Patent management is fundamental to preserving and enhancing the value of most clean-tech investments.
As one of the fastest growing sectors worldwide, billions of dollars are being invested in everything from wind farms to carbon capture and storage (CCS) plants by venture capitalists and corporate investors alike. The first to invest in these technologies of the future are set to reap big rewards, all investors have to do is wait and watch the money roll in...what in the world could go wrong with this failsafe strategy? The answer is patents.
Patents are present wherever there is technology, and US patents for clean-energy technologies in 2009 were at an all time high with 200 more patents than in 2008 at 1,125. The Clean Energy Patent Growth Index (CEPGI), which tracks the granting of US patents in this sector, shows that patents in fuel cells and hybrid/electric vehicles were each up over 20% over 2008, solar patents were up 60% and biomass/biofuel energy patents were up 260%.
Let's take a look at a hypothetical investment in a company making solar cells. At first the investment looks to be a sure thing, the company has a full order book for the next few years. Then the unthinkable happens, a patent infringement suit is brought in the country where the solar cells are manufactured. As an investor you are shocked to discover that the rights in these solar cells are owned by someone else. Even more surprising is the court ordered injunction which requires the company to cease making any more solar cells and indeed pay damages for those already made. All of a sudden the investment doesn't look so hot.
From the perspective of the other side, their investment in obtaining and maintaining that patent has just proved invaluable enabling a major competitor to be forced to shut down its production. The value of such investment was certainly evident to Kenetech Windpower, Inc. when Enercon, a German wind turbine manufacturer, were banned from importing wind turbines into the US in 1998.
Such scenarios are commonplace in mature industries such as the pharmaceutical and electronics sectors. Cleantech is hot on their heels.
Making an investment now in understanding how patents will influence the cleantech sector will certainly pay dividends in the future. With the benefit of hindsight, lessons can be learned as to how to best exploit patents from other industries.
Fundamental to any technology investment is undertaking comprehensive freedom to operate assessments to ensure the company has the right to manufacture the product it wants to sell. This involves looking at the company's key technologies and analysing them in the context of the patent landscape to ensure that its plans do not step on somebody else's toes. Technology-driven companies should be prepared to demonstrate to investors that it has carried out such a task and is keeping an eye on the situation.
Once the other players' cards are on the table, the company needs to make sure its potentially winning hand is protected. This means obtaining patents for its proprietary technologies in all key markets to limit its competitor's activities.
As an investor you might imagine that these seemingly common sense exercises are undertaken by most cleantech companies, but this is simply not the case. Take a look at the work we undertook for a government which wanted to ensure that the contractor chosen to build and operate the country's first CCS plant would be free to do so. We identified more than 12,000 patents relating to post-combustion carbon capture for power stations alone in the first review of its kind to comprehensively identify, review and assess CCS patents. The patent strategies of the companies varied from sophisticated to having only just begun to fully consider the situation.
Furthermore, the review demonstrated the risks of relying on trade secrets which is a common practice in clean-tech companies. Due to the increased levels of patent filings, each new filing brings with it the risk that a third party will be granted a patent to technology that a company had previously kept secret. One of the outcomes of our work on the CCS project was at least one of the companies re-evaluating its patent filing strategy.
Having taken steps to minimise the risks posed by third party patents, the next step is to consider the benefits of owning patents. Patents give the opportunity to require competitors to steer clear of your key technologies and when they don't to close down their operations. A company's level of control over the technological landscape can be augmented by seeking patents for ideas which are secondary to the core business of the company. A valuable asset when seeking to win contracts, your patent portfolio brings with it both a demonstration that you have the rights to deliver on your promises and also restricts what competitors can offer. Patents present an opportunity for new revenue streams from patent licensing, and cross-licensing arrangements improve competition between companies and can assist with settling disputes.
A different business model which we have also seen is for companies to acquire patent portfolios, but instead of manufacturing things themselves, they derive their revenue from different means. This includes seeking to license the technologies or suing manufacturers of infringing products for damages. The prospects of such patent holding companies were brought home by the 2006 Blackberry case, which resulted in a payment of $612 million by Blackberry to such a patent holding company.
The clean-tech sector is marching forwards, the value of businesses involved are rapidly rising and the number of patents growing quickly. Intellectual property rights represent both the biggest risks and the best potential opportunities for investors and companies alike.
With the fast-growing number of patents in the clean-tech sector and the value of the sector rising so rapidly, the potential risks and opportunities for investors and companies alike are huge. Are you willing to take a gamble and wait to see what the price of ignoring the world of patents is?