All Our Patents Still Belong to Us

by McDonnell Boehnen Hulbert & Berghoff LLP

Tesla MotorsOn June 12, Tesla CEO Elon Musk announced that the company "will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology."  This move was hailed by some as a win for those who support reform of an allegedly broken patent system.

But the truth is more complicated.

Tesla is not dedicating its patents to the public.  Instead, Tesla appears to be promising not to sue potential infringers of its patents so long as those parties maintain "good faith."  Tesla's press release does not define what Mr. Musk means by good faith, nor does it set forth any licensing procedures for a party wanting to use Tesla's patented technology.  Consequently, should a competitor sue Tesla for infringement, Tesla has probably maintained the ability to assert its patents in a countersuit.  Perhaps of more concern is what happens if Tesla sells its patents.  Are good faith users then subject to lawsuits?

Further, Mr. Musk announced on a later conference call that the company will continue to pursue patents and put them "into what is essentially an open source category."  So Tesla is not exiting the patent game, just employing a different strategy.

It is not uncommon for holders of a proprietary technology to share it with competitors in order to grow a market.  Many standards bodies exist for such a purpose, and require that participants license their standards-essential patents on a fair and non-discriminatory basis.

Tesla has found itself in a difficult situation.  While it holds about 42% of the electric car market, that segment is less than 1% of the overall vehicle market.  In order for Tesla to grow and become more successful, the adoption of electric cars needs to be more widespread.  For instance, if Tesla ends up holding 20% of an electric car market that is 10% of the overall vehicle market, its effective market share will have roughly quintupled.

And Tesla does need electric car technology to become mainstream in order to succeed.  Its flagship Model S starts at $69,900, well above what the vast majority of car owners worldwide can afford.  One of Tesla's stated goals is to sell a $30,000 electric car.  But to do so it requires a worldwide ecosystem of parts suppliers, mechanics, charging stations, and other partners.  Tesla needs economies of scale, especially for its battery technology, which is a significant portion of the cost of a Model S.  Allowing others a limited dip into its patent portfolio will help make this a reality.

As an ostensible reason for Tesla's move, Musk claimed that patents "serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors."  He did not address, however, why the technology industry as a whole continues to grow, as evidenced by recent record-breaking stock values, billion-dollar acquisitions, and successful initial public offerings, despite this purported stifling of progress.

There is no doubting the brilliance and leadership of Mr. Musk, who is also the founder of Paypal and Space X.  Casting the policy change as an indictment of the patent system has been lauded by the technology industry media and their mainstream counterparts.  But Musk's proclamation is also a savvy business move, well-calculated to help Tesla grow its business.  Any benefit to other companies is a side-effect.



DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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