November 2013

Historically, success in the oil and gas industry has been driven largely by exploration (namely drilling rights) and market forces (such as the price of a barrel of oil or gigajoule of gas). Although the technology used to extract oil and gas has evolved over time, there may have been less incentive to innovate when oil and gas are easy to extract and easy to sell at a profit. Today, harder-to-extract oil and gas continue to be discovered, and current technology and techniques are not equipped to handle the task. Some studies have claimed that only a fraction of Alberta oil sands is profitably extractable using today’s technology. Additionally, new frontiers with vast deposits of oil and gas are known to exist under harsh terrain such as deep seas, shale beds, and the ice and snow of the far north. To exploit these new frontiers, the industry must overcome many of the same types of technological challenges faced in the oil sands in Alberta.
Thus, the advancement of technology continues to become more and more important in the oil and gas industry. As in other major industries, such as pharmaceuticals, telecommunications and electronics, new technologies can breed vast amounts of intellectual property (IP). As the industry resolves technical challenges and creates the efficiencies needed to extract oil and gas at a profit (or to extract anything at all), companies should take steps to protect the IP they generate and to avoid infringing on the IP of competitors.
The types of IP that are typically most relevant to oil and gas companies are patents for inventions; copyright for drawings, software code, user manuals and other work product; and trade secrets for confidential information. Trade-mark protection may also be helpful to large companies that have strong brands and a retail presence. A harder-to-define form of IP includes the skills and experience or “know-how” developed by employees.
Patents and trade secrets are fundamentally different in terms of confidentiality. The fundamental principle behind a patent is that the patentee receives a time-limited monopoly in exchange for making the details of the invention public in order to contribute to the advancement of technology. Thus, if a company patents an invention, the invention is likely to become public knowledge after it hits the market and is no longer secret. By contrast, a trade secret is—as the name suggests—secret and it must be kept secret to retain IP protection.
Companies sometimes choose trade secret protection over patent protection if the patentability of the technology is questionable or the technology cannot be readily reverse engineered. However, trade secret protection is falling out of favour for several reasons. First, the efforts required to conceal and control the dissemination of trade secret information can be daunting. Second, trade secret protection is easily compromised by inadvertent or malicious acts. Finally, misuse of a trade secret is not actionable unless the company has taken reasonable steps to maintain confidentiality.
When balancing patents against trade secrets, the main consideration should be whether the potential monopoly on the innovation outweighs the ability to keep the details of the innovation away from competitors. The company should also consider whether it is feasible to keep the innovation a secret and whether it has the resources, in both time and money, to play the “patent game”. Throughout the oil and gas industry, more companies are turning to patents, rather than trade secrets, for these very reasons—particularly when field testing and necessary regulatory approvals would require the publication of data that could reveal the innovation.
Patents provide the right to prevent others from making, using or selling the claimed invention. Because patents can be filed in most countries, companies often hold patent “portfolios” with rights in various jurisdictions. Since the patent is a form of property, it can be licensed to others on an exclusive or non-exclusive basis. Patents can also be bought and sold, and rights to patented technology can flow from one entity to another based on joint development or contractor-type relationships. For example, rights may be exchanged in joint ventures with another company or in development agreements with academia. Patent office filings in the last few years suggest that companies in the oil and gas industry are filing more patent applications and are increasingly seeking to enforce these patents.
Know-how is also significant to a company’s day-to-day operations. Employees in the oil and gas industry often build up substantial know-how, which then provides leverage for these individuals to move from one company to another in search of a better deal. Since know-how often contributes to patentable innovations or trade secrets, the loss of know-how to other companies, without proper protections for the underlying IP, can be catastrophic. Thus, in addition to protecting against the outright theft of confidential information, companies must have protections in place to avoid a loss of know-how from becoming an even bigger gain to competitors. Unless a company properly documents intellectual contributions by an employee, that employee holds—in his or her head—the only copy of potentially important information. Similarly, when hiring a new employee, a company should be cautious about whether that employee is bringing something to the table that they do not, in fact, own. Therefore, know-how can turn out to be a blessing or a curse.
In the competitive oil and gas industry, where companies must innovate to stay competitive and profitable, the company with a better IP strategy has a strong competitive advantage. The importance of intellectual property has led to more disputes in the oil and gas sector, particularly as more patents are granted. In Canada, IP litigation in the oil and gas sector may now rival pharmaceutical patent litigation in importance.
The stakes can be extremely high in patent litigation. A C$52-million settlement in Varco Canada Limited et al. v. Pason Systems Corp. et al. confirms the importance of patent litigation in the oil and gas industry. In Varco, the patent at issue related to auto-driller systems used in the petroleum industry, particularly for directional drilling. The court ordered a permanent injunction, return of the infringing goods and the C$52-million payout as disgorgement of profits.
In addition to competitors, other threats should be considered, particularly by large, profitable target such as a big oil and gas companies.
Service Companies
Many service companies have emerged to service large oil and gas organizations and offload many technological burdens, particularly in drilling. As more of the problem-solving is outsourced to service companies, companies should consider the IP that may have been generated in the course of overcoming these technological burdens. For example, a service company that develops a novel drilling technique could patent that technique and retain control over the process other companies rely on to extract oil or gas. If the IP is generated during a joint venture or under contract, the oil and gas company should take careful steps to ensure that it retains the appropriate rights. Among other things, the company should consider whether it should seek formal IP protection, which entity would obtain and pay for the protection, what happens in the event of a dispute, and whether to seek indemnities for infringing the IP of others.
Mergers and Acquisitions
In a corporate transaction such as a merger or acquisition, IP due diligence is also becoming increasingly important in identifying value and risk. Indeed, IP issues are paramount regardless of whether the risks come from concerns about the ability to extract the purported value (including concerns about whether the target company has any IP and whether know-how is likely to depart post transaction), indemnities tied to joint developments with third parties, freedom-to-operate issues or existing IP-related disputes.
Foreign Companies
Foreign companies can file for patent protection in Canada, whether or not they are currently operating here. Consequently, new technologies developed in the United States, Europe, China, Russia and elsewhere may be patented in Canada with all the opportunities for enforcement. This underscores the need to develop an IP strategy, including patent “clearance” (also known as “freedom to operate”). The knowledge gained from IP due diligence as part of an IP strategy can lead to strategic partnerships and collaborations—for example, by partnering with an innovative foreign company to share technology.
Non-Practising Entities or “Patent Trolls”
Non-practising entities (NPEs), more commonly referred to as “patent trolls,” are even more alarming than the question of what IP other legitimate oil and gas companies own. Patent trolls typically acquire patent rights that are perceived to be infringed by an industry at large. Since the cost of patent litigation can be in the millions of dollars, particularly in the U.S., patent trolls often propose a quick settlement that is less than the potential cost of litigation.
Unfortunately, since a patent troll is a “non-practising” entity, traditional cross-licensing or counter-claims for patent infringement are not available strategies for defence against a suit by a patent troll. However, a sophisticated IP strategy—namely, having strong IP protections in place—can minimize the effect of a patent troll.
Currently, patent trolls are most active in the U.S., where several large oil and gas companies have been sued. However, the U.S. government has recently announced a proposal to crackdown on patent trolls operating in the United States. If this crackdown succeeds, the oil and gas sector in Canada could present a good alternative target for trolls. Since many of the patent portfolios owned by patent trolls include international rights, oil and gas companies should determine what Canadian patents, if any, could subject the company to a threat of litigation.

A host of litigation remedies are available to protect IP, ranging from Anton Piller orders (civil search warrants) to injunctions. However, the courts consider many of these remedies "draconian", so they often require a high level of evidence before ordering such remedies. Although these types of remedies are fraught with procedural pitfalls, they can significantly protect the interests of the aggrieved party if properly executed. As a result, choosing experienced counsel is critical to obtaining the best and most cost-effective result.

A number of litigation defences can potentially lead to an early resolution without the expenditure of significant legal costs. These include arrangements to have independent third parties inspect and provide a report regarding whether, and to what extent, the offending product infringes upon the IP rights of the claimant. Again, retaining experienced counsel can more readily result in a relatively quick resolution and the avoidance of costly litigation proceedings.

A strong IP strategy is the key to a successful business strategy. By retaining experienced counsel and developing a robust IP strategy, a company can avoid or, at least, manage many expensive pitfalls and add real value into an organization.

If you would like further information or have a specific business issue you wish to discuss, please contact Brett Slaney, Dalton McGrath or any one of our Intellectual PropertyOil & Gas or Litigation & Dispute Resolution groups.