The Wall Street Journal

June 18, 2004

PAGE ONE
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Nanotechnology Patents Surge
As Companies Vie to Stake Claim

By ANTONIO REGALADO
Staff Reporter of THE WALL STREET JOURNAL
June 18, 2004; Page A1

The new-frontier buzz around nanotechnology -- the effort to develop infinitesimally small structures into futuristic products -- has companies, universities and investors hustling for patents, the key to markets that the government estimates at $1 trillion by 2015.

But the intensifying race to file patent applications has sparked concern that a proliferation of patents, especially broadly defined ones, could hobble innovation and produce a thicket of conflicting legal claims that could eventually drive up costs for consumers. In addition, the combination of scant products to date and surging investor interest raises fears of another high-tech bubble.

At stake is control over innovations that could have wide-ranging applications in the computing, defense and energy sectors. "It's the culmination of the historical miniaturization of many technologies," says Thomas Theis, director of physical science research at International Business Machines Corp., Armonk, N.Y. "This will only happen once."

Nanotechnology in general refers to man-made structures less than 100 nanometers in size. One nanometer is one-billionth of a meter; one human hair is about 80,000 nanometers thick. Nano-scale materials exhibit unusual properties -- such as exceptional strength -- which scientists are trying to exploit to manufacture new products, such as inexpensive ultrathin televisions or futuristic computers.

Patents awarded annually for nanotechnology inventions have tripled since 1996, with 10-fold or greater increases in some areas during the past three years. Corporate intellectual-property departments, which have increasingly sought to turn patents into major revenue streams, are stoking the trend.

According to data compiled by the National Science Foundation, IBM won the most nanotech-related patents in 2003. Also among the top 10: computer-memory giant Micron Technology Inc. of Boise, Idaho; manufacturer 3M Corp. of St. Paul, Minn.; the University of California; and Japan's Canon Inc.

Among the small but growing number of developments so far, General Motors Corp. says it will use 540,000 pounds of nanocomposite resins this year in the body of autos like the Chevy Impala. Levi Strauss & Co. sells stain-proof "nano-pants" in its Dockers khaki line impregnated with water-resistant molecules. Intel Corp.'s computer chips recently crossed into the nano-realm: Individual transistors now measure just 90 nanometers across.

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Smaller companies are buying patents from universities, which have been the beneficiaries of increasing government funding in nanotechnology. The federal government spends about $800 million a year on related research, and that sum is expected to increase with President Bush's signing of the 21st Century Nanotechnology Research and Development Act last December. Japan and the European Union are spending similar sums in what is a growing international rivalry.

Nanotechnology isn't a term with any clear definition, which also leaves patent statistics open to interpretation. While patenting is showing a "very strong increase," according to Stephen Maebius, a patent attorney with the law firm of Foley & Lardener, surveys of these patents depend heavily on keywords used to query databases. Analyses by several U.S. law firms and consulting groups all show substantial growth in patenting, but estimates on total patents differed widely.

Driving the patenting boom is the potential for licensing revenue and power to control emerging technologies. IBM already takes in more than $1 billion a year in licensing revenue from its vast portfolio of patents, to which it is quickly adding those related to nanotechnology.

Companies that hold pioneering patents could potentially put up tolls on entire industries. This March, Tokyo-based NEC Corp. announced a licensing campaign for its patents on carbon nanotubes. The telecommunications and electronics giant was first to discover the tiny tubes of pure carbon, which it says will be incorporated in a fuel-cell battery for notebook PCs by 2005.

But nanotubes have many other applications -- including in transistors, ultra-wide-screen TVs and sensors -- and NEC's patents arguably give it control over all of them. "NEC plans to start actively encouraging companies to acknowledge its patents rights," says Diane Foley, an NEC spokeswoman.

Zvi Yaniv, chief operating officer of Nano-Proprietary Inc. in Austin, Texas, says his company spent $1 million to acquire a German patent covering the use of carbon nanotubes in flat-panel television screens, one of more than 50 nanotechnology patents Nano-Proprietary has acquired. Now, Mr. Yaniv says, the company is pursuing companies it believes may be developing new screens.

Several other small companies are also buying up as many patents as possible. "One of the main investment trends we see going on is a patent land-grab approach," says Peter Hébert, CEO of consulting firm Lux Research Inc., in New York. "You are seeing companies try to portray themselves as dominant" in particular areas.

Experts see parallels to the early days of biotechnology, where patents on basic genetic-engineering techniques reaped hundreds of millions of dollars in royalty payments from drug companies. Most leading patent-law firms have raced to set up nanotechnology practices and have been encouraging clients to aggressively file patents.

"It's like biotech on steroids," says Charles Wieland, an attorney with law firm Burns Doane Swecker and Mathis LLP in Alexandria, Va.

Nanotechnology patents have been a hit with investors, even though the science is difficult to understand and few products have emerged so far. Nanogen Inc., a company developing diagnostics devices, saw its stock soar 51% in a single day last December after it put out a news release saying the Patent and Trademark Office had awarded it a nanotechnology-related patent.

The value of the nanotechnology patents will soon be put to a significant test, observers say, by Nanosys Inc., a Silicon Valley start-up formed in 2001 that recently filed for an initial public offering underwritten by Merrill Lynch & Co. and Lehman Brothers.

Although it was formed by top-tier universities and venture capitalists and has attracted substantial interest, Palo Alto-based Nanosys has offered investors only vague product plans. Instead, its anticipated $500 million valuation seems based almost entirely on its claim to control more than 200 patents and patent applications licensed from several universities.

The flood of patents concerns some critics, who say that when faced with new technology the Patent Office all too often grants sweeping or overlapping patents in error.

The agency was criticized for allowing uncontrolled patenting of human genes and of Internet business methods, such as Amazon.com's 'One-Click' computer shopping patent.

Patent Office officials say they recognize the problem and are working to bring the agency up to speed. The agency is developing a system to classify nanotechnology inventions, and it recently began sending 50 examiners each month to training seminars.

"Right now there are not people graduating with nanotechnology degrees, so the expertise is being built internally," says Bruce Kisliuk, an agency director in charge of technology patents.

Experts predict that nanotechnology could rival information technology as an economic driver, but some observers point out key differences. Many seminal inventions in software and computing were freely licensed or not patented at all, notes Ted Sabety, of Sabety + Associates, a legal and consulting firm in New York. By comparison, U.S. universities and companies now patent far more aggressively, and courts are more likely to find competitors guilty of patent infringement.

"The patent thicket is going to be a bigger problem in nanotechnology than it was in computing," says Mr. Sabety. "The policy makers have to pay attention to this issue very seriously."

For many small nanotechnology companies, patent fees are a major cost. When Vijaya Vasista became the CEO of Nanosphere Inc., Northbrook, Ill., in 2000, she says she was surprised to learn that patents were the No. 2 expense after payroll. Winning a patent in the U.S. can cost $30,000 in legal fees, and winning one world-wide can run to $250,000. Although "the patent game is an expensive one," Ms. Vasista says it's necessary to protect the DNA tests Nanosphere is developing that use tiny gold particles.

Big companies are betting their attention to patents now will be critical in the future. Computer giant Hewlett-Packard Co., Palo Alto, Calif., says it has been granted about two-dozen nanotechnology patents in the past five years, half of those coming in 2003. And "we have about 70 applications pending, more than half of which were filed last year," says HP Labs spokesman Dave Berman.

HP's major patenting thrust is driven by the "understanding that the way things are manufactured is likely to change quite a lot in the next few years," says Phil Kuekes, a researcher in a group studying the possibility of new, inexpensive computers built using chemistry.

Dr. Kuekes, who has helped write a half-dozen patent applications already this year, says the claims are important "so that when change happens, you are one of the players."

Write to Antonio Regalado at antonio.regalado@wsj.com3

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