The current shift of wind-turbine OEMs to providing more services is the result of a need to replenish the revenue drop-off from lagging turbine sales, as well as a way to regulate the services performed on their turbines.

Philip Totaro / CEO / Totaro & Assoicates / www.totaro-associates.com

As companies look for ways to monetize services, we see a technological push into areas such as SCADA and condition monitoring data analysis. This will allow for trend analysis on component-damage accumulation, prediction of remaining useful life, predictive maintenance scheduling, spare-parts scheduling, and energy output optimization taking component life consumption into consideration.

Intellectual property rights

The proprietary Intellectual Property Rights (IPRs), which OEMs and other key service providers in the industry secure on these technologies, serve the purpose of preventing others from duplicating that technology. Infringement of those rights could be met with legal consequences and financial penalties to the offenders.

Even though IPRs are largely thought of as a legal tool, the commercial implications of IPR infringement can be costly. While litigation has been used as a tool for achieving commercial goals in the past, such as preventing competitors from gaining market share, the unfortunate net result of past IPR litigation for turbine purchasers has been a constricted supply chain with higher prices and a reduced selection of ‘bankable’ turbines.

The recent GE versus Mitsubishi Heavy Industries IPR litigation provides an example of how commercial costs exceed the legal costs. Even though the $170 million damage award was avoided by Mitsubishi through the cross-license and settlement with GE, they still spent close to $10 million on this litigation. This includes approximately $2.5 million in consulting fees as well as a license fee to former GE employee Thomas Wilkins, for a patent he was later deemed not to even co-own.

The cost of an independent intellectual property risk mitigation, known as a freedom to operate, would have been less than 1/10th of 1% of the commercial loss Mitsubishi incurred. However, MHI did not perform this activity prior to the entry of the 2.4 MW product in the U.S. market, deeming the cost of such an activity an unwarranted expense at the time. Many companies are similarly unwilling to undertake this independent IPR risk assessment, and they do so increasingly at their own peril in the current market environment.

Recently, we have observed a shift away from this model of IPR litigation to one in which the IPRs manifest themselves in contractual obligations of a turbine supply agreement (TSA) and OEM provided long-term service agreements (LTSAs). As a result, there are several considerations for turbine purchasers and independent service providers (ISPs) when engaging in fleet O&M or spare-part scheduling.

 

                                                Market Conditions that increase IPR risks for turbine purchasers and ISPs

The TSA executed between the OEM and turbine purchaser provides the purchaser with usage rights to that OEM’s technology and IPR. During the warranty period, this ‘use license’ and other contractual clauses prevent the turbine purchaser from activities such as reverse engineering and making spare parts, or having them made through sub-contractors based on OEM designs, unless the OEM is unable to supply the part, or it gives explicit permission to sub-component suppliers to provide spares directly to customers.

However, the ‘use license’ for the IPR of the OEM survives the warranty period and the OEMs still retain some control over services and spares due to the patent protection they may hold on key components. This could mean that replacement of key components by the fleet management team of the turbine owners or their sub-contracted ISPs could violate these patents and contractual obligations.

Also, we see OEMs gaining negotiating leverage during LTSA discussions due to the number of patents they hold and the scope of technology claimed in them. Some OEMs believe they ‘own’ key technologies, such as those on services and spares described, and are unwilling to provide licenses to key competitors or turbine purchasers unless turbines and services are supplied by that OEM.

While OEM-provided services may present a good option for some wind-farm owners and operators, they can often be significantly more expensive than having their own fleet management team perform service, or having third-party ISPs competitively bid for service contracts. OEM provided service agreements, which are negotiated based on the strength of their IPR, prevent competitive bidding for service contracts, just as we saw before when threats to turbine OEM market share resulted in reduced competition.

There is a corollary to this in the automotive sector. Car makers have used IPR to enjoin independent repair service providers from working on the car maker’s vehicles. The car makers have developed unique features on spare parts which force repair mechanics to obtain expensive, specialized tools and training to perform work on the vehicles.

Auto manufacturers also use copyrights on the readouts of the Onboard Diagnostics system to ensure repair by company mechanics. The result is more consumers are cajoled into using more expensive dealer-based repair services, because independent providers are fearful of legal ramifications to subverting the IPR of the car makers. Automobile industry bloggers have noticed the trend. For instance, consider this comment from Mike Masnick, from his blog on Feb 11, 2013, www.techdirt.com/article TechDirt:

“Automakers have used copyrights to lock-up diagnostic codes and information concerning onboard computers. The end result is that car owners are often forced to go to dealers (who are expensive) over independent car repair shops.

Independent repair shops who circumvent the digital locks on car computers may be found to be violating the Digital Millennium Copyright Act anti-circumvention clause. As we’ve noted, this seems like a clear abuse of the Act, because it was clearly not designed for such a purpose.

Attempts to fix this with ‘right to repair’ legislation have mostly gone nowhere (automakers are powerful lobbyists, and the entertainment industry also doesn’t want anything that weakens the anti-circumvention clause).”

The next day, Ryan Nerd commented on the article, “Some vehicles have been designed so that even simple things like replacing a headlight lamp require special (read proprietary) tools that only dealerships have.”

Similarly, wind farm owners and operators have an obligation to ensure that any technology they use or any services they employ does not violate the IPR of others. Typically, this is dealt with in the TSA or LTSA by having the turbine vendor or an ISP provide indemnity from patent infringement liability.

But what most owners and operators do not realize is that turbine OEMs are unwilling to provide full indemnity to turbine purchasers in an effort to shift the risk associated with patent litigation away from themselves. They often seek and obtain full indemnity from sub-component suppliers, but do not offer it themselves. This discrepancy opens owners and operators to legal and commercial risk in the event one of their key suppliers of turbines or services is sued for IPR infringement.

Also, wind-farm owners and operators occasionally mandate that certain technical capabilities are incorporated into the wind farm without realizing that those capabilities may be proprietary technology of another OEM or service provider. Technologies such as remote monitoring and inspection fall into this category, with key patents already held.

OEMs are of course reticent to engage in IPR litigation against turbine purchasers, because doing so would damage their commercial sales opportunities. So the litigation we have seen in the past has been one turbine vendor against another. We suspect that while turbine OEMs could target ISPs with threats of IP litigation, the likelihood of that is low, even in the current market climate where the threat of IP litigation looms.

Market conditions that increase IPR risks for turbine purchasers and ISPs

Thankfully, litigation is often a measure of last resort, used after exhausting commercial means to ensure revenue streams. In the scenarios highlighted above, technology and IPR licensing may not be possible, because OEMs want to use those proprietary rights on key technologies to prevent competitors from turbine sales or ISPs from service contracts. Unfortunately, when this happens, the costs rise for wind farm owners.

Nevertheless, these challenges can be dealt with and it is possible to navigate around IPR. Presently, wind-farm owners and operators, OEMs, and even ISPs share responsibility ensuring that proprietary technologies are not used without adequate license rights. The cost of proactive investigation and risk mitigation on IPR may seem prohibitive, but it pales in comparison to the avoidable commercial losses and public relations headaches which would otherwise ensue.

As services continue to represent a larger financial impact for OEMs, we expect tactics used in other industries, such as certification of ISPs, to become standard practice so IPR owners can monetize those rights. WPE