Tesla Gave Up Its Patents, But People Are Freaked Out That Faraday Future Put Its Own Into A Separate Company

from the a-tale-of-two-electric-car-startups dept

Tue, Jan 3rd 2017 2:44pm — Mike Masnick

Over the last couple of years, there's been a tremendous amount of attention placed on upstart electric car maker, Faraday Future. The company, that originally had very secretive backers (later revealed to extraordinarily wealthy Chinese investors), sprung out of nowhere a year ago and was quickly touted as an expected competitor to Tesla. What a difference a year makes. In the last few weeks, there have been a bunch of reports about how the company is flailing. It kicked off with a pretty damning Buzzfeed story about serious problems at the company, including unpaid bills and a bizarre situation involving having workers focus on designing another car for a totally different company owned by their major investor:

In December 2015, employees at Faraday’s headquarters in Gardena, California, received a mandate from Jia: Design a prototype LeEco car that could be shown off publicly at a spring event in Beijing. According to several former employees, some of Faraday’s designers were pulled off of their core projects to work on the vehicle. And in April 2016, LeEco unveiled a sleek, electric sedan called LeSee. On stage, Jia, who has been outspoken about his plans to usurp Tesla, touted LeSee as a LeEco creation as the white sedan glided across the stage to park in a mock garage. The audience couldn’t see that the seemingly self-driving car was in fact being piloted from backstage via remote control.

Back in California, some Faraday employees were unsettled, sources told BuzzFeed News. Though they’d designed the car for LeEco per Jia’s request, they were not given credit for doing so, and the company didn’t receive payment in exchange. And the development of the LeSee had distracted them from work on Faraday’s own vehicles. “[The LeSee project] certainly added pressure onto the design team. It crunched timelines,” a former employee with knowledge of the project told BuzzFeed News. “It certainly made getting deadlines met that much more difficult.” Faraday declined to comment on the project and the specifics of its relationship with LeEco. LeEco declined to comment on the project as well. In a statement to BuzzFeed News, LeEco said that the two companies are “strategic partners” by “bringing together global resources in several areas.”

The Verge then did its own big report on problems at Faraday Future, which included the somewhat bizarre claim that Faraday Future's "intellectual property" was owned by... an entirely different company:

In addition, these sources revealed to The Verge that the company’s intellectual property is not owned by FF, but by a separate entity named FF Cayman Global, a revelation which raises questions about Faraday Future’s relationship with its investors and suppliers, and could further endanger the company’s success.

Later in the article it notes:

According to former employees, FF is in effect not one, but two companies, with a separate entity based out of the Cayman Islands just for FF’s intellectual property. “If you’re an investor, you’re fucked,” one ex-executive said. “The company doesn’t own the IP.”

And that resulted in other publications, like Business Insider putting out an entire article freaking out about the idea that "Faraday Future doesn't own its intellectual property," as if that was the worst thing in the world. It got another quote from another anonymous ex-employee saying more or less the same thing:

"Some of the reasons some of us left was because we were afraid that all of the work that’s being done in the US, there is no proper corporate structure or legal entity structure," the employee told Business Insider. "The feeling we had was that the IP [intellectual property] was not protected and if and when Faraday goes under, these guys would just pick up all the IP and all these other people in the US would be out of a job."

That's all interesting... but what's amazing is that in all of these discussions about how Faraday Future "doesn't own its intellectual property" absolutely no one seems to point out the fact that the company that everyone compares it to, Tesla, famously dumped all its patents into the public domain and told anyone to go ahead and use them. That seems like a relevant point to make in articles about this upstart competitor and its "intellectual property." Of course, it's possible that the articles could mean something else when it says "intellectual property" -- such as trademarks -- but it seems unlikely that the trademarks for a flailing company that is unlikely to ever get anything on the market are that valuable.

The whole story, and the ignoring of Tesla's stance on patents... is just strange. It is true that sometimes failing companies hang onto their patents as a sort of last ditch effort to extract some return for their investors in a patent fire sale. But if you've reached that point, things have already gone way too far south to really matter. Tesla has shown that it can build a pretty damn successful company without relying on "intellectual property." It seems that people should stop freaking out that Faraday Future may have dumped its patents into some offshore company, and focus on the company's real problems -- like the fact that its execs are racing out the door as fast as possible.

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Filed Under: corporate structure, electric cars, intellectual property, patents
Companies: faraday future, tesla

28 Comments

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Pixelation, 3 Jan 2017 @ 2:54pm

Like rats leaving a sinking ship.
If only they owned the patents, that sealer that keep the ship afloat...
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Vidiot (profile), 3 Jan 2017 @ 2:55pm
"... freaking out about the idea that "Faraday Future doesn't own its intellectual property..."

Yet another vindication of a patent-free life...
- If someone else owns your IP, it becomes a crowbar they can use to bludgeon you at any moment.
- But if nobody owns your IP, there's not much pressure they can bring to bear.
Tesla keeps on innovating, smiling all the time, because no one can browbeat/blackmail them into submission.
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- Anonymous Coward, 3 Jan 2017 @ 3:13pm
  
  Response to: Vidiot on Jan 3rd, 2017 @ 2:55pm
  That's something I also thought while reading this. They may be able to have some opportunity if they prepare for that situation by, let's say for example, getting ready to use Tesla's patents.
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- orbitalinsertion (profile), 4 Jan 2017 @ 12:36am
  
  Re:
  Thank you. That is exactly the point, regardless what other pro-IP spin journals, Wall Street, or investors might be putting on this. The problem is yes, it can be used as a bludgeon. It can also suddenly walk away elsewhere, apparently like research and work, payment, and credit.
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killthelawyers (profile), 3 Jan 2017 @ 2:56pm

Well, to look at it another, people are worried that not only is the intellectual property being siphoned off, but the labor is being siphoned off for the sole benefit of an investor. Why shouldn't people freak out that a company's board is breaching its duties to its shareholders for the benefit of another shareholder/board member?
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killthelawyers (profile), 3 Jan 2017 @ 3:04pm

Well, that seems like a bit of an unfair way to look at it. Faraday is a startup which has two things: labor and intellectual property. They have not yet reached a viable manufacturing stage, so the only value being created thus far is in R&D. This article highlights two issues:

1) Faraday does not actually control any of it's intellectual property. Instead, it is held by another private company whose ownership is unclear.

2) Faraday has diverted resources from its own projects for the benefit of an unrelated company which is owned by a shareholder.

I don't think it is necessarily a problem if Faraday chooses to give away its intellectual property for the public benefit, but that's not the situation. Faraday is diverting literally the only two things it has of value (research and labor) for the benefit of a shareholder and competitor. That's an enormous breach of loyalty (in the legal sense) and should raise serious concerns about the board of directors and ownership of the company. While you focus on part of the what (giving away IP), you're missing the "to whom" and "why" part of the question that is really the cause of panic.
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Retsibsi (profile), 3 Jan 2017 @ 3:12pm

I suspect the real fear isn't about releasing the IP into the public domain, rather that it's being used as collateral for funding for another company / someone else. Should Faraday turn out to be a success then suddenly the Cayman company will turn round to enforce those patents against them i.e. heavy licensing fees. It's a very useful tool to manipulate profits and losses however you want to, and the suspicion seems to be that a Cayman registered company will mysteriously be the only one to end up with any profits, one way or another, while Faraday will have little to show for their work, and also be tied in to using those patents / IP.
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Anonymous Coward, 3 Jan 2017 @ 3:38pm

Buzzfeed is not a reliable source for anything
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- Anonymous Coward, 3 Jan 2017 @ 4:35pm
  
  Re:
  Sure they are! Their "Kids React to..." videos are excellent examples of Journalism.
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- Mike Masnick (profile), 3 Jan 2017 @ 4:55pm
  
  Re:
  Buzzfeed is not a reliable source for anything
  1. That's not true. Yes, they have lots of junk, but they also have a news division that has some really fantastic reporters.
  2. Most of this story was about reporting by the Verge, not Buzzfeed.
  3. Rather than just say "bah, Buzzfeed" how about presenting some evidence of what its report got wrong? Can't do that? Maybe because lots of other sources jumped in later supporting what Buzzfeed reported.
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Lawrence D’Oliveiro, 3 Jan 2017 @ 3:41pm

The Fact That The IP Is Owned ...
... means it could be used to sue whoever tries to carry on the Faraday Future business.
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ItsMagic (profile), 3 Jan 2017 @ 3:50pm

Patents vs Intellectual Property
I am afraid that Intellectual Property and Patents are not one and the same. So the assumption on which this article is based is flawed. Intellectial Property is much more than only Patents. It extends to the design of the car, the logo, the trademark, so basically the total company. To put that in an offshore company, you basically render the company worthless. That's the big problem here.

Buzzfeed did a thorough investigation. It was excellent in-depth investigative article.
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- IP, 3 Jan 2017 @ 4:18pm
  
  Re: Patents vs Intellectual Property
  You note a fair distinction, but it's not critical to this issue. Rather, the thing missing from the articles is that many companies hold their IP outside the US in holding companies for tax reasons. It's a pain (lots of legal fees), so not common in start-ups, but an ambitious company may want to do things "right" from the start. The question is who owns the holding company. If LeEco, then cool. If someone else, not so cool.
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  - Anonymous Coward, 3 Jan 2017 @ 4:38pm
    
    Re: Re: Patents vs Intellectual Property
    Many of those who off shore their earnings simply to avoid taxation are also the same people who wag their fingers at the less fortunate wailing about personal responsibility and paying your fair share .. blah blah blah.
    
    Just pay your damn taxes you hypocrites
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- Richard (profile), 4 Jan 2017 @ 7:11am
  
  Re: Patents vs Intellectual Property
  I am afraid that Intellectual Property and Patents are not one and the same. So the assumption on which this article is based is flawed. Intellectial Property is much more than only Patents. It extends to the design of the car, the logo, the trademark, so basically the total company.
  
  Actually it also contains the undocumented "know how" and culture of the company. The problem is that if you separate the formal, legal intellectual property (patents, copyrights, trademarks and registered designs) from this informal property then BOTH are worthless.
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  - Richard (profile), 4 Jan 2017 @ 7:13am
    
    Re: Re: Patents vs Intellectual Property
    (except of course that the legal IP (patents etc) can still be used for suing others.!)
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DB (profile), 3 Jan 2017 @ 5:27pm

Business Insider is a not a reliable journalism source either. It is mostly paid-by-the-piece, which attracts hack writers and stock price manipulators (pump/slag stories).

But in this case they have uncovered a dirty corporate structure. The employees are working for the money-losing company that will be sold for the value of its development losses. Presumably their stock options will be worth zero, and and non-connected investors will be screwed.

The designs and patents will be transferred to the offshore company, which is where all profits will end up.

This isn't actually legal, but it's really difficult to enforce fair-value transaction accounting.
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- Christenson, 3 Jan 2017 @ 6:59pm
  
  Re: Underlying situation
  The thing about "IP" here is that it's an abstract transfer...to which fairly arbitrary real monetary value will be assigned by the accountants, to the advantage of whomever is in control.
  
  I personally think it's so the IP holding company (owned by the billionaire of course) can be the first to get paid since the operating company is going down the tubes... but seriously, who thinks they can beat Tesla at its own game??? Elon Musk has some serious magic about what he does, and there are a lot *easier* ways to make money!
  
  Me, I'm hoping Elon's proposal for 100 mile high internet satellites is what finally breaks the telecom stranglehold...crossing my fingers for SpaceX with the next launch next week.
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  - Richard (profile), 4 Jan 2017 @ 7:07am
    
    Re: Re: Underlying situation
    but seriously, who thinks they can beat Tesla at its own game???
    
    If no one competes successfully with Tesla then Tesla cannot succeed. Electric car takeup depends critically on infrastructure and no one manufacturer is going to build enough cars to suppoprt the infrastructure. That is why it was a really smart move for Tesla to free its patents.
    
    Tesla needs successful competitors in order to succeed itself. There will be a big enough market for 10-20 electric car companies if the thing takes off.
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- Anonymous Coward, 4 Jan 2017 @ 2:33am
  
  Re:
  In other words, someone has studied how Hollywood does accounting, and for the same reasons, keep the money away from those who actually do the work.
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Anonymous Coward, 3 Jan 2017 @ 7:48pm

Mike, think a Hollywood movie.
No matter how successful FF is, all its would be profits end up getting paid in licensing fees to FF Cayman. The investors never see a return.
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Richard (profile), 4 Jan 2017 @ 2:31am

But...It IS a problem
It seems that people should stop freaking out that Faraday Future may have dumped its patents into some offshore company, and focus on the company's real problems -- like the fact that its execs are racing out the door as fast as possible.

Yes - it is a problem - because of the following scenario.

Some third party comes along wanting to "rescue" the business. They buy up what they think are the assets but then find they don't have the rights necessary to make the product. The company is now dead.

Of course any sensible purchaser would be aware of this - which means the company will likely not be rescued.

Of course the underlying problem is relying on IP in the first place - but if you are using that model then hiving the rights off IS a problem.
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My_Name_Here, 4 Jan 2017 @ 2:53am

Tesla didn't "give up" it's patents, rather it released some of them for general use hoping that their charging system would become a standard for other companies. They long since figured out that the long term profitable position is to be the gas station of the future, charging all of these electric cars. That's the long term play here. So there is no amazing motivation other than to be the biggest player in a business that may make the oil companies look small time.
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mjm1138 (profile), 4 Jan 2017 @ 9:53am

Tesla isn't doing it "without relying on IP"
I think a point many people might miss about Tesla's "giving up" of their IP is that they are simply offering it to be freely licensed. Tesla still owns all of their IP, all of those patents. They didn't "give up" anything other than a possible licensing revenue stream.

The key difference then, is that no third-party can constrain Tesla against using any of that IP, and Tesla still ultimately controls it. FF can't say that; they can absolutely be denied the use of FF Cayman's IP. Surprising that Mr. Masnick, who apparently is getting paid to write about this stuff, doesn't seem to grok the distinction.

You can argue that IP and patents shouldn't exist at all if you like, but that doesn't change the fact that they do exist, and that not having control over IP you depend on is a major problem for a business. Tesla isn't doing anything "without relying on IP", they're just not relying on exclusive access to that IP, which is a different concept.
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- That One Guy (profile), 4 Jan 2017 @ 7:11pm
  
  Re: Tesla isn't doing it "without relying on IP"
  'Licences' implies a deal between the two parties, even if no money changes hands, which is rather different than Tesla saying that anyone can use the stuff, no need to contact or involve them at all.
  
  When you make a statement that others can use the patents free of charge and without telling you at all you have essentially 'given up' those patents, with the main(only?) use at that point being defensive, keeping others from suing you using your own patents.
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- Nop (profile), 10 Jan 2017 @ 5:00am
  
  Re: Tesla isn't doing it "without relying on IP"
  Nailed it. Thank you for saving me from having to explain the same point.
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Jano Szabo, 4 Jan 2017 @ 10:23am

This is actually how Tesla's been doing it. (Well, doing us actually.)

http://davidstockmanscontracorner.com/tesla-bonfire-of-the-money-printers-vanities/
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- Nop (profile), 10 Jan 2017 @ 5:10am
  
  Re:
  Um, no, the article is by a climate-change denialist, so I won't be taking it seriously.
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