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Ahead of the Curve Auto Supplier Blog

May 06, 2019

Just How "Free" Are Royalty-free Patents?

In April, Toyota announced that it would grant royalty-free licenses for almost 24,000 patents relative to its electric vehicle (EV) technologies that includes more than 5,000 patents that were previously offered for royalty-free licenses back in 2015. Toyota's move follows a similar "limited enforcement" pledge that Tesla's Elon Musk first made in 2014. 
 
In both cases, the manufacturers suggested that royalty-free access to patents would accelerate EV commercialization and help auto companies to focus on innovation as opposed to worrying about patent infringement or having to reinvent the wheel. Although it's too soon to conclusively say whether the strategy is working or not, it's a worthwhile attempt by these manufacturers to help seed and grow the next generation of EV technology.
 
At the same time, both the Toyota and Tesla programs do bring requirements, obligations and certain hidden costs that suppliers need to fully comprehend before moving forward.
 
Toyota
 
Toyota's new program of royalty-free patents covers a wide range of advanced EV technologies, particularly those used in hybrid electric vehicles, to promote collaboration and significantly increase EV availability and the related infrastructure. As part of the program, Toyota will also “provide" fee-based technical support to other manufacturers developing and selling electrified vehicles when they use Toyota’s motors, batteries, power control units and other vehicle electrification system technologies as part of their powertrain systems.

This technical support is particularly important since the patents alone may not be sufficient to foster open innovation. It's often as important to understand how to integrate the technology into a functional system as it is to understand the technology itself.
 
"Until now we have been a Tier 1 automaker, but now we also intend to become a Tier 2 supplier of hybrid systems," Toyota Executive Vice President Shigeki Terashi said. "We anticipate that there will probably be very few automakers who use our patents to develop their own hybrids from scratch, so by using our system and our components, and offering our support, we can work together to develop these cars."
 
So, is Toyota seeking revenue opportunities further downstream in the supply chain? 
 
Likely so. In exchange for royalty-free access to its patents, Toyota is encouraging manufacturers to utilize its patented technology which may result in adoption of this same technology as a standard in the EV space. To this end, Toyota has the opportunity to carve out a strong position as a supplier in the EV space by tying its explicit aspirations to become “a Tier 2 supplier of hybrid systems” and the potential public adoption of its technology.
 
At the same time, Toyota's initial program in 2015 required users of its royalty-free patents to enter into a license agreement with the company. Thus, it is likely that a license agreement will be required for users of its royalty-free patents under this new program. In contrast to vague “limited enforcement” pledges made by many companies, it is expected that the license agreement will include well-defined terms that are favorable to Toyota as the licensor. These terms will likely include a “grant-back” provision to transfer ownership of or, at least, limit control of any inventions developed by the licensee relating to the technology of Toyota’s royalty-free patents.
 
For example, if a supplier is working with a Toyota royalty-free patent for a component and subsequently invents an improvement to the component, the supplier may be obligated to assign the invention to Toyota or, at least, may be obligated to license the invention to Toyota. In this way, Toyota could offer a sampling of its EV patent portfolio to the market in hopes of developing its next-generation patent portfolio through improvement inventions by users of its royalty-free patents. A potential loss of ownership or control of intellectual property (IP) is a cost that suppliers should consider.
 
Since EV adoption is still in the early stages, representing a small fraction of global auto sales, it's entirely possible that the most valuable IP is yet to be developed. To further the point, full commercialization of the EV market, including infrastructure, requires far more standardization than exists today. Whichever manufacturer owns the corresponding standardization IP will be in the proverbial driver's seat. Toyota's royalty-free patent program could be the company's path to access and control of these innovations.      
 
Tesla
 
Although Tesla’s program has been around since 2014, we would be amiss to not remind suppliers about its program’s obligations and hidden costs. Tesla's program differs from Toyota’s in several important ways. In 2014, Elon Musk announced that he was “open-sourcing” Tesla’s patents, suggesting that doing so would allow the electric vehicle market to grow more rapidly. Tesla's Patent Pledge states “[Tesla] will not initiate a lawsuit against any party for infringing a Tesla Patent through activity relating to electric vehicles or related equipment for so long as such party is acting in good faith.”
 
However, Tesla has significant leeway in determining whether a supplier is "acting in good faith." Tesla indicates that users of its royalty-free patents are not only prohibited from disputes with Tesla over patent infringement, but also over any other form of IP misuse, including trademark and copyright infringement, and trade secret misappropriation.
 
Continuing on the notion of good faith, the Pledge prohibits users of Tesla’s royalty-free patents from asserting "any patent right against a third party for its use of technologies relating to electric vehicles or related equipment." So, before agreeing to the Tesla Pledge, a company must determine whether it's willing to forgo enforcement of its own patents against any other EV competitor, anywhere in the world. It is also important to consider that the term “related equipment” could include companies outside the conventional EV space. There's no doubt that access to Tesla's royalty-free patent could be beneficial, but this is an important cost that suppliers should consider.   
 
So, perhaps these royalty-free patents aren't really free at all. Any supplier looking to access these undoubtedly valuable patents needs to do so with their eyes wide open. Warner's Automotive Industry Group has decades of experience working with suppliers to protect all forms of IP, including patents, trademarks, copyrights and trade secrets. We're here to help you understand all the agreement covenants before you sign on the bottom line (or rely on a “limited enforcement" pledge).

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