Elon Musk famously announced in an open letter in June of 2014 that Tesla would “not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” In Musk’s words, “Technology leadership is not defined by patents… but rather by the ability of a company to attract and motivate the world’s most talented engineers. We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla’s position in this regard.”
Was he right? It sure looks that way. Almost seven years later, Musk is one of the wealthiest people in the world.
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But things are not as they seem. If you focus only on the words in Elon Musk’s open letter, you might think that Tesla’s success came after abandoning its patenting efforts in the interest of promoting social and environmental responsibility. That’s not what happened. The reality is that Musk’s open letter launched a shrewd patent strategy that gives Tesla access to the patented technology of other automotive OEMs (original equipment manufacturers) while Tesla continues to build its own patent portfolio.
Unfortunately, many tech startup founders have misinterpreted Musk’s open letter as an example of how a tech business can be successful without a patent portfolio. After all, the letter starts out by dramatically describing how the “wall of Tesla patents” was removed from the lobby of Tesla’s office building and how Musk no longer sees the value in pursuing patent protection.
But the reality is that Tesla did not abandon its patent portfolio, nor did it dedicate its technology to the public. Tesla, like all other large tech companies, has a growing patent portfolio that it can strategically leverage to maintain market dominance and enforce against its competitors. Despite the anti-patent messaging surrounding its announcement, Tesla’s open source patent strategy reinforces why tech startups need to prioritize patenting.
The brilliance of Tesla’s open source patent strategy
Tesla’s open source patent strategy announcement in 2014 was fairly controversial in the automotive world. At the time of the open letter, it seemed unfathomable that any company, Tesla included, could compete in the automotive market without a robust patent portfolio.
Automotive patent strategies are extremely complex, and automotive OEMs build and maintain massive patent portfolios that can be deployed against competitors if necessary. Even though automotive OEMs tend to avoid suing one another for patent infringement, their patent portfolios allow them to engage in cross-licensing agreements to share intellectual property with one another. That is important if, for example, different OEMs have patents on the technology that allows a vehicle to earn the highest safety rating. By dropping out of the patent race, Tesla would be excluded from the cross-licensing opportunities that other automotive OEMs enjoy. Not having patents would also diminish Tesla’s leverage over its suppliers, which could result in Tesla’s suppliers using Tesla technology and know-how for the benefit of Tesla’s competitors.
Obviously, Tesla is too patent savvy to let that happen. What Tesla really did was create a situation where it can use the patented technology of other automotive OEMs without having to enter into cross-license agreements.
Here’s how it works.
Tesla spent years innovating and securing patents for electric and autonomous vehicle technology before announcing its open source patent policy. Those patents didn’t go away with the publication of Musk’s open letter. Patents owned by Tesla can still be enforced just like any other patent.
More importantly, Tesla’s open source patent strategy came with conditions. If an automotive OEM wants to use Tesla’s patented technology, it must agree to Tesla’s Patent Pledge, which requires, among other things, that the OEM agree that it will not sue Tesla for patent infringement nor challenge the validity of any Tesla patent. Put another way, by signing the Tesla Patent Pledge, an automotive OEM effectively gives Tesla the right to use technology within the scope of the OEMs patent portfolio. If an automotive OEM doesn’t agree to the Patent Pledge, Tesla can still enforce its patents against the automotive OEM.
This puts Tesla in an extremely valuable and unique position. Tesla developed much of the early technology around autonomous and electric vehicles. The major automotive OEMs including Ford, GM, Stellantis (formerly FCA), Mercedes, Honda, Toyota, BMW, Nissan, Volkswagen and others have announced plans to enter or compete in those markets within the next decade. Automotive OEMs developing electric vehicles, autonomous vehicles, or both, may find that they need a license to Tesla’s patented technology, encouraging their participation in Tesla’s Patent Pledge. Therefore, as more automotive companies enter the electric and autonomous vehicle markets, Tesla will be able to exploit its competitors’ patented technology without spending time and money negotiating hundreds of cross-licensing agreements with its competitors.
That’s a brilliant strategy, no?
How tech startup founders can apply Tesla’s patent strategy
Before you try to implement Tesla’s open source patent strategy with your tech startup, it’s important to understand why Tesla’s patent strategy works.
First, Tesla secured some of the earliest patents in its technology areas. Any automotive OEM competing with Tesla is going to need to take great care to avoid infringing Tesla’s patents or it will have to agree to Tesla’s Patent Pledge, which gives Tesla the right to use the OEM’s patented technology.
Second, Tesla is already viewed as the market leader in the electric and autonomous vehicle spaces. Tesla’s brand recognition gives it an incredible competitive advantage in its industry. Specifically, Tesla can continue to compete with large automotive OEMs that enter the market regardless of whether those automotive OEMs rely on Tesla’s patented technology.
Therefore, contrary to the suggestion in Musk’s open letter, the best way for tech startups to adopt Tesla’s open source patent strategy is to continue securing or acquiring as many patents as possible in their technology area. Without that, the tech startup will have limited, if any, leverage over its competitors.
The other requirements for startups that want to mimic Tesla’s open patent strategy is to develop strong market share and brand recognition in an emerging technology field that will eventually attract competitors with large patent portfolios. That’s obviously much easier said than done. Building market share and brand recognition while avoiding a minefield of patents takes significant time and money. You may find large competitors in your market before you’re in a position comparable to where Tesla found itself in 2014.
Nevertheless, once a tech startup has those three things — broad patent protection, strong market share and strong brand recognition — in an emerging field that will attract a lot of competition, it can think about announcing an open source patent strategy, as Musk did, to access the patent portfolios of its competitors and dominate its market.