October 22, 2014
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Emerging Energy and Intellectual Property – The Often Unappreciated Risks and Hurdles of Government Regulations and Standard Setting Organizations
High-tech industries have long used the patent system to protect their developments. The energy sector, particularly emerging energy, is no different, with an ever increasing number of patents being filed both domestically and internationally on technologies such as wind, solar, hydro, biofuels and other alternative automobile power source technologies. The energy sector also faces an unprecedented combination of government regulation and industry standard setting that greatly complicate the intellectual property landscape. In some countries this can result in either compulsory licensing of these technologies or government appropriation of the technologies, which are seen as critical to national development and security. Despite these complexities, energy companies, particularly newer entrants to this sector, seem to lag somewhat behind their peers in the areas of biotechnology, consumer electronics and computers in terms of their level of sophistication in protecting and exploiting their intellectual property assets. In this article we will concentrate on the intellectual property issues that arise in the world of emerging technology including the different patent programs being implemented around the world to promote innovation in the energy industry, and issues faced by the regulated energy industry with respect to the government and involvement in Standard Setting Organizations (“SSO”).
Why Worry About Intellectual Property Rights?
In any industry that involves sophisticated technology, companies engage in significant research and development. This type of research costs money and it is the intellectual property rights secured by that company that helps protect those investments. Securing intellectual property rights can provide a company with an exclusivity position, which in turn will protect its ability to earn. Intellectual property can be used offensively (i.e. to keep others from using the technology or to license the technology) or defensively (i.e. to deter others from suing you). There also are benefits to developing a robust intellectual property portfolio in terms of attracting venture capital and facilitating building a technological identity. That is, by growing an intellectual property portfolio, the company is also building its reputation of being the go-to company on a given technology.
Companies and individuals have been aggressively securing intellectual property rights in energy related technologies. For example, the World Intellectual Property Organization (“WIPO”) reported the following patent filings in the United States for the years 2001-2005[i].
- 2,008 patent filings relating to solar energy
- 2,980 patent filings relating to fuel cell technology
- 591 patent filings relating to wind energy
A recent ad hoc survey of United States Patent and Trademark Office (“USPTO”) filings indicates that these WIPO numbers are now off by as much as a factor of 10 in some areas.
With such aggressive statistics it is imperative for any company in this technology area to consider intellectual property rights. These considerations may involve determining what technology it should protect with intellectual property. Or, alternatively, these considerations may involve analyzing whether any new innovations encroach on the intellectual property rights held by competitors.
Changes In The Legal And Regulatory Landscape In The U.S. And Around The World Are Affecting Energy Related Intellectual Property
In December 2009, the USPTO announced the Green Patent Pilot Program.[ii] The program was initiated to accelerate the examination of patent applications relating to certain green technologies. The articulated rationale for providing accelerated review of these patent applications was that expedited examination would encourage development of green technology. While the average time for a pending application in green technology is 30 months from the time an application is filed to the time a first office action is sent, the pilot program would serve to decrease the waiting time. The pilot program was initially designed to accommodate 3,000 applications related to certain technology categories related to green technologies and the program was originally set to expire on December 8, 2010. In May, 2010, the USPTO announced that it would expand the pilot program and removed the requirement that applications be limited to certain US classifications.[iii]At the time the announcement was made, there were 950 requests to be included in the pilot program on file by applicants. However, only 342 of those requests were granted. Many of the requests were denied because, while the inventions were related to green technology, they were not within the classifications eligible for the program. In November 2010, the USPTO again reevaluated the program and extended the deadline to participate in the pilot program by one year, which allowed patent applications related to green technology to be filed until December 31, 2011.[iv] As of February 27, 2012, there were 5550 petitions submitted, 278 petitions awaiting decision, 3500 petitions granted, 1503 petitions dismissed, 269 petitions denied, and 921 U.S. patents granted.[v]
In other areas of the world similar accelerated programs are being implemented. On April 17, 2012, Brazil implemented a pilot program to give expedited examination to patent applications involving alternative energy sources, transport, energy savings, residues management, and agriculture. The program will be limited to the first 500 patent applications. Canada has also announced plans to amend its current rules to accelerate the prosecution of patent applications relating to environmental technologies.
In China there is a requirement for compulsory licensing of green technology. China also has enacted a law that allows a company to obtain a license to a patent when the patent owner is not developing the invention. Additionally, to further encourage innovation in the energy industry, China law requires 70% of the wind projects to use local sources.[vi] As a result, foreign countries who want to build alternative energy projects in China are required to have a China-based partner and sign a technology transfer agreement.
Intellectual Property Issues Facing Companies That Develop And Use Energy Related Technologies
There are a range of intellectual property issues facing companies that develop and use energy related technologies. These include government rights arising out of the Bayh Dole Act,[vii]which provides for the government march-in rights for certain government funded research. There also are various governmental and private standard setting bodies that create a number of intellectual property risks and opportunities for energy companies, as explained in greater detail below.
The Bayh Dole Act provides that in exchange for ownership rights, recipients of certain government funded grants acknowledge that the government has certain rights in the invention, and also will engage in certain efforts to exploit the technology, such as through the licensing to US companies, creation of a technology transfer entity within the grantee institution, sharing of licensing income with inventors, and certain reporting requirements. An example of how the Bayh Dole Act presents itself is found in Campbell Plastics Engineering & Mfg., Inc. v. Les Brownlee,[viii]which involved the Federal Acquisition Regulations that come from the Bayh-Dole Act. In this case, Campbell Plastics was contracted by the Army to develop certain components of an aircrew protective mask. The contact between Campbell Plastics and the Army incorporated numerous clauses from the Federal Acquisition Regulations including a clause requiring that Campbell Plastics disclose any invention developed and failure to do so will result in an option for the government to retain title to the invention. In this case, Campbell Plastics disclosed the invention, but did so in a “piecemeal” fashion. It was determined that these “piecemeal submissions [did] not adequately disclose the subject invention under the contract.” As a result, the invention was forfeited to the Army. The policy underlying these regulations that provide for forfeiture is to provide the opportunity to the government to secure patent rights when the contractor chooses to forego the option. In other words, while a contractor has the right to retain the rights to the invention, in the event the contractor chooses not to get a patent, the government will be able to secure a patent if given the disclosures in a timely manner.
Additionally, industry standards and standard setting bodies impose intellectual property restrictions and requirements on their members. Energy companies need to be aware of these restrictions. Standards are present in a wide-range of industries.[ix] Standards are “set[s] of characteristics or quantities that describe features of a product, process, service, interface or material.”[x] Standards range from sophisticated protocols that control programming interfaces and define the compatibility of operating standards in the computer industry to less sophisticated standards the define the voltage of electrical outlets. Such standards can arise through various mechanisms including de facto standards established by the market and standards created by government mandate[xi]. For example, the North American Electric Reliability Corporation (“NERC”) has created a series of reliability standards for companies that operate bulk power systems. Various companies offer solutions that are designed to allow companies to comply with these standards. However, there also are risks that the compliance methods are themselves patented by others. Thus, indemnification provisions and other protections often are warranted adopting such a solution.
Private industry groups known as standard setting organizations (“SSOs”) also develop standards relevant to high-technology industries.[xii] “The general goal of standard setting organizations is to benefit the general public by creating widely adopted industry standards.”[xiii] Some of the more recognizable SSOs include the World Wide Web Consortium (“W3C”)[xiv], the Institute of Electrical and Electronics Engineers (“IEEE”)[xv], the Internet Engineering Task Force (“IETF”)[xvi], and the American National Standards Institute (“ANSI”)[xvii].
There are several benefits to participating in an SSO, which include becoming a part of an agreed, sometimes international standard. A SSO participant also will receive the benefit of whatever license/royalty provision agreed to in the event other members have patents that cover the technology. In fact, a participant may be blocked by others’ patents if you are not a member of the SSO. However, with benefits also come potential drawbacks such as the requirement for a participant to disclose its intellectual property to its competitors. Participants also may be subject to the license/royalty terms of the SSO.
Additionally, with the increasing involvement in SSOs come potential for complicated legal issues. For example, if a participant discloses its intellectual property too early, it risks triggering the one-year clock that could bar patent protection. On the other hand, disclosing intellectual property too late may expose a participant to legal action by the SSO. Companies are also increasingly joining multiple SSOs. But not every SSO has the same patent policies. They may even have conflicting patent policies which can create a complicated scenario to navigate. Therefore, it may be beneficial to consult counsel, including IP counsel, before deciding to join an SSO.
Another issue occurs when the standards adopted by a SSO unwittingly incorporate patented technology. This places the patent holder in an increased position of power in the industry where they hold exclusive rights on technology that is now required by a standard. The result could be a patent “hold-up” – where the patent holder demands higher royalties or other costly and burdensome licensing terms that either prevent adoption of the standard or increase the cost of incorporating the standard.
A dramatic example of the pitfalls of failing to comply with the requirements of standard setting bodies is set forth in the Federal Trade Commission (“FTC”) matters In re Union Oil Company of California[xviii]and In re Chevron Corporation and Unocal Corp.[xix]According to the Complaint in In re Union Oil Company of California, Union Oil represented to the California Air Resources Board (“CARB”) that certain gasoline related technology, which CARB eventually incorporated into its rulemaking on gasoline emission standards, was not proprietary and was in the public domain.[xx] The Complaint also alleged that Union Oil made similar misrepresentations to other members of private industry groups who were participating in CARB rulemaking.[xxi] However, at the same time Union Oil obtained patent rights covering this technology.[xxii] As a result of Union Oil’s patent portfolio, Union Oil was in a position to enforce patent rights and charge royalties to companies producing low-emission gasoline that met the CARB requirements. According to the complaint, the result of these royalties would be increased gasoline prices for consumers.[xxiii] The estimated cost was $500 million per year of additional consumer costs.[xxiv]
In 2005, Chevron agreed to acquire Unocal, which included these Union Oil patent rights. This created the potential to further exacerbate the effect of Union Oil’s patent shenanigans. Although Union Oil’s operations are concentrated in the upstream segment of this business, i.e., exploration and production of crude oil and natural gas, Union Oil does not participate in the refining or retailing of oil. However, Union Oil claimed the right to collect patent royalties from companies, including Chevron, that do engage in these downstream activities. Chevron’s acquisition of Unocal would give Chevron the right to claim royalties from other companies that engage in these downstream activities and therefore obtain sensitive information from Chevron competitors. For instance, Union Oil, as part of its license agreements, regularly received reports from licensees regarding the licensees’ production of CARB gasoline. As part of Chevron’s acquisition, Chevron would step into Union Oil’s shoes with respect to the licenses. In other words, Chevron would continue to receive these reports and be privy to information from competitors not otherwise available to it. The Complaint charged that this situation would likely adversely affect competition.
Administrative complaints were brought by the FTC against Union Oil alleging that Union Oil illegally acquired monopoly power in the technology market for producing certain low-emission gasoline as mandated by the CARB and as a result would adversely affect competition.[xxv] The complaint sought an order requiring Union Oil to cease and desist from any efforts to assert those patent rights against manufacturers, retailers, and distributors in California. The issue was resolved by consent orders pertaining to the antitrust allegations. In the consent orders Union Oil and Chevron agreed not to
assert or enforce any of the Relevant U.S. Patents against any Person, to recover any damages or costs for alleged infringements of any of the Relevant U.S. Patents, or to collect any fees, royalties or other payments, in cash or in kind, for the practice of any of the Relevant U.S. Patents, including but not limited to fees, royalties, or other payments, in cash or in kind, to be collected pursuant to any License Agreement, provided, however, that nothing in this Order obligates or requires Respondent to refund any fees, royalties or other payments collected in connection with any of the Relevant U.S. Patents prior to the Merger Effective date. [xxvi].
Whether Union Oil’s failure to disclose its patent holdings to CARB was intentional or unintentional, it illustrates the need for a coordinated intellectual property strategy within energy companies. The strategic planning group should include not only research and development and legal personnel, who among other things, know the extent of the company’s intellectual property holdings, but also regulatory and top business leadership of a company who may be negotiating deals or dealing with regulators.
Building a robust intellectual property portfolio presents both opportunities and risks for energy related technology companies. The complex web of regulations and standards governing energy companies is unparalleled as compared to most other major innovator industries such as biotech and electronics. As a result, companies in the energy sector must remain vigilant in terms of compliance obligations, but also in terms of monitoring the activities of their competitors and of the sector as a whole so as not to be left behind.
[i]World Intellectual Property Organization, “World Patent Report A Statistical Review,” p. 44 (2008).
[ii]“The U.S. Commerce Department's Patent and Trademark Office (USPTO) will pilot a program to accelerate the examination of certain green technology patent applications”, dated December 9, 2009, available at http://www.uspto.gov/news/pr/2009/09_33.jsp
[v]“Green Petition Report Summary,” available at http://www.uspto.gov/patents/init_events/green_report_summary20120227.pdf (dated 2/27/12).
[vi]“Alternative Energy Watch: Solar Winners and Loser; Slowdown in China Wind Growth; Ups and Downs in Energy Storage,” 24/7 Wall Street.
[viii]389 F.3d 1243 (Fed. Cir. 2004).
[ix]Intertek, a company responsible for ensuring products meet relevant standards has been around for more than 127 years. About Us, Intertek, http://www.intertek.com/about/(last visited May 15, 2012).
[x]Nat’l Research Council, Standards, Conformity Assessment, and Trade: Into the 21st Century 9 (1995).
[xi]Daniel J. Gifford, Developing Models for a Coherent Treatment of Standard-Setting Issues under the Patent, Copyright, and Antitrust Laws, 43 IDEA 331, 338-39 (2003).
[xii]Lauren E. Barrows, Why the Enforcement Agencies’ Recent Efforts Will Not Encourage Ex Ante Licensing Negotiations in Standard-Setting Organizations”, 89 Texas L. Rev. 968 (2011); Mark A. Lemley & Philip J. Weiser, Should Property or Liability Rules Govern Information?, 85 Texas L. Rev. 783, 837 (2007).
[xiv]"The World Wide Web Consortium (W3C) is an international community where Member organizations, a full-time staff, and the public work together to develop Web standards.” About W3C, at http://www.w3.org/Consortium/ (last visited May 15, 2012).
[xv]"[T]he IEEE isis the world’s largest professional association dedicated to advancing technological innovation and excellence for the benefit of humanity. IEEE and its members inspire a global community through IEEE's highly cited publications, conferences, technology standards, and professional and educational activities.”." About IEEE, at http://www.ieee.org/about/index.html (last visited May 15, 2012)).
[xvi]"The Internet Engineering Task Force (IETF) is a large open international community of network designers, operators, vendors, and researchers concerned with the evolution of the Internet architecture and the smooth operation of the Internet. It is open to any interested individual." Overview of the IETF, at http://www.ietf.org/overview.html(last visited May 15, 2012).
[xvii]ANSI's mission is “to enhance both the global competitiveness of U.S. business and the U.S. quality of life by promoting and facilitating voluntary consensus standards and conformity assessment systems, and safeguarding their integrity." About ANSI Overview, at http://www.ansi.org/about_ansi/overview/overview.aspx?menuid=1 (last visited May 15, 2012).
[xviii]In re Union Oil Company of California, FTC Docket No. 9305
[xix]In re Chevron Corporation and Unocal Corp. FTC Docket No. 051-0125, Docket No. C-4144
[xx]In re Union Oil Company of California, Complaint, FTC Docket No. 9305 at ¶ 2.
[xxi]In re Union Oil Company of California, Complaint, FTC Docket No. 9305 at ¶ 2.
[xxii]In re Union Oil Company of California, Complaint, FTC Docket No. 9305 at ¶ 3.
[xxiii]In re Union Oil Company of California, Complaint, FTC Docket No. 9305 at ¶ 8.
[xxiv]In re Union Oil Company of California, Complaint, FTC Docket No. 9305 at ¶ 9.
[xxv]In re Union Oil Company of California, Complaint, FTC Docket No. 9305 at and In re Chevron Corporation and Unocal Corp., Complaint, FTC Docket No. C-4144.
[xxvi]In re Union Oil Company of California, Decision and Order, FTC Docket No. 9305 (FTC) at p. 3; In re Chevron Corporation and Unocal Corp., Decision and Order, FTC Docket No. C-4144 at p. 3.