Alternative Energy/Overview of Economics of Intellectual Property in AE

Overview of Economics of Intellectual Property

(CAROL WILL INCORPORATE THIS IN TECH TRANSFER PART OF PAPER + IP GENERAL DISCUSSION)

Data on enclosure: Patenting activity and increase over time

(Copenhagen Economics 2009)

• Between 1998 and 2008 215,000 patent applications were filed for clean energy technologies (specifically wind, solar, fuel cells, geothermal, ocean, biomass, and waste) internationally, of which 22,000 were in developing countries - 7,400 of these were actually owned by residents of those countries and not surpisingly, 6,800 of those were owned by residents of China.
• The worldwide growth rate of patent registrations for the period of 2004-2007 was 120%.
• In 1998 1 in 20 patents was protected in a developing country whereas in 2008 the split was 1 in 5.
• Fuels cell patents and solar energy patents account for 80% of these numbers, and wind energy is a distant third.
• 99.4% of the patents in developing countries were in a small group of emerging markets (China, India, and a few others) whereas the larger majority of developing countries only protected 0.6% of the patents.
• This split has raised concerns among smaller and less wealthy developing countries that the costs of alternative energy technologies will soon rise putting them out of their reach.
• This leads to the conclusion that patent rights can't be an obstacle to the transfer of clean energy technology to developing countries since there are very few patents for these technologies registered in these countries. A relaxation of the property rights regime for these technologies would not improve tech transfer to these countries.
• In 2008 the emerging markets (China, India and a few others) accounted for 20% of worldwide patenting.
• As the world looks for ways to reduce global GHG emissions and developed countries look for ways to facilitate the necessary emissions reductions in developing countries, the Copenhagen report suggests that the insufficiencies in technology transfer to developing countries, may more likely be attributable to some of the following issues:
  • insufficient technological knowledge to produce innovative technologies locally,
  • insufficient market size to justify local production units
  • insufficient financial resources to acquire innovative products
• The study finds that wind technology is the most likely to be patent protected in less developed economies and emerging markets. They account for 15% of the worldwide patent applications in wind technology.
• The very few patents (0.6% mentioned above) owned in the least-developed countries tend to be owned by firms in developed countries.
• The report suggests that firms are less likely to transfer technology to countries where IPR law is enforced loosely - pointing to literature that shows that strengthening IP legislation increases technology transfer because royalty payments represent the sale of IP rights between subsidiaries of a firm.

Image: Clean Energy Spacial Patent Distribution

(Reichman et. al. 2008)

• One barrier to studies of patents in green technologies (defined like clean tech in that the term covers technologies that facilitate carbon abatement, both energy supply and energy efficiency technologies) is that the U.S. Patent and Trademark Office (PTO) does not recognize green technology as a class, making it difficult to assemble quantitative information about patents in the sector.
• There is a lack of empirical evidence regarding the effect of intellectual property rights on innovation due to two factors:
  1. the technology is in a nascent stage and therefore lacks the history to be appropriately studied in this context.
  2. The lack of an appropriate GHG pricing system (or other appropriate economic tool to stimulate the market for carbon-abatement technologies) means that the market is still unstable and immature, hindering accurate studies of IPR.

"As a further indicator of innovation in the sector, the number of U.S. patents granted for clean technology breakthroughs has increased about twenty percent over the past five years, from fewer than 750 in 2002 to around nine-hundred in 2007." (Ward et al, 2008) Also see: Clean Energy Patent Growth Index

The CEPGI (shown below annually) tracks the granting of U.S. patents for the following sub-components: Solar, Wind, Hybrid/electric vehicles, Fuel Cells, Hydroelectric, Tidal/wave, Geothermal, Biomass/biofuels and other clean renewable energy.

Image: Clean Energy Patent Growth Index Chart

As depicted in the below breakdown of the CEPGI by its sub-components, patents in wind, fuel cells, hydroelectric, tidal and geothermal were up in 2008 over 2007 with hydroelectric and tidal patents being at all time highs.

Image: CEPGI Sub-Components Chart

"While the number of U.S. patent applications has steadily increased in recent years, the trend in the number of U.S. patents granted actually fell slightly from 2006-2007.6 This decrease in the number of patents granted may be a result of the U.S. Supreme Court’s ruling in KSR International, Co. v Teleflex, Inc.—arguably the most important patent ruling in years—which effectively raised the bar for inventors who wish to obtain patent protection for products that rely on new combinations of existing, publicly-known elements. Because alternative energy developments often incorporate older technologies, meaningful advances may be susceptible to being seen by the U.S. Patent and Trademark Office and the courts as merely “ordinary innovation” that “does no more than yield predictable results.” (pg 244) (Ward et al, 2008)

Literature review on efficiencies and barriers caused by IP in AE

Patent litigation increases in the US signalling the value of the technology to companies

Source: The Greening of Patent Litigation [1]

Enercon v. ITC

• Enercon v. ITC was a landmark wind energy patent infringment case from 10 years ago.
• ITC excluded Enercon's variable speed wind turbines from the US when Kenetech Windpower filed a complaint saying Enercon's wind turbines infringed its patents for controlling AC power output.
• Federal Circuit affirmed ITC's decision and prohibited Enercon from importing wind turbines into the US until 2010.

Southwest Windpower v. Aeromax

• Southwest, a small wind turbine manufacturer, claimed that Aeromax's wind turbines infringed its patent.
• Arizona court issued an injunction prohibiting sales of Aeromax's wind turbine.

Gamesa Eolica v. General Electric

• Gamesa claimed that GE infringed its patent directed to a speed wind turbine that converts variable frequency AC to fixed frequency AC and maneuvers turbine speed to increase efficiency.
• Wisconsin court found no infringement in favor of GE.

Paice v. Toyota

• Paice claimed that Toyota's hybrid vehicles included a drive train similar to one covered by its patents.
• Texas court held that Toyota infringed Paice's patent, but denied an injunction and allowed Toyota to continue selling its hybrid cars for a royalty payment of $25 for each car sold during the life of the patent.
• Case was affirmed on appeal.

Ovonic v. Matsushita

• Ovonic claimed Matsushita's hybrid electric vehicles infringed its patents covering nickel metal hydride batteries.
• Parties ultimately entered into a settlement agreement including a cross-license and a combined license fee of $30 million.

Maxwell Technologies v. NessCap

• Maxwell, a manufacturer of ultracapacitors for hybrid cars and renewable energy sources, filed a complaint against Nesscap, a Korean competitor, to enforce its patents related to electric double layer capacitors.
• Court entered a preliminary injunction enjoining NessCap from selling its prismatic ultracapacitor products.
• January 2007, Nesscap filed its own suit against Maxwell, alleging that Maxwell's ultracapacitors infringe a NessCap patent.
• Both cases remain pending.

Literature addressing IP factors in cleantech and alternative energy

The existing literature on the IP landscape in clean technology and the debates around the use of compulsory licensing make two points clear. First, there is a need for more research into the effects of IP in the nascent cleantech industry. None of the existing technology innovation models match the complexity of the industry, which involves myriad technologies (as noted earlier) and competitive markets. Second, the literature points to a preliminary finding that IP does not create a barrier to technology transfer - in the case of clean technology as a whole - from developed to developing countries. The weaknesses in these findings are the lack of detailed empirical evidence assembled from the various technologies that comprise the cleantech industry.

In a paper by Prof. John Barton of Stanford Law School (Barton 2007), he argued that the patent and industry license practices are both warranted and crucial to technology innovation. The report focuses on the role of IP in alternative energy technology transfer for solar, wind and bio-mass technologies to China, India and Brazil. He asserts that competition between clean technologies and the competition in the electricity, fuel, automobile, and housing efficiency markets, reduce the ability of companies to charge a premium for their technology leaving manufacturing and capital cost as the greatest costs for clean technologies. Using the wind-turbine manufacturer Vestas as an example, he points out that R&D is only a small portion of overall cost of their turbines, resulting in a mark-up of only 0.20 on the manufacturing cost. This leads to low royalties - on the order of 1% of the sales price for the turbines. Therefore, there is very little wiggle room for differential pricing between the developed world and the developing world, which - he argues - means that compulsory licensing is unlikely to be an effective way to disseminate the clean technologies in developing countries since there will be very little financial benefit. He goes on to discuss the different issues observed in each of his three focus technologies.

• The wind market tends to be quite consolidated with the four top companies controlling 75% of the market. IP issues are not expected to be a big issue here due to the easy access to the technology, though there may be future issues with cartel behavior. Developing countries like China and India have been successful in gaining a foothold in the wind market by buying developed nation firms and acquiring their patents.

• The PV industry suffers from a difficult market existence due to the high cost of the technology. The market is somewhat consolidated, though there are numerous companies that manufacture various parts of the PV installation, which breeds a high level of competition. Thin film technologies may create a bigger IP barrier for developing nations due to the advanced nature of the technology, and the developed nation control over these technologies at the current time.

• The biomass industry does not currently suffer from any IP barriers, but the promise of cellulosic ethanol, could create a battle over patents for the enzymes that will break down the lignin for sugar. The biggest barrier in this sector will probably be trade tariffs like the US tariff on Brazilian ethanol.

Barton notes that in all three technology sectors developing nations firm’s have succeeded in entering industry leadership and in some cases patents may have aided technology transfer. Patent disputes have usually been resolved by cross-licenses or product modifications in a pattern common in non-monopoly industries.

In a later paper, Barton (Barton 2008a) takes a closer look at the economic and policy challenges of meeting the emissions reduction targets of the UNFCCC through technology development and dissemination in developed and developing countries. He focuses on renewable electricity sources, carbon capture & storage and other mitigation technologies, biofuels, industrial efficiency, consumer conservation, and nuclear energy; he outlines the emissions reduction potentials, the modes of encouragement for the technologies, and the special issues in international technology transfer, making three points about the process that will be undertaken to disseminate these technologies. First, the financial heart of technology diffusion will be physical investment in the form of subsidies or regulatory incentives. Second, public-sector support for R&D is important. Third, his examples imply that the costs specifically assignable to technology will be very small when compared with the overall capital and investment costs.

There is general agreement within the literature that innovation in cleantech will only happen with appropriate and consistent carbon pricing systems to create a stable market for new technologies. In particular, a report from Chatham House (Reichman et. al. 2008), an independent research organization in the UK, asserts that these market incentives will create an atmosphere where innovation can happen and R&D funds will flow into the clean energy technology industry. The authors believe that the nascent stage of clean energy technology development leaves very little empirical evidence to support the argument that IPR does or does not create barriers. Their report focuses on bio-fuels, solar PV, hybrid cars, fuel-cells and wind energy. Among their observations, the authors report that:

• Bio-fuels do not seem to have a patent barrier. Small firms working on the enzymes for cellulosic ethanol are collaborating with larger firms and the patents seem to be generating a market for small firms. In the PV sector the authors refer back to Barton’s report (Barton 2007) and note that interchangeable patented technologies that work in the PV modules create a fairly competitive market and reduce any barriers.

• Hybrid cars, fuel cells and the wind industry all represent incremental innovation, which is to say that the basic technology is off-patent and well known, while new improvements are being patented - but not exclusively - by certain market entities. This means there is competition among the manufacturers of these patented improvements.

• There is a possible copyright IPR barrier that could develop around microbial agent research for ethanol enzymes, which is protected under EU Database Law.

The report suggests alternatives to traditional patenting and licensing in order to encourage innovation in green technologies.

• Technology pools (patent pools) - licensing the combination of patents that make up a particular technology in an affordable pool of patents. The Eco-Patent Commons does this in a royalty free manner, but is not currently offering any alternative energy technology patents. This could be the basis of a Global Fund that buys up patent pools for critical carbon-abatement technologies and offers them to developing countries.

• Prizes - rather than offering grants for R&D research, prizes can be offered for the most innovative solution to a particular problem.

The most current and controversial debates taking place around IP and technology transfer have been connected to the UNFCCC Copenhagen Summit, where developing nations such as China, India and Brazil hope to convince developed nations such as the US and the EU, to include a compulsory licensing option in the next version of the Kyoto Protocol climate change treaty. This model is borrowed from the biotech/pharma industry where governments are allowed to mandate that a company license patents for drugs that are critical to public health, at low or no cost, to generic drug companies in developing nations. The US government and the US Chamber of Commerce, in particular, have been quite unhappy with the idea of loosening IP protections for developing nations and have been vociferous in their objections.

A group of US companies who are concerned about the weakening of IP protections at the Copenhagen Summit have joined forces with the US Chamber of Commerce and created the Innovation, Development and Deployment Alliance (IDEA) asserting that “robust IP protection is needed to encourage investment in clean tech research and development, create green jobs and find solutions to the world’s energy and environmental challenges.” (Green Patent Blog 2009) Members of IDEA include large companies with strong patent portfolios like GE and Microsoft. An article by Josie Garthwaite of Earth2Tech explored the development of IDEA. In interviews for the article a venture capitalist and a lawyer opined that compulsory licenses are unlikely to have any affect on the deployment of critical carbon-mitigation technologies in developing countries due to the comparatively larger economic and infrastructure barriers in these countries. They believe that these issues will trump the assumed patent barrier issue.

In a direct challenge to the US Secretary of Energy, Steven Chu, David Hirschmann, the President & CEO of the Global Intellectual Property Center, asserted his belief of the importance of keeping IPR strong rather than loosening the rights as Secretary Chu had suggested in his speech at Brookhaven National Lab. (Revkin & Galbraith 2009; Hirschmann 2009) In an article he wrote for the Intellectual Property Watch blog, he notes that loosening IP protections could result in lost jobs and points out that this would be counterproductive to President Obama’s mission to create green collar jobs. (Hirschmann 2009)

In a 2008 paper by the International Centre for Trade and Sustainable Development (ICTSD), the authors suggested that compulsory licensing could provide the necessary framework for effective tech transfer to developing countries, while also suggesting other options such as financial mechanisms like a “Multilateral Technology Acquisition Fund,” which would buy IP rights for transfer to developing countries; prizes as incentives for alternative energy technology innovation; and institutional arrangements for open or collaborative innovation similar to the USA-China collaboration recently finalized by the Secretary Chu. (ICTSD 2008) In a partial contradiction, Frederick Abbott, a professor at Florida State University Law School, wrote about the Copenhagen Summit IP debates in a report for the ICTSD in June of 2009 (Abbott 2009). He agrees with the general consensus in the literature that there is insufficient information available on the effect of IPR on clean technology innovation and transfer. His report uses the biotech/pharma industry as a comparison model for the cleantech industry, drawing his assessment of future success in the cleantech industry from the current progress of the biotech industry. He asserts that compulsory licensing has influenced the biotech/phharma industry on the margin, but the structure and behavior in the industry have remained largely constant. He notes that research has shown that the industry has consolidated rather than expanded due to compulsory licensing, and more companies (not less) are located in OECD countries. This evidence leads to his conclusion that compulsory licensing will have a similar impact in the cleantech industry. Abbott suggests that a solution to the tech transfer issues faced by the cleantech industry is patent pooling, which could encourage technology sharing at the R&D and commercialization stages.

In similar support of the use of patent pools, Kevin Closson wrote in the IP Strategist in 2009 (Closson 2009), that the wait time for patent approval is currently too long, and that inventors in the US should use the “petition to make special,” which covers sustainable technologies, and can reduce the time to approval. Making a case for patent pools instead of patent thickets, he argued that while these are not a panacea, they will allow more effective access to the technology since sustainability technologies tend to involve a large number of different technologies combined with many of them being out of patent protection and in the public domain.

Copenhagen Economics and The IPR Company, two independent research companies, were contracted to assemble a report on the role of IPR in technology transfer in the lead-up to the Copenhagen Summit, and tried to assert a definitive conclusion on this complicated issue. The report presented data showing that patent protection in emerging markets has been on the rise. They noted that in 1998, 1 in 20 patents were protected in developing countries, while, by 2008, the number was 1 in 5. Within those developing countries, 99.4% of the patents were in a small group of emerging markets (China, India, Brazil, etc.). The authors determined - based on this trend - that patents are not a barrier to tech transfer to the majority of these developing countries since there are hardly any alternative energy patents registered in these countries. The authors also found that within emerging economies, the country with the largest number of wind technology patents only accounted for about 40% of all wind patents protected in emerging economies and the second, third and fourth largest patent holding countries accounted for only 30% of all wind technology patents protected in emerging economies. This indicates that there is a great deal of competition among wind technology manufacturers in emerging economies, which means that the price mark-up due to a patent monopoly cannot be very high. The authors argue that if wind technology is too expensive for developing nations to buy, it is not due to the IPR protections, but rather, more likely due to the additional cost of alternative energy technologies as compared to conventional fossil-fuel based energy technologies, which are often subsidized to create artificially low prices. They conclude that emerging markets could benefit from greater IP protection regimes since they have the market size and technological capacity to innovate locally, and foreign patent holders would be more willing to transfer technology if they knew their patents were protected. The authors suggest that transferring technology to developing countries could consist of financial support to compensate low-income developing countries for the economic burden of carbon abatement while preserving the countries’ incentive to minimize the costs of that abatement.

Mark Weisbrot of the Guardian Newspaper in the UK, offered his support for compulsory licensing in a short article in May of 2009. (Weisbrot 2009) He discusses the World Trade Organization rules that led to compulsory licensing in the biotech/pharma industry, comparing the mandate to the proposed model in the cleantech industry. The author views the WTO rules as protectionist and supporting a fundamentalist view of IPR, and he asserts that the cost of WTO trade restrictions has been $220bn a year when compared to liberalized trade. The article states that the Doha Declaration is one of the few victories to NGO’s fighting for a loosening of the WTO trade restrictions that keep crucial medicines from the populations in developing nations. Based on this historical background, Weisbrot asserts that compulsory licensing would be a positive policy in the cleantech industry.

So while the literature provides a helpful background on the issue, the relative scarcity of academic articles on this topic and the general assessment among the researchers that more research is necessary, leave an opportunity for others to step in and try to complete a more comprehensive study of the field.

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