Working as a design engineer for Ford on Team Mustang years ago, I was amazed with the ingenuity and speed of the aftermarket industry. The all-new 2005 model (S197) Mustang took us years to design using some of the best technology available. By way of comparison, I distinctly remember watching a handful of aftermarket designers work over a prototype they were given access to just weeks before launch, using mere tape measures and sketchpads to come up with alterations. Sure enough, within months of the S197 release, these designers had unique parts ready for sale.
With these capabilities, the aftermarket is not limited to generating unique parts. It could also service the repair market by quickly turning out seemingly identical replacement parts. However, that generally is not done, in large part because doing so would constitute design patent infringement.
A couple members of Congress are trying to change this, in their words, “to ensure consumer choice and competition in the automotive aftermarket.” However, the best interest of consumers and the automotive aftermarket is not really the driving force behind their Promoting Automotive Trade, Repair and Sales (PARTS) Act.
Design patents in the automotive sector
As anyone in the automotive industry knows, OEMs seldom make their own parts. Usually a direct (“Tier-1”) supplier makes the parts and has an active – or even lead – role in designing and testing the parts as well. Yet, the OEM almost always owns the patent on the part design. A quick search revealed that Ford received over 50 U.S. design patents in 2010 alone. By comparison, two of the biggest Tier-1 suppliers to Ford, Lear and Visteon, have received one each in the last five years.
While utility patents protect the functional aspects of an invention that are novel and non-obvious, design patents are limited to the protection of its ornamental features. A grill, a headlamp or a shift knob featuring known technology would not be eligible for a utility patent, but their distinct appearance could be protected with a design patent for up to 14 years – the lifespan of a U.S. design patent across all industries. This far exceeds the average vehicle model lifecycle, and even the most stable designs are refreshed every five to seven years. Thus, an OEM can use design patents to control who makes replacement parts for its vehicles. After 14 years, the replacement market for the parts has dwindled to a point of little concern to the OEM.
Enter the PARTS Act
Earlier this year, Reps. Darrell Issa (R-CA) and Zoe Lofgren (D-CA) introduced the PARTS Act, which seeks to amend the U.S. Patent Act to effectively trim the term of automotive design patents to 2.5 years – roughly the length new vehicles are covered under the standard three-year/36,000-mile warranty. The amendment would legalize the manufacture, importation or sale of replacement automotive parts for purposes of repair after 30 months of their original introduction to the market, regardless of any design patents covering the parts. Thus, the designs would still be protected from use by other OEMs on competing vehicles, but OEMs would lose control over the source of repair parts.
The PARTS Act is being advertised as a win for the consumer and aftermarket competition, but it is the insurance lobby doing the advertising. Its primary proponent – the Property Casualty Insurers Association of America – has pressed for this exemption before, but never with bi-partisan support.
Winners and losers under the Act
The thinly veiled purpose of the PARTS Act is to allow auto insurers to use cheaper, non-factory parts to fulfill claim obligations. Some higher-end insurance policies guarantee factory repair parts, but most will only offer factory parts if the consumer demands it or if design patents necessitate it. With design patents out of the way, insurers will be able to outsource replacement parts for ornamental, highly visible parts shortly after their introduction to the market. There is little question that insurers would be “winners” under the Act.
It is equally clear that the OEMs that own the design patents would be losers. This is not because they would lose out on revenue from replacement part sales – that loss would actually fall on the Tier-1 part manufacturers, and replacement volumes are negligible compared to the parts made for new vehicles. Rather, it is because the OEMs would lose control over the quality of key parts going on their vehicles. Design patents tend to cover the unique parts that give a vehicle its signature look and personality. It is these parts that make or break customer satisfaction, and if they are slightly off because they were produced from soft tools or a quickly assembled, cheap mold, it can disrupt the fit and finish of the whole vehicle. Even worse, the parts may rust prematurely if not provided proper corrosion protection. Such defects reflect poorly on the OEM every time a passerby takes notice.
For the same reason, it seems that consumers would also be losers under the Act. Though, in theory, repair costs might drop, you get what you pay for (or in this instance, what your insurer pays for). The consumer will have already paid the premium and will be owed a quality repair. Whether the insurer will pass its savings along in the form of lower premiums in the future is speculative at best.
And then there is the domestic aftermarket – now free to copy OEM designs for sale to the replacement market. But is this a market worth entering? The aftermarket makes its money by charging a premium over the stock part for something distinctive. This allows a profit even on small volumes. The replacement market operates under a different model. The Tier-1 producer already has a production facility making the parts, and the OEM has already paid for production-grade tooling. Though there is some design and development recovery cost baked into the factory piece price, that price is still competitive and marks a ceiling under which any competitor would have to operate. This ceiling may prove impossible to profitably undercut given the investment that would need to be made in tools and equipment to produce parts of equal quality.
Success in a market like the one the PARTS Act would create does not require the ingenuity and flexibility of the domestic aftermarket, but rather the ability to mass produce low quality duplicates off quickly cobbled tools using underpaid labor. The domestic aftermarket cannot compete with certain Asian manufacturing along those lines, and, thus, a few Asian manufacturers are likely the only other winners.
Time will tell if the PARTS Act will become law. It would not be the first time that a lone special interest has altered the U.S. Patent Act. However, the sales pitch that this is all about consumers and aftermarket competition should be viewed with considerable skepticism.
Mike Turner is a patent attorney with the law firm of Neal Gerber & Eisenberg LLP (Chicago), where he helps entities acquire, enforce and defend against design and utility patents. Views expressed above are those of the author and not the firm. Mr. Turner may be reached at [email protected] or 312.827.1092.
