Patent Pledge and Technological Innovation: The “Good Faith” of Tesla

On June 12, 2014, Tesla declared that it would refrain from initiating patent litigation against any party that, in good faith, seeks to utilize its technology. The stated intention behind this move was to stimulate the market for electric vehicles. This research presents the first empirical analysis of the impact of patent pledge for pledgor’s entire patent portfolio as a corporate strategy on both the pledgor's innovation and follow-on innovations. The result indicates that adopting this strategy increased technology similarity for innovations associated with Tesla’s innovation and raised Tesla’s patenting activity, suggesting an expansion of ecosystem surrounding Tesla. Nonetheless, no significant impact has been observed on Tesla's innovation activities and the extensive margin of follow-on innovations, which may be attributed to the good faith condition that distinguishes Tesla's patent pledge from a patent expiration or mandatory royalty-free licensing. This paper offers implications for managers considering incorporating patent pledge in their strategic toolkit to augment their firm’s ecosystem. Meanwhile, policymakers should also treat firms’ patent pledge carefully, including evaluating the social implications of the conditions attached to their patent pledge.