The Ethanol IP Evolution

By Camille Urban | January 11, 2012

Working with a firm that provides services to numerous ethanol plants provides an interesting outside/in perspective that has provided an opportunity to witness a present-day evolution.  

Many ethanol plants were the result of a vision held by a group of investors, a design/build plan that included a license to a specified process, and a lot of hard work. But it wasn’t long until the operators of these plants began to add components to the design/build and to tweak conditions of the licensed process to produce ethanol better, faster, cheaper.

The evolution includes equipment and processes developed for production of value-added byproducts to extend the ethanol profit. During the past few years, the role of the process and equipment providers began to change, as well. Now, design/build providers design and build in cooperation with the ethanol company, rather than provide a turnkey, nearly take-it-or-leave it project.  But this evolution is not without rough patches.

Now, the operators of the plants make adjustments, add components and tweak conditions of the processes provided for turnkey plants. A few of these improvements rise to the level of invention. And that raises an interesting question: Who owns the innovations made by those using the processes or equipment, when the original process or equipment was provided by another?

One would think that an entity supporting and/or funding the innovation (the ethanol plant) would be the hands-down rightful owner, right? But the combination of inventor’s rights under United States patent law and the fine print in some of the provider contracts may obliterate that assumption.

Inventors in the United States are the owners of their inventions unless a) there is a contract in place stating otherwise or, b) the inventor is an employee who invented something that is within the scope of his employment, in which case the employer owns the invention. For comfort and certainty related to scope of employment, it is advisable to include invention assignment obligations in all employment contracts.

Many of the provider contracts include an assignment provision that requires assignment to the provider of any improvements made by the plant to the process or equipment. You may want to read that sentence again. Technically, that means the provider owns the improvement and could exclude the very plant that developed the innovation from using it. You may want to dig out that agreement before you invest in improvements. If such a clause exists, the provider should be willing to pay for some of the development costs. More importantly, the process provider should agree to a royalty-free and perpetual license back to the plant. Many provider contracts have addressed this issue by including just such a license. The provider retains commercial benefit of the plant’s improvement; the plant retains a right to use.

What’s both wonderful and terrible about innovation, though, is that it is often the result of collaboration, with two entities working toward, and finding, a solution to a problem. Without contractual obligations to the contrary, under United States patent law an invention resulting from such collaboration will be deemed jointly invented. This means either joint inventor may sell or license its interest to any other party it wishes and could result in no competitive advantage. Even if both parties wish to out-license the invention, there will quickly be a race to the bottom for royalty rates. What’s the remedy for this unfortunate situation? Careful drafting of an agreement BEFORE the collaboration begins is crucial to a happy ending. The terms should cover the uses allowed for each party and structure accounting as necessary. Further, the agreement must address later improvements made by only one of the parties.

It is important to remember that inventions and innovations are the logical and beneficial result of evolution. If you wish to enjoy the benefits of your own evolution in the ethanol production world, however, checking current agreement terms or drafting addendums may be a necessary evil.