Summary: In this eight-week alert series, we are providing a broad look at current and emerging issues facing the energy sector. Attorneys from across the firm will discuss issues ranging from environmental disclosures and risk management in business transactions to insolvency, compliance programs and intellectual property. Please click here to read all of our recent publications.
The recent slump in oil prices has impacted oil and gas companies in a variety of ways, some to be expected, some less so. One unwelcome development is that while these companies have been implementing cost-savings and other measures to offset decreasing revenues, their expenditures on patent infringement litigation have been increasing. The correlation between decreasing crude oil prices and increasing patent litigation within the oil and gas industry, whether incidental or consequential, has been noteworthy: during the same time period crude oil prices have experienced a more than threefold drop, patent litigation within the oil and gas sector has increased by more-than-threefold.1
While the majority of these cases reflect litigation campaigns
launched by non-practicing entities (NPE), there has likewise been
an increased volume of competitor cases within the oil and gas
sector, possibly as companies attempt to offset declining sales
revenues with licensing revenues. To confront the challenge of
increased patent litigation during this time, companies facing
patent litigation should consider several potential
strategies.
Use of Inter Partes Review in Patent Litigation
Strategy
As part of its overall defense strategy, a defendant accused of
patent infringement can initiate a separate inter partes
review (IPR) to challenge the validity of the patent(s). The
procedure for conducting an IPR took effect on September 16, 2012,
as part of the implementation of the Leahy-Smith America Invents
Act (AIA), which expanded the then-existing inter partes
reexamination proceeding. An IPR may be sought against any patent,
regardless of issue date.
An IPR is a trial conducted by the Patent Trial and Appeal Board
(the Board) in which the Board reviews whether the claims of a
patent are patentable. Only patents and printed publications may be
relied upon to show that one or more claims of the patent should
not have been issued, and the claims may only be challenged as
lacking novelty (an earlier reference discloses the invention) or
on the basis that the claims are obvious (one or more references
can be combined or modified in an obvious way to arrive at the
invention.)
An IPR proceeding begins when a third party files a petition for
review of one or more claims of an issued patent. For example, a
defendant accused of infringing certain claims of a patent can
petition to have the asserted claims reviewed in an IPR. However, a
defendant in this situation has only one year from the date of
service of the complaint in which to file the petition. The patent
owner has three months from the filing date of the petition to
submit a preliminary response arguing why the Board should not
review the claims. Three months from this preliminary response
filing date, the Board will issue a decision on whether it will
institute a review of any of the challenged claims. If the Board
decides to institute a review, it will then issue a final written
decision on the patentability of those claims within one year of
institution of the IPR.
Aside from ending due to a final written decision by the Board
finding for or against patentability of the claims, an IPR can be
dismissed for procedural reasons, patent owners can disclaim (give
up) claims, and/or the parties can settle and agree to terminate
the proceedings. Thus, the outcome of an IPR is often more nuanced
than merely a straight win or loss by the patent owner. However,
generally speaking, IPR proceedings have been an effective tool for
patent defendants. Based on all IPR petitions completed as of
January 31, 2016, in about 64% of those IPRs, all of the instituted
claims were found unpatentable, at least some of the claims were
found unpatentable, or the parties agreed to settle.2
During the same period, IPRs resulted in complete wins for the
patent owner in about 36% of cases.
Despite the more-than-threefold increase in patent litigation in
the oil and gas sector from 2013-2015, data associated with IPR
proceedings in this sector shows that the number of IPR petitions
filed has remained relatively flat at less than 2% of all IPR
petitions filed. Moreover, although lawsuits naming top oil and gas
production companies3 also saw a threefold increase
during the same time, none of the named companies appeared as a
petitioner for an IPR on the patents asserted in the
lawsuits.
This is despite the fact that for about 77% of those proceedings
relevant to the oil and gas sector overall, all of the instituted
claims were found unpatentable, at least some of the claims were
found unpatentable, or the parties agreed to settle.4
Thus, it appears that IPR proceedings in the oil and gas sector
have been an effective, but underused, tool available to defendants
in the oil and gas sector.
Patent Clearance/Freedom to Operate
Given the effectiveness of the post-grant proceedings mentioned
above, one can grasp the importance of carefully considering the
use of these proceedings when faced with an accusation of
infringement. However, patent litigation can be expensive, with the
all-inclusive cost of defending a claim of patent infringement
averaging $2.2 million in 2015 for cases with $1 million-$10
million at risk.5
How can energy companies avoid such litigation, or minimize their
exposure when faced with such patent assertions? Some companies
seek to better understand their risk by conducting patent clearance
searching, which is also commonly referred to as performing a
patent freedom-to-operate analysis. In the energy context, project
planners, whether in the company's legal department or R&D
department, often commence this type of legal project when the
company is about to make a new investment or expansion. For
example, when the company launches a new product or service,
expands into a new market or industry, or plans construction on a
new capital investment, the company seeks to understand whether its
investment will further open it up to claims of patent
infringement.
For example, a company considers purchasing equipment or technology
for a big new project (e.g., drilling rigs, solar panels or wind
turbines). The company is deciding between two vendors: Vendor A
and Vendor B. Vendor B undercuts Vendor A on price by 20%, but the
company's patent diligence reveals that Vendor A holds key
patents on this technology and has actively enforced its patents in
the industry. Because the costs for defending patent claims from
Vendor A will likely dwarf the 20% price difference, and because
Vendor B's pockets are not deep enough to indemnify the
company, the company ultimately selects Vendor A at the higher
price. Or, a similar set of facts could lead to a different
outcome: upon "kicking the tires" on Vendor A's
patents, the company decides that the patents are nowhere near
worth the 20% premium and selects Vendor B, and fortifies itself
against the eventual claim from Vendor A.
Will knowing about these patent risks discourage new
investment? Not necessarily. Every new product or service
offering carries with it some level of risk. Understanding the
patent risk component, especially early in the process, permits
energy companies to (1) modify their plans to reduce the patent
risk, (2) obtain opinions of counsel to minimize the risk that any
patent infringement verdict would be tripled due to alleged willful
infringement, and (3) contractually shift the risk to other parties
involved in the project. At the very least, understanding the
patent landscape when diving in to a new project can minimize
surprises, such as a "blindside" patent infringement
claim, as well as questions from the company's leadership such
as "why didn't we see this coming?"
Defensive Portfolio Strategy
Often, small- or medium-sized companies that find themselves
defending a claim of patent infringement wish they had patents of
their own with which to "fire back." However, because the
patent process usually takes several years, from application filing
to patent grant, building a defensive patent portfolio necessitates
a longer-term and deliberate strategy long before facing a lawsuit.
A defensive patent portfolio strategy offers several advantages.
First, it places arrows into the company's quiver should
competitors try to copy its technology. Second, it gives the
company ammunition to fire back if a competitor accuses it of
infringement. Third, a defensive patent portfolio can create a
deterrent effect to make the company a less attractive target for
such claims. Fourth, a robust patent portfolio often makes a
company a more attractive target for merger or acquisition. Fifth,
as mentioned in the example above, patent coverage can convey
leverage in a competitive bidding or vendor selection process.
Finally, building a patent portfolio can make it more difficult for
competitors to patent the same improvements themselves.
While building a defensive patent portfolio necessitates a
longer-term strategy, the graph below illustrates a general
correlation between the number of patent applications filed in the
energy industry and the price of crude oil.6 While this
could signal that more inventions are made when business is good,
it could also signal that energy companies consider patent
applications to be an optional asset to be developed as profits
permit, rather than a core part of their competitive strategy. This
can leave companies more vulnerable compared to competitors who
continue to protect new innovations even during the downturns.
While a defensive patent portfolio strategy works for some companies, it also has limitations. For example, a defensive patent portfolio does not usually deter patent infringement claims from NPEs; as their moniker suggests, NPEs do not have any business of their own, and thus no products or services that could subject them to infringement claims. As another example, some companies simply do not innovate. If a company buys drilling equipment and performs well drilling services according to specifications, the company becomes invested in a current solution rather than searching for the next solution. However, sometimes a patentable idea comes out of those routinely using existing technology, and can be as simple as an employee asking "have we ever thought about modifying the rig by ____ to do ____?" In this way, even smaller companies can develop patent assets.
Patents as Revenue Generation
Large energy companies have been amassing defensive patent
portfolios for a long time; they view it as a necessary strategy to
remain competitive, build it into their yearly budgets, and foster
a culture that encourages engineers and scientists within the
company to recognize and submit new inventions for protection.
Whether in a large company with a long history of regular patent
filings or in a smaller company that is newer to the practice,
sometimes company leadership asks about other revenue generation.
Particularly as oil prices decline, energy companies look at their
assets, including their intellectual property assets, and wonder
whether any of them could generate revenue. This contributes to the
trend reflected in the graph above: competitor sues competitor to
recoup its R&D cost for new technologies, or smaller companies
sell themselves or their patent assets to NPEs who then aim those
patents at the entire industry.
In addition to deriving the defensive benefits of a patent
portfolio, how can energy companies make money from their patent
holdings? Companies can license their patents, but approaching
other companies and convincing them to license technology can
itself be risky. Often, the only way to convince a company that
they need a license is to threaten a patent infringement action.
This can backfire by inflaming tensions between the two companies,
or by making the first company look like a patent bully in the
marketplace. Even successful patent license negotiations require
some level of policing or auditing to ensure compliance.
Government regulatory activity can also create opportunity for
windfalls for patent holders. For example, if the government were
to mandate that all well bore caps comply with new criteria, and if
a company held patents on the only currently known well bore cap
technology to achieve that criteria, those patents would become
immensely valuable until a non-infringing alternative is
discovered. Identifying these types of opportunities involves not
only maintaining a steady defensive patent portfolio strategy, but
also actively comparing the patent portfolio to competitors'
activities, as well as staying abreast of regulatory developments.
More than a handful of government agencies actively regulate the
energy industry.7
With Every Downturn Comes an Upturn
As the price of crude oil remains low, energy companies may turn to
their other assets, particularly their intangible assets like
patents, to derive additional value. Adoption of a sophisticated
intellectual property strategy will help energy companies weather
the storm and position them for longer-term success. This includes
defensive strategies like planning for potential litigation and
understanding the array of available patent invalidation tools,
building a defensive patent portfolio, and conducting patent
freedom-to-operate analysis when launching a new product, service
or capital project. Companies further maximize patent value by
identifying licensing opportunities and positioning themselves well
for purchasing or selling patent assets. Understanding the
intellectual property risk profile associated with all of these
activities will give energy companies an extra strategic edge when
the price of oil rises again.
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