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Patent dispute - Clash of the titans reshapes sector

US: As Mitsubishi takes on GE Energy over rights to variable-speed technology, the ramifications of the case are many. Some Asian players are keen to take a slice of the US market and launch larger wind turbines, so the importance of protecting technology patents is key, writes Ros Davidson.

MHI's controversial 2.4MW turbine
MHI's controversial 2.4MW turbine

The patent war between two of the wind industry's largest companies is escalating. The lengthy dispute has profound consequences for wind's first major Asian entrant, Mitsubishi Heavy Industries (MHI), and US giant General Electric (GE). The case is also a harbinger of the legal fights that will become more common in the matured wind industry.

2010 is an important year for MHI, which needs to gain traction in the booming US market with its flagship 2.4MW turbine while generous stimulus funds are still available, if it is to re-establish itself as a major player and successfully globalise its business. In 2004, Mitsubishi Power Systems Americas (MPSA) - a wholly owned subsidiary of MHI - had a 30.8% share of the US market, or 140MW. That dropped to 6.9% in 2005, or 170MW, says BTM Consult.

The multimillion-dollar fight with GE is also being watched to see how much it will shape the US and global wind markets. Some manufacturers have avoided the US market because of the hold on key wind intellectual property (IP) by GE and previous owners of the older patents. Patents that survive challenges tend to become stronger, and foreign players are no doubt watching how well GE can protect its intellectual wind property. GE holds a number of crucial wind patents in the US and is thought to license a suite of them for as much as $25,000 per megawatt.

North America is by far the largest of MHI's wind markets. As of the end of 2008, more than 80% of MHI's global installed capacity was in the US and Canada, according to data by Emerging Energy Research (EER). And GE turbines make up more than half of US sales in terms of installed capacity.

GE has, so far, been pursuing a three-pronged attack on MHI. The first attack is an appeal against the recent decision by the US International Trade Commission (ITC) to end the probe into alleged patent infringement by MHI's 2.4MW turbine. Initiated by GE in 2008, the probe could have led to a block of US imports of the turbine just as GE is preparing for launching its own rival 2.5MW model later this year. In a ruling made fully available at the ITC on March 2, the commission declared that MHI was not violating two of the three patents were question and that - unusually - none of the three patents was being used in the US either by GE or its licensees, a requirement for breaking the Tariff Act. Notice that the ITC was ending its investigation came on the same day in January that $5.1 million in stimulus funds was announced for MHI's planned plant in Arkansas for assembling 2.4MW machines; the $100-plus million plant is also receiving more than $3.75 million in incentives and tax relief from the state's government.

The ITC ruling was surprising. On average the commission backs the complainant - in this case GE - 40% more often than the respondent, says Larry Kass, a partner at New York law firm Milbank, Tweedy, Hadley & McCloy, who is following the case. GE's appeal, in a federal court with special expertise in patents, could take 12 to 18 months. Alleged infringement

GE's second attack came in February. The company filed a new suit in the US District Court in Dallas against MHI and MPSA alleging infringement of two different patents in MHI's 2.4MW turbine and sought damages. GE's complaint, which cited the Goat Mountain wind farm in Texas owned by independent developer Cielo and its partner Edison Mission, does not explain the alleged violations. Indeed, the defendants are formally seeking to have the case dismissed. "GE's complaint contains no factual explanation of why it believes there is infringement," notes MPSA. "Under the law, GE must explain with specificity which products it accuses and why they allegedly infringe GE patents."

Previously, GE filed a lawsuit in the US District Court in Corpus Christi, Texas, citing the same three patents at issue in the ITC case, which it noted were allegedly in the MHI turbines installed in the Penascal and Gulf Wind projects developed, respectively, by Spanish operator Iberdrola and now-defunct Australian firm Babcock & Brown. That first suit was shelved, pending the outcome of the ITC case, a fact that may have led to GE choosing to file the second suit in Dallas, notes Kass, who has written about the ITC case in the National Law Journal. Interestingly, the question of whether GE or its licensees actually use the patented technology is irrelevant in the District Court cases, notes Eric Lane, a patent attorney in San Diego and author of greenpatentblog.com. That means the court, unlike the ITC, could find against MHI regardless of whether the patent owner GE is itself using the patented technology. GE is seeking to stop MHI using the patented technology, as well as seeking unspecified damages.

The clash of the titans has broad ramifications. "I think the fight is significant not only for its immediate market impact but also as a kind of wake-up call to the industry," says Kass. He notes that when the industry was young, many of the individuals involved were not from a competitive technological background - many were from regulated utilities - and may not have fully understood the importance of owning and protecting intellectual property. That view is seconded by a prominent wind insider, who prefers not to be named. He says that wind engineers used to describe their technology too openly at conferences - a tendency that soon changed when a patent war broke out between Kenetech and Enercon in the 1990s.

"Having seen the impact a patent case can have, players in the wind industry would be well advised to strengthen their own patent portfolios, whether by innovation, IP acquisition, or mergers and acquisition," adds Kass. "A strong portfolio is important not only for offensive purposes but also for defensive purposes, to provide leverage in cross-licensing with companies like GE when accused of infringement."

Lane agrees: "It's a very important case for the renewable energy industries. I think it's the first of many we'll be seeing. It's a sign that wind is mature." This is because patent enforcement - a hugely costly activity - typically only happens when technology is mature, whereas patents are applied for when technology is first invented.

In fact, large companies are often interested in more than just protecting their own intellectual property. They may wish to use their own patents to barter licenses from other patent holders. GE might, for example, be seeking a licence for Mitsubishi's highly valuable nuclear technology, the advanced pressurised water reactor (APWR), as part of a broader negotiation that includes wind patents. The global shift to lower carbon power means that access to such technologies is crucial.

The case is also notable for the number of politicians who have weighed in and for the ITC's emphasis on public interest - rather than just on the interests of the parties involved - because of the general benefit of clean energy. In fact, Kass notes, the emphasis on public interest meant that the ITC's own attorneys argued that even if MHI were to lose the case, it should still be allowed to supply its 2.4MW turbines to Iberdrola's Penascal II, which has received $114 million in federal stimulus funds and is due to be finished this spring.

Yet despite the ITC ruling, MHI faces more challenges in the US wind market. MHI is not known for being nimble, says Tim Stephure, a wind analyst at EER. The company has a highly vertical hierarchy and strategises very carefully. Despite being a very early entrant to the US wind market, MHI lost its foothold as GE - a relatively late entrant, in 2002 - moved aggressively to supply most of the US market. "(MHI) lost a lot of its market share," he says. "They were in a really good position to leverage it."

Fear for the future

MHI has pledged to accelerate its turbine production from 400MW worldwide in 2007 to 2GW in 2010, but as of 2008, its assembly plants were operating at 51%, with only 617 turbines delivered. MHI licensed the technology to its 1MW machine to NingXia Yinxing Energy in China, which faced challenges in achieving rapid production growth after establishing its own local supply chain. This year, NingXia plans to increase production capacity to 200 units of 1MW machines. Despite this slow start, Mitsubishi may re-engage the same partner on the 2.4MW. Licensing arrangements for the 2.4MW machine are under negotiation and have not been finalised, notes Mitsubishi.

The patent wars have dented MHI's fortunes as well, and will necessarily be a factor in decisions to use 2.4MW machines, because of a developer's need for due diligence in business decisions, although they are always indemnified by their insurers against intellectual property disputes. Mitsubishi declines to comment on whether the patent dispute with GE has affected its ability to secure customers for the 2.4MW turbine in the US.

In addition to the patent fight, MHI faces significant holes in its customer portfolio despite having made steady gains since 2005 - most recently with its 2.4MW turbine. Three major customers look likely to scale back their purchase of MHI turbines. Spain's Iberdrola, Cielo Wind Power and B&B accounted for 74% of MHI's installed US capacity in 2009, according to American Wind Energy Association project data.

In September 2009, Iberdrola - which bought almost 50% of the 813MW of MHI 2.4MW turbines installed or under construction in the US - expanded its framework agreement with Spanish turbine maker Gamesa. Cielo announced supply agreements with manufacturers A-Power and Samsung. And B&B remains in a legal fight with MHI, which has accused B&B of moving money out of the US to avoid making payments on a $1.4 billion-plus purchase of 456 of MHI's 2.4MW turbines, a charge B&B denies. "Mitsubishi is in a tough spot," says Stephure. "We expect them to have difficulty securing new customers."

MHI must regain its US foothold before GE can build momentum with its new 2.5MW machine. In addition, MHI must reassert itself in the US as quickly as possible because many of the federal stimulus incentives expire in 2013 and may not be extended, a fact that GE is also acutely aware of.

The market is becoming more competitive, too, with other major Asian players - such as South Korea's Daewoo, Samsung and Hyundai, and China's Goldwind and Sinovel - all keen to launch larger wind turbines in North America while the subsidies remain generous. The US's incentives are especially attractive to foreign players, says Stephure. "There definitely is a sense of urgency for MHI to move forward as quickly as it can," he says. Samsung C&T and Korea Electric Power have already secured a deal in Ontario whereby they will invest C$7 billion over six years to build 2GW of wind, manufacture turbines and also develop solar.

The fight is "100% about market strategy and keeping a big competitor out of a key market", Stephure says. He adds: "2010 is a key year for GE because it is launching a new product in the US." The patent wars are also likely to keep lawyers busy for many months to come. When GE filed its suit in Dallas, it publicly issued a threat. "GE has 148 issued US patents related to wind energy. MHI has substantially less," said GE in a statement. "We believe that there are multiple areas where MHI's 2.4MW wind turbines infringe on GE's existing patents."

MHI denies this. "Mitsubishi is not aware that it is violating any of GE's patents and will vigorously defend itself against any allegations that it is," says Roger Taylor, a patent lawyer working for Mitsubishi. "Logically, one would assume that GE had chosen its strongest case of infringement at the ITC - and it failed to prove infringement there."

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