Restrictive OEM part patents could have a major impact on repairers
Members of the collision repair industry can be excused if they sometimes believe the sky is falling. In an industry where every business transaction seems tied to some larger, longstanding bitter struggle, bad news on the order of catastrophic can seem like a regular occurrence.
Get out your umbrellas because a serious problem is looming, according to the Quality Parts Coalition (QPC), an industry group that represents the interests of the automotive aftermarket. The QPC contends OEMs, which already control more than 50 percent of the replacement parts market, are taking legal steps to aggressively grab even more market share. If not stopped, the group believes, these efforts could cost repairers millions in lost work.
Design patents
The current controversy stems from the types of manufacturing patents OEMs are seeking for auto parts.
The U.S. Patent and Trademark Office grants manufacturers two different kinds of patents: utility and design. The QPC says utility patents give manufacturers exclusive rights to a design for several years while design patents are far more restrictive, providing 14 years of exclusive protection. Design patents are far less common than utility, accounting for just 3 percent to 4 percent of the total patents granted each year. However, in the automotive market, requests for design patents by OEMs have skyrocketed.
During the past five years, the number of design patents granted to OEMs has grown to nearly 25 percent of all the patents awarded to auto manufacturers, with Ford and import heavyweights Toyota and Honda accounting for the majority of the requests. More importantly, parts typically identified as "crash parts" account for anywhere from 50 percent to 93 percent of the design patents awarded to OEMs. The QPC believes those facts point to efforts by OEMs to restrict, if not outright smother, competition in the replacement parts market.
Manufacturers are taking steps to see that design patent laws are enforced on crash parts. In 2005, Ford filed complaints of design patent infringement with the International Trade Commission (ITC) against two U.S. parts distributors, Keystone Automotive Industries and U.S. Autoparts Network Inc. and several Taiwan-based manufacturers. The suit involved 14 design patents for the 2004 model year F-150 Ford truck covering its headlamps, grilles, bumpers, bumper lower valences, fenders, hood, sideview mirrors and tail lamps.
In May 2007, ITC Judge Paul J. Luckern, ruled in favor of Ford on seven of the 14 parts (three patents were ruled invalid due to prior use). That means for the next 14 years, Ford has exclusive rights to manufacture these seven parts for one of the industry's most popular vehicles. The aftermarket will have to wait until 2021 before it can get involved. Keystone is appealing the decision.
The QPC argues the decision along with the growing number of design patents will have a chilling effect on the automotive parts aftermarket and collision industry. The aftermarket will lose jobs as it loses access to valuable revenue streams. As less expensive aftermarket alternatives dry up, repair costs will rise, costing insurers an estimated $1 billion more annually in higher repair costs, according to the QPC. Those costs could be passed along to consumers in the form of higher premiums. Higher premiums could force some motorists to drive without insurance or go with higher deductibles or reduced coverage.
It also means fewer repair opportunities for shops. With higher costs, insurers might total out more vehicles.
Customers who pay out of pocket (who makeup 13 percent of all repair customers) could decide to forego repairs, as could insurance customers unable to cover their deductibles or who are no longer fully covered.
In a broader context, OEM actions are harming the entire replacement parts market, according to QPC. They charge OEMs with ignoring the importance of competition to the health of the market and the benefits the aftermarket provides to consumers in the form of lower prices and buying options. Less competition is bad for everyone, QPC argues.
In the case of the Ford F-150, Ford has effectively denied F-150 owners just such repair options that are readily available to owners of other vehicles. Eileen Sottile, executive director of the QPC, tells ABRN, "Consumers will be left to ask themselves if they can afford to own a Ford F150 They can bet on increased totals, increased OEM part prices and increased insurance costs. Competition from the alternative parts industry saves consumers $1.2 billion dollars a year."
Sottile and other members of the aftermarket believe the Ford case is just the opening salvo of what could be widespread OEM efforts to slam the door on aftermarket access to the replacement parts market.
Sandy Bass-Cors, executive director of the Coalition for Auto Repair Equality (CARE), says, "We foresee that the ITC's decision and the remedial action it entails will trigger a plethora of new ... cases aimed at foreclosing competition for automotive parts produced other than by vehicle manufacturers. The inevitable effect of such cases, if successful, will be serious harm to the American consumers, to innovation in competitive value and supply chains, and to the American economy."
Richard Keister, president and chief executive officer of Keystone, says, "This case could have far-reaching consequences beyond just the automotive industry."
OEMs respond
Auto manufacturers defend their increased interest in winning design patents and say their actions, far from being part of an effort to grab market share from the aftermarket, are necessary steps to protect their products, their economic well-being and their customers' investments from the growing threat of "knockoff" parts flooding the market, particularly from overseas sources.
Kristen Kinley, a spokesperson for the environmental and legal communications department of Ford says, "Copycats [illegally produced] parts have mushroomed in the last 25 years. Industry analysts estimate that OEM suppliers lose $12 billion in sales annually because of this. That's not even including the U.S., where OEMs lose $500 million each year."
Those lost dollars translate into lost jobs as well. She notes that in Europe, where new car sales are equal to those in the United States, copycat parts have cost suppliers and OEMs 50,000 jobs and nearly 2 billion euros.
OEMs also are trying to protect their investment in new parts. "We spend hundreds of millions of dollars designing and creating unique and distinctive parts," Kinley says. "We also manufacture them, so you can imagine how much we have at stake."
The controversy over patents is a "pride" issue, she says. "These are distinctive parts that are a significant part of the branding and marketing of our vehicles."
This calls attention to a key factor being debated by QPC and OEMs — whether design patents should be applied to auto parts. According to U.S. patent regulations, utility patents are intended to protect functional aspect or improvements on existing inventions. In short, utility patents are tied to how a product is used or works.
Design patents protect the appearance of a product — its ornamental design, configuration, improved decorative appearance or its shape.
While that definition might seem to almost certainly apply to exterior parts, the QPC notes that design patents typically have been awarded to works by artists and similar inventors.
Ford disagrees, stressing that the "look" of its parts is central to their popularity, sales and the company's overall marketing strategy, making them prime candidates for design patents.
Ford will continue fighting for that point and it will continue taking the steps it deems necessary to defend its part designs. "We hope we don't have to go about it aggressively, but it is becoming increasingly important to ensure our design patents are protected," says Kinley.
Repairers weigh in
Tom Bailey, owner of Auto-Body Masters in Milwaukee, has worked in the industry for almost 25 years. He says the potential impact of the ITC ruling along with the move toward design patents could have greater impact on the industry than anything he's seen during his tenure as a repairer, especially if the number of insurer-totaled vehicles increases.
"Salvages are killing our business," he says. " I'm seeing this as are a lot of the guys I talk to. If this all means more salvages, look out. For what it's worth car manufacturers are going to be getting an earful from shops."
Rod Meiger, owner of Rescue Repairs in Scottsdale, Ariz., says the controversy could turn into a terrific problem if available parts options are reduced. "What we might be looking at is having a single source for parts per vehicle maker," he says. "So, who's going to handle these? Are we going to have to go through a dealership? Right now I have a choice of vendors for what I buy. I buy based on price and service. If there are fewer choices for me, what happens then? You can run the best operation possible, but if the people you rely on aren't doing their jobs, that all gets passed on to your customers with longer repair times, costs and a lot of other problems."
He adds, "What really worries me right now is that based on what I know, automakers really aren't looking out for our needs. We already have problems getting repair information we need, and cars are getting more difficult to repair. We've taken this issue to them, and nothing has really happened. I'm guessing we'll be the folks who bear the brunt of all this."
Stuart Berschman, a retired repairer who worked in Pittsburgh and the New Castle, Pa., area, warns repairers not to overreact, at least not yet. "There's a huge, huge difference between being potentially able to take over a market and whether it's a good idea to. If carmakers wanted to be the only source for parts, they would have to do some serious math and figure out how many more parts they would need to make. They would have to figure in costs like the costs of increasing production facilities, training new people and buying the extra materials. Even for a big company used to working all over the globe, that's a big, expensive job.
"We can speculate all we want, but bottom line we don't definitely know what the carmakers are after. Maybe they haven't sorted that out. They might only want to make certain parts, the ones that are the most profitable — the cheapest to manufacture with the most demand and profits. They could be looking at selling licenses to the aftermarket for them to use their patents. Or, they might just be looking for ways to control all the parts building that's going on in Asia, especially China and India. They're going to have a lot of their own problems."
The waiting game
The aftermarket doesn't believe it can afford to wait and has taken steps to combat OEMs on the issue.
"The August 2006 hearing before the ITC administrative law judge only dealt with the very narrow issues of whether the patent is valid or infringed," Sottile says. "The affirmative and more global issues including patent exhaustion, permissible to repair, license and patent misuse which were not considered during the ITC hearing, may now be considered on appeal."
In another arena, the QPC and others are petitioning Congress to take their side. They're asking legislators to establish a "repair clause" in U.S. design patent law to specify that the "making and use of a matching exterior auto part to repair a vehicle is not an act of infringement." The QPC said a similar repair doctrine has evolved in United States case law with respect to the utility patent context.
The QPC also points to a statutory "repair clause" already in existence in Australia, Belgium, Ireland, Poland and the United Kingdom. The QPC said the European Union also is in the process of adopting a similar design directive.
The QPC sees even more reason for optimism, at the very least on the world stage. In December 2007, the legal affairs committee of the European Parliament voted unanimously in favor of a repair clause. If adopted, the directive will create a limited design patent exception for spare parts intended to restore the original appearance of complex products, including automobiles, according to QPC.
The QPC also points to the power of its growing ranks, which include members such as State Farm Insurance. Sottile says several consumer advocacy groups, such as RetireSafe, have joined the fight as well.
"We'll need all the hope we can get," says Bailey. Still, he chooses to remain philosophical about the controversy.
"We worry all the time about changes that are going to hurt us, everything from consolidation, taxes, insurer payouts, you name it, but most shops keep rolling along. You can't stress out about everything," he says.
Bailey sees one potential positive result of this controversy. "You might finally have an issue where we can get together with insurance companies and share some common ground," he says. They can't be happy about this. Maybe this will get them to see things from our point of view for a change. We'll see."
