In Defense of IPR: The Timing of the Tesla Move will Diminish The Company’s Value

In the early stage of an industry, the long term may seem like it’s too far away.  Penetration of electric vehicles (EVs) has not yet reached levels where it is displacing significant market share from conventional gas-powered automobiles, in spite of the popularity of EVs in some regional markets around the world.

A recent move intended to inspire further EV adoption, announced in a blog post by Tesla CEO, Elon Musk, to “not initiate patent lawsuits against anyone who, in good faith, wants to use our technology,” seems to be quite popular so far.

While this is a noble and well-intentioned move, unfortunately, this thought process represents a widely held misconception about intellectual property: that it is only a legal matter, rather than a commercial one.

Patents are not just about hitting the ‘litigation lottery’ as Mr. Musk put it.  Patents are the codification of innovation and they represent the investment of time and effort from the innovative and creative people who have their names on them.  Making the investment in intellectual property protection in the first place presumes that you are willing and able to enforce your rights.

In any market there will be those who are driven by greed, and we have seen the exploitation of intellectual property by so-called “patent trolls.”  Mr. Musk appears to be frustrated with this exploitation of intellectual property, stating that:

…too often these days [patents] serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors.

I choose not to be so cynical about the process of protecting innovation and intellectual property rights (IPR).  While many things are inefficient about the patent and trademark protection process, we live in a time when IPR are more respected around the world than they have ever been, notwithstanding the specific cases of misuse which we have become aware of in recent years.

Simply put, IPR create jobs and shareholder value for the companies that invest in innovation.  The legal profession around protecting and litigating IPR has arisen because of the increase in innovation, not because of a desire or need to line their pockets at the expense of companies who misappropriate the IPR of a competitor.

“Open sourcing” one’s patent portfolio reduces the ability to obtain value in return for that investment in innovation.  There is also value in holding a portfolio of IP assets on a diverse set of technologies because IPR creates a mechanism by which you can cross-license your technology and that IPR in case litigation comes your way, even if you don’t intend to initiate it.

Perhaps the big carmakers aren’t fully embracing EVs yet, but they certainly have the resources at their disposal to overwhelm Tesla if they wanted to.  Interestingly, Tesla doesn’t seem to understand another important aspect of IPR, which is that IP litigation between practicing entities only typically arises when their market share is encroached upon.  I suppose that if Tesla were making more of a dent in the car market, they wouldn’t be forced into this type of public relations stunt.

The timing of this also affords us the opportunity to discuss another widely held misconception about intellectual property, which is that there is more to IPR than just patents.  Typically, being first to market with a product in a new niche market matters more than having the most patents on that technology.

The inevitable action of competition that has the resources to invest in competing with an early market leader will be to duplicate their technology with improvements of their own in an effort to replicate the market leader’s commercial success.

A comment on the Tesla blog which first announced the intention not to litigate on their patents highlights some of the main concerns with this plan:

TeslaFan2014

4:42AM | JUN 14, 2014

Mr. Musk:

Great News for those interested in your company’s technology!  Can you please back up this press release with actual details/procedures?

Can you please direct those that are interested in practicing your company’s patented technology a contact where they can receive a royalty-free, perpetual license to practice your company’s technology, as the release suggests? No company will start [to] willfully practice another company’s technology without assurances they will not be sued (a press release does not cut it).

Can you have your IT folks upload a perpetual, royalty free license like the one above, signed by you, so that it can be easily downloaded and signed by companies that want to practice your patented technology?

Can you specify which patents you are actually talking about? Does this mean all of Tesla’s patents? In any country?

The spirit behind this press release is great. Now, we need details.  

Thank you again for such a generous thing that you are doing.

 I, and others, look forward to seeing how you are actually going to get this done.

In Tesla’s case, this move will hurt them in two ways longer-term:

Undercutting the future commercial value of the company

IPR precludes duplication of one’s technology by competitors.  Even if I don’t have Tesla’s drawings, if I have engineering and financial resources, I can still reverse engineer what they’ve done and improve upon it at a potentially faster rate than Tesla can innovate.

If Tesla is informing their competitors they will not enforce their IPR, how do they expect to effectively deter competition from penetrating the market with potentially better technology than theirs in the future?

Savvy companies tend to study the IPR of their competitors and spend time and resources designing around or improving upon the current state of the art.  Tesla’s move does address one of Mr. Musk’s pain points in that it will lower the commercial barriers to competition in the EV market, rather than using proprietary rights to “stifle progress” in the industry.

However, giving away key aspects of your technology without a license fee inherently diminishes your investment and makes it easier for your competition to leapfrog you.  So, when the EV market does take off, Tesla’s competitors will be in a better position to gain commercial advantage and more market share than Tesla.

Tesla will still be a takeover target, given their entrenched position commercially and technologically, but with a significantly lowered valuation resulting from this move.

Spares Sourcing

Tesla has been involved in several lawsuits and state legislative efforts to enable the company to have direct sales of their cars to consumers.  The car dealers in many states are of course unhappy because it undercuts their ability to generate sales revenue since they are bypassed by Tesla.

Providing a royalty-free license in their patents will exclude Tesla from preventing their sub-component suppliers to directly sell spare parts to consumers or independent repair shops.  This will bypass Tesla and curtail its ability to generate aftermarket and services revenue.

Since the EV market is immature and Tesla’s fleet of cars is relatively new, one can presume that this consequence was simply a strategic oversight on behalf of the company.

The move may garner some good PR value and potentially achieve greater market penetration of EVs and Tesla EVs, but it lacks foresight.  Tesla is a company beyond Elon Musk, and the passion and dedication of hundreds of employees and investors who made the commitment to work with the company in the early days deserves recognition and reward resulting from the commercial success of the company.

This noble attempt at changing the paradigm of technology development in a key industry of the future is ultimately short-sighted for Tesla, unless it has commitment from its competitors that they will follow suit and open their portfolio of IPR to the industry as well.

The open source software industry has been successful over the past 25 years because there was a community of companies who all agreed to play by the same rules.  So far, only Tesla is playing by these open source rules, and it appears unlikely that other major automakers would be willing to follow their lead.

Unfortunately, we don’t all live in the world of Gene Roddenberry’s Star Trek where money has been abolished and people want for nothing because nobody wants more than what they really need.  But until we achieve that utopian paradise, if I were a Tesla employee, I’d be furious right now that my company will be less valuable in the future than it could have been.

If Mr. Musk would be willing to redistribute his wealth to the employees and investors who made the commitment to create value for the company in the first place, then this move to open source their patents during the formative stages of the EV industry might make more sense.

Article by Philip Totaro, Founder & CEO of Totaro & Associates, a consulting firm focused on innovation strategy, competitive intelligence, product development and patent search.  To find out more, or get in touch please visit www.totaro-associates.com.

Article appearing courtesy Green Patent Blog.