Welcome back everyone, I'm Jordan Geesege, and this is The Limiting Factor. After each video I do on a Tesla patent or patent application, I get a number of questions and comments that reveal some fundamental misconceptions about patents in general and Tesla's position on patents. For example, why although Tesla's patents are open source, they still sue companies over intellectual property, or why Tesla has patents even though Elon says patents are for the week. So today I'm going to run you through what I would consider a patents 101 video, but with a focus on Tesla, let's get into it.
Before we begin, a special thanks to my Patreon supporters, YouTube members and Twitter subscribers, as well as RebellionAir.com. They specialize in helping investors manage concentrated positions. RebellionAir can help with covered calls, risk management, and creating a money master plan from your financial first principles. To kick things off, what is a patent? A patent gives an inventor what you might call a monopoly on an invention for up to 20 years. During that time period, the inventor has exclusive rights to the invention and all the benefits that emerge from those rights, like the right to advertise, license, and sell the invention.
I say it's what you might call a monopoly because there are requirements for and limits on patents, so it's not a monopoly in a strict sense. The requirements are that the invention has to be novel, inventive, and have industrial applicability. Novel means that the invention isn't publicly known. Publicly known can include anything from an article to a product that's on the market to an earlier patent application. Creative means that the invention isn't obvious, and industrial applicability means that the patent application must provide enough information to achieve the results from the invention that the patent application is climbing. If that language seems abstract, you're not wrong.
That's why each country has objective criteria to determine whether the requirements are met. However, for the purposes of today's video, we don't need to get that deep into the patenting process. It's enough to know that the patent applications go through well-defined processes to evaluate the invention, and in return gain a patent grant or grants for well-defined rights. That brings us to the social contract of patents and the reasons why they exist. As a society, we've decided that in exchange for sharing details of how the invention works, which are published publicly, the inventor should be granted temporary, exclusive rights.
Those rights increase the odds that the inventor will profit from their invention, which incentivizes further invention. Meanwhile, the fact that the patents are published publicly also drives further invention. That's because the patents form a public knowledge base that any potential inventor can review to brainstorm ideas for further inventions. Besides the requirements for patenting, I also mentioned that there are limitations on patent rights, like the 20-year life of a patent. Let's take a look at some other limitations.
As I said a moment ago, each country has its own criteria for assessing patents, which is created by an intellectual property office that has jurisdiction in that country. That means by extension, patents are limited by jurisdiction. The Patent Cooperation Treaty, or PCT, does put in place a system for inventors to seek patent protection internationally, but the patents themselves are granted country by country. Therefore, as an example, if a US company has a patent on a product in the US, but not a patent on that product in China, a Chinese company could legally manufacture that product in China.
And patent infringement wouldn't occur unless the Chinese company attempted to import the product into the US. The next limitation is in the scope of the patent. This is often the greatest source of confusion when it comes to patents, and it's why you can often see two different companies using what appears to be the same technology, but there's no patent infringement. For example, suppose two companies want to address the problem of water beating up on camera lenses. One company invents a coating that makes the lens surface hydrophobic or water repellent.
That keeps the lens clear by making the water beat up and roll off. Another company may come up with the idea of making the lens surface hydrophilic, or water loving. That causes the water to form a thin film on the lens that the camera can see through. Each method could be granted a patent for solving the same problem because they solved it in a different manner. That is, with great engineers, a company can often develop a technology that achieves the same end as another technology, but are in fact non-overlapping from a patent standpoint.
But of course, what does often happen when two companies are intense competition with each other over a technology is that they may intentionally or unintentionally step on each other's patent rights, and that's where having a strong hand of patents becomes important. If one party has a stronger hand with a certain technology, it has more bargaining power and negotiations. However, bear in mind that even one or a few patents can be enough to stop all competitors from using the technology. Either way, to resolve the issue, patents can be swapped or shared, territories can be established, or licensing fees can be paid. Interestingly, because patents are a kind of legalistic arms race, besides having great engineers, it's also important to have a good patent attorney. That's because the more patents an inventor or company has on worthwhile inventions, and the better the claims are worded, the greater protection and leverage they provide during negotiations.
So, to reinforce the point, what all this means is the rights granted by a patent aren't as broad and absolute as many people assume, and it's the biggest misconception that I have to bust in the comments section. When people see another company using the same technology as Tesla, or Tesla using the same technology as another company, they assume foul play, but that's not necessarily the case. There can be more than one methodology or approach to achieve a result that appears the same or similar. Even if there was foul play, odds are that to resolve the issue, it would just be handled quietly out of court with negotiations, mediation, or arbitration, as about 97% of cases are. The rare cases that do go to court are situations where, for example, there's vast sums of money involved, there's obvious and willful infringement, or distrust between the two parties.
Now that we have an understanding of patents in general, let's take a look at how that plays into Tesla's patent strategy. In June 2014, Elon Musk released a blog post on Tesla's website titled, All Our Patent Are Belong To You, where he made several key points. In the first point of the post, Elon states that Tesla is open sourcing their patents for those who want to use them in good faith. What does Elon mean by using their patents in good faith? Tesla has the answer to that listed on their additional resources page under definition of key terms. I will paraphrase because the language is legalistic. First, Tesla doesn't allow companies that are suing Tesla over intellectual property rights to use their patents. That is, it's a policy of, if you don't sue us, we won't sue you. I imagine this is the reason why a company wouldn't take up Tesla's offer to use their patents. They might not want to submit to Tesla's terms because they'd rather develop their own technology and leave open the option to sue Tesla in the future.
But as I'll cover later in the video, that won't do them any favors because usually, innovation trumps litigation. The second requirement for acting in good faith is that if a company uses Tesla's patents, they can't just make knockoffs of Tesla's products. That is, other companies are free to use Tesla's patents to solve technology challenges, so long as they add their own element of creativity to differentiate their products from Tesla's products. What these two criteria for acting in good faith mean is that although Tesla's happy to share their inventions, it's a competitive marketplace and they're not a pushover. The question is, why is Tesla offering to share their patents in the first place? To answer that, let's take a look at the second point in the post. Elon states that Tesla's goal is to accelerate the advent of sustainable transport. If they clear the path to the creation of an electric vehicle, but then lay intellectual property landmines that inhibit competition, they're acting in a manner contrary to that goal.
Furthermore, Tesla was surprised to find that the competition that they originally feared from big auto turned out to be non-existent, and they now had the opposite fear. One of the major automakers in 2014 were seriously pursuing Tesla's lead, and with global vehicle production approaching 100 million vehicles produced per year, Tesla was concerned that they alone couldn't do enough and fast enough to transition the world to sustainable energy. The implication is that by open sourcing their patents, Tesla was hoping to give the competition a leg up to help achieve that goal. Additionally, the post states that Tesla, other companies, and the world would all benefit from a common, rapidly evolving technology platform. The best example of this is Tesla's North American charging standard, which they open sourced in 2022. Currently, there are multiple charging standards, and certain vehicles can only be charged at certain charging stations. That's resulted in billions of dollars wasted on a worse customer experience.
Now in the past 12 months, the rest of the auto industry has announced plans to adopt Tesla's charging standard, which will result in greater charger availability for all customers, supercharger installation costs that are 35-75% less, and a much better overall customer experience. The third and final point in the post is that technology leadership is not defined by patents, and the history has repeatedly shown that patents are small protection against a determined competitor. That's because the ability to bring a product to market depends on solving thousands of technical problems, and then more problems to solve to continually improve the product to maintain a competitive edge. So if one company has a patent for a more efficient process or a better device than another company, that doesn't guarantee the company with the better patent wins, because most of the problems that need to be solved don't need a patent or can't be patented, because they don't meet the requirements for patenting. That's why Elon follows up by saying that 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.
And he believes that an open source philosophy strengthens Tesla's ability to do that. How does that work? I'm not sure exactly how Elon thinks about this, but in my view, when a company takes an open source approach, it's a sign that the company has competent leadership that has confidence in its team. The best talent tends to enjoy a creative environment with a free flow of information where competition is viewed as mutually beneficial. It's energizing rather than something to be feared. Regardless of what Elon's exact thinking is here, it's clear that his view is that attracting the best engineers and corporate culture are what matter most for technology leadership, and being open source is part of that. The opposite would be an organization that tries to use patenting and patent litigation as a moat and has an engineering team that's shackled by bureaucracy.
As a final note, Elon has made a number of derisive comments about patents, which often leads people to ask the question, why does Tesla pursue patents at all? Or isn't Tesla being hypocritical if they file for patents? The comments that most people frequently cite are, patents are for the weak, they're used like land mines and warfare, and a patent is a ticket to a lawsuit. Let's cover each point. First, Elon says patents are for the weak because in a sense it's true. As we covered a moment ago, having a strong and well-led engineering team that can innovate rapidly is the path to technology leadership. In comparison, patents are more of a defensive move that may encourage a company to rest on its laurels. On that note, second, as for Elon's comment about using patents like land mines, it's true.
But I don't fault companies for using that strategy. Starting a company or launching a product is brutally hard and you need every advantage you can get. Elon prefers a different approach based on speed of innovation because he's one of the best engineers in the world and attracts the best engineers in the world. But not everyone is Elon. Third, patents can be a ticket to a lawsuit, but that's not always the case. It depends on the technology. Some industries aren't very litigious, but gaining a patent in a newer and highly competitive technology space can be like seizing a piece of land in contested territory. People may want to fight you for it. So how do we square Elon's comments with the fact that Tesla has sought and been granted thousands of patents over the years and is continuously seeking more patent rights? The reality is that Tesla must file for patents because if they don't, other companies are out there using patents like land mines.
That is, despite Elon's criticism of patents, Tesla must pursue patents to ensure Tesla has the rights to use technology that it's invented. That's so that some other company doesn't patent it first and block Tesla from using that invention. To put it another way, it's not hypocritical to criticize the rules of a game that you're forced to play by. With that said, in Elon's typical fashion, he's found a way to make the system work for him. Once Tesla has a patent or patents, they're in a position of strength, and rather than using that position to take a litigious approach or block competition, they're allowing other companies to use their patents as long as it's in good faith.
Strategically that's a win-win because it means Tesla's less likely to get involved in negotiations and court battles over patents and because it gives Tesla more influence over the emerging technology platform for electric vehicles.
In summary, the patent system is useful in fostering innovation and protecting intellectual property. But it's not perfect as a competitive moat because it's legalistic and offensive. Elon tends to focus on what could be improved with the system rather than what works, so it's no surprise that most of what he says is critical of the patent system.
His approach to building a competitive moat with Tesla and his other companies is to innovate as quickly as possible, to patent what's necessary, and then open source the patents to at a minimum head-off patent turf wars, but more ideally to get everyone using Tesla's technology platform.
As a side benefit, in my view, the open source strategy is also a signal to the best engineers that Tesla's confident in its engineering team, has a company culture that's led by engineering rather than bureaucracy and litigation, and that its mission to accelerate the world's transition to sustainable energy is genuine.
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