At a glance: automotive industry disputes in USA

Disputes

Competition enforcement

What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?

While no special competition laws apply exclusively to the automobile industry, antitrust issues are pervasive in the sector. First, the Hart–Scott–Rodino Antitrust Improvements Act, 15 USC section 18a, requires parties to certain mergers, asset acquisitions and joint ventures to notify government enforcement agencies before closing. If notification is necessary, then the parties may not close the transaction until the statutory waiting periods expire. These statutes allow government enforcement agencies to review mergers, acquisitions, and joint ventures for competition-law concerns before consummation of the deal. Even transactions that are not subject to pre-closure review, however, may be challenged retrospectively under US antitrust law.

Second, automotive sector companies must comply with generally applicable antitrust laws. The Sherman Act prohibits agreements among two or more entities that unreasonably restrain trade. It also prohibits certain unilateral conduct permitting a firm to obtain or maintain monopoly power or threatening to allow a firm to do so. In particular, the Sherman Act flatly prohibits agreements between or among competitors to fix prices, rig bids, allocate customers or territories, and boycott suppliers, customers or competitors. Other agreements are judged under a fact-bound inquiry into their competitive effects. Under that analysis, if, on balance, the anticompetitive effects of an agreement outweigh its pro-competitive benefits, the agreement is unlawful.

In addition, the Robinson–Patman Act in certain circumstances prohibits differential pricing of commodities, which includes automobiles and automobile parts, and many states have special statutes protecting automobile dealers.

In the US, antitrust violations carry both criminal and civil penalties. In addition, private parties injured by antitrust violations may recover triple their actual damage and obtain injunctions against future violations. An active plaintiffs’ bar regularly brings private actions. Antitrust actions are common in the automotive industry. For the past several years, the US Department of Justice has conducted a massive investigation into price-fixing and bid rigging in the automotive parts industry. A number of companies have pleaded guilty to criminal violations and received substantial fines. Individuals have also pleaded guilty and received prison sentences. Those investigations have also spawned substantial private civil litigation by automobile dealers and consumers. The Department of Justice also recently investigated whether four automobile manufacturers improperly entered an agreement concerning emission of greenhouse gases with the State of California. That investigation closed without action.

Dispute resolution mechanisms

What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?

Original equipment manufacturers (OEMs) rarely have disputes with each other. Consequently, litigation among OEMs is rare.

Disputes are more likely along the extended supply chain in the auto sector. Even there, however, litigation between an OEM and a supplier is relatively rare. The nature of the economic relationship between the parties means disagreements are typically worked out through other methods of dispute resolution.

Disputes are not uncommon between manufacturers and auto dealers. 

Disputes regarding intellectual property are a somewhat different situation.

Distressed suppliers

What is the process for dealing with distressed suppliers in the automotive industry?

Traditionally, financial distress may arise from one or more of the following three factors: (1) internal (eg, weak quality control, financial mismanagement or strategic missteps), (2) sources close to the supplier (eg, a defaulting upstream raw materials or sub-component supplier, a lender unwilling to renew or extend a line of credit), or (3) market-wide influences (eg, government regulation, technological change, commodity supply or pricing – or today, pandemics).

The growing trend, as 2020 approached, towards autonomous, connected, electric and shared vehicles gave rise to concerns of potential distress for suppliers and other industry participants, due to anticipated flat or depressed automobile sales and meaningful technological and other industry-wide advancements that could result in significant winners and losers. In 2020, the covid-19 pandemic weighed heavily on automotive production, triggering all three financial distress factors outlined above. As companies realised significant cash burn rates, they used CARES Act financing, favorable debt and equity markets, and a run-down of working capital to fund operations and avoid full-scale restructurings. As a result, while automotive suppliers generally have emerged from the pandemic intact, many now face increased leverage ratios and continuing uncertainty regarding their long-term business prospects. 

In 2021, industry projections rely upon an anticipated second-half recovery in demand and production, with a continued increase in 2022. However, assuming demand returns, not all suppliers will share equally in the rebound, as global themes of electric vehicles vs internal combustion engines realign long-term production goals and supply chains. Technological trends are taking up most of the time in management discussions, which is a departure from the emergency communication that dominated 2020 and previous distressed cycles. This is expected to result in significant strategic, operational, financial and transformation challenges for many suppliers, who have been and will be navigating through somewhat uncharted territory.

This dynamic industry backdrop provides a more complex environment for assessing financial viability and points of distress. Ideally, an OEM or top-tier supplier will identify the distressed supplier before the first delivery is missed or the supplier requests payment in advance to cover insufficient working capital. Obvious signs of supplier distress include, without limitation, failed refinancings, increasing leverage ratios, impending debt maturities, divestitures or sale-leaseback transactions, sharp drops in debt/equity security prices, management resignations, employment of advisors and deteriorating accounts receivable. While these signs of distress need to be monitored closely, the investigation of each of these criteria needs to be evaluated in terms of overall liquidity and strategic assessment within the currently changing industry environment.

Further complicating financial assessment is the accelerating demand for electric cars and the roll-out of electric vehicle (EV) models from legacy and start-up manufacturers. SPACs have become the most popular medium for EV and automotive technology startups to access public market funding. While these entities may appear to have strong investor support, recent regulator comments may hinder this trend and require more outside scrutiny. Specifically, regulators have questioned the overly optimistic projections used by startups to merge with SPACs. These entities may need to substantively restate financials and review true cost structures, which may have a significant impact on financial viability.

Additionally, a distressed supplier may materially disrupt the complex and potentially fragile just-in-time inventory system upon which the automotive industry depends. OEMs and top-tier suppliers examine the financial health of prospective suppliers, but one that fails to continue to monitor its suppliers, its competitors, or trends in its sector or region does so at its peril. Recently, automakers around the world, for example, have had to radically adjust assembly lines and idle production due to shortages of semiconductors. These production delays may have a meaningful downstream effect on suppliers that are relying on a significant rebound in production by the third quarter of 2021.

One must assess, through a close and open dialogue, how long it may be before the supplier’s distress affects upstream customers, and whether the supplier has the talent, ability, resources and time to cure its distress. These factors will inform a decision on whether to merely work with and monitor the supplier as it addresses a problem, or to move more aggressively to replace the supplier or consider other options, including (1) entering into accommodation agreements, under which the customer provides the supplier with commitments to continue sourcing parts balanced with customer protections, including collateral grants (including intellectual property rights) and facility access agreements, (2) extending financing, (3) providing operational support or facilitating changes in management and (4) acquiring the supplier. The last option would not necessarily change the source of distress, but would provide the OEM or top-tier supplier with greater control to assess and fix its problems, and make necessary adjustments.

The US Bankruptcy Code permits the assets of bankrupt companies to be sold ‘free and clear’ of all liens and other liabilities, which could allow an OEM or top-tier supplier to obtain key unencumbered assets from the distressed business. An OEM or top-tier supplier may thus find that an acquisition of a distressed supplier (or key assets) is best accomplished within a formal bankruptcy proceeding, where the transaction is approved by a court and the chances of a post-closing challenge to the transaction terms are greatly diminished.

Intellectual property disputes

Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?

Intellectual property disputes, and in particular patent infringement actions, remain a significant issue in the automotive industry. Over the past several years there have been hundreds of automotive-related patent litigation cases, filed in US district courts and the International Trade Commission. Most of these suits have been filed by non-practising entities (NPEs or “trolls”), often against multiple OEMs. This patent litigation is trending toward global disputes with high risk.

However, these patent cases typically do not focus on purely vehicle-related technologies, but rather on aspects of the infotainment, mapping and navigation systems, as well as the autonomous vehicle and connected car technologies incorporated into the vehicles. This is expected to continue into the near future, and there is a clear continuing trend towards disputes involving standard-essential patents (SEPs), particularly in the connected car space. Connected cars will need to rely on existing infrastructure owned by telecommunication entities and others to access the internet, communicate with other devices, receive traffic information, provide in-vehicle entertainment, and enable control of vehicle systems via smartphones (eg, climate control, turning the car on and off). Using the existing telecoms infrastructure, however, requires using certain protocols, procedures, and data formats that are subject to industry standards set by standard-setting organisations whose members are telecoms companies, national administrations, universities, and research groups. Existing patents that cover these standards, such as LTE, 5G, 4G, 3G, UMTS, GSM, GPRS and WLAN, are referred to as SEPs. The owners of these SEPs are often the telecom or chip companies, although NPEs (including Nokia and Ericsson) are obtaining an increasing share. SEP owners are forming patent pools together (eg, Avanci), to attempt to license large patent portfolios relating to telecom standards. As vehicles implement more connected car technologies, including in 5G, the owners of SEPs in this space will continue their licensing campaigns and will file suits against automotive makers and suppliers when those licensing negotiations fail. These litigations will likely be on a global level and carry significant risk.

Resolution of intellectual property disputes vary, and may depend on whether the plaintiff is an NPE or an automotive company or supplier. When the plaintiff is an NPE or SEP holder, it is more likely that the dispute may be resolved for a licence fee, although the threat of an injunction still looms in jurisdictions such as Germany and the International Trade Commission, to create leverage in licensing pricing. Resolution of automotive patent litigation (and the amount and nature of such litigation) has also been impacted by inter partes review (IPR) proceedings filed by defendants in the US Patent and Trademark Office (USPTO) to challenge the validity of patents asserted in litigation. Defendants are having success invalidating patents, or forcing the patent owners to settle or drop lawsuits, by filing or threatening to file IPRs. The trend of filing IPRs in response to most patent lawsuits is expected to continue, although perhaps not with the fervour it did several years ago given the prior administration’s propensity to enhance the protection and enforceability of patents. There is also a recent trend to ensure that IPRs are filed in advance of or at the start of lawsuits, as the institution of an IPR can be denied by the USPTO if the final decision in the IPR would come after trial or claim construction of the same issues.

Next Post

Gov. DeSantis vetoes no-fault repeal legislation

Fri Jul 9 , 2021
Gov. Ron DeSantis has vetoed legislation that would have ended Florida’s no-fault rule after mounting pressure from critics who argued the bill would increase rates for many drivers. The bill (SB 54) cleared the Legislature in April, and landed on the Governor’s desk Monday. The measure, carried through the Senate by […]