ANALYSIS - Patent wars flare again as GE tags Vestas for ZVRT in US

The patent infringement dispute between General Electric Co (NYSE:GE) and Vestas Wind Systems A/S (CPH:VWS), the top two onshore wind turbine suppliers for 2016, and the importance of independent IP due diligence is the subject of a new piece by Philip Totaro of Totaro & Associates.

GE has filed a complaint, 2:17-CV-5653, on Monday of this week in the US District Court in the Central District of California alleging that Vestas is infringing a patent on zero voltage ride through (ZVRT). GE contends that the Vestas V90-3.0, V100-2.0, V112-3.0, and V117-3.3 wind turbines comprise technology which utilises a converter control system capable of riding through a grid voltage drop down to "approximately zero volts."

Interestingly, this is the same patent which was used by GE in a previous patent litigation against Mitsubishi Heavy Industries (TYO:7011), or MHI. During the course of those patent litigation trials, the patent went through a "re-examination" process at the US Patent & Trademark Office (USPTO) to determine whether or not it is a valid patent. While the GE patent seems to have been battered a bit through that re-examination process, it has survived mostly intact and is considered valid.

In this new complaint, GE lists the San Gorgonio Wind Farm, Brookfield Wind Farm, Alta II-IX Wind Farms, and Solano III Wind Farm which comprise Vestas turbine units as potentially infringing the ZVRT patent. GE also cites other US project sites where the same turbine models have been installed in California, Texas, Oklahoma, New Mexico, Maine, New Hampshire, Vermont, and Kansas.

Pending litigation against Vestas in the other states referenced is unknown at this time. However, for the project sites identified in California, GE is within its rights to request an injunction on the ongoing operation of those projects in order for the potentially infringing technology in the converter control system to be removed or otherwise altered. This type of injunction creates a significant financial risk that goes well beyond the commercial damages of the patent litigation, since the injunction could further expose liquidated damages for lost production.

Vestas may be listed as the only defendant in the court trial, but typically in such matters, they are not alone. Project developers and asset owners share in the risk due to the terms typically used in turbine supply agreements throughout the industry by multiple OEMs. Surprisingly, most OEMs do not fully indemnify developers and asset owners from patent infringement liability.

As we saw in the UK recently when Enercon had sued Siemens (ETR:SIE) for patent infringement on wind turbine controls, the project developers and even engineering, procurement and construction (EPC) contractors may have some responsibility and liability for patent infringement. The Enercon litigation against Siemens had threatened over USD 5 billion worth of projects in the UK offshore sector. While the lawsuit was ultimately decided in favor of Siemens, it highlights the shared risks noted above, since both Dong Energy (CPH:DENERG) and A2SEA were named as co-defendants in the litigation trial.

While Siemens was likely contractually obligated to defend Dong and A2SEA in the trial, there was a chance that Enercon could have been successful with an injunction that may have delayed start of project construction on both Westermost Rough and Gunfleet Sands. Equally, London Array could have faced a shutdown order until the potentially infringing technology was removed from the turbine control systems.

But how does a matter like this end up in court? Why aren't the similarities between products and competitor patents uncovered during the product design / development process when it is easier and less costly to change the design? Why aren't intellectual property risks identified and mitigated during the project finance due diligence or type certification process? Why do the insurance underwriters continue to ignore USD 2.3 billion in total patent infringement liabilities in the wind sector?

Sadly, this matter was probably avoidable, as is the case so many times in patent infringements. Intellectual property (IP) risk is not considered a “real” risk by most companies unless litigation happens. But you don’t have to see the inside of a courtroom to suffer commercial harm.

In the complaint filed in the California court, GE cites a number of documents which make reference to the Vestas product specifications for the V90, V100, V112, and V117. It is quite frequent to see such documentation pop up online when project developers are obligated to reference such documents for siting committees and the like. While many documents comprising technical specifications and other proprietary information are redacted when shared in the public domain, not all of them are.

But the key isn’t to simply avoid being caught.

So how do we keep OEMs and others out of court? An independent IP due diligence, similar to getting a type certification, is the simple answer. Proactive companies who have already undertaken this have saved a collective US 293 million in royalties they would have otherwise paid to companies like GE. They avoided the cost by identifying where the potential landmines are, and navigating a path around them during product design.

Presently, independent IP infringement risk certification is not mandated in the wind industry, or virtually any other industry where project finance is utilised. Most turbine OEMs provide their own internal data and validation to turbine purchasers and project financiers, but only if asked, and typically only in matters related to publicly acknowledged patent infringement litigation where a competitor is known to be in active litigation (such as this new matter between GE and Vestas).

But, in-house validation from the OEM is indeed not an independent assessment. What most turbine OEMs do not realise, or else they have not publicised, is that they are all infringing on one another to a certain degree. The only reason more litigation has not sprung up is due to the recognition of the mutual costs of pursuing patent infringement litigation against one another and the inevitable counter-suits each would face. This has resulted in a preference to acquiesce to a comfortable détente.

No one should ever want to see the inside of a courtroom for an IP litigation, but the time to understand the risk profile is not right before you have one foot past that threshold.

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