Owing to the depletion of existing resources and geopolitical factors, participants in the energy marketplace are searching for alternatives to crude oil originating from the Gulf states. This is further incentivizing the exploration for and development, production, and upgrading of untapped oil and gas resources, especially unconventional reserves. Much of the production and upgrading is enabled by technology development. As new competitors are attracted to participate in the commercial exploitation of oil and gas resources, competitive pressures increase, and it becomes increasingly important to aggressively protect intellectual property associated with new technologies that are being developed.
There is no one-size-fits-all solution as it relates to the intellectual property protection strategy for oil and gas technologies. Depending on the technology’s role within the value chain, different considerations apply.
At the risk of oversimplifying the analysis, it may be helpful to treat oil and gas service companies differently from producers/operators when evaluating applicable intellectual property protection strategies. Approaching this analysis by distinguishing between service companies and producers is, perhaps, not surprising, given the difference in: (i) the competitive marketplace within which they operate, (ii) the nature of the technology solutions being developed, and (iii) the risks/rewards associated with the technology hurdles being overcome. In fact, each of these factors informs the direction the intellectual property protection strategy takes.
Oil and gas service companies
Service companies generally develop technology to address problems of oil and gas producers in upstream operations. Service company technologies can include drilling technologies as well as technologies relating to well completion, service and maintenance.
Solutions to these problems demand “thinking-on-your-feet” ingenuity, and are based on years of know-how developed through practical application. Typically, these solutions yield immediate and fairly significant commercial rewards, thereby rendering it easier to justify the initial investment in research and development. As such, technology development is occurring at a relatively fast pace, and it is important to keep informed of competing service companies’ patenting activities to avoid tripping over their patents and attracting patent infringement liability.
Apart from addressing customers’ immediate problems, some of the larger service companies are also undertaking fundamental research. This includes research into new materials for sand control and coiled tubing, hydraulic fracturing fluids and rheology of fluids transport.
Patents vs. trade secrets
The intellectual property vehicle of choice for service companies is more likely to be patent protection rather than trade secret protection. This is because it is more difficult to control information flow, and maintain trade secrecy, when technology is exploited on the behalf of multiple customers and at multiple properties.
For smaller service companies, there is another reason why patent protection is preferable—such companies may be hoping to be acquired by larger service companies. Such potential purchasers are likely to discount the purchase price in cases where the service company’s technology is being protected as a trade secret. This is because the technology’s value is dependent on whether the target service company has successfully protected the trade secret, and this may be impossible to determine with any certainty.
Relevance of start-ups and non-practicing entities
It is difficult for an inexperienced start-up to jump into the oil and gas service marketplace with an important technology advancement. Such a business would lack the benefit of insight into customers’ problems, which is usually gained through years of experience and an intimate relationship with the customer. Accordingly, commercially meaningful innovation may prove difficult. Further, without a track record and customer relationships, it would be difficult for such start-up organizations to find customers for their technology. Such organizations would, therefore, face significant commercial risks.
Given such risks, inexperienced start-ups in this marketplace are rare. New technologies, and associated intellectual property rights, are unlikely to be created from this kind of market participant.
Although a consideration relative to their potential threat level vis-à-vis producers (more on this below), non-practicing entities (“NPEs”) are less likely to be significantly relevant to service companies. NPEs are business organizations that own patents for technologies they have no intention to use for commercial purposes. Because NPEs do not make, use or sell technologies, they cannot be sued for patent infringement. As such, when an NPE claims for patent infringement versus an oil and gas company, the NPE is invulnerable to counter-assertion threats by the allegedly infringing producer. This further exacerbates the power imbalance beyond what is typically present in a patent dispute between marketplace competitors.
NPEs typically acquire intellectual property rights of failing or failed companies. Start-ups, although perhaps inherently vulnerable to business failure, are unlikely to provide fertile ground for service company-relevant intellectual property, for the reasons discussed above. With respect to patents of more mature yet failing service companies, these are more likely to be acquired by a competing service company rather than an NPE. This is because the competing service provider is better positioned than an NPE to enjoy economic benefits from actually using the intellectual property protected technology and, therefore, able to pay a higher price for these assets.
Even so, NPEs cannot be completely ignored. Service companies should be alert to business failures and intellectual property that may become available for acquisition as a result of such business failures, if only to render it unavailable to NPEs.
Responses to increased competitiveness
Due to the lucrative nature of this business, additional market participants are likely to be attracted to this industry, and intellectual property protection strategies are likely to shift. As the number of market participants increases, the risk of becoming ensnared in a competitor’s patent increases, and it becomes even more important to police competitors’ patenting activities to avoid patent infringement liability.
The increased competitiveness further dictates a more aggressive intellectual property protection strategy. As the number of competitors increases, it becomes more difficult to maintain competitive advantages in the marketplace based on first-mover advantages and service quality. Under these circumstances, it is likely there will be an increase in patenting service company technology as well as enforcing such patents. By patent-protecting developed technology, the service company secures a tool to block imitating competitors, and thereby preserves competitive advantage in the marketplace. Even with the mere existence of patent protection, competitors become “chilled” from developing imitative technology, for fear of triggering a patent infringement claim.
From a defensive perspective, it also becomes preferable to patent-protect technology, as opposed to protecting it as a trade secret. By choosing to protect developed technology with a patent, rather than as a trade secret, an earlier-developing service company avoids becoming vulnerable to a competitor’s future patent that is granted covering the same technology (in some jurisdictions, such as Canada, trade secret technology does not function as prior art versus later independently developed technology, such that the later developing patentee can enjoy valid patent protection and assert it versus an earlier-developing competitor when the earlier-developing competitor has maintained the technology as a trade secret).
Also from a defensive perspective, it is worthwhile to grow a patent portfolio. Growing a patent portfolio facilitates cross-licensing arrangements. As well, the organization is better positioned to counter-assert patent rights in response to a patent infringement claim by a competitor. By being able to counter-assert patent rights, the organization is in a better negotiating position to exact a settlement of the patent infringement claim on more favorable terms.
Oil and gas producers
Producers have relatively robust research and development departments, focused on new technology development in upstream, midstream and downstream operations. Producers generally do not develop technologies related to drilling or well completion, service or maintenance, but there are instances of overlap with service company technology development. For example, ExxonMobil has been active in developing multistage fracturing technology.
Patents vs. trade secrets
When deciding between patent protection and trade secret protection, trade secret protection is generally a relatively more realistic option for producers than for service companies. Producers are better able to control third-party access to information, and are thereby better at preserving secrecy and rendering infringement detection by competitors more difficult. This is because their technology is being deployed on property the producers have exclusive rights to develop. It is much easier to control access to information on one’s own leasehold interest in property, for example, than someone else’s.
Having said that, with increasing collaboration, employee mobility, and the risk of mandatory information disclosures to regulatory authorities during project approvals, trade secrets may be difficult to maintain, even for producers. If the technology is commercially significant, producers must also be mindful that competing producers may be attracted to independently develop the same technology. Once developed, the trade-secret-protecting producer has no control over the later-developing producer’s behavior.
The later-developing producer may choose to disclose or, even worse, patent such technology. So in the extreme, the trade-secret-protecting producer is vulnerable to a patent infringement claim by a later-developing producer who independently develops the same technology. This patent infringement risk is only exacerbated as the industry’s appetite for patent protection increases. To sum up, the risk for early expiry of trade secret protection, coupled with the patent infringement risk, materially discounts the trade secret protection strategy option for producers.
Collaborations and start-ups
Recently, oil and gas producers have begun collaborating and sharing technology developments. A good example of this is oil and gas producers participating in COSIA (Canada’s Oil Sands Innovation Alliance). COSIA facilitates developing, capturing and sharing technologies directed at improving the environmental performance of oil sands production. The long-term success of these and other collaborative relationships depends on succinctly defining intellectual property rights from the outset.
Start-ups appear to occupy a role of conducting fundamental research and developing technologies that industry may put to commercial use. This is especially the case for developing potentially disruptive extraction or upgrading technologies at universities, where academic freedom encourages testing of blue-sky hypotheses. Recent examples of oil and gas technologies being developed by start-ups include in-situ solvent-based oil sands extraction technology (N Solv Corporation), solvent extraction of bitumen from mined oil sands (Switchable Solutions Inc.) and heavy oil upgrading technology (Well Resources Inc.).
Start-up-based technology developments generally require an oil and gas producer to validate the technology (e.g., pilot plant testing). Failing that, it is unlikely the technology development will be accepted. This is because of the natural reluctance to risk upsetting an existing, economically successful operation by deploying an unproven new technology. As well, the general nature of the technology may dictate the participation of a producing company.
For potentially disruptive technologies (e.g., a novel oil sands extraction process) where development carries significant risk, and the rewards are not necessarily immediate, an alliance with a producer almost seems mandatory. Such alliance results in more substantial resources being made available to fund the research and development and also results in the sharing of risk.
As a necessary incident to creating this relationship, intellectual property rights, and the extent to which they can be exploited by the interested parties vis-à-vis one another must be contractually addressed before such rights are created. Otherwise, the parties’ expectations may be thwarted, and the relationships may unravel.
Threats from non-practicing entities
Intellectual property strategies may also shift if non-practising entities begin assuming ownership of oil and gas technology patents.
Given the potential economic rewards, NPEs are more likely to become prominent in the oil and gas space, and especially become a threat to producers. This is because of the relatively greater relevance of start-up-developed technology within this space that, once orphaned, can potentially be acquired by NPEs. NPEs can take the form of academic institutions or start-ups, who develop technologies and secure patent protection, but never successfully deploy them (whether unintentionally or not) to industry (“orphaned technologies”). They can also take the form of patent accumulators, who accumulate patents covering such orphaned technologies.
To pre-empt NPEs, producers may need to more closely monitor relevant start-ups and develop relationships with them. As well, producers may need to behave like NPEs by looking out for and purchasing orphaned technologies. Apart from running the table on NPEs, producers can further protect themselves from NPEs by biasing their intellectual property protection strategy towards patent protection. In doing so, producers mitigate the risk of being sued for patent infringement by an NPE in relation to trade secret technology whose use by the producer pre-dates the NPE patent.
Norton Rose Fulbright Canada LLP
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