triggers practical issues where manufacturers do

not have a direct relationship with the customers and would need to implement a process with their car dealerships in order to collect the required data. To allow manufacturers to best respond to these new obligations, they could seek agreements with the telecom service providers they use to procure connectivity so that such operators have to help, to the extent possible, satisfy any regulatory requirements the law imposes on manufacturers in this context.

Regulators need to keep pace with the technologyat the moment, the focus of regulatory interest is on relatively broad issues around spectrum, data privacy, network security and network resilience. However, it is clear that they will need to start to look at the specific implications of connected vehicles and work to develop streamlined and convergent telecommunication regulation in this area. This will be difficult for regulators, given the pace of development in a whole range of emerging technologies. The Internet of Things and the machine to manage communication which rely on wireless technology and data exchange, as well as connected cars, will all require changes to regulatory regimes. This means it will be essential to encourage early dialogue with all regulatory authorities to ensure they understand the technological developments and the need for clarity and certainty about how they are to be regulated. Continued on page 22 >

Regulators need to keep pace with the technology at the moment, the focus of regulatory interest is on relatively broad issues.

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Another issue that will need to be addressed is that of spectrum availability. Indeed all telecommunication systems require a certain amount of electromagnetic bandwidth to operate. The overall electromagnetic spectrum is allotted to different uses (TV broadcasts, AM/FM Radio, cellular communications). Part of the spectrum will therefore need to be allotted to connected vehicles. This is not expected to be a barrier to the development of connected vehicles in the near term, but it is likely that in the future regulatory changes will be needed to help facilitate the increase in network traffic.

In France, manufacturers need to obtain a licence to use spectrum or to contract with a telecom operator to use its licence, unless manufacturers use free frequencies. However, free frequencies are very limited, and do not offer any protection against signal jamming. So it is likely that measures will be needed to make more spectrum available. This includes the liberalisation (which has already begun in some countries including the UK) of the use of “white space” which harnesses the potential of unused gaps in the radio spectrum.

New responsibilities and liabilitiesAs well as the need to meet the requirements of telecommunications legislation and of data regulation, the increased role of telecommunications in connected cars brings new questions of liability. We can envisage scenarios where an autonomous vehicle crashes as a result of the interruption of data to the car and where the reason for that interruption was a defect in the mobile network operator’s system. Such a

case would raise questions about where any claim would be directed. The car owner might have a case against the telecommunications provider if they had a contract with them for a data plan for the car. Alternatively, if the carmaker procured the telecommunications provision as part of the overall car package then the claim would be against the manufacturer.

The allocation of responsibility and any resulting sanctions will vary in different jurisdictions. Under current German telecommunication law, the liability of a mobile network operator is limited to 12,500 EUR per end user and to an aggregate sum of 10 million EUR in cases where there is damage incurred by multiple end users. This makes sense for mobile telephone services, since it is unlikely that much damage can be caused by an outage that affects a simple telephone conversation. However, that provision may not be adequate for the much greater damage that could potentially be caused by a failure of connectivity in a car.

The challenges of managing different regulatory regimesA further complication lies in the divergence between the various national telecommunications regulation regimes, even within Europe. As a result, connected car manufacturers will have to study the applicable regulation in each country its vehicles may travel to and each country it plans to sell its vehicles. It will also need to make sure, through appropriate procedures, that it still is in compliance should the car travel from one jurisdiction to another or be sold to a buyer in another jurisdiction where that results in

The allocation of responsibility

and any resulting sanctions under

local telecom law will vary in different

jurisdictions.

> Continued from page 21

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Connected and Autonomous vehicles: the emerging legal challenges

provision of telecommunication services outside the initial territory where the car was first brought to market. In addition, some countries require telecommunications service providers to be situated in the country, so a car manufacturer who was providing these services would, under certain circumstances, need to establish a separate entity in Russia, for example, in order to provide connectivity for the Russian market.

As a result, manufacturers will need a clear understanding of which components of a connected car are governed by which elements of telecommunications regulations, bearing in mind this may vary in different jurisdictions. They will also need to ensure that any agreements with service providers or with customers meet the requirements of the telecommunications legislation in the relevant country and that the service providers undertake to deliver any support needed in order to fulfil local telecom law regulatory requirements that the manufacturer may be subject to. The European Commission adopted in May 2015 a “Digital Single Market Strategy” that aims, amongst other things, at creating an enhanced regulatory consistency across Member States. This could help manufacturers immensely if the relevant measures are adopted promptly.

All this adds up to a complex picture but one which needs to be addressed quickly if vehicle manufacturers are to meet the clear demand from customers for telecommunication enabled services in their vehicles, and to secure the value from this opportunity.

Manufacturers will need a clear

understanding of which components of a connected car

are governed by which elements of

telecommunications regulations, bearing

in mind this may vary in different

jurisdictions.

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Industry Perspectives

Dr Nick Reed, TRL

Creating public trust and confidence in autonomous vehicles

Driverless vehicles offer clear benefitsWhat is emerging from this focus on the potential of driverless vehicles is the range of services and benefits they could provide. Even before we get to fully autonomous vehicles, we are seeing the increasingly widespread use of automated parking systems which could free up parking spaces in cities, saving time, reducing emissions and making journeys less stressful.

Another potential application of autonomous vehicles is deliveries, where driverless electric vehicles could reduce costs and emissions. MIT have taken this concept further, researching autonomous electric tricycles, based on the city bike hire schemes but where the bicycles can be summoned to an individual address rather than having to be picked up and could be used by individuals or for deliveries.

Looking more broadly at the advantages of connected vehicles, there is clearly potential to use the data they collect to provide local authorities with information about the road condition and so help them plan maintenance more effectively.

More research and testing is neededHowever, none of these developments will happen unless there is public trust and confidence in the technology. Among the UK projects, TRL is involved in GATEway (Greenwich Automated Transport Environment) which is researching and testing driverless shuttles which could be used for short journeys from public transport hubs. The initial public reaction to the shuttles in Greenwich, which is where TRL’s Smart Mobility Living lab is located, has tended to be focused on the novelty

of driverless vehicles. However, the public then rapidly seem to become comfortable with the concept, raising a potential concern that people may become too confident in the technology and lose their awareness of road safety.

Overall, our early demonstrations with automated vehicles in Greenwich has shown that public perceptions of the vehicles are highly affected by their direct experience of being a passenger. So, for most people, there is a gap between perceptions and reality because knowledge of automated vehicles comes from media coverage and entertainment rather than their own experience. It is hard to understand a concept of which we have no experience. There is clearly therefore a need for more research and testing to engage the public in the reality of the technology and to understand their reactions to it.

Ultimately the testing process for automated vehicles will be complex and it will need to be more extensive than that which is carried out on conventional vehicles. An automated vehicle with full responsibility for control will encounter a huge range of different conditions and the manufacturers will need to be sure that their responses to each of these are safe. The essentially infinite number of situations involved means that much of the testing will have to be done virtually using simulation but that, in turn, means that any such simulators will have to clearly show that they have sufficient validity to recreate real world driving conditions.

It is also important to recognise that there are still technical challenges to be overcome in ensuring that driverless vehicles can operate safely in all conditions. In particular, the interaction with

There is a tendency to assume that self-driving cars are an entirely new concept, only enabled by 21st century technology, but TRL first started exploring the idea of autonomous vehicles in the 1950s. However, it has only been in the past five years that the combination of technical advances and the high profile commitment of Google, and others outside the traditional automotive sector, that we have seen the idea gain real momentum.

The testing process for automated

vehicles will be complex and it will need to be

more extensive than that which is carried out on

conventional vehicles.

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other vehicles or other road users is difficult to manage. Eye contact with a pedestrian trying to cross the road is one way a driver communicates, and how those kinds of interactions are managed in automated cars will need to be addressed. In addition, there will need to be further developments to ensure the vehicles can deal with the impact of weather conditions. Snow and rain can have a very significant effect on the effectiveness of the various sensors in perceiving the environment. The technology will need to be able to manage in those circumstances.

Whatever simulated testing takes place, it will need to be supplemented by on road testing and we are seeing an increasing number of trials across the world. Schemes like Volvo’s “Drive Me” will start in Gothenburg in 2016 and test 100 self-driving vehicles in everyday driving conditions around the city. This testing will take a year and, subject to successful development, Volvo plans to start selling the technology in 2018.

It will be a bumpy transitionTesting and research will inform the transition to automated vehicles but that transition is unlikely to be smooth. That is true of any technological transition but will be a particular feature in this case because there are very different interests wanting different approaches. Google and other technology companies are working on fully driverless vehicles and are keen to move quickly to an entirely new approach but traditional vehicle manufacturers are looking at more incremental changes. Equally, there has not been enough research into public views to get a perspective on how drivers will react and how eager they will be to adopt the new technology and potentially give up car ownership and driving.

One likely scenario is a gradual increase in shared mobility in urban areas, building on car clubs and

similar schemes that are already in place. In the UK there has already been a decline in the number of young people taking driving tests which may suggest that the cultural and social focus on car ownership may be declining in younger generations. Shared mobility schemes will also adapt to ensure the use of a shared vehicle can still be personalised. Like browsers or smartphones, users can bring their own profiles such that a shared vehicle would come with your own music pre-loaded and your preferred seat position and temperature stored and applied when you summon the vehicle.

Another area where adoption of driverless vehicles may happen quickly is in deliveries. A number of logistics companies are exploring the possibilities of driverless vehicles. Starship Technologies has outlined a possible scenario where parcels could be carried by vehicles that operate on pavements and deliver directly to an individual door. While there is some way to go to make these options a reality, they are likely to take hold quickly if autonomous vehicles are able to reduce costs significantly.

All these developments depend on getting the right regulations and legislation in place. Vehicle regulations can take many months or even years to be developed and implemented and in that time, automation technologies may have already superseded the regulation. So regulators will face a real challenge in keeping up with the pace of development whilst ensuring that their approach does not hinder technological developments and also keeps the public safe.

There are still obstacles to be overcome requiring further research and testing. The precise pace and scale of adoption of automated vehicles is hard to predict but is clear that there is now real momentum behind their development and motivation to achieve the significant benefits that they promise.

Testing and research will

inform the transition to automated

vehicles but that transition

is unlikely to be smooth.

Connected and Autonomous vehicles: the emerging legal challenges

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The effect of connected and autonomous vehicles will be felt across the supply chain It is clear that the move to connected and autonomous vehicles has the potential to bring significant changes to business models across automotive supply chain, and in the contracts that govern the relationships within those supply chains. These changes will require the development of new thinking on where liability lies and how it might be enforced.

They will also potentially change the balance of power in contracts, as well as raising a whole range of challenges around managing intellectual property and protecting data. In addition, the sector may need to develop new relationships with its customers and, if it moves towards a servitisation based business model, it will need to adapt to very new types of contractual arrangements.

The question of liability is clearly critical to the development and public acceptance of connected and autonomous vehicles. Even if manufacturers

say they will accept strict liability for failures in connected and autonomous vehicles this will only solve the liability issue at the front end. The causes of accidents and defects in connected and autonomous vehicles will range from faulty design to faulty manufacture and from faulty software to faulty telecommunications, as well as faulty maintenance and other services. This means that manufacturers will need to ensure that their contractual arrangements with all elements in their supply chain are clear and robust enough to allow for liability to be passed back in the event of these failures.

The question of liability is clearly critical to the development and public acceptance of connected and autonomous vehicles.

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Connected and Autonomous vehicles: the emerging legal challenges

New types of contracts may emergeAs a result of this, we may see a move away from the traditional linear contracts used in the automotive sector to ones that are more closely linked to behaviour and provide methods of risk sharing. Indeed, the very nature of connected and autonomous vehicles, and the number of interdependent technologies that are needed, means that we may see more multi-party “behavioural” contracts. This means that the vehicle manufacturer may end up with a contractual relationship with all elements in the supply chain.

These types of contracts are increasingly being used in large construction projects and major procurements and may be helpful in the development of connected and autonomous vehicles where there are considerable uncertainties about the pace and scale of adoption of new technology. The exact form of behavioural contract can vary but is focused on developing frameworks that provide incentives to encourage more collaborative behaviour and manage risk in more integrated ways.

While this brings some additional complexity, it could help to provide the flexibility needed to respond to rapidly changing technology and markets more effectively than following traditional contracting models.

For many manufacturers this will represent a significant shift from the way they are used to doing things and they will need to explore the implications carefully. In particular, behavioural contracting requires a change in mind-set to accept a different approach to risk and liability. However, whichever contractual model is adopted, it will be vital that there is clarity over where liability lies.

A shift in the balance of power in the supply chainAnother key development we may see in the connected and autonomous vehicles’ supply chain will be a shift in the negotiating power of manufacturers and their supply chains. Traditionally, vehicle manufacturers, by virtue of their size and dominance in the market, have held the power and have largely been able to dictate the terms of contracts to their suppliers. Suppliers have had little scope to change those terms, leading to relationships that can be adversarial, inefficient and which have little flexibility.

In a world of connected and autonomous vehicles, those relationships may be very different. It is possible that the automotive sector will follow a similar pattern to that seen in the development of smartphones, where power switched dramatically from handset manufacturers such as Nokia to software providers. In a world where consumers

Manufacturers will need to

ensure that their contractual

arrangements with all elements

in their supply chain are clear

and robust.

Continued on page 28 >

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are demanding infotainment and connectivity systems in their vehicles, manufacturers will be dependent on specialist hardware and software providers to ensure that they are competitive in that market. This creates a very different kind of relationship to the one manufacturers may have had with their traditional suppliers who provided a particular part to the manufacturers’ specification.

Manufacturers also have to accept that the more IT and software is being used in the car, the more their legacy concept of not being able to change components after the start of production will be challenged. This is because IT and software suppliers typically work with regular updates and patches in order to deliver constant improvements and bug fixing. Similarly, the product life cycles of cars with development lead times of up to seven years and the fast paced ones for IT products need be aligned in order to ensure that a new vehicle is not already outdated in terms of IT when coming to market, all of which needs to be reflected in the underlying supply agreements.

Challenges for technology companiesThe challenges of a new connected world do not just apply to vehicle manufacturers. The suppliers of technology will also face their own challenges, particularly around protecting their intellectual property. They will need to ensure that they have the appropriate protections in their contractual documents to safeguard their ownership of their hardware and software and their right to derive revenue from such technology. Manufacturers

and businesses higher up the supply chain will need to ensure that appropriate licences or rights are obtained to use any intellectual property that they do not own. All of this adds to a more complex set of contractual relationships and the need to secure the expertise to deal with unfamiliar legal arrangements.

A further area of contractual complexity in the development of connected and autonomous vehicles lies in the way they may lead to entirely new business models for vehicle manufacturers. At the moment, most manufacturers have limited interaction with the end consumer as their arrangements are principally with dealers. However, connected and autonomous vehicles open up a whole set of new business models where manufacturers could find themselves selling services directly to consumers which range from insurance to servicing and from infotainment to leasing.

We can also foresee scenarios where the whole nature of car ownership could change. We are already seeing some evidence of this with the growth of urban car clubs where people simply hire a car to use for limited periods of time. The emergence of connected and autonomous vehicles could enable that further, with users able to call on pools of cars which could be ordered by phone and arrive at your door. This means that car makers could see their business developing into one which no longer sells cars but provides mobility as a service.

The challenges of a new connected world do not just apply to vehicle manufacturers. The suppliers of technology will also face their own challenges, particularly around protecting their intellectual property.

> Continued from page 27

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Connected and Autonomous vehicles: the emerging legal challenges

New ways of doing businessThese developments offer potentially significant new income streams but represent very different ways of doing business. As a result, manufacturers will need to ensure that their contractual arrangements reflect this new approach and manage risk effectively.

A move towards servitisation will also change business models further as it brings in income over an extended period of time as opposed to a one off payment. In addition, it may bring manufacturers within the remit of consumer protection legislation which governs transactions with individuals and which can have more onerous requirements than those applying to business-to-business contracts. Servitisation models have worked well in some sectors for a number of years, most notably in Rolls Royce’s approach to aircraft engines, where the engines are leased and Rolls Royce maintains them.

There is a great deal of uncertainty about how the connected and autonomous vehicles market will develop and how fast. However, it is clear that connected and autonomous vehicles will have implications for the whole automotive supply chain and will potentially lead to the emergence of different kinds of relationships in a more complex environment, involving a wider range of parties. These changes could be very beneficial to all those involved but it will be vital to manage them carefully to ensure that the arrangements put in place are as dynamic as the technology they are designed to cover.

Connected and autonomous

vehicles open up a whole set

of new business models where

manufacturers could find

themselves selling services directly

to consumers.

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Discussion of connected and autonomous vehicles tends to focus on the challenges in making them a reality. While these are undoubtedly important, it can mean the extent of the benefits these developments could bring can sometimes be overlooked. By transforming mobility, autonomous vehicles have the potential to deliver solutions to some of the critical social, economic and environmental problems we face. This starts with dealing with traffic congestion which is a growing drag on economic development in many cities around the world. Reduced congestion will, in turn, lower emissions and could enable the use of more electric and cleaner vehicles. Autonomous vehicles could also deal with the “last mile” problem, where people are less likely to use public transport because they have to get from the station or bus stop to their home. A fleet of on-demand autonomous shuttles could solve that problem. Another significant benefit of a move to driverless cars comes from the potential improvements in safety. Most of the 25,000 serious accidents every year in the UK are caused by driver error, so removing driver control could dramatically improve road safety. Equally, as we spend the equivalent of six working weeks a year driving, the widespread use of fully autonomous cars could free up significant amounts of time. There is also the advantage that they would increase mobility for a large number of people who cannot currently drive, perhaps through disability. While this might mean that the number of journeys would increase,

if road space is better managed it would not increase congestion, and would transform lives.

These will all be in addition to new business opportunities. Research for the UK society of Manufacturers and Traders suggests that the development of connected and autonomous vehicles will help generate 320,000 jobs in the UK and create a market worth £51 billion.

A wide range of challenges However, to reach this point will require a number of issues to be addressed. The first is that we tend to treat cars and driving in a different way to other products we buy. Buying a car is likely to be the most expensive purchase we make, apart from our houses, and for many people buying a car is a very different kind of transaction to buying a washing machine or a computer. For them driving is not simply a way of moving from place to place, it can be an inherently enjoyable experience in which they have an emotional investment. Driverless cars will potentially disrupt the whole nature of the driving experience. That means manufacturers will need to consider whether people will be willing to give up car ownership and move to a leasing or hiring model and how they make a driverless pod attractive to users.

Industry Perspectives

Professor Paul Jennings, Warwick Manufacturing Group

Transforming mobility through autonomous vehicles

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Connected and Autonomous vehicles: the emerging legal challenges

Surveys suggest that there is currently some public concern about the safety of driverless cars and that, at the moment, people are happier getting a taxi with a driver whose skills they know nothing about rather than an autonomous car.

It is these broader and softer issues, as much as the technical ones that will need to be resolved before manufacturers can be sure that autonomous vehicles will be commercially viable. This means that the success of manufacturers in maximizing these new business opportunities will depend on their understanding that creating a market for autonomous vehicles is not just an engineering problem but a psychology, communications and marketing challenge as well. In particular, they will have to get the experience and the price right. As we have seen with the low take up of electric vehicles, buyers need to be sure of the advantages of a new form of driving and confident that the new car will be as safe, reliable, affordable and enjoyable to drive as traditional vehicles.

In meeting those challenges, manufacturers will need to consider how to get from where we are now to driverless vehicles. That transition will be complex and the debate has tended to assume that there will be incremental change that will pass through different levels of autonomy until we get to fully driverless vehicles. That is a potentially slow and expensive process, given the length of time and cost involved in developing and launching new car models.

An alternative scenario might be to develop and sell fully autonomous cars as soon as they are technically viable but allow the driver to be able to switch that facility on and off. So we could envisage that the driverless car function could be used on a motorway lane where all the vehicles were operating in the same way. However, in a congested urban area, the driver would still be in charge but, over time, the number of roads where the fully autonomous function could be used would grow. This would allow manufacturers to navigate through the transition phase without constantly having to upgrade vehicles and give

legal and regulatory authorities the time to develop new regimes.

Building public trustFor this to happen there will need to be public trust in the technology. Surveys suggest that there is currently some public concern about the safety of driverless cars and that, at the moment, people are happier getting a taxi with a driver whose skills they know nothing about rather than an autonomous car.

Testing will play a critical role in building that trust and addressing those concerns but that will be a complex process. Real world testing will need to check the response of the vehicle to every variable: a child in the road; a plastic bag; different weather conditions; and other vehicles. It will be hard to replicate each of the huge range of specific individual scenarios to test the consistency of the response of the vehicle, meaning comprehensive testing will be very expensive. So while much of the focus has been on the need for on-road testing, it may be necessary to use simulators which allow for the vehicles to be tested in a wide variety of conditions and to repeat those tests consistently.

All this underlines that the development of connected and autonomous vehicles requires a very different process to that used in many other products because it requires such a multi-disciplinary approach. It needs to bring together engineers, software developers, philosophers, marketers, behavioral insight researchers, experts in standards and systems, and legal specialists. However, that combination of expertise is a very powerful one and if they can make driverless cars a reality then they will be making a significant improvement to both the quality of many people’s lives and to our wider environment.

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Protecting Intellectual Property in a world of connected vehiclesThe volume of new technology required, and the fact that much of this technology needs to be shared widely, means that connected and autonomous vehicles raise many intellectual property (IP) issues.

The whole automotive supply chain is likely to need more access to the information and technology of others, including potential designs, patented technology, trade secrets and other confidential information, as well as personal data. This means that agreements will be required that set out who owns the rights in such material, each party’s rights to use them and how the related rights are enforced. It will also be important to address who owns the rights in any improvements or developments and who can use them. These issues need to be expressly provided for rather than assuming that they will be implied or covered by general contractual provisions.

Protecting intellectual property rights needs to be addressed earlyThe starting point is the importance of protecting the intellectual property rights in the new developments either in the cars themselves or in the software they use. If the new developments are patentable it will be important to consider this early as once they are in the public domain

such protection is likely to be lost, resulting in a fundamental diminution in value. There is a growing recognition of the importance of patents in the automotive industry, with Ford recently filing a number of patents related to their vehicle communications technology developed during a three year research project.6

A report by Thomson Reuters in early 2015 analysed the patents filed relating to autonomous cars and found that Toyota, GM and Hyundai were the most prolific filers. However, it was not just the carmakers themselves filing patents, Bosch, and Continental AG had also been very active in filing patents.7 With the increasing use of technology in connected cars this level of activity looks set to grow and underlines the need for carmakers and other related developers to check the patents landscape to determine what patents are already out there. Freedom to operate searches will be key and it will also be important to agree whose responsibility these will be given the costs involved.

6 http://ae-plus.com/technology/ford-files-connected-car-patents-after-3-year-project7 http://www.reuters.com/article/2015/01/19/us-autos-patents-innovation-idUSKBN0KS1TU20150119

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Connected and Autonomous vehicles: the emerging legal challenges

If car manufacturers and service providers invest substantially in the systematic collection of the data generated by autonomous cars this could be a way to establish a certain degree of ownership and protection in the databases thereby created which then can be monetized.

A complex pictureFurther complexity around IP rights is likely to arise because of the very nature of connected vehicles. The need for interoperability and the sharing of a wide range of technology to enable their services to work, will put pressures on traditional IP licensing and royalty models. Car manufacturers will find themselves involved in more diverse supply chains, with different relationships with their suppliers and IP issues will need to be addressed in all those contractual arrangements.

That then brings further challenges in enforcing IP rights. While the parallel with 3D printing is not exact, its IP challenges do provide some lessons for a more connected world. In particular, it highlights that by enabling a wide range of service or product suppliers to access the protected technologies, the IP owner may find it very difficult to protect their IP and may have to look for different ways of dealing with infringements. So when the Hasbro toy company found customers were downloading 3D-printable designs of its toys from online sites, they tried and failed to shut down the sites and instead decided to provide their own licences for their toy designs which customers could buy.8

What is clear is that connected cars are going to be using many and various technologies, the rights in which will be owned by a range of IP rights holders. This will require the implementation of multiple licensing arrangements both to protect the manufacturers’ own technology and in order to use the technology they need for connected services. The arrangements will need to provide clear and enforceable protection for the services

they are developing or providing and set out clear rights of use both for the manufacturers and their customers and even the purchasers of the cars in the second hand market.

The importance of collaborationCollaboration will also be key to the development of connected cars given that no one supplier in the chain is likely to have all the technology they need to make them happen. As a result, we are seeing a growing number of partnerships and joint ventures for connectivity projects. Such collaboration will again require the clear regulation of intellectual property rights, both in terms of rights ownership following creation and the on-going rights of use, as well as in the protection and management and the costs of protection and management of the intellectual property created as a result of the collaboration. These issues should be explicitly addressed in contracts providing for these issues both during the term of the collaboration and following its termination. Any collaborator who seeks to rely on implied rights is likely to be very disappointed by the outcome. For example, it will not always follow that because you have paid for the collaboration you will own the IP rights. Also the rights that are implied will vary between jurisdictions.

Clear legal advice in relation to the handling of intellectual property rights will be required from those who understand the technology and the development of connected cars. This should include a careful examination of the IP implications of the different contractual licensing models that may be implemented.

All this is made more complex as legislative frameworks do not always keep up with the rapid pace of change in technology in general and in particular the developments relating to increased connectivity. It will be important to keep track of the developments in this area.

Car manufacturers will find themselves involved in more diverse supply chains, with different relationships

with their suppliers and IP issues will need to be addressed in all those contractual arrangements.

8 http://www.computerworld.com/article/2923949/3d-printing/patent-trolls-may-be-preparing-to-target-3d-printing.html

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A new world for the automotive industry: standard-essential patents and FRAND licencesGiven the absolute need for connectivity in autonomous and connected driving to enable communication between vehicles and management systems, interoperability is fundamental. Without technical standards for this diverse range of communication, connected driving will therefore not be feasible.

The way that connected vehicles communicate means that many of the existing technical standards used in mobile communications will be relevant – for example, the concept of ‘handover’ between cells which is a core principle in ensuring that connections are not dropped as a handset user moves between ‘cells’. Technology that is well-established in telecommunications in relation to mobile phones and other handheld devices becomes the new world for the automotive industry.

New technical standards are neededAs well as the relevance of existing technical standards relating to mobile communications such as those from the European Telecoms Standards Institute (“ETSI”), new technical standards are needed for the large quantity of new ‘telecommunications’ technology specific to the developments in autonomous cars – as highlighted by the discussion of the importance of telecommunications. Initial steps to create additional standards needed for connected cars were taken some time ago. For example, ETSI and the Comité Européen de Normalisation (CEN) (at the request of the European Commission) have already developed standards for the European Union with regard to vehicle-to-vehicle communication, which led to a first guideline being issued in 2014. This standardisation covers,

among other things, data formats and radio frequencies.

The need for technical standards in the automotive industry goes well beyond features involving mobile communications. For example, where there are electric vehicles, the charging infrastructure must also be compatible with as many vehicles as possible, and consequently, standardised. In this way, the patent regime seen already in mobile communications and other high-tech sectors spills over into the automotive industry, bringing with it new licensing issues. However, licensing models which have been used in telecommunications, and discussed below, may need to evolve in a different way in the automotive industry.

How standards are developedStandards are typically developed by standardisation organizations (“SOs”), whose members consist of the market participants in the respective industry sector. During the course of developing a particular technical standard, members of the SO put forward proposals for specific functionalities that the standard should have, typically based on their own research and development which they have patented or are seeking to patent. If a patented technology becomes part of a standard and it is mandatory

The need for technical standards in the automotive industry goes well beyond features involving mobile communications.

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Connected and Autonomous vehicles: the emerging legal challenges

to implement the particular feature as part of the requisite standard, such patents are designated as standard-essential patents (“SEPs”).

If a patent is a SEP, the use of the technology protected by SEP is mandatory to comply with the corresponding standard. This potentially conflicts with a patent holder’s basic right to exclude third parties from using its invention. However, this contradiction is resolved by the need for the owner of a SEP to agree to license the technology to a willing licensee on terms that are fair, reasonable and non-discriminatory, or “FRAND”.

The complexities of standard-essential patents The development and management of SEPs is complex. Looking at existing technical standards, members of ETSI alone have declared more than 175,000 patents as essential or potentially essential to ETSI standards. When negotiating FRAND licensing agreements, it is rare to be considering a single SEP. On the contrary, the parties, often competitors, have to negotiate FRAND conditions for a portfolio of patents,

sometimes hundreds of them, and often with cross-licensing between the parties. In addition to this – ironically – it is often not possible to define what will be deemed FRAND, to apply it to different licensing agreements.

Above all, there are often disagreements regarding the interpretation of specific FRAND conditions and in particular, the amount of licence fees to be paid. It must be borne in mind, that a SEP owner, if the SEP can be enforced successfully, may prohibit a (potential) competitor from entering the market with regard to the use of a specific standard. This becomes even more significant because SEP owners can also try to enforce a prohibition on using a SEP by means of obtaining interim injunctions that can be obtained very quickly.

The Court of Justice of the European Union (“CJEU”) in Huawei v. ZTE9 has given guidance on the circumstances in which it will be an ‘abuse of dominant position’ for the owner of a SEP to seek an injunction, and other relief, with a ‘framework’ around steps in a formalised offer-acceptance system.

9 Case C-170/13, Huawei Technologies vs. ZTE Corp. and ZTE Deutschland GmbH, 16 July 2015

Continued on page 36 >

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Adhering to this framework, a SEP owner must notify the prospective licensee of the infringement. If the potential licensee indicates its willingness to conclude a licence on FRAND terms, the SEP owner must make a written offer of a licence on FRAND terms, and specifying the amount and method of calculation of the royalties. The prospective licensee should respond to the offer “diligently” and without any delaying tactics, and – if it does not accept the offer – promptly make a counter-offer on FRAND terms.

If the prospective licensee does not do so, it will not be able to bring a defence of abuse of dominance against the SEP owner in the court proceedings which may ensue.

Importantly, if the prospective licensee is utilising the SEP already and the SEP owner rejects the counter-offer, the prospective licensee should provide “appropriate security” in accordance with recognised commercial practices in the field, for example by providing a bank guarantee or placing money on deposit.

The CJEU, though, has not specified the conditions of a licence agreement, and in particular the amount of the licence fee, that will be FRAND. Therefore significant potential remains for legal disputes related to SEPs. However, there is still hope that the automotive industry will be able to move away from the licensing models used in telecommunications and to take a different route to resolving contrasting views when it comes to SEP and FRAND conditions.

Licensing models which

have been used in telecommunications,

may need to evolve in a different way

in the automotive industry.

> Continued from page 35

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While there is clearly significant activity in this area, there are some real challenges facing manufacturers as they look for acquisitions. The biggest of these is that technology M&A is very competitive, more so than the traditional automotive sector. So in seeking to buy a technology firm, vehicle manufacturers and suppliers may face competition from private equity and software companies, as well as from other manufacturers, and they may have to cope with higher valuation multiples than they are used to.

A further challenge lies in the way that boards have to make tough decisions about the cost and risk of any acquisition when they are dealing with emerging technology where it is still unclear how the connected and autonomous vehicle market will develop. All this makes it harder to carry out effective due diligence. Yet the competitive nature of the sector means that they will have to react more quickly or risk missing out on opportunities.

An active market for acquisitions A number of big deals are being done. For example, in a transaction worth €2.8 billion, Audi, Daimler and BMW recently acquired Nokia’s “Nokia Here” mapping unit. The service uses cloud technology to send maps to mobile phones, tablets and vehicles and is seen as a key enabler

of connected cars.10 This transaction is particularly interesting given that three fierce competitors have collaborated to make this acquisition.

It is not just vehicle manufacturers that are in the market for these acquisitions, Google and Apple have also been very active in buying connected technology. While Apple has yet to confirm that it is developing a connected car, it has acquired a small UK artificial intelligence company. Vocal IQ, provides speech-related artificial intelligence software which could drive the development of the Internet of Things because it provides users with a more natural way to communicate with their devices. Vocal IQ has previously worked with General Motors so they clearly see the potential for applying this software to connected and autonomous cars.11

Mobile network operators are also becoming more active in the market. For example, Vodafone acquired a 74% majority stake in the Italian company Cobra Automotive for $145 million in June 2014. Cobra provides security and telematics technology to the automotive and insurance sectors and the acquisition is clearly designed to give Vodafone the ability to secure business in connected car services.

Connected Cars are driving increasing mergers and acquisitions activityThe development of connected and autonomous vehicles is driving a new stream of joint ventures and M&A activity. This is being seen both among traditional manufacturers and new entrants, with a focus on activity that brings the automotive and technology sectors together.

Connected and Autonomous vehicles: the emerging legal challenges

10 http://www.wsj.com/articles/bmw-daimler-audi-agree-to-buy-nokias-here-maps-business-143858069811 http://www.forbes.com/sites/theopriestley/2015/10/03/why-apples-artificial-intelligence-acquisition-is-much-bigger-than-siri/

The high valuations for

tech businesses are amongst

the serious challenges facing

manufacturers as they look for

acquisitions.

Continued on page 38 >

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A new appetite for Joint venturesAs well as acquisitions, we are also seeing more joint ventures. PSA Peugeot Citroën and IBM have a seven year agreement to drive the development of the Internet of Things, focusing on developing technical solutions to deliver connected services to cars. IBM also have a partnership with Continental AG, a major car parts supplier. They are working on what they call an “electronic horizon” platform which uses IBM Big Data and Analytics to provide information to cars on weather, accidents, or traffic jams. This is then combined with Continental’s hardware and algorithms that analyse vehicle sensors or commercial traffic data to create one overall picture on a digital map. At the same time, Google is rumoured to be planning a joint venture with Ford to develop and manufacture autonomous vehicles based on Google’s self-driving car technology.12

All this adds to up to a difficult area to navigate for Boards. There is real uncertainty about where the revenue will be generated in the automotive industry in the future. The range of technologies and the huge spectrum of possibilities is also making it harder to work out where the best deals are and whether they should buy in technology or build it themselves.

It is equally unclear how quickly connected vehicles and driverless vehicles will become a realistic option for most customers or whether

they really will embrace them at all. Boards are having to take judgements on whether most drivers will be content with, what The Economist has called, a “smartphone on wheels” or will they still crave the romance of owning and driving their own cars. That is why many of the deals we are seeing at the moment are companies hedging their bets and developing flexible partnerships in a range of areas.

A variable pictureSo while the volume and value of the M&A market in automotive technology increased significantly over the past three years there is a wide variation in the amount different manufacturers are investing. There is also a wide variation by geography, with a survey of M&A by corporate finance advisors, Hampleton, finding that the majority of recent acquisitions of automotive technology companies were based in North America, with 37% based in Europe and 7% in the rest of the world. The two European countries with the most M&A activity were the United Kingdom and Germany.13

Whichever course they take, it is clear that connected and autonomous vehicle developers will need to carefully consider M&A options and will need the systems and advice in place to assess opportunities rapidly, carry out effective due diligence and ensure the acquisition really can add value.

38

12 https://www.yahoo.com/autos/google-pairs-with-ford-to-1326344237400118.html13 M&A Market Spotlight, Automotive Technology, Hampletons March 2015

> Continued from page 37

The need to join traditionally different worlds of ‘hard’ technology on the one hand and of TMT on the other will lead to a wave of strategic alliances.

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Connected and Autonomous vehicles: the emerging legal challenges

The Automotive Industry has entered the global arena of IT, communication and infotainment and grapples with opportunities and challenges presented by the ever increasing connected world. Companies in this sector are often at the leading edge of international investment in new frontiers in order to find the customers of tomorrow. Automotive companies, tier suppliers and suppliers of IT and telecom solutions and services that embrace the paradigm shift of connectivity have access to unprecedented opportunities in the 21st century. In a sector which is sensitive to a litany of regulatory frameworks, it can be difficult to navigate the changing business environment. Our focus is on providing pragmatic advice that makes a real difference by providing solutions, not just identifying problems. We help our clients to steer a clear path through the multijurisdictional regulatory and legal minefields that stand between them and success.

Our TMT, commercial, supply chain, IP, Data Protection, Insurance regulatory and Corporate teams all have a wealth of experience within the sector and regularly draw upon the complementary and specialist skills each other offer within the field. Our Automotive Team, operating out of hubs in Munich, Paris, Shanghai and the British Midlands have advised clients on the legal solutions required for original equipment and parts manufacturers, IT and telecom suppliers operating in an increasingly global market. The team has extensive expertise advising clients on their contractual arrangements, the procurement of software and hardware solutions, content for applications and on distribution schemes, regulatory issues against the background of telecom and data protection laws as well as giving operational support regarding risk management, compliance and intellectual property.

About the Pinsent Masons Automotive team

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For more information on any of the issues raised in this White Paper, please contact:

United Kingdom

Nicole LiveseyPartner, Head of Manufacturing and Automotive & Tech M&AT: +44 (0) 121 623 8637E: [email protected]

Sean ElsonPartner, Health & SafetyT: +44 (0) 121 335 2907E: [email protected]

Andrew MastersonPartner, Dispute Resolution and LitigationT: +44 (0) 113 225 5457E: [email protected]

Manoj VaghelaPartner, InsuranceT: +44 (0) 20 7490 6985E: [email protected]

Cerys Wyn-DaviesPartner, IP & Data ProtectionT: +44 (0) 121 625 3056E: [email protected]

Victoria BentleyLegal Director, IP & ITT: +44 (0) 121 629 1723E: [email protected]

Anthony FieldingSenior Associate, IT, Telecoms & OutsourcingT: +44 (0) 20 7418 9506E: [email protected]

Ben GardnerSolicitor, Commercial & Supply ChainT: +44 (0) 121 335 2946E: [email protected]

Germany

Stephan ApptPartner, Automotive, IT & Data ProtectionT: +49 (0) 89 203043 561E: [email protected]

Eike FietzPartner, Automotive & Tech M&AT: +49 (0) 89 203043 530E: [email protected]

Marc L. HoltorfPartner, Head of IP, Munich and DüsseldorfT: +49 (0) 89 203043 574E: [email protected]

France

Christoph MaurerPartner, Automotive & Tech M&AT: +33 (0) 1 53530 965E: [email protected]

Emmanuel GougéPartner, IP & ITT: +33 (0) 1 53530 868E: [email protected]

Annabelle RichardPartner, IT, Telecoms & Data ProtectionT: +33 (0) 1 53530 223E: [email protected]

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Connected and Autonomous vehicles: the emerging legal challenges

External contributorsChris ReevesCommercial Manager – Intelligent Mobility & Future Transport Technologies, HORIBA MIRA

Alastair RuddleComputational Electromagnetics Consultant, HORIBA MIRA

Professor Neville JacksonChief Technology & Innovation Officer, Ricardo

Dr Nick ReedAcademy Director, Transport Research Laboratory (TRL)

Professor Paul JenningsInternational Digital Laboratory,Warwick Manufacturing Group (WMG),

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London30 Crown Place (Headquarters)Earl StreetLondonEC2A 4ESUKT: +44 (0)20 7418 7000F: +44 (0)20 7418 7050

Aberdeen13 Queen’s RoadAberdeenAB15 4YLUKT: +44 (0)1224 377 900F: +44 (0)1224 377 901

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Brussels*Office 154 rue de la Presse1000 BrusselsBelgiumT: +44 20 7418 7000F: +44 20 7418 7050

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IstanbulBüyükdere Caddesi No 127,Astoria B Kule,Kat 5, No 13-14-15-16Esentepe 34394 ŞişliIstanbulTurkeyT: +90 212 336 6050F: +90 212 336 6051

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Our offices wordwide

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Connected and Autonomous vehicles: the emerging legal challenges

This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2016.For a full list of our locations around the globe please visit our websites: www.pinsentmasons.com and www.Out-Law.com.

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