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Tesla Motors opens up

15th Aug 2014

Tesla Motors’ recent decision to open its patent portfolio to all who “in good faith” want to use its technologies appears to pave the way for others to make free use of Tesla’s innovations to drive forward the development of electric vehicles. However, aside from generating a great deal of positive press, what are the possible motivations for this and is the situation as clear-cut is it first appears?

Although only a recent entrant to the automobile industry, Tesla Motors has already built up a solid reputation for designing and manufacturing critically acclaimed electric vehicles, such as the Model S, that rank alongside their fossil-fuel powered rivals. Since its establishment in 2003, the company has accumulated a total of 676 granted patents and pending applications1 to control the use of its innovations around the world and now enjoys a market share of more than 38% of all new purely electric vehicles sold in the US2.

Having invested heavily in protecting its intellectual property, Tesla’s co-founder and CEO, Elon Musk, made the surprise declaration in a June blog post3 that the company “will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology“. The blog states that the decision has been made “in the spirit of the open source movement, for the advancement of electric vehicle technology” and to encourage other car makers to help Tesla to “address the carbon crisis“.

Far from being a purely altruistic move, the commercial benefits to Tesla from this decision are clear and potentially huge. At present, Tesla operates at the luxury end of the electric vehicle market and cannot hope to meet the potential global demand for electric vehicles on its own. The company also employs a different charging system to the standard type found on most electric vehicles, meaning it bears the costs for setting up the charging infrastructure for its vehicles. By opening up its technology to others, the hope for Tesla is presumably that its systems will become the standard across the industry, in the same vein as JVC with VHS and IBM with the PC. Tesla can then profit from sales of its charging systems and batteries to its competitors and can share the huge costs of setting up a nationwide charging infrastructure with other companies. Win, win.

To meet the anticipated demand for its technologies, Tesla has also announced the signing of an agreement with Panasonic to construct a $4-5 billion “gigafactory” by 2020 for manufacturing lithium-ion battery packs for a broad range of applications. The planned production capacity of the factory is 35GWh per year; more than the entire global production in 2013. So, not only will Tesla stand to benefit from the use of its technologies by its automobile competitors, it should also be in a position to supply battery packs to manufacturers across a host of different industries. This could end up being more lucrative to Tesla than its current core business of making and selling cars.

While Tesla clearly has a plan for encouraging investment in its technologies, the legal position of parties wishing to take Tesla up on its offer is far from clear. On the face of it, the announcement appears to declare an open season on Tesla’s patent portfolio. However, the freedom of third parties to make use of Tesla’s patented technologies appears to rest on the company’s own interpretation of the term “good faith”, which is currently unknown. In addition, Tesla would be perfectly within its rights to reverse the decision to open up its patent portfolio at any stage, if it saw fit to do so. This could leave potential infringers stranded and without a formal licence agreement to fall back on. That is not to say that Tesla has any plans to take such a course of action.

The legal situation surrounding the pledge is further complicated by the manner of its delivery, since it remains to be seen whether blog postings can constitute an enforceable contract. Interestingly, the terms of use of Tesla’s website (which can be found by clicking on the “Legal & Privacy” link at the bottom of the blog) specifically states that “neither these internet sites, nor any material contained therein shall in any way grant or be taken to grant any person a license to Tesla Motors, Inc.’s intellectual property“. So, can the blog content be relied upon, even if it has been posted by the CEO? This is crucial, but unclear. Consequently, parties who wish to use Tesla’s technology would be well advised to proceed under the framework of a formal licence agreement with Tesla, rather than relying on the blog alone.

Regardless of the legal situation of the pledge or the outcome of Tesla’s strategy, the fact remains that Tesla is in a position to control the use of its innovations only as a result of having sought patent protection for them. With no patents or patent applications, there could be no such control. It would also be reasonable to argue that Elon Musk’s belief in a possible sea change in electric vehicle investment on the back of opening up Tesla’s patents speaks volumes of the effectiveness of a robust patent portfolio as a potential deterrent to others.

  1.  Source: LexisNexis, TotalPatent®. The total shown does not include unpublished applications.
  2. Source: According to this data, the Tesla Model S sold a total of 17,650 units in 2013. The total for all 100% electric vehicles that year was 46,148. This total excludes sales of conventional hybrid and plug-in hybrid vehicles. If these are included, the total sales in 2013 amounted to 549,578, of which Tesla’s 17,650 sales constitutes had a 3.2% share.
  3. The blog title “All Our Patent Are Belong To You”, rather than being a clumsy mistake, is apparently a deliberate reference to the opening scene of the 1991 Sega video game “Zero Wing” in which the phrase “All your base are belong to us” is used. No, I didn’t know that either.

This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking before any action in reliance on it.

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