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Thursday, June 19, 2014

Thoughts on Tesla Motors' decision to 'give away' its patents

By Jesse Gleeson, Senior Associate

Elon Musk is a true tech visionary. His involvement in everything from PayPal, to his private space company SpaceX, to his electric-only Tesla Motors and even his proposal for a 'hyperloop' high-speed vacuum tube train between San Francisco and Los Angeles shows his extraordinary ambition.

Musk has garnered considerable press recently for his announcement* on his blog on the Tesla Motors website:
Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.
In Musk's blog post his rhetoric attacks the societal value of patents generally. However, it would be a mistake to take Musk's comments as suggesting that companies should not register patents or seek to take advantage of patents as a powerful business tool. Patents do not serve just one purpose, and can still have considerable value to businesses even if they do not seek to use those patents as an offensive weapon against competitors or as a source of licensing revenue. Indeed, in limiting the licence to 'good faith' use preserves the ability of Tesla to use its valuable patent portfolio as a shield against patent infringement proceedings being brought by other car markers – for instance, if Tesla wanted to use another company's patented improvement based on his patented base technology, or even if Tesla infringes a car maker's unrelated patents. Tesla could force other car markers into cross-licensing arrangements and thereby limit Tesla's potential exposure to patent infringement liability.  Musk has been quoted by Bloomberg as stating '[s]omebody can’t go and use a whole bunch of our patents but then sue us for using one of theirs… That seems like it wouldn’t be a very nice thing to do.'

So while under some circumstances Tesla may have given away the right to use its patents as a sword, or even perhaps as a source of licensing revenue, it has not (subject to some interesting estoppel arguments) given away its ability to deploy its patents to massive tactical effect if that becomes necessary. In subsequent telephone hook-ups with various journalists, Musk confirmed that Tesla will continue to seek to protect its important innovations with further patent applications.

On the flipside, if Musk's offer stimulates other car makers to enter the long-range electric car market, and deploy expensive recharging infrastructure more broadly, particularly in a format compatible or common to Tesla's, then Tesla will likely sell many more cars in aggregate, even if its market share in the electric car market is lower. Likewise, more competition may mean economies of scale which may reduce costs to a point where Tesla can produce a profitable mass market vehicle.

Thus on its face, aside from the public relations value, Musk's decision may well be a very sound one for this phase of his business and this phase of his industry's development. For many other businesses a similar strategy would represent the destruction of very considerable shareholder value and a diminution of competitive advantage. With all due respect to Robert Frost, sometimes 'the road less travelled by' is that way for good reason!


* If Musk's title for the post perplexes you – see: http://en.wikipedia.org/wiki/All_your_base_are_belong_to_us

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