Patent-Free Innovation

Late last week, Elon Musk, the CEO of Tesla, announced he would not initiate lawsuits against anyone who uses the patents for Tesla’s technologies. In effect, Tesla’s competitors can now freely take advantage of the company’s designs for sunroofs, vehicle parts, and batteries.

Given Musk’s celebrity status as an inventor, it is no surprise that most of the press has devoted its coverage to analyzing his rationale. On the face of it, letting others openly copy the technologies and ideas you have painstakingly developed doesn’t seem like a sensible business plan. In the long-term, however, Musk’s decision shows how greater knowledge sharing and looser patent regulations could accelerate innovation in the clean tech industry.

Musk understands that if Tesla is to flourish, it will stand to benefit from a more dynamic and robust electric car industry. The fossil fuel industry is a mighty competitor; the vast network of gas stations alone places fossil-fueled vehicles at a considerable advantage. Even with a range approaching 300 miles, Tesla’s cars depend on the frequency of recharging stations. By opening up the technology for its supercharger network, Tesla is hoping to encourage others automakers to adopt it and help the company build out its infrastructure.

A larger EV industry could also help bring costs down as more suppliers enter the market. One of the expensive components of an electric car is its battery. Although Tesla battery cell technology has improved the range of its cars, it remains costly. A shortfall in battery production has also constrained Tesla’s production in 2013. To remedy the situation, the company is in the process of building its own battery production facility. By sharing its patents, Tesla hopes to encourage rivals to adopt its Lithium-Ion technology. Thus, the decision could also help Tesla become the leading manufacturer of electric car batteries.

For Tesla, relinquishing its patents could just be a smart business choice. But at a more profound level, it is also a move against the stifling effects of patents on technological progress. As Musk argues on his blog, “These days [patents] serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors.”

Of course, this is hardly how patents are supposed to work. They should encourage, not inhibit, innovation. In theory, patents are awarded for two reasons: to strengthen the ownership of innovations and to accelerate knowledge dissemination. As imitation is usually easier than invention, those investing time and efforts into developing useful knowledge need extra motivation. They need to be confident they will benefit from their discovery. Patents are intended to provide such a guarantee. In exchange for a monopoly over its use, patents holders are forced to make their discovery public. If it sounds appealing in theory, it isn’t in practice.

Innovation economists Richard R. Nelson and Giovanni Dosi have long argued that patents inhibit, rather than enhance, the process of sharing knowledge. They note, “If those who do R&D today are cut off from being able to draw from and build on what was achieved yesterday, progress may be hindered significantly."¹ And though firms can license their ideas for others to use, they often have little incentive to do so. Indeed, today’s dominant technology firms are more patent trolls than patent sharers. Even when they are willing to share, the process is laborious and expensive. As Musk remarks, the legal profession benefits most out of these arrangements.

Economists like David K. Levine and Michelle Boldrin have further criticized the notion that patents are the principal means to reward inventors. Instead, they highlight that first-mover advantage is a much more substantial reward. Consider Apple’s iPhone, whose first serious competitor, the HTC Dream, took more than a year to emerge. At that point, Apple had already sold over 5 million phones. In 2009, the following year, Apple outsold all its Android competitors 25 million units to 7 million. As Levine and Boldrin note, it is no coincidence that the patent wars that dominate today’s news cycle began after 2010. Only once competitors caught up –– when Apple lost its edge –– did patents become important to their business strategy. More often than not, a firm pursuing patent litigation signals their demise as a leading innovator.

Tesla’s decision to willingly surrender its discoveries underscores this point. For innovative companies, patents are not a significant source of competitive advantage. Whether it is because they have the associated manufacturing capacity or have progressed far enough down the learning curve, inventors have multiple advantages over the competition. And these are reward enough.

If patents are neither critical for appropriation, nor an effective way to accelerate knowledge diffusion, then it begs the question of whether we need them for innovation at all. That’s the larger question looming in the background of Tesla’s announcement: if the goal is to ramp up cleaner energy technologies as quickly as possible, then the very notion of a 20-year patent, as is common in the United States, borders on ludicrous.

Cleaner energy technologies, whether in the form of electric vehicles or carbon-free fuels, have large public benefits. Insofar as clean tech can mitigate the effects of climate change, their growth stands to benefit everyone. Promoting the rapid development and diffusion of these technologies is thus especially important, and if patents slow this process, they are especially problematic.

Granting such long-lived patents for clean energy technologies starts to look even more dubious when a large part of the effort to develop clean technology comes from the public sector. The state has been critical to accelerating technological progress in clean energy, whether through research, funding, or tax credits, and whether these investments went toward renewables, nuclear, and/or fracking. Musk himself greatly benefitted from federal subsidies, as my colleagues pointed out last year. Rather perversely, the patent system rewards private firms for the efforts that, in large part, the public sector made.

In fact, a close partnership between the federal government and a private sector unburdened by patent controversies is a much better model for accelerating clean energy innovation. In the case of shale gas, for instance, those collaborating on exploratory research projects were required to give up any intellectual property claims on their findings. If patents cannot be eliminated, then at the very least, they should be loosened.

Photo Credit: Flickr User Maurizio Pesce