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New Patent Paradigm? Emerging Licensing Practices

· June 28, 2019

Firms commonly obtain patents and take legal action against alleged patent infringers as a means to limit competition to their business. In this manner, firms can attempt to assert control over a specific technology and establish dominance in their industry. For example, an inventor may patent a new design so that their competitors cannot use the same design without paying royalty fees. However, in recent years, some firms have shifted away from this paradigm towards a business model that emphasizes open-source licensing. That is, firms are licensing their patents for free in an effort to develop infrastructure for the patented technology. They are simultaneously offering support of the technology for a fee, betting that their experience and know-how will be worth more to licensees than the forgone licensing fee.

Some automakers have recently adopted this new open-licensing model. In 2014, Toyota began opening up its hydrogen fuel cell patents. Then, in April 2019, Toyota committed to licensing nearly 24,000 patents on electric and hybrid vehicles, royalty-free through 2030. [1] [2]. These moves appear to be motivated by the drive to hasten the development of clean fuel-efficient vehicles like hybrid electric cars.  Executive Vice President Shigeki Terashi, describing Toyota’s new strategy, stated, “[u]ntil now we have been a tier 1 automaker, but now we also intend to become a tier 2 supplier of hybrid systems.” Toyota aims to supply automakers with its electric vehicle components, which would help reduce the costs of hybrid vehicle technology and aid in its proliferation.

This strategy also allows Toyota to capture revenue by selling its support for the technology. Toyota will offer consulting contracts to help other companies leverage Toyota’s 20-year expertise in electric vehicles. Other companies will gain access to patented technologies, and Toyota will make money helping others use them.

Tesla, a company producing only electric vehicles, took similar actions in sharing their patented technology as well. Since 2014, Tesla CEO Elon Musk has regularly stated that “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”

This trend extends beyond the auto industry as well. Red Hat, a company that provides open-source software, has held a similar patent promise since 2002. Instead of using intellectual property to limit competition, Red Hat works with the open-source software development community to provide consumers, individuals and businesses, with free access to important technology. Red Hat then provides support and consulting contracts on open-source software to provide more effective enterprise IT support.

So why are firms taking these actions? Firms are likely engaging in this practice for three key reasons: First, offering their expertise on these open-source patents through paid services helps generate an alternative (and non-adversarial) stream of revenue. From the licensor’s standpoint, getting a licensee to pay for consulting services that would help them incorporate the patented technology creates opportunities for partnership and collaboration, opportunities that litigation might cut off. When encountering common patent dilemmas, firms of all backgrounds can benefit from collaboration rather than litigation. Second, firms not charging for their patents could help avoid escalation of prices. If a firm charges a royalty for its technology, then other industry players that use that technology could be incentivized to reciprocate with royalty requests to counterbalance the payments to patent holders. While patent-holding firms thereby benefit by profiting off their own inventions, consumers as well as firms could also face higher prices. Finally, because open-licensing aids in keeping costs and prices low, firms can more confidently invest in innovative technologies. Tesla and Toyota recognized, for example, that if they aided in the proliferation of electric and hybrid fuel cells, they could cut the cost for such technology and benefit from an environment that supports hybrid vehicles.

These licensing practices could signal a new wave of innovative services and a new business model yet to be fully explored. The actions of Red Hat, Tesla, and Toyota show that there could be a new framework in which companies encourage others to use their technology, while succeeding by providing the know-how that goes with it.

Intellectual Property

The Internet enables the free exchange of ideas and content that, in turn, promote creativity, commerce, and innovation. However, a balanced approach to copyright, trademarks, and patents is critical to this creative and entrepreneurial spirit the Internet has fostered. Consequently, it is our belief that the intellectual property system should encourage innovation, while not impeding new business models and open-source developments.