Intellectual Property Issues in Shale – Protecting Your Intellectual Property and Avoiding Infringement

July 13, 2011 Authors: Charles B. Walker, Jr., Richard S. Zembek

The rise in energy prices and significant volumes of natural gas and oil contained in deep shale formations has led to a renewed interest in recovering natural gas and oil from these formations. As work proceeds in these formations, companies are developing improved technologies for stimulation and production, including hydraulic fracturing techniques.

Development of these new technologies has led to an increased effort to protect the intellectual property associated with these developments. For example, since 2011, the United States Patent and Trademark Office ("PTO") has issued over 100 patents relating to various aspects of hydraulic fracturing, and many more patent applications are still pending before the PTO. Some of the issued patents address materials used in connection with fracturing such as hydraulic fracturing proppants, gelling agents, cross-linkers, breakers, and surfactants. Other issued patents relate to aspects of the fracturing process itself. For example, one patent relates to a method for estimating the size and orientation of the fractures created. The owners of these intellectual property assets are not limited to major producers or large service companies, but they also include raw material suppliers, proppant manufacturers, and other companies involved in different aspects of hydraulic fracturing.

The growth of intellectual property relating to hydraulic fracturing raises several key issues for companies involved in all aspects of hydraulic fracturing. The first set of questions involve how do I identify and protect my IP assets? Next, how can I extract value from these assets? Finally, how can I avoid infringing other companys' IP assets? This article addresses each of these areas.

The Answer to "What Do We Have?": Intellectual Property Audits

The first step to maximizing the value of a company's developments is identifying the intellectual property assets that are already in the company's possession. In addition to cataloguing the patents, trademarks, trade secrets, and copyrights that a company possesses, a review of the company's processes should be conducted to identify the activities or innovations that give the company a competitive advantage. For example, the steps that allow a company to produce hydrocarbons in regions where others have been unsuccessful may represent a valuable intellectual property asset. It is important during this part of the process to not overlook technologies the company considers to be "merely" the result of good engineering or business practice.

Identifying potential intellectual property assets is not a one-time action, but an ongoing review process that should be done periodically. The initial identification process should include a review of all aspects of the business. Later reviews should focus on the areas where changes or improvements have been made. The frequency of subsequent reviews is often dependent on the types of changes, but should occur at least annually.

The cataloguing of a company's intellectual property assets may have another benefit. Identification and documentation of processes and methods used by the company can be helpful in establishing prior uses which may invalidate another company's patents.

Should We Protect It, and How?: the Different Forms of Intellectual Property Protection

The next phase involves deciding what form of protection, if any, is best suited for the asset and taking the necessary steps to secure that type of protection. While there are many different forms of intellectual property protection available, most of the innovations that companies make are generally protected by patents, copyrights, and/or trade secret protection.  The scope of protection, benefits, and deficits of each type of intellectual property protection varies greatly. The choice often depends on such factors as the nature of the asset to be protected, its life cycle, the relative cost of the forms of protection, the need for secrecy, and the scope of protection afforded. Because of the complex legal and business issues involved in deciding which form of intellectual property protection is appropriate for a given technology, these decisions are best made by a team that includes technical and business personnel, as well as intellectual property counsel.

Patents

Patents are perhaps the best known but least understood form of intellectual property protection. A patent gives its owner the right to exclude others from making, using, selling, or offering to sell the invention described in the claims of the patent in the United States, or importing that invention into the United States. A patent protects against both those that copy the invention and those that develop it independently. Thus, a patent generally provides the broadest type of available protection.

The drawbacks of patent protection include a limited term (generally limited to 20 years from the original filing date of the patent application), and a full public disclosure of the technology (the information contained in the patent application will almost always become public, even in situations where a patent is not granted). Perhaps the biggest drawback of patent protection is cost.  Depending upon the complexity, maturity, and value of a given technology, the cost for obtaining patent protection in the United States can run into tens of thousands of dollars. If foreign protection is sought, the cost can run into the hundreds of thousands, depending on the countries in which protection is sought.

Copyrights

Copyrights protect certain tangible expressions of an idea or concept, including forms such as books, movies, sound recordings, computer software, and website pages from direct copying. They do not, however, protect the concept of the idea itself, nor do they protect against independent development. The cost for obtaining a copyright registration is very low compared to the cost for obtaining a patent, and the copyright registration itself is only necessary in certain circumstances (such as a prerequisite to filing a lawsuit for infringement). The actual copyright exists from the moment the work is fixed in a tangible medium. The duration of protection a copyright provides is also much longer than the duration of a patent: the life of the author of the work plus 70 years in many cases. Copyright registrations are often obtained for items such as as computer software and sales and training materials.

Trade Secrets

A trade secret consists of information owned by a person or company that is not generally known by others and that provides the owner with a competitive advantage. The duration of a trade secret can be indefinite as long as: (1) the owner protects the confidentiality of the information and (2) a third party does not discover the information through independent development or reverse engineering. The formula for Coke® is a classic example of a trade secret that has endured for decades.  Something need not be patentable to be eligible for trade secret protection.

The cost of trade secret protection depends largely on the cost of protecting the information from public disclosure.  While the precise steps taken to protect a trade secret will often depend on the nature of the information. They typically include such practices as the use of non-disclosure agreements before releasing the information to employees or third parties, physical security of the facilities where the information is stored and used, limiting access to the information to those who need to know it, and retrieving copies of the information shared with third parties when the need for sharing ends.

Can We Make (More) Money from It?: Monetizing Intellectual Property Assets

Once the asset has been protected, the next step is to decide how best to use the asset. Many times this will entail using the asset, either to gain or maintain a competitive advantage or to keep competitors from practicing a given technology.  Sometimes, there will be opportunities for gaining extra value from a given intellectual property asset by licensing the asset to a third party for a royalty or fee.

A technology developed for a particular region or type of formation may have an unexpected applicability in another region or formation.  For example, Ukrainian companies interested in developing shales in their home country are turning to U.S.-based companies to obtain the requisite technology. Similarly, hyraulic fracturing technology is being used to develop the Neuquén Basin in Argentina. The use of these technologies in different regions or formations offers the companies that developed the technology opportunities to license.  Making the information available for licensing may also help a company gain access to technology develped by others through cross licensing and joint ventures.

An alternative path to obtaining value for your intellectual property assets is through litigation. This avenue is expensive and places the asset at risk. The benefits include capture of royalties for past infringement potential, future royalties, and a possible injunction preventing the competitor from using or selling the technolgy for the life of the IP asset.

Systems should also be established to determine if a competitor is making, selling or using a production method that falls within the scope of your asset. This is often accomplished by monitoring your competitor's activities to see if they appear to be the same as what is covered by your asset. Once a patented activity is identified, you need to work with your IP counsel to confirm that the activity is covered by your asset and which course of action will likely bring value to the company. A careful cost-benefit analysis should be done to ensure that likely return from licensing or litigation far exceeds the potential cost of either license or litigation.

The innovations that help companies succeed also present new opportunities to develop intellectual property assets that can add to a company's value and competitiveness. By working with its intellectual property and licensing counsel, a company can ensure that its intellectual property assets are properly protected and used to maximize their value to the company.

Avoiding Patents of Others

With the increase in the number of patents sought and issued, there is likely to be an increase in patent infringement litigation.  While these disputes have generally been limited to the major service companies, the increased number and variety of companies obtaining patents suggests that future suits may not be so limited. Each party involved in hydraulic fracturing should take steps to minimize its risk of being accused of infringement.

In a perfect world, a company would be aware of all patents relating to the technologies it uses and be able to take steps to avoid or reduce the risk of infringing those patents. Unfortunately, the growth of IP in the field of hydraulic fracturing, the growing number of simple players in the field and economics make such an effort impractical. For this reason, companies often use a more limited approach to detecting and evaluating patents and other IP which might upset their operation.

The approach used by most companies is to conduct selective searches of the patent literature focusing on the major aspects of the process including major components of the fracturing fluids. The searches should be conducted before implementing any major change in process or the fracturing fluid composition. IP counsel is usually involved in developing the search strategy.

If the search identifies patents or published applications that may be relevant, a careful, technical and legal review of the patents and applications should be made to determine if they present a significant risk to use of the new technology. This process often results in identification of a handful of patents or applications that warrant still further investigation. An analysis of the patent's validity as well as a careful determination of the likelihood of infringement is done at this step.

Once this second review is complete, the company must decide whether to proceed with implementing the new technology or to redesign the product or process to avoid infringement. The company may also consider whether to challenge the validity of the patent either through declaratory judgment action or the reexamination of the patent by the PTO. Still another option would be to seek a license under the patents at issue.

The opportunities offered by the development of shales such as the Marcellus Shale go beyond the value of the hydrocarbons extracted from the formations. Companies are also developing intellectual properties that can be protected and exploited, adding value to a company's bottom line. The increased role of intellectual properties in the development of shales therefore represents both a risk and an opportunity to companies. By consulting with IP counsel early in the process, a company can minimize its risk and maximize its opportunities.

This article was prepared by John E. Schneider, Charles B. Walker, Jr. (cwalker@fulbright.com or 713 651 5203) and Richard S. Zembek (rzembek@fulbright.com or 713 651 3662) from Fulbright's Intellectual Property and Technology Practice Group.

Learn more about Fulbright's Shale and Hydraulic Fracturing Task Force at www.fulbright.com/fracking.