Why Tesla Should Consider Amending its Patent Pledge
Over two years ago, Tesla’s CEO Elon Musk announced that the company would not initiate any patent lawsuits against anyone who was using Tesla’s technology in good faith. This pledge has raised many questions as to the motivation behind Musk’s statement and its legal nature, while also stirring our beliefs about innovation and patents in general. Although the answers to these questions are far from clear, wherever one stands on these issues, perhaps it would be in Tesla’s best interest to amend its pledge in a way that would make it legally enforceable or, alternatively, get rid of it altogether.
On the eve of a potential merger with solar panels retailer Solar City, carefully assessing the Tesla’s IP position could be crucial. Otherwise Tesla risks the patent pledge being stretched far beyond the company’s original intentions, which could potentially undermine its long term business objectives and even defeat its commitment to the open source movement.
Tesla’s motivations
Tesla gave a very plausible rationale for its patent pledge: Tesla alone might not be able to destabilize the dominant gasoline based auto-industry; significant progress requires other car manufacturers to turn towards electric cars and cooperate in that movement. More specifically, for electric cars to become a true alternative to gasoline cars, charging stations are needed with the same frequency and availability as gas stations, something that Tesla alone is not in a position to provide. If more car manufacturers paid attention to electric vehicles and started building new charging stations themselves, then this economies of scale hurdle could be overcome.
But if the patent pledge was such a reasonable business move, it’s only natural to wonder why it wasn’t made more legally robust, thus giving more certainty to potential patent users. True, Tesla has argued that some car manufacturers have already started using its technology, but the relevant question is how many more would have jumped on board if Tesla had proven that it meant what it said.
The uncertainty as to enforceability
Tesla’s pledge was instantly met with skepticism, mainly because it is not clearly enforceable in courts and hence possibly meaningless. One could even take this skepticism a step further and point out that Tesla is still pursuing and protecting its patents, lending credence to the theory that the pledge is no more than marketing puffery.
Tesla’s promise is particularly weak under a contracts theory because it’s not clear whether it’s supported by any meaningful consideration. Although courts do not inquire about the value of any given consideration as per Hamer v. Sidway, promises still need to satisfy a vague quid pro quo threshold per the Restatement (Second) of Contracts § 71.
In this case, unlike the classic Hamer scenario in which someone agrees to refrain from exercising a right in exchange of a tangible asset, potential users of Tesla’s patents would not be “relinquishing any rights” by merely using them in good faith. Those users would have never had such a right in the first place.
Perhaps courts could interpret the “good faith” requirement as some equivalent of a bargained for exchange. However, in clarifying his original statement Musk has arguably gotten rid of the good faith element, stressing that anyone can “just go ahead and use” Tesla’s patents. Ironically, although this version is a more categorical expression of the pledge, it leaves a potential user warier as to the nature of the promise and hence its legal futility.
One might also point out that Tesla’s pledge could still be salvageable under a theory of promissory estoppel. But this theory is less than ideal for two reasons. First, to succeed under this theory one must still prove reliance, which would expose both the companies who use Tesla’s technology inadvertently and those who fail to demonstrate reliance in court.[1] Second, this promise might be revoked at any time.[2] Furthermore, if Tesla were to sue for patent infringement before revoking its pledge, a defendant could only invoke promissory estoppel retrospectively (with regards to past use of the patents), and thus Tesla could still assert its patents to stop any future use of the technology.
The worst of both worlds: no meaningful assurance and potential unwanted exposure
As it now stands, Tesla’s patent pledge does not give reliable assurances to potential users of its technology. On the flip side, Tesla might have given up more territory than it wanted to by making the promise. Indeed, it’s conceivable that in some not-so-distant future, the essential conditions that made the pledge a reasonable business decision could cease to exist, leaving Tesla unable to enforce its patents even when it would have much to gain from doing so. After all, this is a company that nearly went bankrupt in 2008 and has only just started to generate profit.
But even today, although Tesla continues to dominate the electric car industry, the open patent pledge might be problematic for Tesla’s expansion into other new industries, which is a process ruled by very different market conditions. Indeed, as Tesla is now approaching a possible merger with Solar City, a solar panels retailer owned by Elon Musk’s cousin (and one in which Musk himself is the largest shareholder), it might be prudent to revisit the patent pledge and assess whether or not it fits Solar City’s business model as well as Tesla’s.
Musk has described the merger as a “no-brainer” and Forbes has labeled it a welcome move to expand a brand with a potential that goes beyond its car making capabilities. But many have been wary of this deal. Critis raise questions about Solar City’s stock performance, which declined by 62% in the last year, and accuse Musk of trying to use “one of his successful businesses to prop up one of his faltering businesses.”
Although not currently at the epicenter of the Solar City debate, the patent pledge issue should be revisited if the merger were to occur. While Tesla’s business model might benefit from competition and thus a no-patent approach, Solar City faces more threatening and extensive competition to both the efficiency and price of its solar panels. Furthermore, many of these competing firms (such as Sistine Solar, a company that manufactures camouflaged solar roofs) are actively seeking patent protection for their products. Even if Tesla as an electric car manufacturer might benefit from the patent pledge, it is not obvious that this is an advisable strategy with respect to the current solar panels industry.
Conclusions
If the patent pledge turns out to be non-enforceable, then it is not really meaningful for other actors in the electric car industry, and hence it does not help to solve Tesla’s economies of scale problems. By amending its pledge and providing for some non-fictional consideration as well as concrete limitations and conditions, Tesla could give meaning to its good intentions and actually help change the industry without risking being over-exposed to unpredictable contingencies.
If on the other hand the patent pledge is somehow enforceable, then Tesla’s other endeavors–such as its merger with Solar City–could lose ground against real competitors under the theory of promissory estoppel, thus driving investment away from Tesla and ultimately hurting its ambitious clean energy agenda. Therefore, Tesla should at least consider limiting its pledge to the electric car industry. If this weren’t enough, and if revoking its patent pledge were the only way to secure its position across different industries and advance its long term goals, then maybe that is also a valid option. After all, although the clean energy movement might be in need of heroes, it has currently no use for martyrs.
Manuel Ayarra is a J.D. candidate, ’18, at the NYU School of Law.
[1] Jorge L. Contreras, A Market Reliance Theory for FRAND Commitments and Other Patent Pledges, 2015 UTAH L. REV. 479, 479 (2015).
[2] Catharina Maracke & Axel Metzger, 17 N.C. J.L. & Tech. 483, 506 (2015-2016).
