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Patent Standards and Investment in Alternative Energy

IP Law 360
February 1, 2008

Raciti, Eric P.


Authored by Eric P. Raciti

Patents are, at the slight risk of overstatement, part of the engine that powers our nation's economic growth. From the standpoint of technology businesses and their investors, patents are of utmost importance because they provide the necessary protection for newly developed products or processes. At times, basic inventions protected by patents have created new industries and given rise to new companies, for example instant photography invented by Polaroid Corporation.


Statistics such as the number of patents granted by the United States Patent and Trademark (PTO) are often cited as a measure of inventive activity, and therefore an indicator of research and development funding. Obtaining a patent involves a significant commitment of resources, including efforts by inventors in developing innovations and by patent counsel drafting and shepherding a patent application through the PTO. An issued patent is not only an indicator that innovation has occurred, but also that this innovation had enough perceived economic value to justify the time and expense of procurement.

Recently, the U.S. Supreme Court in KSR International, Co. v. Teleflex, Inc., 127 S. Ct. 1727 (2007), the most important patent ruling in years, raised the bar for obtaining patents on new products that rely on new combinations of existing, publicly-known elements. If the combination results from nothing more than "ordinary innovation" and "does no more than yield predictable results," the Court reasoned, it is not entitled to the exclusive rights that a patent conveys. "Were it otherwise," Justice Kennedy wrote for the unanimous Court, "patents might stifle, rather than promote, the progress of useful arts." Because most inventions combine previously known elements, the Court's more liberal approach to determining "obviousness" will almost certainly make U.S. patents harder to obtain and defend in litigation. "Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress," Kennedy wrote.  He added that such patents (based on only incremental improvements) were also undesirable because they might deprive earlier innovations of "their value or utility."

Unfortunately for the emerging alternative energy market, the KSR decision has come at a potentially inopportune time, when patents and innovation are more prized than ever by investors. There has recently been a boom in the number of green-tech startups, companies that are developing environmentally friendly technology and products ranging from solar panels to energy-efficient fluorescent bulbs to bioengineered molecules that excrete biofuel. Venture capital and private equity new investment in clean technologies grew by 27% to $8.5 billion in 2007, according to the Cleantech Venture Network, a group that monitors venture capital investments in environmentally friendly technologies. Cleantech expects investment in the sector to reach $8.7 billion by 2009. However, investors have started to retreat from later-stage investments and returned to early-stage deals, as their familiarity with the sector and technologies grows and the pipeline of commercialization-ready opportunities dries up. If granted patents are an indication of innovation in a sector, clean technology breakthroughs are up significantly over the past five years, but down slightly from 2006. In 2007, a little less than 900 patents were granted. That is compared to 2002, when less than 750 patents were granted in the sector, and in 2006, when a little more than 900 were granted. These numbers were reported through a new quarterly cleantech patent tracking service offered by the New York based firm of Heslin Rothenberg Farley & Mesiti P.C. The Clean Energy Patent Growth Index (CEPGI) tracks the number of patents granted in solar wind, electric/hybrid vehicles, fuel cells, hydroelectric, tidal/wave, geothermal, biomass/biofuels, and other renewable energy technologies.

A breakdown in the patent procurement pipeline could lead to a negative impact on investments in alternative energy. Surveys have been conducted to validate the use of patents as a proxy for innovations (see Cohen, Nelson, Walsh, 2000; Arundel and Kabla, 1998). All these studies have highlighted the existence of a marked difference among technological sectors. For example, the medical device field has long used patents as a means for appropriating returns from product and process innovation. In fact, in the medical device field, the Cohen, Nelson, Walsh (2000) report found that the mean percentage of product innovation for which patents are considered effective is almost 55%. Another reason why patents have been so useful in the medical device field is that big companies often license or acquire new technologies. Alternative energy also has the potential to focus on IP transaction work since it is likely that big oil, gas, and chemical companies are also going to have to license or acquire new technologies.

While it is unclear what precisely has caused a slowdown in the number of alternative energy patents in the past year, it is very possible that the effects of the more stringent patentability standards are being felt. Alternative energy often incorporates older technologies, and thus meaningful advances are perhaps susceptible to being seen as merely "ordinary innovation."  Because of the concerns mentioned above, the IP groundwork for a company hoping to succeed in the alternative energy industry should be prioritized to a level above the typical, garden-variety filing of a few patent applications. The writing is on the wall. To better the chances for successfully attracting investment, companies need to view their IP procurement as a global and strategic undertaking, and not as commodity work.

The following considerations represent just a few of the major concerns of prosecuting patents in the alternative energy market.

What's The Plan?
Building a strong IP portfolio starts with an assessment of the IP owned or licensed by the company. Is the purpose of this IP to expand new products or protect or improve existing ones? Which inventions provide value more in the short-term than the long-term? Who are the important competitors and which technologies will be needed to compete with those competitors? A business plan should be developed which charts the future course  of development of the company's IP.


Who Holds the Keys to the Kingdom?

Many businesses need to strengthen their IP portfolio by licensing from universities or acquiring IP from defunct or non-competing companies. Since the Bayh-Dole Act in 1980, universities have been able to transfer their patented technology to commercial businesses. Additionally, the Ocean Tomo firm has begun to coordinate regularly held patent auctions. Thus, there are more opportunities than ever to acquire technology through transfer. One recent example of the successful use of this strategy was undertaken by Direct Methanol Fuel Cell Corporation, which licensed 56 issued patents from Caltech and the University of Southern California, including an important blocking patent. Now the company stands to benefit with interested laptop manufacturers like Toshiba, Hitachi, Fujitsu, and IBM looking to new ways to power their laptops. Quite often, patents already at work protecting an existing  product have additional value protecting new products.

Is A Patent Worth It?

Companies looking to patent new technology to strengthen their IP portfolio need to decide if a patent is worth the cost. Some factors to consider are:

1. Is There a Demand for the New Technology (Now or Projected into the Future)?
A start-up interested in a quick exit strategy may be wise to find a small market niche and attempt to lock that niche up.  But other business models should be considered. Demand could be found anywhere from the military to large companies. For example, a business may want to plan for the future and consider the value in significant royalties from a larger, established sector like the automotive industry.

2. Is the Invention Fully Developed?
A company may not want to risk patenting an invention for which the infrastructure is not yet established. Furthermore, if the enabling technology is non-existent, such that it is not clear enough to "enable any person of ordinary skilled in the art to which it [invention] pertains … to make and use the same [invention]," then the patent may be invalid under 35 U.S.C. §112.

3. Can the Invention be Maintained as Proprietary?
If there are other companies engaged in the same R&D area, your patent may be at risk of becoming effectively worthless, even if you invent first. While claims must be narrow enough to be patentable, it still must have some broad claims to be scaleable and to protect the invention so that others do not easily design around it. 

Where To File?

Decisions on where to file patent applications are often made on the basis of which countries would produce products or which countries would have markets for products embodying the invention. In the case of many clean technology applications, especially those involving energy storage or alternative energy, both the production and use of such products involve developing countries, resulting a large number of countries where patent coverage may be desired. This consideration must be balanced against the expense of such broad filings.

The Need for Speed

The duration of a patent is 20 years from the filing date, so reducing the time between filing and issuance extends the useful working life of the patent. Given that a patent typically takes 3 years to prosecute through the PTO, shortening this time lag could lessen the cost of patent prosecution, reduce uncertainty during finance rounds, and lead to increased revenues from licensing or market exclusivity. One attractive option is the submission of a Petition to Make Special. This allows the application to get "bumped up" on the examiner's docket. Among the ways to qualify for a special application is if the subject matter is energy-related.

Do the Due Diligence

A company must conduct thorough due diligence to gain a clear picture of the patent rights supporting their technology. This requires vigilant surveillance of competitors' activities or other third parties' potential patent infringement, as well as keeping tabs on a company's own patent portfolio and patentable inventions. Due diligence also helps mitigate against the risks of litigation. Armed with good intelligence, companies better know whether to pursue a patent for their inventions, or to alter their products to avoid infringing a competitor's patents. Aside from licensing and litigation opportunities, one of the major outcomes of due diligence is the opportunity to strengthen the company's patent portfolio and identify potential blocking patents that would prevent a company (or its competitors) from legally exploiting its technology.

The Best Defense Is a Good Offense

In order to maximize the value of a patent portfolio, it is wise to consider building a portfolio that employs both defensive and offensive strategies. A defensive strategy protects the company's core technology, providing legal leverage in the event of an infringement dispute. A company can resort to a pre-emptive threat or actual litigation to provide leverage to negotiate a more favorable settlement. An offensive strategy provides a company with opportunities for increased valuation, licensing royalties, or the threat of injunctions to prevent a competitor from selling a product. Patent claims with a forward-looking perspective help position a company against future competitors. This strategy could lead to a crucial blocking patent down the road. This was the case in Microsoft's patenting of the interface now used in Apple's iPod.  Even though Microsoft had nothing to do with the manufacture or development of the iPod, it could earn a large sum of revenue simply for inventing the interface. 

The demand for alternative energy has led to government and venture capital investment, business R&D, and consumer interest. Since the alternative energy industry is still primarily focused on R&D, a strong IP portfolio is crucial to securing an effective market position. When preparing an IP portfolio for this industry companies must determine the value of the patents owned and the value of potential patent applications. Then, they must strengthen their IP portfolio through acquiring licenses and due diligence. Having crafted offensive and defensive strategies in the IP portfolio, the companies must then have a plan for leveraging their IP, including contingencies for licensing or litigation. By taking a strategic and forward-looking view, alternative energy companies can best realize the advantages of a solid IP plan.

Copyright © Finnegan, Henderson, Farabow, Garrett & Dunner, LLP. This article is for informational purposes and is not intended to constitute legal advice. This memorandum may be considered advertising under applicable state laws.