Structuring IP Licenses To Manage Supply Chain Risks In The Automotive Industry

• Published date: 06 April 2023
• Subject Matter: Intellectual Property, Litigation, Mediation & Arbitration, Patent, Trade Secrets, Trials & Appeals & Compensation
• Law Firm: Foley & Lardner
• Author: Mr Robert C. Okonowski and Nikhil T. Pradhan

In recent years unexpected supply chain disruptions made it difficult for some automotive suppliers to manufacture components needed to fulfill their downstream orders on time and on budget. Although looking to alternate component sources may mitigate scheduling issues, an approach taken for expediency can expose the supplier and the substitute component source to significant risk of patent infringement claims. This article explains how these entities can use IP agreement tools such as conditional licenses and "Have Made" clauses to proactively manage such risks.

For the automotive industry in particular, single sourcing and other approaches that optimize supply chains for efficiency also may make the supply chains more susceptible to disruption. This is particularly true as automakers and their Tier 1 and Tier 2 suppliers integrate greater numbers of complex electronic components throughout various systems of the end vehicle. A disruption from a Tier 2 supplier can prevent the Tier 1 supplier from delivering their products on time or on budget, which may ultimately delay manufacturing and delivery of the end vehicle. Companies throughout the supply chain should consider IP risks when mitigating the impact of any potential supply chain disruption.

Intellectual Property Implicated in the Automotive Supply Chain

A supplier may have various IP rights covering a component supplied to a customer, typically including patents and trade secrets. Patents provide the supplier the right to exclude others from making, using, selling, or offering to sell products which are covered by the patent. Supplier trade secrets or "know-how" protect a supplier's interest in confidential information for as long as the confidential information is properly kept a secret.

A patent allows a patent holder to restrict others from making, using or selling a patented invention for approximately 20 years

Trade secrets protect confidential information (e.g., composition, formula, pattern, compilation, customer lists, confidential sales information, program, device, method, technique, or process, etc.) for as long as the confidential information is properly kept secret.

In both patents and trade secrets (as well as other forms of IP), the owner retains the IP rights, unless granted as part of a license or some other agreement. These IP rights do not create an issue when a Tier 1 supplier buys its needed component parts from the entity that also holds the patent covering the components. But that changes when supply chain disruption forces a shift to using an alternate source of those component parts. Absent a license or other agreement providing for the Tier 1 supplier or alternate component supplier to freely use the original supplier's IP, parties manufacturing patented products or using proprietary information risk being sued by the original supplier.

Automotive suppliers...