Cleantech Investor

First published in Cleantech magazine, February 2011. Copyright Cleantech Investor 2011

by Arthur Girling

“Economic warfare” was the phrase used by France’s industry minister Eric Besson at the start of this year, when several Renault executives were accused of stealing secrets and possibly selling them to China. The involvement of the French Government shows the importance that France gives to the high tech electric vehicle industry, where key breakthroughs are potentially worth billions of dollars.

The case also highlights the importance of intellectual property (IP) issues in this emerging industry.

Consider the number of patents filed with the US Patent & Trademark Office (USPTO) – in 2002, there were 373 patents mentioning the phrase 'electric vehicle'. This number has increased steadily year-on-year, and by 2010 there were 1,493. That's a more than four-fold rise over nine years, with a particularly significant increase between 2008 and 2010.

The USPTO publishes patents around 18 months after applications are made, so this visible spike may be the result of innovations in 2008-09, according to Eric Lane, patent attorney at Luce, Forward, Hamilton & Scripps in San Diego.

The European Patent Office has a database listing patent applications from more than 80 countries. Although trends in this data may be less reliable (the sources of data for different years are not the same), and these numbers are estimates rather than exact figures, it seems to show a similar increase, although interestingly it appears filings peaked in 2009.

The patents resulting from a search for 'electric vehicle' are incredibly diverse – from a “system for managing electric vehicle traffic” filed by Cisco Systems to battery components, charging infrastructure and drivetrains.

Japanese companies dominated the top 20 of the league table of EV-related patents in 2010. This is a long term trend – a 2009 report from the Japan Patent Office found that Japanese companies had filed 76% of patents related to EVs worldwide between 1995 to 2000, and 69% of EV-related patents from 2001 to 2006.

Toyota has had an aggressive patenting strategy in this area since 1994. Australian law firm Griffith Hack stated in 2009 that Toyota held 4,000 patents related to hybrid vehicle technology, or 43% of the total worldwide.

According to Griffith Hack’s analysis, this domination of IP related to hybrids allowed Toyota effectively to force some manufacturers off the road, pushing them into developing other kinds of hybrid technologies and competing products, such as pure electric vehicles. Other competitors have been forced to license Toyota technology.

This is a prime example of an early mover catching the IP worm. The first mover is able to secure a monopoly over an area by claiming more general ideas, then file subsequent, similar patents which would otherwise infringe the first.

Jackie Maguire, CEO of Coller IP Management, agrees that this is an established technique: "The owner of a grandfather patent can build on this to create more inventions and therefore build a cluster of patents. The bigger and more developed the cluster, the more likely it is that they can claim technology areas as their own, marking out their territory."

She added that "developing platform opportunities is where the bigger gains can be found, although some inventors and investors may strike lucky with smaller peripheral components".

In fact, Toyota came to the table late compared to Paice (Power Assisted Internal Combustion Engines), which was founded by Dr Alex Severinsky in 1992. Paice, although small, holds four of the top ten patents in hybrid technology, including the two most important patents, according to Griffith Hack. The patents are a good case study in staking out territory in IP.

Paice filed US Patent 5343970 in 1992:

An improved hybrid electric vehicle includes an internal combustion engine and an electric motor. Both the motor and the engine provide torque to drive the vehicle directly through a controllable torque transfer unit ... The motor is operable as a generator to charge the batteries as needed and also for regenerative braking. No transmission is employed. The motor operates at significantly lower currents and higher voltages than conventionally and has a rated power at least equal to that of the internal combustion engine...

The general nature of the patent allowed Paice to claim infringement by the design of several hybrids, including the Toyota Prius and the Lexus HS 250h. After six years of litigation, Paice settled with Toyota for an undisclosed sum. Paice has also licensed the technology to Ford.

It seems that in 2010 long-established carmakers filed the most patents related to electric vehicles. In the top 20 there were only three companies founded in the last 20 years – Chery (established in 1997), BYD (1995) and Tesla (2003).

“It is interesting to see how the most established companies have been early movers in innovation in the EV sector,” Eric Lane said. “This ability to innovate is very different compared to some other cleantech sectors – for example the oil industry has been more cautious regarding biofuels. However, there are also a lot of start-ups filing some very interesting patents.”

The majority of applicants on the international database seem to be Chinese companies and individual inventors (the format of the data makes exact estimates difficult), most with only one or two applications mentioning electric vehicles in 2010.

China once had a very relaxed attitude to patent law – under the communist regime, intellectual property was regarded as a common good. But things have been changing ever since the Asian superpower brought in a patent regime in 1985.

Chinese patent filings increased at a rate of 26.1% per year between 2003 and 2009. In comparison, growth of patent applications was 5.5% in the US, 4.8% in South Korea and 1% in Japan. In 2011 China will become the number one country filing patents, according to a recent Reuters report.

This change in attitude to patents may have consequences for other companies. "People are starting to take China more seriously, and China is taking patents more seriously,” Maguire said. “China is now part of the IP strategy for larger companies."

Nonetheless, China is still regarded by many as a country which disregards patents. According to the US Government, almost 80% of counterfeit goods in the US come from China, and Chinese copies of components have infiltrated huge tracts of the industrial supply chain.

But an increase in intellectual property rights (IPR) was a condition of Chinese accession to the World Trade Organisation (WTO) in 2001. Furthermore, China may continue to tighten IP controls as it moves into more high tech sectors, according to Reuters. Xinhua, the official press agency of the Chinese Government, reports that between 2001 and 2007 IPR cases in Chinese courts increased almost 23% a year. Nonetheless, rumours of Chinese involvement in the Renault case would seem to indicate that less legal means may still be common.

Lane said that “China will probably be added to the US as one of the most important places for companies to patent. For the cleantech sector, it's an increasingly important market, and a very crowded patent environment. In the electric vehicle industry we will probably see more bilateral licensing between international companies and Chinese patent holders.”

However, despite the potential for international collaboration, IPR might be another area in which Chinese and US interests compete.

There are rumours that a new ten year plan to make China the global leader in manufacturing EVs may stipulate that foreign companies wanting access to the Chinese market must become minority partners in joint agreements with Chinese firms. This arrangement could mean that foreign companies would be forced to share their intellectual property. US Senator Carl Levin (D-Michigan) has said that “these practices hurt American companies and American workers, and I strongly favour strong action by U.S. trade officials to rein them in”.

Within the US, Chinese company BYD was delayed in launching its e6 all-electric sedan in 2010 due to a possible IP infringement over the lithium powder used in its car batteries.

So what should investors be aware of when considering IP issues? "What investors should look for is whether the IP is valid, whether it is differentiated, and in what way it underpins the business model,” Maguire said. “Investors need to be IP-savvy to be able to pose the right questions - some are more savvy than others."

Lane, who writes about IP issues at greenpatentblog.com, sees a common pattern emerging for companies involved in the electric vehicle industry.

“As the industry matures, we will see some changes in the field.  First, the number of patents related to EVs will level off, and perhaps drop as innovation (and therefore new patents) transitions from big jumps to incremental improvements in technology. Secondly, as technologies are commercialised and spread there will be an increase in litigation as patents are enforced. Thirdly, as the industry matures I would expect to see a lot of intra-industry licensing agreements.”

According to Lane's formula, the EV industry still has some way to go before it matures, in the US at least, if the above figures are to be believed.