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Tesla sues former supplier for misappropriation of trade secrets related to battery manufacturing

03/07/2024

On 14 June, Tesla filed a lawsuit against a former supplier, Matthews International Cooperation, for alleged trade secret theft. 

The alleged misappropriated trade secrets relate in particular to Tesla’s dry-electrode battery manufacturing technology. Tesla acquired Maxwell Technologies, a developer of ultracapacitors, in 2018, to boost its expertise in dry-electrode manufacturing. Dry-electrode manufacturing has the potential to significantly reduce the environmental impact, costs and time associated with traditional electrode manufacturing, which relies on wet coating methods.

Tesla alleges that Matthews used Tesla’s confidential trade secrets in their own patent filings, alleging attempting to “claim for itself both ownership and inventorship of Tesla’s confidential trade secrets”. Tesla also alleges that by filing patent applications containing Tesla’s trade secrets, Matthews set in motion events that could lead to the publication of confidential information regarding the dry-electrode manufacturing process.

In addition, Tesla alleges that Matthews disclosed Tesla’s confidential trade secrets to Tesla’s competitors, including by “selling equipment for dry-electrode battery manufacturing” which “embodied Tesla’s confidential trade secrets”. Tesla “conservatively estimates” that the damages will exceed $1 billion.

Tesla’s IP strategy

Tesla has long pursued a fairly uncommon IP strategy, and in particular CEO Elon Musk has been happy to advocate his views on patents (“Patents are for the weak”; “[Patents] serve merely to stifle progress”). 

In 2014, Tesla also made its patents “available for anyone to use for free”, doubling down by promising in 2019 that Tesla would “not initiate patent lawsuits against anyone who, in good faith, wants to use our technology”.

Because of its CEO’s stance on patents, Tesla generally appears to file fewer patent applications than may be expected for a company of its size and innovation. In fact, since 2018, the number of patent applications being filed by Tesla appear to have been declining significantly.

It is generally understood that Tesla relies heavily on trade secrets as an alternative to patents. However, Tesla’s recent lawsuit highlights one of the possible pitfalls of such a strategy.

Third parties in supply chains, and trade secrets

In the battery EV field, even a vertically integrated company such as Tesla relies on complex supply chains. However, an IP strategy that is trade secret heavy, and light on patents, may be risky if trade secrets have to be shared with third parties.

Tesla controls many aspects of the production of its vehicles, including for the most valuable part of electric vehicles, the battery. Tesla controls aspects from raw materials to manufacturing. Nevertheless, they still rely on suppliers such as Matthews for machinery. Indeed, Tesla’s gigafactories rely on a range of new machinery to run smoothly, not all of which can be developed in-house and without third-party expertise.

Trade secrets vs. Patents

Trade secrets have some advantages over patents, and Elon Musk is not their only fan, with trade secrets being heavily relied on in the EV and battery industry. 

As long as trade secrets are kept confidential, they may offer protection indefinitely. Trade secrets, by their very nature, also do not require any public disclosure, can be maintained at relatively lower cost, and there is no formal application process. Due to the low hurdles, rapid advancements and incremental improvements may be protected by trade secrets for which patent protection may not be available.

However, trade secrets are not a monopoly right, and their misappropriation can be difficult to police. If trade secret information becomes publicly known or it is independently discovered, then protection may be lost.

Patents on the other hand are obtained through a formal application process, requiring disclosure of the invention.  The patent application will be published about 18 months after filing of the application.  A patent application is essentially a contract with a government – in exchange for public disclosure of an innovation, you are granted the exclusive right to make, use, sell, and license the patented technology for a period of time, typically a maximum of 20 years.

Final thoughts

Patent applications are published, whereas trade secrets can, theoretically, remain secret in perpetuity. Thus, in some sense, trade secrets may be seen to “stifle progress” whereas patents enforce disclosure of innovations, allowing others to build on innovative developments.

It will be interesting to see if Tesla will be successful in its lawsuit, and the effect Matthew’s patent applications will have on Tesla’s alleged trade secrets, and its IP strategy.

In general, trade secrets can be a valuable part of a successful IP strategy, particularly in a fast moving field like battery manufacturing. However, patents have some significant advantages over trade secrets, and their enforcement is perhaps more straightforward. Most large companies’ IP strategies should likely include a combination of patents and trade secrets.

One cannot help but wonder whether Tesla’s position would have been improved, had they filed patent applications to the alleged trade secrets being implemented in equipment and disclosed in patent applications by Matthews.

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 any action in reliance on it.

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