Whether you call it "cleantech," "greentech," or "envirotech," environmental and sustainable technologies are an inevitable growth market. Even in the midst of an unprecedented downturn, the commitment to clean technology is firm, and indeed, is considered by many -- including the present U.S. presidential administration -- as an integral part of our recovery. In January of 2010, USA Today reported that while venture-capital funding for clean-technology fell in 2009 from the previous year, it still performed better than other technologies.
That said, cleantech development is fraught with uncertainty. Both the innovator and the investor have ample incentive to investigate due diligence issues required prior to a significant investment. In an emerging commercial market where technological innovation is a key driver, the significance of IP is exponentially higher, and accordingly, the depth of the IP investigation is proportionally more important in answering questions for risk assessment.
Clean technologies rely heavily on innovations. Yet these innovations occur in a fairly well-developed technological environment. Indeed, from cellulosic biofuels to wind tosolar many of the core technologies for alternative energy sources have been seriously pursued for decades, and are now long established. Thus in clean technology, the potential profitability and return from an investment in a breakthrough innovation may turn on a set of improvements in a crowded technology field.
Moreover, the innovation itself, once discovered and reduced to practice, may be very easy to replicate by a competitor. Even if the inventive technology is not easy to replicate, the more successful it is, the more competitors new and old will attempt to implement it themselves. Strong IP is the best defense against those who would profit off another's inventive success -- and a good business plan will account for this truth.
Finally, failure to anticipate and identify IP risks ahead of time can stop a company in it tracks -- no matter the size. For example, over the past two years, GE and Mitsubishi have been engaged in "the Turbine Wars," a series of patent litigations in the ITC and federal courts. Both GE and Mitsubishi had invested hundreds of millions of dollars to develop wind farm infrastructure for its turbines. Yet GE filed a complaint in the ITC and Federal District Court to block Mitsubishi from importing its turbine components. Although the complaint in the ITC suit was tossed out in January of 2010, Mitsubishi's lawyer recently agued in the federal district court that Mitsubishi's annual U.S. sales of variable speed turbines went from $2 billion to nearly nothing since GE filed the suits.
Despite the power of IP to shape markets, even sophisticated investors and innovators sometimes treat intellectual property as an afterthought, or as a last-minute affair. As explained below, the well-advised clean technology investor knows that IP is central to securing, protecting, and profiting from cleantech innovations. Moreover, the failure to properly evaluate IP can leave risks to profitability or market entry undiscovered -- thus importing more uncertainty into the investment. Finally, well-planned IP due diligence can identify and help secure untapped sources of potential revenue.
IP Due Diligence: The Basics
IP includes patents, trademarks, copyrights, and trade secrets. IP protections allow the company to exclude, control, or limit the ability of others to operate in the market for its products and processes. For example, patents, the prime focus of this article, confer on their owners a right to exclude others from practicing the invention claimed in the patent. IP thereby allows an innovative company to secure higher profitability in two key ways: 1) by blocking competitors large and small from entering into the company's market space carved out by the IP, and 2) by licensing or cross-licensing the technology covered by the IP to other companies. There are, of course, many other benefits to strong IP, but when a company's technology becomes successful, these two are of key importance.
IP due diligence, broadly speaking, is an investigation into a company's patents, trademarks, copyrights, and trade secrets to assure that a strong proprietary "fence" surrounds the innovative products and methods that will drive the company's future profitability. It can also involve a "Freedom to Operate" investigation, which looks at the IP landscape staked out by other entities to assess what risks of infringement of other IP may exist.
During an IP due diligence investigation, IP counsel will make inquiries and do independent research and analysis to verify the existence and scope of a target's IP, its strength, ownership thereof, agreements related thereto, as well as related litigation. For example, an IP due diligence investigation of patents and patent applications will determine, among other things:
- The scope and content of a target's patent portfolio, national and international;
- Whether the target owns all the patents;
- Whether the patents cover the target technology, as well as ancillary inventions;
- How readily can potential competitors "design around" the patented invention;
- If the patents are valid and enforceable;
- How the patent portfolio related to the company's business plan;
- Does the target have the freedom to operate without infringing other IP.
In the course of the investigation, counsel thereby assesses the risks posed by uncovered weaknesses in the IP, and any remedial action, if available.
Don't Wait Until the Last Minute
Proper IP due diligence takes time. For instance, an investment target may have a significant number of patents, including "key" or "core" patents or patent applications, in its portfolio that require a "validity and enforceability" analysis. In patent law, there are numerous bases by which to invalidate a patent or render it unenforceable: from a lack of novelty or obviousness to fraud on the Patent Office. Even if the target is cooperative and accurately identifies to the investigator what it regards as its most important patents, the time required to search, analyze, and prepare a report on just validity can be, to say the least, extensive.
What's more, any such report would be subject to the uncertainty that all last-minute projects endure. When considering that a validity analysis is but one part of a comprehensive IP due diligence investigation, it is clearly evident that IP due diligence is not to be put off as a last-minute concern.
So how early should investors start addressing IP issues? In the clean technology space, from the outset. Beginning IP due diligence early allows investigators sufficient time not only to assess the basics (are the patents valid and do they cover the core technology), but also to allow the IP counsel to create solutions for the issues that invariably arise in every investigation.
For instance, an investigation may reveal that an inventor demonstrated an invention at a gathering, along with distributing a PowerPoint presentation or displaying a poster explaining the invention. In the U.S., an inventor has one year from the date of certain public disclosures to file a patent application, after which they are time-barred from obtaining a patent on the disclosed matter. Thus, such a demonstration could frustrate potential patentability, if not caught in time.
As another example, one aspect of evaluating a patent is whether a competitor can "design around" a patented technology by copying it with some key changes. An IP due diligence may reveal that the "claims" of a patent, which are used to define a patent's coverage, are very narrow, and relatively easy to design around. If caught early enough, there may be actions available to attempt to get broader claims.
As a final example, a potential competitor or other company, even a small one, may have a patent or patent application that could serve as a barrier to entry into market (see the "Turbine Wars" discussed above). Identifying the IP landscape early on can allow a company to prepare any of a number of strategies, from "designing around" a patent to initiating certain procedures in the Patent Office to frustrate any attempt to enforce the patent, or to get the upper hand should any enforcement actions ensue. It is true in IP as it is elsewhere: forewarned is forearmed.
By engaging early, many a problem can be fixed or prevented by having an objective look at a target's patent portfolio (and other IP), as well as that of the competitive landscape. On the other hand, if the IP diligence is started too late, an attorney may not be able to cure lost protections, or worse, may not ever have the time to identify discoverable problems to begin with. Accordingly, bringing IP due diligence in early saves money and can assist in keeping the costs of investing in a potential target commensurate with the progress of the investment itself. To put off such IP due diligence until the last minute is penny-wise and pound-foolish.
Another reason to begin the process early is to secure a cooperative working relationship with the target. An innovator seeking investment needs to be wary of disclosing competitive intelligence or trade secrets about its technology. By starting early, IP counsel can set out the rules of engagement for the investigation, the disclosures and the attendant agreements early on, thus allowing the target to cooperate with the investigation, while at the same time being confident that its interests are protected.
Starting early allows IP counsel to become intimately acquainted with the target technology and the IP landscape. A good IP firm will have a force of scientifically astute attorneys and scientific advisors, and investors will seek those that also have experience in clean technology diligence. That said, with each fresh project, the investor is well-served when an IP diligence team can augment their own technical expertise with those who are working in the field on the cutting edge.
Diligence on such technology will demand a cross-disciplinary team of attorneys and scientific advisors, along with an attorney who has experience in clean technology due diligence and patent work. Such a team, assembled early, can interact with practicing experts in the field -- including the target themselves -- to best understand the company's specific technology and its expected contribution to the industry.
Moreover, the attorneys have time to familiarize themselves and properly assess how well the target's IP aligns with the strategic goals of the company. And, unlike an army of attorneys formed for a last minute project, a smaller team can handle the same amount of work, thus creating an important efficiency; this streamlined group's accumulated experience with the technology allows them to perform the analysis swiftly and efficiently -- but not hastily -- and with the benefit of a penetrating understanding. This is especially the case in clean technology, when inventions and improvements can come both fast and like a swarm, and with myriad host of impacts.
In short, strategic IP due diligence of clean technology requires engaging early. At the last minute, an army of attorneys and support staff can perform an IP due diligence that uncovers liabilities and strengths -- up to a point. But doing so comes at great expense, both financially and in lost opportunity. On the other hand, involving IP counsel early gives the investor an assurance and an edge in identifying and preserving a potential lucrative investment, and can enhance the quality of the protection of the targeted technology.
Clean technology promises to provide rich and just rewards to investors who can identify the innovators who will shape the energy field in the next decade. As before in the biotechnology and information technology fields, analysts are expecting cleantech to be the next forefront for growth. As the market grows, a company's IP portfolio is a primary tool for capturing and holding the markets generated by its innovations. It also can provide additional sources of revenue as a company identifies and seeks protections for innovations both inside and outside its core business.
Additionally, the attention an innovative company pays to its IP can act as a bellwether for its business acumen. Thus, IP due diligence into a cleantech investment target can identify companies that will be best positioned to protect profits from innovations. In this vein, a robust and efficient IP due diligence begins early in the investment process. An early start saves costs and enhances the quality of the risk analysis. Most importantly, an early evaluation of the IP portfolio of a potential target forestalls risks, as well as preserves and creates new sources of value. By carefully attending to IP due diligence, an investor goes far in assuring their green investment will grow.
Brian M. McGuire is an associate at Frommer Lawrence & Haug LLP. His practice focuses on procurement and enforcement of intellectual property rights, including patent prosecution, litigation, the preparation of patent infringement, validity and freedom-to-operate opinions, intellectual property due diligence, and client counseling on intellectual property matters.