Weekly Update

The Honeywell-Nest lawsuit: Have the patent wars come to cleantech?

While companies suing one another over patent infringement isn’t new, the mobile patent wars exploded last April when Apple fired the opening shot at Samsung over “slavish” copying of the iPhone and iPad designs. What has followed has been a vicious battle of claims, counterclaims, defensive acquisitions to control patent libraries (Google’s purchase of Motorola, for example) and the ultimate nightmare for a company: an injunction resulting in a product’s being pulled, as demonstrated by the brief disappearance of the iPad recently in Germany.

Historically, cleantech has largely avoided such nastiness. That changed last week when Honeywell filed suit against Nest, the startup whose smart thermostat uses a variety of sensors to learn users’ behavior, which the company says results in energy savings of 25 percent. The suit alleges everything from infringement on the natural language installer setup to a patent on the thermostat’s “offset drive,” the rotating control ring around a fixed ring. The latter is the core mechanical design of the Nest thermostat.

Nest founder Tony Fadell was asked at the GigaOM RoadMap event last November whether Nest had set out to evoke the classic 1950s Henry Dreyfuss Honeywell thermostat design. Fadell’s response was simply to say that he was after the “most simple but most powerful interface with just a dial and a button.” Needless to say, it is not the 1950s thermostat design that is being litigated but a number of very broad patents that Honeywell made a conscious decision not to use when it opted not to build a behavior-learning thermostat.

On balance, the Honeywell lawsuit represents a dangerous new business precedent influenced by the mobile patent wars and executed more perniciously by patent trolls like Intellectual Ventures and Lodsys, which purchase patents and then sue companies for infringement. Simply put, patent litigation has become just another business strategy used against competitors either to drive revenue via unreasonable licensing demands or, more often, to slow them down or eliminate them.

The key difference between the Honeywell lawsuit and what is happening in mobile is that in mobile, established, multibillion dollar companies are fighting one another. In the Honeywell lawsuit, a company with over $46 billion in market cap is going after a startup that is trying to disrupt and innovate a very staid home energy management space. Sure, Nest has the resources to defend itself, because Fadell’s success at Apple has attracted tens of millions in VC, but most smaller startups are not as well financed.

Large tech companies have an unprecedented amount of cash right now on their balance sheets (estimates are around $700 billion) and now have an even more virulent weapon against startups: well-financed legal teams armed with patent libraries that most of the time will never result in bringing a product to market, as was demonstrated by Honeywell’s decision not to build a learning thermostat.

One of the interesting things about covering the cleantech space, as compared to more-mature industries like mobile where the barriers to entry are much higher (try building a cell network), is that it is a very startup- and VC-driven area. Just look at how few publicly traded cleantech companies exist. Cleantech is about new ideas and raising a couple of million dollars to get an innovative light or an experimental solar panel technology to the next stage. That is why the appearance of a large company using its patent libraries to fight a new product’s coming to market could have chilling effects on the ability of startups to convince investors that investing in a new idea is worth the risk. It is tough enough right now to raise capital for early-stage cleantech startups. Build in extensive patent survey costs for startups and investor concern about late-stage litigation, and it gets even harder.

recent flash analysis, which surveyed 197 GigaOM readers, found that over half of the respondents felt that Nest would either go under as a result of the lawsuit or be forced into selling itself to Honeywell. I think this reaction is, well, reactive. Moreover, it ignores the fact that Nest does have resources to defend itself and that patent litigation can go on for years, which would allow Nest to continue building its business or, in the worst-case scenario, have the chance to figure out a licensing deal. What is more concerning for me from the reader poll is the evidence of fear among those in the tech community that a patent lawsuit can sink an exciting startup and that once a multibillion dollar company comes suing with a few patents, it’s lights out. Because what the cleantech community needs right now isn’t fear but hope and excitement that a few great ideas can change how we use energy.

Question of the week

Does the patent system in the U.S. need to be reformed?