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U.S. and China -- Strategies For Developing And Protecting IntellectualProperty In The New Clean Energy Economy

The nation that leads the world in creating new sources of clean energywill be the nation that leads the 21st century global economy.

– U.S. President Barack Obama

Challenge and opportunity always come together. Under certainconditions, one could be transformed into the other.

– Chinese President Hu Jintao

A Global Challenge

One of the greatest challenges we face in the 21st century is slowing the atmosphericbuild-up of greenhouse gases which cause climate change. The U.S. and China – theworld’s biggest emitters of greenhouse gases – are poised to lead the world intransforming how we generate, transmit, and use energy. Innovation will be critical totackling the climate change challenge and developing and implementing the sources ofclean, renewable energy needed for continued economic growth. Strong systems forprotecting intellectual property rights will spur the necessary innovation and attract theinvestment capital needed for their development and commercialization. As the marketfor clean energy technology grows, and the financial stakes increase, it will be importantfor U.S. and Chinese cleantech innovators to adopt and follow through on intelligentstrategies for developing and protecting their intellectual property.

The Governmental Response – Legislation And Investment

Both the U.S. and China recognize the need to address climate change and embrace cleanenergy technologies through legislation and investment. In the U.S., President Obamahas identified creating a new, clean energy economy as one of the top priorities of hisadministration. In China, leaders understand that the country’s rapid development andeconomic growth will be unsustainable without clean, renewable sources of energy.

President Obama’s “New Energy for America” plan and budget calls for the federalgovernment to invest at least $150 billion (U.S.) in clean energy over the next 10 years.1

The budget will build on efforts in the 2009 Recovery and Reinvestment Act to directtens of billions of dollars toward creating a new, smarter electric grid with the capacity totransmit clean energy from where it is generated to where it is needed.2 The Presidentplans on raising fuel efficiency standards, providing tax rebates for plug-in hybridvehicles, requiring 10% of electricity to come from renewables by 2012, andimplementing an economy-wide cap-and-trade program to reduce greenhouse gasemissions.3 The U.S. Congress is also currently considering groundbreaking cleanenergy legislation – the Waxman-Markey bill (aka The American Clean Energy and

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Security Act of 2009) – that will place a cap on carbon emissions, set renewable energystandards, and mandate improvements in energy efficiency.

In China, the country’s leaders currently are investing an estimated $12.6 million everyhour to green the Chinese economy, according to the Center for American Progress.HSBC Global Research in Hong Kong is projecting that nearly 40% of China’s proposed$586 billion (U.S.) economic stimulus plan will be targeted toward investments inrenewable energy, low-carbon vehicles, a modernized, smart power grid, efficiencyimprovements, water treatment, and pollution controls. This stimulus spending is on topof existing and pending4 government policies, mandates, and investments aimed atreducing carbon emissions and developing clean energy sources. As a result of thiscommitment, China’s clean energy industries are expanding rapidly, and the countryreportedly is on track to have 20% of its energy come from renewable sources by 2020.5

Opportunities For Clean Energy Innovators

With U.S. and Chinese leaders committed to addressing climate change and embracingthe new clean energy era, opportunities in the cleantech sectors in both countries shouldgrow and accelerate. A November 2008 Merrill Lynch study calls cleantech the “SixthTechnology Revolution,” and predicts it will usher in a “golden age,” rivaling the impactof the Industrial Revolution and the Information and Telecommunications Revolution.6

China already is the largest producer of photovoltaic solar panels in the world, and is theworld’s second-largest market for wind turbines – gaining quickly on the U.S.7 In theU.S., a study released in June 2009 finds that the clean energy sector is emerging as a“vital component” of the country’s economic landscape:

. . . jobs and businesses in the emerging clean energy economy havegrown at a faster rate than U.S. jobs overall. And they are poised for evengreater growth, driven by increasing consumer demand, venture capitalinfusions by investors eager to capitalize on new market opportunities, andpolicy reforms by federal and state lawmakers seeking to spur America’sfiscal recovery, reduce our dependence on foreign oil and protect theenvironment.8

Innovation will be critical to tackling the climate change challenge and developing andimplementing the sources of clean, renewable energy needed for continued economicgrowth in the U.S. and China. Strong systems for protecting intellectual property rightswill spur the necessary innovation and attract the investment capital needed to developand commercialize the innovations.

The U.S. has long had one of the world’s strongest systems for intellectual propertyprotection. Since entering the WTO in 2000, China has begun to revamp and strengthenits intellectual property laws. Chinese leaders recognize the importance of intellectualproperty to the country’s continued economic success. Prime Minister Wen Jiabao hasstated that the “[c]ompetition of the future world is competition in intellectual propertyrights,” and has urged Chinese companies to “raise their independent innovation

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capabilities and have independent intellectual property.”9 As the market for clean energygrows and the financial stakes increase, in the U.S., China, and around the world, it willbe critical for cleantech innovators in both countries to implement and follow through onstrategies for protecting the intellectual property in their innovations.

Developing And Protecting Intellectual Property

Fostering a Culture of Innovation

To thrive in the clean energy economy, cleantech companies must develop and encouragea culture of innovation. Employees should be motivated to think creatively, and beeducated about the importance of innovating and obtaining patents. Companies of allsizes should establish incentive programs that recognize and reward employee creativity– particularly where it results in inventions and patents. A recent survey published byipPerformance Group finds that companies with such programs are far more innovative.10

Regular employee innovation brainstorming sessions should also be encouraged. Sincecleantech innovations often meld principles from traditionally separate areas of scienceand engineering, companies should combine employees with diverse technicalbackgrounds in brainstorming sessions. Someone with a background in chemistry orbiology, for example, may offer fresh insights and ideas to a team of electrical engineersand computer scientists struggling to come up with an innovative solution for a smart gridstart-up. If possible, patent attorneys should be invited to attend or review the results ofevery brainstorming session.

Where To File For Patents

Patent applications should be filed in countries with significant markets for the invention,as well as in countries which will produce large numbers of products incorporating theinvention. Both the U.S. and China will be hotbeds for production and use of cleanenergy technology, so American and Chinese clean energy innovators should be makingevery effort to obtain patent protection in both countries.

Incremental Inventions

U.S. Secretary of Energy Steven Chu has said that revolutionary, “Nobel-levelbreakthroughs” in science and technology will be required to solve the world’s energyproblems.11 Every cleantech company therefore needs to be “thinking big” wheninnovating. When formulating a patent strategy in the clean energy sector, it is importantto remember that incremental innovations based on existing technology may also bepatentable and commercially valuable. Thomas Edison understood this principle, andmany of his most valuable patents were for incremental inventions. His patented lightbulb, for example, was an incremental improvement upon an incandescent electric lampdeveloped 20 years earlier by another inventor, Joseph Swan. Innovations directed atincremental improvements in efficiency and profitability of existing energy technologiesare excellent candidates for patent protection.

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Enabling And Interface Technologies

With leaders in the U.S. and China committed to modernizing power grids, there will beopportunities to develop valuable innovations at the interface between sources forgenerating clean energy and the grids for transmitting it to end users. Consider aninvention developed for use in connecting the output of a wind farm in the Texaspanhandle, or on Nan’Ao island in China’s Guandong province, to a power grid withoutcausing frequency and voltage-related fluctuations. Valuable patent claims to thisinvention could be written to cover the interface between the grid and any fluctuatingclean energy source (whether that source is wind, solar, geothermal, or wave power). Inthis way, a single, carefully-drafted patent application may cover applications or sectorsbeyond those initially contemplated by the inventors.

Energy Storage Technologies

Energy storage will be a fundamental enabling technology in the clean energy economy.Powering electric vehicles, smoothing out fluctuations in supply of electricity fromrenewable sources like wind or solar farms, and extending appliance functionality allrequire energy storage technology. Innovations addressing energy storage andmanagement issues will become particularly valuable as leaders in the U.S. and Chinafollow through on plans for investing in modern, smart power transmission grids because“a next-generation smart grid without energy storage is like a computer without a harddrive: severely limited.”12

Carbon Capture And Sequestration

Many countries, including the U.S. and China, will likely continue to rely on coal togenerate base-load electrical power for many years. Developing increasingly efficientand effective carbon capture and sequestration technologies will be critical to meetingcarbon dioxide emissions reduction goals. Clean energy innovators should seek outopportunities for developing and patenting these technologies.

Emissions Measuring And Trading

Innovations in trading emissions credits or measuring greenhouse gas emissions are areasof great opportunity. In the U.S., the Obama administration has promised to implementan economy-wide cap-and-trade program aimed at reducing greenhouse gas emissions,and a number of studies predict the value of the carbon trading market in the U.S. alonewill reach $1 trillion per year by 2020.13 A recent report finds a significant upward trendin inventions relating to methods for trading emissions, with patents issuing to, amongothers, U.S. mortgage finance company Fannie Mae, who patented a system for tradinggreenhouse gas reduction credits earned by homeowners.14 Clean energy innovatorsshould consider developing and staking out claims for measuring emissions and fortrading emissions credits.

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Cross-Licensing

U.S. and Chinese cleantech companies should consider proactively using their patentportfolios as leverage to share in the technical innovations of others. Collaborative patentportfolios will be rewarded with a greater freedom to operate and innovate, whileremaining competitors will be left trying to design around a wall of cross-licensed patentportfolios.

Large cleantech companies can generate huge revenues from licensing agreements. Ernst& Young expects worldwide revenue from patent licensing to reach $500 billion by 2015,up dramatically from $110 billion in 2000.15 Small clean energy start-ups should alsoconsider licensing arrangements with larger companies, especially if the enterprise is in aforeign market the start-up wants to enter, like the U.S. or China. Larger companies havegreater financial, marketing, distribution, and manufacturing resources, and often moreextensive regulatory knowledge. Such licensing arrangements also give the largercompany a financial incentive to protect the invention. Would-be infringers may bedeterred, and enforceability of the patents is effectively strengthened, because theexpense of a patent infringement suit filed by the cleantech patent owner could besubsidized by the larger company.

Conclusion

The U.S. and China have the opportunity to lead the world in tackling the climate changechallenge and transforming how we generate, transmit, and use energy. Innovation willbe key to seizing and maintaining this lead. Companies in the clean energy sector in bothcountries will thrive by fostering a culture of constant innovation and adopting andfollowing through on intelligent strategies for protecting their intellectual property.

1 See The White House, The Agenda: Energy and the Environment (2009),http://www.whitehouse.gov/agenda/energy_and_environment/ [hereinafter Energy andthe Environment]. See also The White House, Jumpstarting The Economy And InvestingFor The Future, p. 21 (2009),http://www.whitehouse.gov/omb/assets/fy2010_new_era/Jumpstarting_The_Economy.pdf2 See Jumpstarting The Economy and Investing For The Future, id. at p. 23.3 See Energy and the Environment, supra note 1. See also Jumpstarting TheEconomy and Investing For The Future, id. at p. 21.4 A New Energy Industry Promotion and Development Plan, dedicating at least anadditional $440 billion (U.S.) to renewable energy, has been submitted to the StateCouncil for review and is expected to be announced soon. Seehttp://www.in-en.com/article/html/energy_0703070365353609.html and

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http://news.xinhuanet.com/fortune/2009-05/23/content_11421842.htm.5 See China eyes 20% renewable energy by 2020, China Daily, June 10, 2009,http://www.chinadaily.com.cn/china/2009-06/10/content_8268871.htm.6 See Steven Milunovich & Jose Rasco, Merrill Lynch, Cleantech: The SixthIndustrial Revolution (2008), http://www.responsible-investor.com/images/uploads/resources/research/21228316156Merrill_Lynch-_the_coming_of_clean_tech.pdf7 See Adam Aston, Can China Go Green?, Business Week, May 14, 2009,http://www.business week.com/print/magazine/content/09_21/b4132040805185.html.8 See The Pew Charitable Trusts, The Clean Energy Economy (2009), available athttp://www.pewcenteronthestates.org/uploadedFiles/Clean_Economy_Report_Web.pdf.9 See Wen Jiabao Emphasized Intellectual Property And Innovation Again AndAgain In His Inspection Tour To Guangx, April 2009,http://www.sipo.gov.cn/sipo_English/news/official/200904/t20090417_453660.html10 See Inventor Incentive Programs are Central to Generating Invention ActivityAccording to ipPerformance Group Survey, Jan. 29, 2009, http://www.iptoday.com/news-archived-article.asp?id=3455&type=.11 See John M. Broder and Matthew L. Wald, Big Science Role Is Seen in GlobalWarming Cure, N.Y. Times, Feb. 11, 2009,http://www.nytimes.com/2009/02/12/us/politics/12chu.html.12 See Katie Fehrenbacher, FAQ: Energy Storage For The Smart Grid, May 13,2009, http://earth2tech.com/2009/05/13/faq-energy-storage-for-the-smart-grid/.13 See New Carbon Finance, Carbon Industry Intelligence Research Note, Oct. 2008,http://www.newcarbonfinance.com/download.php?n=RN_State_of_Carbon_Market_Q308.pdf&f=fileName&t=NCF_downloads.14 See James Tyson, Fannie Mae Wins Patent For Trading In Greenhouse GasCredits, Bloomberg.com, Nov. 20, 2008,http://Bloomberg.com/apps/news?pid=newsarchive&sid=aDkAbYu5Dtx8#.15 See CPA Global, Past Events, Transform Your Company’s IP from a DormantAsset into a Dynamic Asset, Jan. 16-17, 2008,http://www.cpaglobal.com/events/archive/1/904.

AUTHORS: Rodger A. Sadler and Xiang Wang are intellectual property partners atglobal law firm Orrick, Herrington & Sutcliffe LLP based, respectively, in New York andBeijing. Chi Cheung is an associate in Orrick’s New York office and Shelly Zhang is amanaging associate in Orrick’s Beijing office. Jamie Shookman is a summer associate inOrrick’s New York office and a student at Boston University School of Law. Theauthors would like to thank Andrea L. Reinke, Esq. for her assistance editing this article.