The COVID-19 pandemic has caused global industrial slowdowns and travel restrictions resulting in an unprecedented and rapid decline in the global demand for oil. Coupled with the failure of the OPEC+ producers and Russia to negotiate a production cut in February/March 2020, this rapid decline in demand resulted in an oil supply glut that sent prices spiraling downward. Ultimately, in April 2020, May futures for West Texas Intermediate crude — the U.S. standard oil price — turned negative for the first time in history.
Facing severely depressed oil prices and the uncertainty surrounding future demand for oil, operators and large companies in the petrochemical industry have responded by cutting capital and operational expenditures. Such cuts trickle down to all aspects of the oil and gas industry — from drillers, to service companies, to equipment manufacturers.
As they face uncertain (and likely depressed) oil prices in the COVID-19 world and beyond, companies in the oil and gas industry may find it helpful to their survival and future success to take a hard look at assets that are often overlooked during difficult times — in particular, intellectual property assets. A company’s intellectual property assets, including its patent portfolio and trade secrets, should not be neglected in difficult times, but rather should be strengthened and evaluated for potential sources of revenue and growth.
Maintaining Strong Intellectual Property Protection
To survive in the highly competitive oil and gas industry, companies must continually strive to make oil and gas exploration more efficient and affordable. Because “time is money” in the oil patch, new technological advancements over the last 20-plus years have made certain drilling and production programs economically feasible for the first time. Likewise, such advancements have unlocked oil reserves previously thought unrecoverable. Continuous technological advances in drilling and production are the lifeblood of the oil and gas industry, and they require the commitment of considerable time and expense for research and development.
It is thus imperative that oil and gas companies protect innovative technologies that result from their research and development efforts. This is true whether the price of oil is $100/barrel or $10/barrel, as seeking intellectual property protection for innovative technology can help companies stay competitive in these uncertain times. Therefore, companies in the oil and gas industry should continue to protect their critical intellectual property, whether through patent acquisition or enforcement, or through increased trade secret protections and monitoring. Some benefits of such investments are set forth below.
- Prevention of copying — The primary right afforded a patentee is the right to exclude others from making, using, offering to sell and selling the patented invention within, or importing the patented invention into, the United States. A U.S. patent therefore acts as a deterrent to competitors that may attempt to copy the invention. This is particularly important in these uncertain times, as the temptation to copy may be greatest when companies are attempting to survive the current market conditions.
- The “détente” effect of a strong patent portfolio — Having a strong patent portfolio may be a deterrent to a competitor filing a patent infringement action against a company. Concern over a potential infringement counterclaim may prevent a competitor from filing a patent infringement action. Further, a strong patent portfolio and the threat of a potential infringement counterclaim can provide the leverage a company needs to obtain favorable terms during settlement and licensing negotiations if a company is sued.
- Merger or acquisition possibilities — The right to exclude others from practicing a particular invention covered by a patent can help protect a company’s market share in a particular technology field. A strong patent portfolio can therefore make a company an attractive merger or acquisition target and can increase the overall value of the company.
- Protection of trade secrets — An unfortunate result of the downturn in the oil and gas industry is the termination of literally thousands of employment relationships. As more and more employees are terminated, the potential for theft of trade secrets rises. As terminated employees seek new opportunities to make a living, they may seek to start a competing company with a “head start” provided by their former employer’s trade secrets, or they may seek to improve their employment prospects by offering to bring their former employer’s trade secrets to their new employer. Either way, the temptation to misappropriate a former employer’s trade secrets will be stronger in these uncertain and volatile times. Companies in the oil and gas industry must therefore be vigilant in enforcing confidentiality and other restrictions in employment agreements, as well as monitoring departing employees’ behavior to identify any potential trade secret misappropriation at the earliest opportunity.
Taking steps now to maintain strong intellectual property protections is critical to a company’s future success when the price of oil rebounds. Failing to do so may leave a company at a disadvantage to competitors that continue to protect new innovations even during the current downturn.
Mining Patent Portfolios for Revenue Opportunities
As oil prices decline, revenue from sales of equipment and services in the oil and gas industry also declines. In such an environment, companies in the oil and gas industry often look more broadly at their assets, including their intellectual property assets, to determine if they could generate revenue. Generally speaking, companies can generate revenue from their patent portfolio by licensing their patents to competitors, by recovering damages for past infringement in litigation (whether by settlement or judgment), and/or by selling patent assets. Which approach makes the best business sense depends on a number of factors that must be analyzed.
For example, approaching competitors and attempting to convince them to pay a royalty for a license to particular technology can be risky. The competitor may refuse to take a license, leaving the potential licensor with the decision of whether to let the infringement continue or to file suit against the competitor to get it to agree to a license. The competitor may pre-emptively file a declaratory judgment action seeking to invalidate the patents at issue or may seek to invalidate the patents through an inter partes review proceeding at the U.S. Patent and Trademark Office. Either way, a company may find itself embroiled in a legal fight with a competitor it did not intend to start.
Even if the competitor agrees to a patent license, once licensed, the licensor has authorized that competitor to compete in the given field of the licensed technology for the duration of the license. A company must carefully weigh the benefit of immediate revenue generation in the short term while the price of oil is depressed, against the detriment of having a competitor in the marketplace competing with the same technology once the price of oil rebounds.
Rather than approaching a competitor to take a license, a company may choose to file a patent infringement litigation either to potentially obtain an injunction forcing that competitor out of the marketplace, thereby protecting market share when the price of oil rebounds, or to recover damages for past infringement as a way to supplement revenue, or both. Whatever the motivating factor(s) may be, litigation can be used as a tool to get a particular commercial result, and identifying the right patents and the right companies to file a patent infringement action against can be an effective way to improve a company’s business in the short term as well as the long term.
A company should also review its patent portfolio to identify patents in technology fields that are no longer a strategic focus of the company. Such patents can be shopped to companies practicing in that particular technology field as a way to potentially generate revenue during the downturn.
Potential Growth Through Acquisition
While the current conditions in the oil and gas industry have negatively impacted many companies, and oilfield services companies in particular, some companies in the industry with strong balance sheets and access to capital may see the current conditions as an opportunity to grow through acquisitions of businesses and equipment at depressed prices. Growth through the acquisition of distressed businesses is a common and predictable response to downturns in the oil and gas industry.
Companies seeking to acquire distressed businesses in the current conditions may focus on companies with similar technology offerings, thereby allowing for consolidation in a particular technology field. An important component of the value of the distressed businesses is the strength of the company’s intellectual property protections for its technology. As with any acquisition, it will be important for companies to understand and evaluate a target company’s intellectual property protections, and patent portfolio in particular.
While the pandemic presents practical difficulties to conducting due diligence into a company’s intellectual property, such due diligence is necessary. Companies should hire experienced intellectual property counsel with a particular focus on technology in the oil and gas industry to conduct such due diligence.
As the COVID-19 pandemic subsides, and as life begins to return to normal, demand for oil and gas, and, thus, the price of oil, will continue to rise. Those companies in the oil and gas industry that understand the importance of protecting their valuable intellectual property assets and looking for opportunities to exploit those assets may gain a strategic advantage when oil prices return to pre-pandemic levels.
McGuireWoods has published additional thought leadership related to how companies across various industries can address crucial COVID-19-related business and legal issues, and the firm’s COVID-19 response team stands ready to help clients navigate urgent and evolving legal and business issues arising from the COVID-19 pandemic.