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The solar power sector is characterized by a great deal of creativity that results in a large number of patent holders with diverse interests. While the solar sector has not seen the volume of patent litigation that has plagued the tech industry more generally, a number of market trends are harbingers of a different future.

As highlighted in a 2013 Law360 article, “Clean Energy Patent Boom Sets Stage for IP Wars,” the number of patents for renewable energy technologies continues to increase significantly year over year. According to a number of attorneys interviewed for the article, the reason patent litigation in the solar sector has not yet been a significant problem is that there are currently too few dominant and highly profitable technologies and patents in the solar technology marketplace.

In the tech industry in general, infringement claims are most often brought against highly visible and public uses by companies with deep pockets. When dominant companies with profitable patents become the norm in the solar sector, the resulting patent litigation risks will increase. A number of factors affect these risks, including the visibility of a particular project and the role various parties play in its development, ownership and operation.

Keeping these factors in mind, three types of solar projects stand out to us as being more susceptible to allegations of patent infringement:

• Projects where a solar equipment manufacturer plays a role in addition to that of a supplier, such as manufacturers that also function as developers; engineering, procurement and construction (EPC) contractors; operations and maintenance (O&M) providers, or joint venture partners;
• Utility-scale projects; and
• Residential and commercial projects developed for sale to investment funds and other bundlers of solar leases and power purchase agreements.

 

Patents are not enough

To mitigate the potential risks of intellectual property infringement through due diligence, developers, financiers and owners should ask whether a manufacturer has conducted a thorough freedom-to-operate analysis to determine whether there is a material risk that the manufacture, sale or use of its equipment infringes the intellectual property rights of third parties.

Developers, financiers and owners should regard as erroneous a manufacturer’s contentions that there are no such risks because the manufacturer has its own patents. In reality, the manufacturer’s right to exclude others from practicing its patents does not dictate whether there are third-party patents that would be infringed by the manufacture, sale or use of its equipment.

Even if a manufacturer has conducted a freedom-to-operate analysis, developers, financiers and owners would be well advised to seek contractual protections to mitigate the adverse impacts of future allegations of patent infringement that are likely to become more prevalent as the solar market matures. Such adverse impacts might involve specific instances of past damages, ongoing royalties and injunctions. However, that can also include more generalized risks, such as financing difficulties, decreased project value when marketed to third parties and the general uncertainty that comes with pending intellectual property claims.

Although manufacturers are often in the best position to determine whether the manufacture, sale or use of their equipment will infringe a third party’s intellectual property, the standard forms of contract used by most manufacturers contain very limited representations, warranties or indemnities related to intellectual property risks, or they exclude these provisions entirely. Some manufacturers not only resist providing express intellectual property protections, but they go so far as to disclaim any and all implied warranties against infringement in the disclaimers, buried in their standard forms of contract or equipment warranties.

 

Manufacturer blind spot

To the extent that contractual protections are initially offered by manufacturers, the most common provision seen in the marketplace is a limited intellectual property indemnity between the manufacturer and the initial purchaser of the equipment. The most significant issue with the typical indemnity offered by manufacturers is that it is only enforceable by initial purchasers, given the restrictions on assignability found in most contracts. The net result of these meager and often nonexistent contractual protections is that most interested parties are left exposed to the growing risk of intellectual property infringement without any contractual recourse against the manufacturer.

At a bare minimum, the disclaimer of implied warranties language should be reviewed to ensure that the language is not so broad as to exclude protection under Section 2-312 of the Uniform Commercial Code, which is commonly known as the implied warranty against infringement. While one must always confirm that the applicable state has adopted Section 2-312 without material changes, Section 2-312 as drafted in the Uniform Commercial Code provides at least some protection with respect to infringement claims. Specifically, Section 2-312 requires a seller to hold a buyer harmless against claims of infringement, subject to some notable limitations.

One notable limitation on the applicability of Section 2-312 is that it only covers “the rightful claim of any third person by way of infringement or the like.” The interpretation of this language varies from state to state, but it generally requires finding that the infringement claim at issue has some level of sufficient merit in order for the seller’s hold-harmless obligation to be triggered.

Another limitation of Section 2-312 is that the rights of remote purchasers remain uncertain regardless of whether the contract with the initial purchaser has been assigned or transferred. Given that the language and interpretation of Section 2-312 vary from state to state, that it applies only to “rightful claims” and that uncertainties exist as to what protection it offers to remote purchasers, we generally recommend that stronger, express protections be included in contracts with manufacturers.

To seek greater protection than what is offered in a manufacturer’s standard form of contract or Section 2-312, consider negotiating for the grant of an irrevocable license, a standard suite of intellectual property representations and warranties, and a broad indemnity. The irrevocable license should generally provide an irrevocable, non-exclusive, royalty-free license for at least the use, operations and maintenance of the equipment. A strong representation and warranty should provide that the use, operations and maintenance of the equipment does not - and will not - infringe any third-party patent, trade secret, copyright, trademark or other intellectual property rights in the U.S.

One should recognize, however, that it can be difficult for a manufacturer to provide such a broad representation and warranty with respect to third-party patent rights, given the lag time between filing a patent application, the publication of that patent application and the issuance of a granted patent, often resulting in manufacturers insisting on knowledge or temporal limits on their representations.

A good indemnity that favors developers, financiers and owners of solar projects should generally cover all losses arising from or relating to infringement claims. Depending on the circumstances, even a limited indemnity under which the manufacturer is given the option to provide a non-infringing alternative or to obtain a license from the third party with commercially reasonable terms may be acceptable.

One critical and often overlooked element of any contractual protection scheme for intellectual property issues is the assignability to remote purchasers in the event that the equipment is assigned or transferred to subsequent purchasers. This issue arises because solar equipment is commonly purchased by one party and then the panels are sold to a separate and often unaffiliated project company that will own the installed panels. Unless the contract itself is assigned to the project company - which is unusual - the project company will not have the benefit of any intellectual property protections in the contract itself. Instead, the project company will have to rely on whatever is in the separately assignable equipment warranty.

For this reason, the best practice is to negotiate for and include at least the essential intellectual property protections in the equipment warranty itself, either in addition to or instead of relying on any such protections in the underlying contract, because equipment warranties are separately assignable to - and enforceable by - project companies that are indirect, remote purchasers of the equipment. Structuring the documentation in this way ensures that all remote purchasers will have rights under the negotiated intellectual property protections.

Thus far, the solar sector has not yet been subject to the intellectual property wars being fought in other tech industries. However, taking precautions now will ensure that a company has a good defense should issues arise.

As an added benefit, project participants, whether the ultimate buyer or a financier, are likely to be impressed by - and find comfort in - a coherent and sophisticated strategy for addressing potential intellectual property issues in the applicable contracts. With the increasing market share of solar projects being developed for sale to investment funds and other bundlers of solar leases and power purchase agreements, one’s being able to demonstrate how intellectual property protections are assignable to all remote purchasers of the projects is an important and attractive advantage. R

 

Andrew D. Morris and Elizabeth A. Lester are associates at Sutherland Asbill & Brennan in Atlanta. Morris practices in the Energy, Environmental and Commodities group and can be reached at andrew.morris@sutherland.com. Lester practices in the Intellectual Property group and also advises clients on intellectual property issues in business transactions. She can be reached at elizabeth.lester@sutherland.com.