Contributed by partner Bijal V. Vakil and law clerk Abdul Hafiz.
In April 2019, Toyota announced it would provide royalty-free patent licenses for its vehicle electrification technology. Toyota joins Tesla as the latest auto manufacturer to leverage its intellectual property to increase adoption of new technologies—particularly where there is little dispute over the need to develop sustainable mobility options to combat rising emissions. This comes at a time when European and other global regulators have enacted laws to cut vehicle emissions by up to 50 percent by 2030.
As companies enter the hybrid and electric vehicle market, there is a strong desire to capitalize on a growing consumer market, changing regulatory policies, and government tax credits. As the market matures, current manufacturers in the EV market are looking to their competitors to adopt their technologies in hopes to standardize the industry.
The open sourcing of patents in the automotive industry is a novel idea to help increase overall adoption of electric, hybrid, or fuel-less vehicles. Tesla and Toyota, are attempting to influence the industry by increasing the emphasis of public policy directed to their particular technology, fostering a standardization process (such as in charging stations), and to provide parts, such as batteries, and services to those companies who decide to use the available patents.
Open Source Patents
Open source patents emerged from the concept of open source software, whereby companies or software developers release their software and source code for use and development by the community. Open source patents are "[public] commitments voluntarily made by patent holders to limit the enforcement or other exploitation of their patents." In some instances, this is accomplished through royalty-free licenses. Open source patents made by public commitments differ from standard licensing agreements. Typical licensing arrangements involve confidential terms that are unique to those contracting parties. The open sourcing of patents enables market participants to make investments without worrying that the finished products and their potential revenue will be blocked by the patent holder in the future.
Open source patents are designed to create a cooperative environment where companies can collaborate on shared goals and ideas for the advancement of society and technology. It brings to life the old adage that "two heads are better than one." For companies, it decreases the cost of research and development and provides greater capacity for innovation. The open sourcing of patents may lead to the adoption of universal standards in new or rapidly evolving industries.
Open source patents have unique challenges for manufacturers of tangible products, such as automakers, because of the expense of large equipment and labor. Manufacturing plants can require an extensive retrofit before the open source patent can be fully used. This is in direct contrast to open source software, where the overhead is minimal (typically, the only equipment required is a computer). A developer releases the source code to the open source community, who can then manipulate the software as they deem appropriate. As open source software developed, standard licenses (such as Apache, GPL, etc.) were created to set the use parameters of the software. Software developers could then decide whether to use the open source software given its license. If the license type was deemed too restrictive, the industry could decline to use it.
Open Source Patents in the Auto Industry
Tesla and Toyota have taken different approaches to inducing their competitors to buy into using and developing their patents. Back in 2014, Elon Musk announced that Tesla would open source all of its patents to all who planned to use them in good faith. Conversely, Toyota stated it would provide royalty-free licenses to those who would like to use selected patents. Toyota has created a webpage for interested companies to submit an inquiry on how to obtain a license. Once the form is submitted, Toyota will respond on how to proceed. Toyota will also provide fee-based technical support to other manufacturers developing and selling electrified vehicles when they use its motors, batteries, and other vehicle electrification system technologies as part of their powertrain systems.
Toyota's pledge is aimed at driving industry uptake of hybrids and fending off the challenge of all-battery electric vehicles. Toyota believes the future of sustainable vehicles lies in hybrid technology. Hybrid vehicles are vehicles that can utilize both electric and gas energy.
Tesla, on the other hand, believes fully electric vehicles will proliferate globally. EVs are getting cheaper to make because the cost is driven by the battery price. "[A]s battery prices have come down greatly in the last year or so, there is the potential [that battery powered electric vehicles will] swamp the hybrid market," said Michael Lenox of the University of Virginia's Darden School of Business. However, society needs to shift to allow for increased EV charging capacity. Tesla maintains approximately 1,600 public charging stations across the country. In urban environments where garages are scarce, charging battery electric vehicles may be difficult compared to the suburbs, where electric vehicle owners can have a personal charging station in their homes.
It is still unclear how other auto manufacturers may respond to Toyota's and Tesla's announcements. No large auto manufacturer or competitor has publicly announced that they plan to use open source patents. Last year, a large auto manufacturer announced its plans to begin production of EVs in the U.S., but there is no indication that it plans to use the available open source patents. Further, two large auto manufacturers have begun an alliance to share technological developments in manufacturing EVs, saving them millions of dollars in research and development costs. Despite the growing market for emission-free or lower emission vehicles, traditional vehicles with combustible engines still dominate the vehicle market. Currently, hybrid vehicles account for around 3 percent of all vehicles sold globally, while fully electric vehicles make up about 1.5 percent.
When viewing the various options to use open source patents, auto manufacturers would likely prefer a licensing scheme. The patent holder and the licensee would be entering into a bilateral contract permitting their use of the open source technology. It's uncertain whether auto manufacturers who seek to license the patents would have any bargaining power to negotiate terms with the patent holder. Nonetheless, there is little legal uncertainty on how courts would construe a licensing agreement. Also, a purchaser or successor of the pledged patent will be bound by all enduring terms of the license. Additionally, if the patent holder goes bankrupt, the covenant is not dischargeable. Further, negotiating and finalizing licensing agreements would not be very onerous on patent holders because 14 companies control the bulk of auto manufacturing globally.
Patent holders must also make it clear if there will be an expectation or requirement that auto manufacturers who use and develop open source patents will be obliged to reciprocate by open sourcing their developments. For example, if an auto manufacturer uses a patented battery component to create a new design that charges at twice the speed, can the original patent holder (and others) use the improved version royalty-free? The key to successful open sourcing is the perpetual ability to use and develop improved technology by the community. Thus, automakers should encourage future reciprocal collaboration when making their patents available to the community.
Patent litigation is expensive and a tremendous burden on an ongoing business. In some instances, juries have awarded hundreds of millions of dollars to patent holders. These large awards also inhibit trust between large market players who have the resources for a drawn out court battle. This is enough to alarm many auto manufacturers, who manufacture thousands of vehicles each year and maintain an extensive patent portfolio of their own.
The transportation industry needs to make some tough decisions. On one hand, those automotive manufacturers that choose to use open source patents will have no option but to rely upon assurances that patent lawsuits will not result from their use. These automotive manufacturers will decide to use technology granted to the public in an appropriate manner and then make the required investments to improve technology.
On the other hand, other auto manufacturers have decided they would rather rely on themselves than the current selection of open source patents. This raises the question whether there is a lack of trust in the auto industry or whether the risks for open source collaboration are just too high, resulting in market independence and alliances rather than broad collaboration.
To read the original article on Bloomberg Law, click here (paywall, Bloomberg Law access required).
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