Sunday, February 15, 2009

Legal Issues of Making Hawaii A Patent-Free Zone For Renewable Energy Technologies

Respondents to my earlier blog “Should Hawaii Be A Patent-Free Zone For Renewable Energy Technologies?” have raised the question, “Why limit patent-free use of renewable energy technologies in Hawaii to research grantees? That would leave out non-grantee patentees and out-of-state patentees. Why not pass a State law to exempt renewable energy technologies from patents State-wide?” This blog will outline some of the legal issues involved.

The U.S. Patent Laws are a federal statute implemented under authority of Article 1, Section 8, of the U.S. Constitution granting Congress powers (inter alia) … “To promote the progress of science and useful arts, by securing for limited times to … inventors the exclusive right to their … discoveries.” No state can enact legislation which contravenes or interferes with the U.S. Patent Laws under the well-established constitutional doctrine of Federal Pre-Emption. Therefore, the State of Hawaii cannot enact a state law that would contravene or interfere with the U.S. Patent Laws.

Enactment of any state law that would allow use of a patented invention without just compensation would probably also run afoul of the Due Process Clause of the Fourteenth Amendment to the Constitution, that “No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of … property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”

The U.S. Patent Laws could be amended to modify provisions for patents on renewable energy technologies in the United States. However, this would require hearing, debate, and passage through both houses of Congress, and therefore must be legislation that would be favored by Congress as consistent with national patent policy.

Another approach might be to invoke immunity from patent suits under the States’ Immunity Clause of the Eleventh Amendment to the Constitution, that no suit may be “commenced or prosecuted against one of the … [states] by citizens of another state, or by citizens or subjects of any foreign state”. However, in order to pass muster under the Constitution, prior Supreme Court precedents indicate that a state must demonstrate that compulsory licensing of patents is necessary to achieve an overriding state purpose, the state must create a state agency to own the facilities as to which it will invoke immunity, and it must offer procedural and substantive due process of providing “just compensation” to the patentees of infringed patents. These requirements may be too complex and onerous for a state to implement.

As suggested in my prior blog, perhaps the quickest and most effective way to create a patent-free zone for renewable energy technologies in Hawaii would be to have grantor agencies for renewable energy research implement a policy of offering grantees to voluntarily exchange a non-exclusive royalty-free license to use any patented technology in Hawaii developed under research grant funding in exchange for a similar license to them to use those of any other grantees. This would be a simple “quid pro quo” for receipt of grant funds, and would probably be of most benefit to the grantees themselves. It would be entirely consistent with grantor agencies’ policies to promote cooperative and effective research efforts on renewable energy in Hawaii.

The shared patent licensing pool can be expanded by encouraging State agencies to join the pool, for example, by having the University of Hawaii and the Hawaii Natural Energy Institute renegotiate appropriate incentives for patent royalty sharing with its researchers to offset potential loss of patent revenues due to royalty-free use in Hawaii. Private companies doing renewable energy research, as well as Hawaii's utility company HECO, could also be encouraged to join the patent-free licensing pool since they have far more to gain by eliminating legal costs and roadblocks to deploying RE technology than they stand to lose in patent revenues foregone in Hawaii. Even out-of-state patentees might find it advantageous to join the patent-free licensing pool and make profits by selling RE products and systems in the State without roadblocks from patents owned by others.

** For full disclosure, Leighton Chong has handled patent matters in renewable energy technologies for the University of Hawaii, Office of Technology Transfer & Economic Development, Hawaii’s utility company HECO, and private renewable energy companies in Hawaii and on the Mainland.

Sunday, February 8, 2009

An "Unfair Advantage" for Hawaii R&D Companies in Renewable Energy Technology

Hawaii tech companies are typically underfunded by a factor of 1/5 to 1/10 what their Mainland counterparts can command for the same venture proposal. At the same time, Hawaii tech companies need to offer compensation competitive with the Mainland to attract senior company officers for assurance to venture capital investors. Often key technical employees also need to be hired from out-of-State. Hawaii’s geographical remoteness from enabling business infrastructure, alliance partners, and distribution channels, along with high transportation costs, all combine to limit product sales to Hawaii’s small domestic economy (1/300 of Mainland GDP), as low levels of venture funding would make a national or global sales effort unattainable.

However, the renewable energy (RE) technology sector in Hawaii may finally reverse this decades-long “perfect storm” of disadvantages, perhaps even giving our RE tech companies an “unfair” advantage over their counterparts in other states. Based on mostly fossil-fueled power generation, our electricity rates are the highest in the nation, hitting 31 cents/kwh in October 2008 and still holding at around 19 cents/kwh, compared to a Mainland average of about 11 cents/kwh or less. This means that there is a strong economic incentive for our local businesses to install RE power generating facilities at their business locations to save on utility costs. Even at $8,000 to $10,000 per installed KW of generating capacity, they can save on utility costs more than enough to pay back on long-term (15 to 25 year) debt financing for the facility, taking into account the 65% return in RE tax credits (35% Hawaii, 30% Federal) that the project owner gets on the installed costs of the facility. When the PUC issues its rulemaking in mid- to late-2009 on feed-in tariff rates for selling excess RE-generated power back to the utility, many if not all commercial and industrial users in the State should seriously consider installing some level of solar PV or other RE power generation facilities at their business sites.

At the same time, the new forefront in RE innovations in Hawaii is not in “big-science” discoveries of exotic new materials or processes to achieve higher RE conversion ratios (which typically take decades to perfect and bring to market), but rather in near-term, practical energy efficiency improvements, “smart” energy usage management, on-site storage optimization, new user interfaces to a “smart” utility grid, etc. A tech company can partner with an RE facility owner to use the already-financed RE power generating facility as a test bed for conducting R&D on a new energy efficiency or “smart” energy management technology. Such targeted R&D on non-fossil-fuel energy technology and/or advanced software-based energy management controls should readily qualify for the State’s 100% investment tax credit and 20% refundable R&D business tax credit, even if the Hawaii investor tax credit law (Act 221/215) is amended to remove certain abuses during the current legislative session.

The anatomy of a new hybrid business model for an R&D leveraged company in renewable energy technology in Hawaii might look like this. The R&D company can partner with the owner of an RE power generating facility as a test bed. As an example, current electricity costs can justify a $3 million debt financing to pay for a 300 KW capacity, solar PV system (such as the recent installation for Tony Group Autoplex reported in the Honolulu Advertiser) as a self-amortizing business loan to be repaid over 25 years from the expected savings on utility costs, with close to $2 million in renewable energy tax credits off State and Federal tax liabilities. As a partner in the R&D work, the project owner may be given a percentage of company stock, the continued use of any successful energy efficiency or energy management system tested at their site, and/or a percentage of profits on any technology successfully proven and later commercialized by the R&D company.

The R&D company now only has to raise perhaps $500K in venture capital to test their new energy efficiency or energy management technology at the test bed site, instead of having to raise an additional $3 million to build the test bed site. Since the venture investment is specifically for R&D activity which qualifies under the Hawaii tax credit law, the investors in the R&D company will get back their $500K in State investment tax credits, and the R&D company will also get a business tax refund of up to $100K from the State for the amounts it expends on qualifying R&D costs. By having to raise only 1/7 the venture capital financing than if they had to build the test bed site, the R&D company can now focus all of the raised funds on its R&D activity, and avoid the high costs and time distractions of raising a 7x larger venture financing, hiring senior company officers, and diverting scarce venture funds into product manufacturing, distribution, marketing, sales, and customer service.

If the R&D company is successful in developing a new energy efficiency or energy management system, it can transfer the system at cost to the facility owner to continue receiving the energy savings benefits off utility costs. The R&D company will own any patent rights, copyrights in software, and other intellectual property (IP) rights in the system which they can then exploit commercially throughout the Mainland U.S. and globally, either through licensing or by then seeking venture capital financing for expansion of their company to commercialize their now-proven technology.

Monday, February 2, 2009

Should Hawaii Be A "Patent-Free Zone" For Renewable Energy Technologies?

Patents are sought by inventors to secure exclusive legal rights in their inventions. For a patent to be granted, the invention must meet a high standard of being "new" and "nonobvious" over all prior published knowledge cited in Patent Office examination and in any subsequent legal challenges. Once granted, a patent provides the inventor with exclusive rights for a limited term of 20 years from filing within which to try to derive profit from their invention. A principal requirement of the patent system is that the inventor provide a complete disclosure to the public in the patent document of how to do something that was not known before in exchange for grant of a 20-year patent monopoly.

However, the U.S. patent system has been increasingly criticized as imposing heavy transaction costs and creating legal frictions that stifle competition in industries due to what some economists refer to as "excessive rent-seeking behavior". Defending against patent infringement claims can impose heavy legal costs on companies seeking to develop new products in areas where others have obtained prior patents. Also, in seeking to maximize the acquisition of patent rights, typical company policies require company research to be kept secret until patents are applied for.

In certain fields of cooperative research requiring the participation of multiple parties, such as in long-term medical research or joint university research, it is common to form research consortiums to jointly manage or pool together patent rights in order to remove ownership and enforcement issues as obstacles to sharing research work among participants. Also, in circumstances where multiple parties must develop and optimize different parts of a complex system, such as occurred in the development of digital television and microprocessors, allowing component developers to be licensed under collective patents for the whole system can remove the legal friction that might otherwise occur from the assertion of patent rights between contributing parties.

The State of Hawaii, in partnership with the U.S. Department of Energy, has set ambitious goals (the "Hawaii Clean Energy Initiative") to convert its current, almost total dependency on imported fossil fuels to 70% renewable energy usage by 2030. To accomplish this, many new or improved renewable energy (RE) systems, processes and products must be developed, optimized, and deployed widely in the State within the 20-year timeframe. This will require cooperation in research in diverse fields among multiple parties, as well as the removal of legal frictions between multiple contributors to complex systems.

I suggest that renewable energy policy agencies in Hawaii should consider making Hawaii a "patent-free zone" for renewable energy technologies. Since much RE research will be funded at least in part by research grants, implementing a "patent-free zone" policy can start by grantor agencies adopting a policy to retain shared patent licensing rights for all grantees to use any RE technology developed in whole or in part under research funding received from those agencies.

Companies can still file for their own patent rights to keep their investors happy, but would be able to license or enforce them only outside Hawaii. Since Hawaii's economy is relatively small in relation to national and international markets, the loss of possible licensing revenues foregone in Hawaii would be relatively small, while the benefit to all companies working toward the State's renewable energy goals would be large.

As an example, the Federal Government already requires retention of a royalty-free non-exclusive license under the Bayh-Dole Act when it allows small companies to take title to inventions funded under government research grants such as SBIR and STTR. The Federal Government will only exercise its access rights if the patent owner does not or can not commercialize a patented technology that is needed within a relevant industry.

As a parallel example in the State of Hawaii, the Hawaii Renewable Energy Development Venture (HREDV) has been set up through PICHTR as a central coordination agency for channelling federal funding for RE research in Hawaii. HREDV would be well-positioned to institute a "patent-free zone" policy by retention of licensed access rights to RE technologies developed by companies receiving research grant funding. Since it is a private industry organization, HREDV could implement such a policy without requiring the passage of legislation. It can also serve as an example or starting point for State-funded research entities like the University of Hawaii and the Hawaii Natural Energy Institute, and private companies in renewable energy research and Hawaii's utility company HECO to join the "patent-free zone" policy.

With at least the main clusters of RE research in Hawaii implementing a "patent-free zone" policy, all participating companies can freely cooperate on RE research in Hawaii knowing that they will not be blocked from using whatever they have contributed, thereby promoting shared research and removing legal frictions to help attain the State's renewable energy goals.