Renewable Energy Project Developers are Negligent if they Persist in Ignoring Intellectual Property Risks
With billions of dollars at risk and business interruption insurance not sufficient to cover the losses associated with a renewable energy asset shutdown due to an injunction resulting from an intellectual property (IP) litigation, project developers need to recognize the market reality of continuing to ignore IP risks.
While there have been some well-known court cases regarding patent infringement in the wind industry, particularly recently, this is a relatively new challenge the industry faces. Most discussion of this matter has been based on anecdotal evidence rather than empirical data.
From the standpoint of turbine purchasers, the turbine suppliers you source from can, and should, retain the risk of patent infringement liability for the turbines they supply. In some cases this is not happening today. The reason wind park developers and owners should be more concerned is that current market conditions appear to be making assertion of intellectual property rights more likely.
There are currently over 62,000 global patents on horizontal-axis, utility-scale wind turbine technology, with more added every week.
Turbine suppliers are vast majority owners of patent rights, particularly for widely used technologies on wind turbine control, providing ancillary services support, or even on wind turbine architecture itself.
Insurance underwriters are exposing themselves to losses by backstopping projects with business interruption insurance when they have not full quantified the patent infringement risks which could lead to a stop in production due to an injunction.
Turbine sales revenue / margins for turbine OEMs is shrinking in the next 18 – 24 months leaving these companies and their shareholders to look for other revenue generation opportunities.
There is a history of patent assertion, particularly in the very litigious jurisdiction of the US, but also UK, Spain, Ireland and India.
Presently most major global wind turbine OEMs are not willing to provide full indemnity to turbine purchasers in the supply agreements, even though the OEMs receive full indemnity from sub-component suppliers when they buy a generator or a blade or even a tower. Vertically integrated OEMs have even more work to do themselves when it comes to ensuring they have freedom to practice, since they retain more liability due to an increased scope of supply.
Nevertheless, patent infringement risk is shared by all, especially in cases where the OEM is not engaging in appropriate risk mitigation activities on their own. Even those who do so may only pay attention to the hot button issues at the urging of project financiers or outside counsel, especially those patents in active litigation. Hundreds of relevant patents which pose risks to supply chain companies, OEMs, insurers, and project financiers are often missed due to a veil of ignorance covering a gaping whole.
By way of example, General Electric has a combined total of more than US$1.7 billion in patent infringement liability exposure in the United States. If all the companies for which GE has exposure would choose to enforce their IP rights, GE would not only be liable themselves, but any wind park owners and operators would be potentially subject to claims.
As we noted above, since full indemnity from patent infringement liability is not given by OEMs to turbine purchasers, the owners will share in the commercial risk exposure and could be named as a co-defendant.
Similarly, Vestas Wind Systems also has a rather significant patent infringement risk level based upon their installed base of turbines in the market. Totaling more than US$718.2 million, Vestas and GE are already locked in a heated patent infringement trial in California, which could net GE a total of approximately US$140 million if Vestas is found to infringe them.
The consequences of this could be far-reaching because even if an injunction and a stop on production is not implemented as a result of the trial, owners could still see lost production due to a swap out of wind turbine controls or hardware which is found to infringe patents. Additional financial liabilities can pile up for every day which an infringing turbine is operated until / unless the software or hardware swap out is made.
In many cases the risk mitigation protocol used by most turbine suppliers is likely inadequate. Prior to a product launch into a new market, some proactive turbine suppliers conduct a freedom to operate review in order to ensure they and their prospective customers will have no risk of patent infringement liability.
As a result, most turbine suppliers feel justified in their non-infringement position already and feel no additional work is required. Unfortunately, there are some turbine suppliers either are resource constrained or simply do not take the time to engage in this type of risk mitigation activity.
But this is not an independent assessment of patent infringement risks. Take the example of BP Wind Energy in the US market. They face a shared liability with the respective wind turbine OEMs of more than US$227 million for patent infringements by the products they have sourced. If any one of the OEMs is sued for patent infringement liability, BP could be commercially impacted for a portion of that US$227 million based upon the language in their supply contracts.
Famously, Enercon GmbH not only sued Gamesa for patent infringement liability in Spain on a wind turbine control patent, but they also sent demand letters to the asset owners of the Gamesa products they believed to infringe their patents.
In order to appropriately mitigate risk, our recommendations to safeguard developers / owners are:
Either during the request for proposals (RFP) or the turbine supply agreement (TSA) negotiations, full indemnity from patent infringement liability should be mandated.
Just like the requirement for a turbine supplier to carry property & casualty insurance, making patent infringement indemnity insurance coverage mandatory can also be specified in the RFP or TSA negotiations.
Whether full indemnity is provided or whether insurance is obtained, an independent validation of patent infringement risk position is possible. This data can be provided to developers / owners as well as the insurance providers during the TSA negotiation.
The implications of patent infringement can be substantial but this risk can indeed be quantified and mitigated, but companies must be more proactive to deal with this during project diligence.
This example shows the patent infringement liability exposure for NextEra Energy based upon their purchase of the GE 1.5SLE wind turbine model. NextEra Energy has a total IP infringement liability exposure of US$297 million dollars based upon the installed base of that product in the US market.
This includes a US$73 million patent infringement liability exposure of this product alone to Vestas IP enforcement, as well as US$56 million for SGRE. Should these companies decide to enforce their IP rights, NextEra could share in some financial liability or otherwise be adversely commercially impacted.
While some argue that an OEM who would sue a potential customer for IP infringement would jeopardize their own product sales to that customer, such as SGRE suing GE and naming NextEra as a co-defendant, companies make decisions on enforcement of IP based upon a commercial risk vs. reward analysis.
If SGRE or Vestas determines that it is commercially more valuable to impede GE in the market as a result of their own lost sales, they can proceed even though they would be potentially giving up on sales of products to NextEra as a result.
Similarly, another example shows the patent infringement liability exposure for Pattern Energy based upon their purchase of the SGRE SWT-2.3-108 wind turbine model. Pattern Energy has a total IP infringement liability exposure of US$211 million dollars based upon the installed base of that product in the US market.
This includes a US$54.7 million patent infringement liability exposure of this product alone to GE IP enforcement, as well as US$50 million for Vestas.
Without a proper IP risk mitigation strategy which is part of a project diligence process, developers and owners can be liable for a portion of the IP infringement costs if these companies decide that they have been commercially harmed.