As I write the oil price has fallen 10 dollars in a week. This renewed volatility is a reminder of the sensitivity of our industry to geopolitical and economic issues beyond our control.
Meanwhile, costs in the industry, which tend to track prices, have risen significantly in the last few years. With oil prices falling, and pressures on costs, companies will need to “work smarter” to maintain profit margins.
Faced with the twin challenges of deeper waters and unconventional resources, the industry has invested heavily in technology and knowhow to the point where the tools and tricks of getting oil and gas out of the ground have become a major asset in their own right. A lot of those tools will be on display at OTC and so it seems a good time to review the basics of a sound intellectual property rights (IPR) strategy.
A successful IPR strategy has three stages:
- Identifying what IPR your business owns and uses;
- Protecting that IPR properly;
- Realising the value of that IPR through commercialisation and enforcement.
The first step is identifying your IPR portfolio, whether it consists of software, designs, equipment, data or processes. One key concern is ensuring that IPR you have paid to create actually vests in your company, whether created by your own employees, in joint ventures or by suppliers.
Where they invent something, employees may consider that it belongs to them personally. However in many jurisdictions, such as the UK, under statute the employer owns IPR created by employees during their employment and sometimes even in their own time.
Furthermore, the English courts will protect trade secrets from disclosure by employees both during and after employment.
Nevertheless, where an employee is likely to be involved in IP creation, their employment contract should include extra protections. Critically, contractual protections must be included in the services agreement of any consultants, as under English law, consultants will own the IPR they create unless the contract expressly assigns it – unlike US law.
Joint ventures are common in the industry and raise particular issues for IPR. Whether the JV is corporate or contractual, the agreement will need to set out what each party brings to the party. Typically, each shareholder will retain ownership of this “background IP” but license it to the JV. The “foreground IP” created in the course of the JV’s activities will also be owned by its creator unless the parties provide otherwise.
One solution that at first may seem pragmatic is for the parties to co-own the rights. However, in many jurisdictions, including the UK, co-owned rights cannot be exploited by one party without the other’s consent and this may give rise to practical problems, especially if the parties fall out.
Once ownership is decided, the agreement should transfer the IP to that owner on its creation as well as licence the other parties to use the foreground IP where appropriate, and address the parties’ rights to use the IPR on termination.
When it comes to service contracts, the differing relationship will clearly alter the dynamics of any negotiations. To many service companies, the profits from exploiting IPR are just as significant as those from providing services whereas for operators, exploiting IPR created in their upstream activities may simply not be a core business activity. Sometimes operators claim ownership of all IPR, but this can result in service companies charging higher fees and technological developments may then be slower to spread around the industry.
Many service companies are eager to enter into projects that allow them to test and develop equipment. For example, with increased Arctic exploration, service companies which have tools and processes tried and tested in the region will gain a competitive advantage. This may impact the terms the supplier is willing to accept. The operator might also be able to negotiate advantageous terms for future use of the kit. Operators, however, are sometimes wary of ceding too much IP to one service provider as it may become dominant in a particular area of expertise.
Once you have established what IPR you own, you will need to decide how to protect it. In many cases, the decision will be between patent or trade secret protection. The pertinent questions are:
- Is the invention patentable? Patents protect inventions that are novel and non-obvious over “prior art”. If the invention has already been publicised, for instance, this option will not be available.
- Will disclosing the invention reduce its value? Patenting gives a monopoly right over it for a specified period. However, the disclosure required during the patenting process may give competitors enough information to design around it.
- What value does the invention add? Patenting involves significant investment, especially in an international industry where protection will be needed in multiple jurisdictions. Will the added sales resulting from having a patent recoup those costs? If not, one option is defensive publication of the invention to make it part of prior art. While this will allow other parties to use it, at least parties with deeper pockets cannot obtain a monopoly right over it.
- Can the invention be kept confidential? The more visible the invention, the more likely that it can be reversed engineered. Trade secret protection will be most appropriate for technology that can be exploited without any visibility to third parties.
Patent owners should remember that there is still no such thing as an international patent. While obtaining protection in multiple jurisdictions has become simpler, it is still costly. To minimise the cost, one approach is to register the patent only in major oil provinces or in countries with a large manufacturing base. This strategy, however, will not be effective in situations where infringement can be avoided until the infringer is in international waters where protection does not apply, for example use of patented processes or unpatentable software.
Companies should also be aware of certain tax benefits in relation to the profits made on patents, such as the UK Government’s potentially useful new Patent Box scheme.
Mark Getty, chairman of Getty Images, has said: “Intellectual Property is the oil of the 21st Century”. Was he exaggerating? Certainly IP rights can be a valuable component; if players choose to exploit them to their full advantage.
Penelope Warne is head of energy at international law firm CMS Cameron McKenna