#HBRLive: Is Tesla's Patent Sharing a Sound Decision?

21:18Orly Lobel:No, I think there's some industry-specific things. So I wouldn't say in general the patents are less valuable. If you look at something like, say, the pharmaceutical industry, they're probably more valuable than they've ever been. But where they're not very valuable is in software and some of the software-related industries. Thirty years ago, there weren't really very many software patents. Software was not used. You're seeing even as recently as 2008 where we have numbers, The majority of software startup firms are not getting software patents or patents of any kind. The majority of software IPOs were not getting patents of any kind.

21:59Orly Lobel:On the one hand, so they're not – the traditional software firms aren't benefiting a whole lot from the extension of patent coverage to software. On the other hand, you have this tremendous explosion of litigation largely over software patents. It involves patent trolls, it involves companies suing each other, so there's a huge rise in litigation costs. And I think that's at least part of what's different about the environment today, that people are much more concerned about having the defensive protection from patents, much less concerned in software in particular about being able to use patents to exclude competitors.

22:43Orly Lobel:In the software industry there are too many other ways, and firms don't rely on patents as a rule to earn returns on their innovations. There are lots of other ways that they do that. We just had a question come in that asked whether it was the case that firms are sort

23:02James Bessen:of bifurcating in their strategy. In one camp, a group of firms that are trying to be more open to either only use patents defensively or to open source their IP, and then in the other camp the rise of patent trolls. So I guess the question is, are these two camps sort of separating from each other, whereas previously firms sort of pursued a more standard strategy? And I would add to that, in Tesla's case, I mean, to what extent do these sorts of strategies depend on reciprocity? Does this only work if other electric vehicle makers decide that they'll do similar things so that the industry as a whole can benefit.

23:41James Bessen:So I guess those are two questions in one. Are we kind of splitting in terms of how firms are pursuing these strategies?

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24:44James Bessen:Awards based on 2026 model year. Newer models may be shown. And do industries need to get on the same page in order to gain value from these strategies?

24:54Let me take the second one first, which is Tesla probably still gets some benefit if firms don't necessarily reciprocate.

25:06Orly Lobel:But boy, they get a whole lot more if firms at least participate in forming common standards, and even more if firms then start sharing some of their own knowledge and own advances.

25:21Orly Lobel:So reciprocation, I think, is not necessarily crucial, but maybe in the bigger picture, it's extremely important. We've always had patent trolls back to the 19th century. And I think it's important to distinguish patent trolls from technology licensing companies, which is a different business model. What you're seeing today is a huge uptick in patent trolls, largely because of weaknesses in the patent system, weaknesses in patent quality, weaknesses in having large numbers of patents on software and methods of doing business that probably should never have been granted but in any case have very vague boundaries and are able to claim all sorts of things that have typically often already been invented.

26:13So it's an open door to litigation and that's why we're seeing a huge uptick.

26:20Orly Lobel:So to some extent that business model of acquiring patents simply to assert them, it's been around but it's been a separate business model from the beginning. On the other hand I want to distinguish and say that there are technology licensing firms. Very often a start-up will develop a technology and will then license it and that's a very different model from being a patent troll and it's one which has much more in common with the kind of thing that Tesla is doing. Tesla may end up licensing some of its technology and passing on not just the patents but also some of its know-how and technical knowledge.

27:06Yeah. Well, the question about the bifurcated market is, of course, at the core of the recent patent reforms or the efforts for some reforms. and this question of whether we can really label some entities as just patent assertion entities or even more negatively trolls and those great companies who are producing technology and innovation and they're not really interested in litigation. I think the real story or the reality is much messier than that bifurcated world. And that's the reason actually the patent troll bill just a few weeks ago failed, at least for now, before the Senate. That there are many different interests and kind of contexts where there's a question about how patents in certain industries benefit incumbents versus startups or entrepreneurs.

28:22And with some of the proposed reforms, the anti-trolling reforms, there was a concern by venture capitalists that their investments will be at risk where, you know, everybody's agree that it's going to be harder to litigate, but really the burden will be more costly on these newer companies. I think that it really depends on what's creating the value. In software, this is the very recent ruling that maybe we want to talk about with Alice. In software, what's going on is that, as Jim said, there's a real uptick in litigation, but there's also a sense that so many software patents are getting invalidated, or they're really, the patent office is granting patents for innovation that is really not patent eligible.

29:32And so I think there's more of that idea, and this is what's contributing to these statements that we're seeing that we're only going to use our patents defensively and not assert them. There's an idea that even if you have a long patent portfolio, it's very difficult to assess its value, and a lot of these patents are really not going to hold in court. So the court's ruling last week seemed to limit the ability to patent software, but

30:08James Bessen:in a fairly limited way. I mean, it didn't necessarily set out a very clear set of rules in terms of what can and can't be patented, and didn't necessarily get to the heart of what counts as sort of an abstract idea when it comes to being articulated through software. I mean, will this ruling how software firms go up or the risk that they face in terms of litigation, or was it too narrow and too uncertain to really have much of an impact?

30:46Orly Lobel:Well, one of the judges on the federal circuit, the appellate court that made the last decision before the Supreme Court warned that if the ruling came down this way, it would mean the deaths of hundreds of thousands of software patents and business method patents. I'm not sure that she's right about that, because it all depends how the details get worked out in the courts, but I think it has the potential for making some big changes. I think it's probably not sufficient to solve the problem, but it's possibly a step in the right direction. Yeah, so the court was very explicit, Justice Thomas, in a unanimous ruling, stated very clearly that this is not a decision that rules out software patents.

31:40It's really specific to how you cannot remove, you know, building blocks of, in this case, what they call it, the modern economy building blocks, but just, you know, business models that have been prevalent for many years and just kind of in the end say, and you use a computer to implement them, those kinds of software patents are very much at risk now. Everybody who got and they were granted in high numbers, those are probably just not going to hold. But the ALIS ruling itself is actually not so different from a line of of these kinds of rulings of Bilski before that and Mayo. They've all said that you need some kind of technological innovation.

32:40It's just not enough to say, here's an abstract idea and you can implement it in a computer or in some other kind of testing or step and that will be enough to be an eligible patent.

33:00James Bessen:Well, we're running out of time, and I want to get to a couple more questions in just a minute, but maybe just for two minutes, since it just happened a couple of hours ago, the Supreme Court ruled against Aereo, the TV streaming service. I'd love to have one of you maybe just give us the background on that case, and then maybe get your two cents on whether it was the right ruling and what it means for TV streaming and copyright going forward. Well, I wrote a short piece for you guys at HBR on Arrow before the Supreme Court ruling, and I'm with a dissent on this, so my views are known. This is the case where the big broadcasters sued Arrow, an online streaming company, saying that that's copyright infringement, the technology that they're providing, which were individualized antennas that would allow the end user to watch any kind of over-the-air broadcasting for free, that kind of technology infringes upon copyright.

34:10It's a public performance because Arrow is providing the technology. And this is the ruling that just came out a couple of hours ago. So I actually have not had the chance to read the entire decision, but this is a very split decision, 6-3, where it just seems like the majority was so convinced that what Arrow is providing is a service that's similar to the cable networks or the cable providers who do pay transmission fees, and they said, well, so that has to be a public performance, just like we've deemed, or actually Congress has deemed, cable providers as public performance, actually overturning some previous Supreme Court cases.

35:10And Justice Scalia in the dissent says, oh, this is really guilt by resemblance, and he just disagrees with the entire analysis, the entire interpretation of how we're reading here the Copyright Act.

35:39James Bessen:So there was some commentary that I saw prior to the ruling that was making the case that basically this was a business that was trying to be sort of true to the letter of the law while violating its spirit. Given that you're with the dissent here, would you take issue with that? I definitely would. So this is very much part of what the debate that we should be having about copyright protections, copyright and also patent law where the whole idea is that you're granting a temporary exclusive monopoly over some kind of information or knowledge or design or technology and you know patents it's all the time a build around in order to not be at risk of infringement And here, again, with copyright, they very much wanted to try to avoid the black letter of the law.

36:40And, you know, in intellectual property, we're trying to balance that. We're trying to say whatever has been deemed infringement, you know, that's off limits. But we want to encourage the next steps of innovation. We want to encourage disruptive technologies. And here, what they effectively did in this decision is burn out, I think the number is$100 million in that specific venture, in that investment. and also just kind of a chilling message of, you know, you want to come up with a new technology. There's always that risk because we're going to read the spirit of the law, and that might be even broader than what you've interpreted before as infringement.

37:35James Bessen:So I'll ask one more question from our audience, and then I want to ask kind of a final wrap-up question. But we got a question that asks why now specific. We talked a little bit about the way that patent strategy has evolved over time. But can we read anything into the timing of Tesla's announcement? Did they feel that they had reached a certain barrier in terms of the defensive portfolio they had? Is it a sign of desperation around really a need to get the EV market moving in a way that it hadn't been so far? I mean, can we say anything about whether this is a sign of weakness or strength or why they chose to do it, you know, this quarter rather than a year ago or a year from now?

38:16Orly Lobel:I certainly don't have information to answer that.

38:24So I think what I remember, so Tesla has been around, what, for a little over a decade, I think, and they're producing only 200 ,000 cars a year, while they're seeing this enormous market of 100 million new cars annually and, you know, 2 billion cars, gasoline cars overall. all. I think they have reached a point where they think that they've spread out I think a hundred stations, charging stations in the United States, only 20 in Europe, and it's going to be very costly to create many more of that. I think they feel like they need the next steps of opening up and creating more competition.

39:40James Bessen:Well, at the risk of vastly oversimplifying, I'm going to end by asking directionally where you see things going. I mean, I think we see in all these topics we've just touched on, we have Tesla offering to, you know, share its patents, only use them for defensive purposes. We talked a lot about how there are other companies going in that direction. The Supreme Court acts to, at least in a limited way, limit the way that software can be patented. Then the flip side, potentially a chilling effect on certain kinds of innovation because of the area in the copyright realm. and then a couple weeks prior the death of a patent reform bill that would have attempted to try and limit certain behavior by so-called patent trolls.

40:27Is one of those two forces going to be winning out in the next couple of years?

40:32James Bessen:I mean, will more open IP strategy be the norm over the next several years as companies try to cope with essentially the growing costs of litigation, especially if you're talking about the software industry? or is there sort of no end in sight, you know, the necessary policies aren't coming and we're seriously going to continue to see stifling effects because of such significant litigation?

40:58Orly Lobel:So if you look at the graph of litigation, it's a hockey stick. You know, just it's the number of lawsuits, the cost of the lawsuits has been accelerating. Mike Moria and I wrote a book, Patent Failure. It came out in 2008, and we looked at a graph then, and it looked like a hockey stick, and we said, if this isn't fixed, this is going to be a bad situation. And if you look back now, 2008 looks like the low point of the hockey stick. So things are continuing to deepen. Maybe I should say worsen. I think part of the open source movement has its own rationale aside from litigation. But I think in terms of the litigation aspect, you know, you're seeing what's interesting about the patent reform is that it had a political momentum that wasn't there a couple years ago when the American Invents Act was passed.

41:58Orly Lobel:There was a whole new patent law that was passed in 2011 after seven years of lobbying and battles that didn't deal with these problems of patent quality or patent trolls. The reform effort that just went down in flames may not have been the best approach, but what was clear about it was that it involved a much broader spectrum of businesses across the country who were now being affected by patent litigation. And it's not just trolls. Trolls are a big part of it. They're a majority of the lawsuits, but we're also seeing a big uptick in corporate, you know, like the smartphone patent wars and other corporate, intracorporate or intercorporate patent litigation.

42:42Orly Lobel:So, what we can say is that the problem is getting worse and the rescue is not there on the horizon. The Congress does not seem capable of dealing with anything in the short run. The Supreme Court is taking steps, and it's taken a number of steps over the last four or five years, which have been in the right direction. We haven't seen them have the positive effect that many people would hope they would have. And, you know, whether that just needs more time, we'll wait and see. But it's quite clear we're into very uncharted territory, and the Haki's curve seems to still be going up. Jim and I are in agreement on this.

43:34I'm quite concerned about the expansion on all pillars of intellectual property. So we talked about patents and we talked about copyright. There's also a huge uptick in trade secrets. And I think in my book, Talent Wants to Be Free, I talk about a lot of expansions that are really under the radar, expansions of the ways that we control knowledge that goes even beyond intellectual property of non-competes that go into human capital. And I think what we're getting caught up in, or what's going on with the courts and some of the industry, is that there's so much of this conviction that intellectual property is property and, you know, we have this right that's almost like a natural right in inventions and innovation, whereas, you know, we're forgetting that intellectual property is all about striking the right balance and it's all about the purpose of promoting, not impeding progress in arts and science.

44:40So, you know, it's good to have these kinds of debates and these kinds of reminders that there's a purpose to intellectual property. It's not just, you know, to enforce the law because the law says, you know, this is what copyright is or patent is.

44:58James Bessen:Yeah. Well, I think on that note, we conclude with the theme that, you know, help is not yet on the way, but that's where we are for now. Thank you, Orly. Thank you, Jim. Thanks to everyone for joining. Thanks for asking questions. I know we didn't quite get through all of them, but thank you all so much. In the U.S., there's a break in every 26 seconds, but when intruders step near, SimpliSafe Home Security steps up.

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