Authored by Shawn S. Chang and Jason E. Stach
Electric vehicle manufacturer Tesla Motors recently announced on its blog that it "will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology." [http://www.teslamotors.com/blog/all-our-patent-are-belong-you (last visited Feb. 13, 2015).] Bold for a small company in an automotive industry filled with large, entrenched competitors, but is it strategically foolish? Perhaps not. Companies today increasingly are looking for ways to maximize the value of their patents, and some are employing alternatives to the traditional direct monetization methods of patent licensing and assertion. These alternatives include agreeing not to assert patents offensively or to provide free patent licenses. While Tesla recently grabbed headlines for its non-assertion pledge, this is not an entirely new phenomenon. In 1959, Volvo shared its three-point seat-belt patent. In 1974, General Motors similarly allowed others to use innovations in its catalytic converter. Tesla's move differs in that it made all of its patented technologies widely available, not just technology for any specific vehicle component. What is Tesla hoping to gain, and would a similar strategy benefit your company or your clients?
Tesla's CEO, Elon Musk, believes that a rising tide floats all boats, stating "that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly-evolving technology platform." [Id.] He also recognizes that the market for electric vehicles is potentially so large that Tesla cannot satisfy the demand, so sales by his competitors are not cutting into his bottom line in a significant way. He explains:
Given that annual new vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for Tesla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world's factories every day. [Id.]
While agreeing not to assert patents does not create any direct monetary value, given Tesla's market position, its non-assertion pledge could lead to several advantages. For example, the electric car industry suffers from not having sufficient infrastructure to support charging electric vehicles across the United States and throughout the world. While Tesla is actively building out its Supercharger stations, there are currently only 380 stations globally. [http://www.teslamotors.com/supercharger (last visited Feb. 13, 2015).] To further complicate the situation, the industry has several competing quick-charge standards. [See, e.g., http://insideevs.com/dc-quick-charging-battle-just-beginning-chademo-vs-sae-combo-vs-tesla-supercharger/ (last visited Feb. 13, 2015).] These competing standards stymie the proliferation of charging stations that can universally support vehicles from any manufacturer. Without an easy way to quickly charge the vehicles, electric cars are only useful as daily commuter vehicles because the current infrastructure simply does not allow these vehicles to quickly "top off" like you can at a gas station. By sharing its patented technology, Tesla may accelerate the adoption of a unitary standard around its technology that will allow its electric cars to be charged at stations built by others. Widespread charging capability could transform electric cars from niche products useful primarily for short commutes to ubiquitous products that replace their gas-powered brethren. By forgoing direct benefits from patent licensing and assertion, Tesla hopes to indirectly benefit from an increased market size.
Tesla, however, isn't just a car manufacturer. It is building what it calls a "Gigafactory" to position itself to be the largest global lithium ion battery supplier for electric vehicles. According to Tesla, by 2020, Gigafactory production alone will exceed the current global production, and will supply up to 500,000 electric vehicles. [http://www.teslamotors.com/sites/default/files/blog_attachments/gigafactory.pdf (last visited Feb. 13, 2015).] By increasing the size of the electric vehicle market, Tesla may gain additional benefits by having the option of supplying these battery components to its competitors. Its open patent strategy may create long-term value for the company, potentially bolstering its positions in both the electric vehicle and component industries.
Tesla's non-assertion announcement also resulted in increased media coverage and a related increase in its stock price. Within a week of the announcement, Tesla's stock price shot up over 16 percent. Although these are likely shorter-term benefits, and follow-on companies making similar announcements may not achieve the same publicity boost, one cannot ignore that much of the publicity was positive and may have heightened Tesla's image in the eyes of potential purchasers and investors.
Tesla's pledge also may protect its portfolio from challenge. Competitors facing patent threats often initiate contentious proceedings before the Patent Office to try to cancel troublesome patent claims. Another of Elon Musk's companies, SpaceX, filed two inter partes review petitions seeking to invalidate a competitor's patent so SpaceX can practice technology it deemed "old hat" in the rocket-engineering world. [Space Exploration Techs. Corp. v. Blue Origin, LLC, IPR2014-01376, Paper No. 2 at 6 (P.T.A.B. Aug. 25, 2014); Space Exploration Techs. Corp. v. Blue Origin, LLC, IPR2014-01378, Paper No. 2 at 5 (P.T.A.B. Aug. 25, 2014).] By pledging not to assert its patents against competitors, Tesla takes away the incentive for its competitors to do the same against its own patents.
Although not directly stated in its pledge, Tesla also may be hoping that others will offer similar pledges. When your primary competitors are large, well-established companies with significant resources for patenting their own innovations, the much-smaller Tesla may find itself running into infringement issues of its own. By making its public pledge, Tesla may be attempting to goad its competitors into doing the same, clearing additional hurdles Tesla may face as it develops its technology.
For all the potential benefits of Tesla's pledge, its biggest gains are achieved only if competitors actually adopt Tesla's technology or offer patent pledges of their own. It remains to be seen whether competitors will take the bait. One impediment may be the form of the pledge. Some have questioned whether competitors can reasonably rely on a one-sentence pledge in a blog post, even if it does come from the company's CEO. Others have questioned what it means to use Tesla's patents "in good faith," which is the only stated requirement in Tesla's pledge. Without a clearer statement of when Tesla will or will not assert its patents, competitors may be reluctant to use Tesla's technology in a way that could benefit the entire industry. Tesla also continues to obtain patents, with over 40 issuing after Tesla made its pledge. Competitors may wonder if this signals Tesla's intention to revoke its pledge at some point in the future, or at least to keep that option available, exposing competitors to claims of infringement. While there might be legal mechanisms to combat the revoked pledge, the uncertainty and prospect of ancillary litigation may deter widespread acceptance of it.
For those evaluating whether to make a similar pledge, consider whether widespread adoption of a technology will benefit all market participants or only a few. Consider how this type of pledge may be perceived by potential customers and investors. The form of the pledge also may drive its success, so consider whether a more formal license agreement would be more likely to entice people to accept its terms and adopt the technology.
Time will tell whether Tesla's non-assertion pledge was a shrewd move that expanded an entire industry, a colossal blunder that gave away millions of dollars in research and development, or a non-event because not enough competitors relied on the pledge. Regardless, it demonstrates that companies increasingly are evaluating alternatives to traditional patent licensing and enforcement. While the traditional approach remains the best option for maximizing value in many instances, counsel should evaluate all alternatives before setting a course for their company or clients.
Reprinted with permission from the IP Litigator, published by Wolters Kluwer. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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