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The oil and gas industry has always been attuned to the fact that innovation is at its heart. The importance of investing in R&D, protecting and monetising innovation and preventing competitors from threatening that exploitation are not novel issues.
Investing in the development of new technology to extract oil and gas has tended to be cyclical: the easier to extract and sell at a profit, the lower the incentive to be innovative and vice versa.
Currently, the sector is under a cacophony of pressures. While not in a perfect storm, and there are encouraging signs in the UK industry of at least bottoming-out and perhaps even a recovery from last year’s oil price fall, the challenges are significant.
The industry continues to operate in an environment where easy-to-extract oil and gas in established fields is depleting, forcing it to explore opportunities where extraction is more complex whether that be technically, legally, politically or a mixture of all of these factors. For example, fracking for shale gas.
Investing in innovation to adapt to the new frontiers is clearly on the agenda and is being actively pursued. Global management consulting firm, Bain & Co, place worldwide expenditure on research and development in the Oil & Gas industry in excess of US$12 billion per year and estimate that this will rise by 10% during 2015.
From the recently published UK IPO statistics for 2014, patent applications for drilling and mining remained at consistent levels at 426 (with 192 patents granted in 2014 compared to 294 in 2013). 24% of the top 25 companies who have had the most patents granted are those involved with the oil and gas sector including Baker Hughes, Schlumberger and Vetco Grey.
This continuing trend for the patenting of new technology highlights the importance of monopoly rights and also creating the opportunity to drive alternative revenue streams through licencing and careful collaborations with third parties.
Further, tolerance for proximity to proprietary technology by competitors tends to decrease during tougher times: any resultant loss of market share is considered a potential actionable offence.
It is therefore worthwhile refreshing memories as to what intellectual property rights ("IPRs") and associated rights are available to the innovative company so as to maximise benefits from that investment in innovation.
IPRs can take many forms. The most relevant to the oil and gas sector tend to be:
While design rights and registered design protection are available in practice, they are rarely if ever the protection of choice in this industry.
A patent protects an inventive product or process. In order to qualify for patent protection in the UK (and the EU generally), the invention has to satisfy a number of conditions, namely, it must be new (in other words not previously disclosed to the public), demonstrate an inventive step (ie it must not be obvious to someone who is skilled in the relevant field) and must be capable of industrial application.
In principle, once granted the patent will normally last for twenty years from the date of the application subject to payment of renewal fees.
It should be noted that, except in very limited circumstances, there is no "grace period" allowing disclosure of the invention to the public before making any patent application.
Patents are often viewed as the last link in the chain from research and development to exploitation on a monopoly basis. The quid pro quo for receiving this time-limited monopoly is to disclose the invention to the public and, of course, that includes competitors.
Obtaining patent rights also opens the door to licencing to third parties either on an exclusive or non-exclusive basis and also selling or transferring that technology from entity to entity.
As a property right, a value can be put on a company’s patent portfolio which, in turn, can increase the value of that entity. Having such property on one’s books can attract inward investment and make the business a more attractive proposition when looking for a potential exit.
Further, in an industry where field testing and obligatory regulatory consents are part and parcel of operating, the publication of results and ancillary data could disclose the underlying invention. Relying on the law of confidence or trade secrets to protect this information becomes untenable in these circumstances, with patents offering the best chance of protection.
While the certainty of monopoly rights (subject to any claim for invalidity) and licencing opportunities are attractive, obtaining patent protection can be an expensive and lengthy process.
Further, obtaining patent protection and enforcing patent rights can be particularly challenging in certain jurisdictions where the technology is in use.
This issue can arise in two scenarios:
As a further consideration, given that some regions in which the industry operates, a current reasonable enforcement system could yet be undermined by political instability down the road.
Consideration therefore needs to be given to the type of patent applied for and where (eg Is there any point seeking a patent for a process of extracting where that extraction is taking place in a "difficult" territory, or would a patent for the equipment used be easier to enforce as proceedings could be raised at the place of manufacture of the equipment rather than just where it is being deployed?)
Added to this, the industry is generally secretive regarding the specific technology and processes it employs: getting wind of a possible encroachment of a patent right and then gathering enough evidence to commence proceedings is likewise challenging.
A duty of confidence arises under UK law when the confidential information is disclosed in circumstances where the recipient has a duty to maintain that confidentiality. Such a duty can be inferred in the circumstances of the disclosure.
The law of confidence can offer an alternative protection regime where certain know-how or inventions are valuable to a business but are not patentable or a patent is not pursued for various commercial reasons.
A very wide range of commercial information may be protected as long as the confidential nature of the information is maintained and the circumstances of disclosure are carefully controlled.
Maintaining a secret requires substantial effort to control and police the dissemination of that confidential information.
Leaking of or taking away of such confidential information, which can include the "know-how" invented, developed, contributed to or learned by an employee, is a real risk for any innovative business: the oil and gas industry has a highly mobile workforce with skilled workers in high demand.
It is therefore crucial to try to limit the loss of the IP which can underpin that know-how through diligent record keeping of the contributions of that employee to inventions and innovations and what access an employee has had to the same.
The use of non-disclosure agreements and specific clauses in employment contracts/contractor contracts which impose a prohibition on the disclosure of, and a restrictive covenant on the use of confidential information is the very least by way of safeguards which should be put in place.
In the UK, enforcement can be directed against the recipient of the confidential information or any third party recipient even where that third party was not aware of the confidential nature of that information when it became aware of it.
There can also be secondary liability where a person assists the recipient in the misuse of the confidential information: this can include "turning a blind eye".
If confidential information is wrongly disclosed or used for an unauthorised purpose, to achieve a remedy for that breach, a claimant company must first establish that the information reaches the standard required to be protectable and that the company took reasonable steps to maintain confidentiality.
Thereafter establishing a breach is a fact and evidence heavy process. It is worth noting that the courts are likely to take a more restricted view of what can properly be considered confidential information than the average business person.
However, the approach to confidential or proprietary know-how is not uniform across different jurisdictions. Courts outside of the UK may take divergent views on the extent to which a former employee is entitled to use the knowledge and experience gained at previous employers when carrying out their duties at a new employer.
As well as seeking to safeguard against disclosure of proprietary know-how stored in a former employee’s head – insofar as is possible – care also needs to be exercised when employing a person from within the industry.
The new employer will quickly get entangled in any dispute involving a former employee. This will likely include at least legal correspondence and possibly litigation in the circumstances where the former employer makes allegations of wrongful disclosure or threat of disclosure of proprietary know-how which may advantage the new employer.
Understanding any restrictive covenants imposed by a former employee to which the employer is subject is also important as they may operate to exclude that employee from being involved in the development of certain technologies (remembering that restrictive covenants are open to challenge).
Emphasising the importance of not using an employee’s proprietary know-how or trade secrets when gained at a former employer should be adopted as part of the induction process together with the inclusion of provisions in the contract of employment specifically prohibiting of use of third party IPR and proprietary know-how.
Development of IPRs by employees acting in the normal course of their duties will have the effect of the resultant innovation being owned by the employer. However, there are certain circumstances where an employee can seek compensation in addition to his usual remuneration.
The waters can become muddied when contractors and service providers are engaged to either innovate or contribute to any innovation. It is therefore important that the ownership and use provisions of any resultant IPR is dealt with in the contract for services at the outset.
Ownership and use rights can quickly become complicated, leading to competition issues and dispute.
The remedies for breach vary from IPR to IPR. However, common features include injunction (interim and final) and the payment of damages or an account of profits.
It is vital that any litigation or threat of litigation be carefully prepared, particularly given the risk of a claim for unjustified threats (a feature of patent infringement, amongst other particular IPRs).
Further, defensive strategies including invalidity claims either in response to an infringement claim or seeking a declaration of non-infringement before the right-holder raises proceedings (and thereby have more control over the proceedings including selecting the jurisdiction seized, assuming there is a choice) can be powerful strategies to engage.
Patent litigation and fact heavy litigation such as breach of confidence claims are expensive and can detract from the day-to-day management of the business. It is therefore important to take steps to minimise the risk against disputes arising in the first place.
A strategy to address this includes seeking advice at an early stage from experienced advisors in this field: a well-planned litigation strategy necessarily includes triggers to assist parties achieving an early and commercially sensible resolution to any dispute.
For further information on our senior Intellectual Property team and experience in this sector, please click here.
This article was written by Ian Wood.
For more information please contact Ian on +44 (0)20 7203 5124 or at email@example.com