Tesla’s $1bn secrets suit exposes potholes for electric vehicle makers

The latest mega suit adds to growing evidence that complex supply chains are proving risky for the sector's booming battery industry, finds Muireann Bolger.

Elon Musk is a fan of trade secrets.

Vocal about his disdain for more traditional forms of IP, the billionaire has even dismissed patents as the preserve of the “weak and feeble-minded”.

But the Tesla founder’s latest lawsuit against an ex-supplier suggests that protecting secrets, especially for electric vehicles (EV), may not be quite as straightforward as he hoped.

The complaint filed in a federal court in Northern California on June 14 targets Matthews International, which Tesla commissioned in 2019 to supply equipment for the mass production of dry-electrode batteries for EVs.

Matthews is accused of revealing proprietary information to third parties and stealing confidential information to file and register a slew of patents—allegedly Musk’s least favourite form of IP.

As he explained in 2022: “We don’t really patent. Our primary long-term competition is China. If we published patents, it would be farcical, because the Chinese would just use them as a recipe book.”

Trust issues

Tesla is seeking $1 billion in damages for Matthews’ alleged “betrayal of trust”.

From its roots in California, Tesla has built its multi-billion dollar empire on the back of dry-electrode battery manufacturing technology, which it describes in the complaint as one of its “most path-breaking innovations”.

Tesla outlines how Matthews agreed, in writing, that it would hold trade secrets in the strictest confidence, and on that basis the automaker trusted Matthews with “highly confidential designs” of industrial machinery necessary to its manufacturing process.

It goes on to say that, without Tesla’s knowledge, Matthews applied Tesla’s confidential trade secrets to “a variety of impermissible purposes and, in so doing, visited “extraordinary harm” on Tesla.

And while Musk’s contempt for patents is well-documented, the complaint notably argues that Matthews’ improper conduct has potentially denied Tesla patent rights to its own technology—leading to “direct and serious” harm to the EV giant and its business.

Matthews has strongly refuted Tesla’s claims, scathingly referring to the complaint as “threadbare” and “utterly without merit”.

“Notably, the complaint vaguely references trade secrets, but fails to identify even one trade secret that Tesla purportedly disclosed to Matthews,” counters the supplier.

Highly charged: EV market litigation

The case is one of the latest in a spate of disputes involving the alleged misappropriation of trade secrets in the EV sector.

This month saw China’s Supreme People’s Court set a record for the amount of compensation awarded in a trade secrets case in China, handing 640 million yuan ($88 million) to an EV manufacturer Chengdu Gao for the theft of vehicle chassis technology.

A few years ago Tesla also sued Rivian alleging trade secret misappropriation after former Tesla employees began working for its EV rival.

Elsewhere, LG Chem has taken aim at SK Innovation at the International Trade Commission, alleging that its competitor developed EV batteries using trade secrets brought over from former LG Chem employees.

This uptick in cases demonstrates the growing importance of battery technologies to the market, particularly for electric vehicles, as Paul Keller, partner at Crowell & Moring, tells WIPR.

“Battery technology is now one of the most at-risk industries for the theft of trade secrets,” says Keller.

EVs are big business, with global sales surging from 3 million in 2021 to 14 million last year, according to the International Energy Agency.

But as the industry gains pace and its supply chains become more complex and unwieldy, are trade secrets the best way to safeguard these assets?

What’s more, if in-house counsels in the EV space follow Musk’s lead and eschew patents in favour of secrets, how can they avoid the risks of theft by employees or supply chain leaks?

Keller says “striking the right balance between openness and protection in this space is a constant challenge” for EV manufacturers.

“The development of advanced battery technology requires significant investment in research and development, and the resulting trade secrets, such as chemical formulations, manufacturing processes, and battery management systems, are highly valuable and can provide a significant competitive advantage,” he explains.

Added to that, the common practice of reverse engineering can expose trade secrets embedded in a product—a particular concern in the EV battery industry, where competitors may analyse batteries to uncover technological advantages.

“Collaboration and open innovation are essential for advancing battery technology. However, these practices can increase the risk of trade secret disclosure,” says Keller.

Vulnerable supply chains?

James Gale, partner at Cozen O’Connor agrees there are substantial threats for both established players and new entrants.

“EV manufacturers are rapidly competing to refine and enhance this technology. Any time there is such competition, there is a higher chance that such technology will be stolen,” says Gale.

The global nature of the battery supply chain, with raw materials, components, and finished products increasingly sourced from around the world, further compounds the problem.

A complex supplier network as well as differing legal frameworks and enforcement mechanisms between countries can create vulnerabilities that can be swiftly exploited.

Then there are the digital pitfalls to contend with.

The battery industry, continues Keller, is increasingly reliant on digital systems for design, manufacturing, and supply chain management.

This makes it vulnerable to cyberattacks, which can be launched by state-sponsored actors, criminal organisations, or disgruntled employees.

In the face of such risks, identifying and classifying which information exactly constitutes a trade secret is critically important.

“Because the legal standard for establishing a trade secret requires ‘reasonable’ steps to be taken to protect the information’s secrecy, one must first have some sense of what the information is in order to protect it,” says Keller.

NDAs and contracts

This requires a thorough understanding of the technology and the technical and competitive landscape, and places a premium on the role played by confidentiality agreements or other contractual arrangements protecting valuable information,

As Gale explains, all relationships and agreements with vendors and suppliers are potentially risky if they include the sharing of trade secret information.

“Such relationships should include the use of a Non-disclosure Agreement (NDA). This NDA should also include a restriction on using//disclosing/misappropriating/reverse-engineering any trade secrets, and there should be a detailed showing of the trade secrets that have been shared and stolen.”

That said, enforcing these agreements can be difficult, especially across international borders.

As supply chain challenges mount for EV manufacturers, the pros and cons of trade secrets protection are likely to come under renewed scrutiny.

“Although one can have the appropriate agreements and protections in place [for trade secrets], the risk of misappropriation of those assets is real,” concludes Keller, “especially in industries with sought-after information, such as the battery industry.”