August 24, 2015
Law360
Authored by Charles T. Collins-Chase and Jennifer H. Roscetti
Against a backdrop of falling oil and gas prices, exploration and development of oil and gas reserves increasingly requires costly, tailored technologies and enhanced safety and environmental measures. This is due in part to greater desire to develop unconventional oil and gas resources, such as shale gas and tight oil, and to develop reserves in more remote and environmentally sensitive areas. Exploration and production companies have been developing deep-water reserves, shale plays, and other unconventional sources, but many lack the infrastructure to gather and process the resulting oil and gas.
More and more, the industry is responding to these challenges by forming joint ventures to spread capital costs, overcome technological limitations and mitigate risks. These include joint ventures between two or more upstream companies; upstream companies partnering with midstream companies that have the capacity to transport and store gas or crude oil; and agreements between industry players and private equity or venture capital firms.
Around half of oil and gas CEOs surveyed recently said they expect to enter into a new joint venture or other strategic alliance within the next year, and 57 percent said they are either already working with competitors or would consider doing so.1 Late last year, for example, a Shell PLC and Statoil ASA joint venture was awarded a license to test a potentially large shale play in southeastern Algeria.2 In the United States, Dominion, Duke Energy Corp., Piedmont Natural Gas Co. Inc. and AGL Resources Inc. formed a joint venture to build and operate the proposed 1.5bcfd Atlantic Coast Pipeline.3 Similarly, Enterprise Products Partners LP recently entered into a joint venture with Anadarko Petroleum Corp., DCP Midstream Partners LP and MarkWest Energy Partners LP, assigning 45 percent of Enterprise's interest in the Panola Pipeline to expand the pipeline and increase capacity.4 And BP and Sinopec Fuel Oil recently announced a 50:50 joint venture for marine fuels bunkering in several locations around the world.5
But do risks accompany these economically advantageous joint ventures? No doubt. Risks originate from an arguably necessary component of such deals—sharing intellectual property through patent licenses and confidential exchange of trade secrets and knowhow. While this risk analysis is complicated, past disputes provide guiding principles to keep in mind when entering joint ventures.
Despite partnering up, many joint venture parties in the oil and gas industry are, and remain, direct competitors. And the recent industry downturn has led to a greater number of disputes over joint venture contracts.6 Thus, companies should consider exactly who will receive a license to use the identified IP. This question is more complicated than it may seem. For example, does the license extend to a company's subsidiaries or related companies? What about a licensee's acquired companies or spinoffs? If the licensee is acquired by another company, does that company become a licensee? It is vital to answer these questions at the start of the joint venture, as demonstrated in one recent patent infringement case.
In Technology Licensing Corp. v. JVC Americas Corp., a district court considered the situation where a licensee ceased to control a company that had been its subsidiary at the time of the license agreement. The court held that the former subsidiary retained its rights under the agreement, which was drafted to grant a license to any company that was a subsidiary at the time of the agreement, and thus that the former subsidiary did not infringe the patent.7 To avoid similar confusion, a license agreement should carefully specify who has rights under the license, and should also include provisions to handle future events such as changes in company ownership.
Another important issue for joint venture partners to understand is precisely what rights the license agreement confers and for how long. Most license agreements identify covered patents, rights to associated knowhow, trade secrets and pending or future patent applications. The situation is more complicated, however, when licenses are restricted to certain products, fields of use, or geographic areas.
In Alps South LLC v. Ohio Willow Wood Co., for example, the U.S. Court of Appeals for the Federal Circuit held that an exclusive licensee lacked standing to sue an alleged infringer without joining the patent owner because the licensee had only a field of use license, which restricted the licensee's use of the patented technology to certain fields and products.8 Similarly, in Trendx Enterprises Inc. v. AllLuminum Products Inc., the district court held that Trendx lacked standing to sue a competitor for infringement because Trendx was a field of use licensee, with rights in the patents only for non-marine applications.9
To avoid these issues, a license agreement should state whether it extends to everything covered by the licensed patents or only to certain technologies and products and identify the licensed geographic territory. It should also specify whether it confers an exclusive license or, instead, permits the licensor to grant additional licenses to other parties (i.e., a nonexclusive license). The joint venture partners should also agree on whether the license ends at the conclusion of the joint venture.
Participation in a joint venture usually requires sharing technical information, which increases the risk that a party's trade secrets will be made public or discovered by a fellow joint venturer. Joint ventures thus present a significant challenge to protecting a company's trade secrets, and companies entering into joint ventures must take precautions to protect their trade secrets and other know-how.
Trade secrets survive only as long as they have independent economic value and remain secret,10 and companies therefore go to great lengths to ensure their secrets are not disclosed. Indeed, a company must take reasonable steps to keep its information secret to maintain its trade secret rights.11 The greater a company's efforts and expenditures to protect its trade secrets, the more likely the company can enforce those trade secrets against unlawful misappropriation. In Wellogix Inc. v. Accenture LLP, for example, the U.S. Court of Appeals for the Fifth Circuit concluded that Wellogix's procurement software for oil and gas well drilling projects contained trade secrets, based in part on Wellogix's efforts to protect its software by placing it behind a firewall and sharing it subject to confidentiality agreements.12
Before entering into a joint venture, the parties should negotiate a detailed agreement addressing ownership and protection of confidential and trade secret information to minimize the risk of improper disclosure, which could destroy the trade secret. First and foremost, the agreement should clearly identify what information the joint venture partners believe constitutes their trade secrets. It should also require all parties to agree that the identified information is secret and valuable, and should be protected.
This specificity is needed because, in many trade secret disputes, a former partner will later argue that the technology at issue does not contain any trade secrets. In Wellogix, for example, Wellogix's former collaborator argued that Wellogix's software did not contain any trade secrets because Wellogix had allegedly disclosed its technology publicly through patents.13 Similarly, in Vesta Corp. v. Amdocs Management Inc., a former collaborator in a joint development project argued that a trade secret misappropriation suit filed against it should be dismissed because the plaintiff failed to identify any trade secrets it had shared during the project.14
Identifying trade secrets clearly at the beginning of a joint venture will help minimize the risk that joint venture partners will later claim that they helped conceive your company's trade secrets or that the trade secret is not valuable or secret. Furthermore, because trade secrets are not protected from independent discovery by a third party, identifying trade secrets up front will help ensure that joint venture partners cannot later claim independent discovery. For these reasons, it is also important to consistently mark documents to identify trade secrets and other confidential information.
Joint venture nondisclosure agreements customarily prohibit unauthorized disclosure or use of trade secrets and specify the steps required to protect and limit access to trade secret information, such as computer security measures and confidentiality agreements for employees and third parties. These agreements also usually require partners to certify they returned all confidential information at the conclusion of the joint venture and acknowledge their ongoing confidentiality obligations, similar to policies governing departing employees.15 In essence, the agreement should provide the same type of safeguards as a company's own internal policies and procedures.
Despite these protections, however, companies should treat joint venture partners like any other third party for the purpose of trade secret protection, and should disclose the least amount of information necessary and routinely verify that joint venture partners are using reasonable efforts to protect trade secret information. Disputes can arise even for well-drafted agreements. Moreover, parties may encounter problems enforcing agreements. In Roe v. Nano Gas Technologies Inc., for example, the parties entered into a collaboration and non-compete agreement related to a technology for dispersing gases into liquids.16 Both parties filed suit for alleged breaches of the agreement and sought an injunction, but the district court held that the agreement's arbitration clause governed the parties' disputes, and thus that neither party was entitled to seek injunctive relief.17 The court dismissed the case.18
In addition to protecting its own trade secrets, a company must also avoid any allegation of misappropriating trade secrets owned by joint venture partners, including after the conclusion of the joint venture. In Wellogix, for example, the court awarded the trade secret owner over $40 million in damages based on circumstantial evidence that Wellogix's former collaborator relied on Wellogix's trade secrets in subsequent business activities.19
To avoid such pitfalls, companies should purge collaborators' trade secret information to avoid any implication of improper use, returning or destroying the information and confirming destruction.
Joint ventures can also lead to development of new innovations, and disputes may arise as to who owns the resulting IP rights. Patents may be jointly owned, and each co-owner holds an undivided interest in the patent. Thus, in the absence of any agreement to the contrary, each co-owner may practice the patent without needing permission from the other co-owners. Each co-owner may also freely license the patent, which can effectively prevent a co-owner from granting a third party an exclusive license to the patent. And finally, filing a patent infringement suit to enforce a jointly owned patent generally requires the consent of all co-owners.
Because these aspects of co-ownership have major implications for the joint venture partners' rights to use and exploit any newly created inventions, joint venture agreements should specify how to deal with these issues. For example, the agreement should specify who owns any resulting IP rights and, if the rights are to be jointly owned, what rights each party has to use or license the IP. It should also identify which party bears the burden to file patent applications and pay patent prosecution expenses, and specify whether joint venture partners have the right to review each other's patent applications. Joint venture partners should also agree on procedures for identifying and protecting trade secrets and other confidential information. And because disputes may arise, the joint venture agreement should also include specific provisions to address inventorship disputes.
One common theme of the disputes identified above is the importance of understanding whether a change for your partner—such as forming a joint venture with a competitor, losing control of a subsidiary, or being acquired by a competitor—means a change for you. For example, should you renegotiate certain terms of use, sublicense grant provisions, or use of trade secrets?
But it may be too late, as in Technology Licensing Corp., where, even though a licensee ceased to control its subsidiary, the former subsidiary nonetheless retained patent rights. Thus, these complications should be contemplated before the deal is inked. This requires an ongoing understanding of your partner's business goals, including future joint ventures with competitors. Through careful drafting of joint venture agreements, companies can mitigate these risks and protect their IP assets.
Endnotes
1 Top worries of oil and gas CEOs, Oil Online, Mar. 31, 2015, https://www.oilonline.com/news/business-activity/top-worries-oil-gas-ceos.
2 Paddy Harris, Shell-Statoil Joint Venture Nets Algeria Onshore Acreage, Oil & Gas Technology, Oct. 1, 2014, http://www.oilandgastechnology.net/upstream-news/shell-statoil-joint-venture-nets-algeria-onshore-acreage.
3 Christopher E. Smith, Oil & Gas Journal, Sept. 8, 2014, http://www.ogj.com/articles/print/volume-112/issue-9a/general-interest/dominion-heads-1-5-bcfd-atlantic-coast-gas-pipeline-joint-venture.html.
4 EPP, Anadarko, Others Form NGL Pipeline Joint Venture, Oil & Gas Journal, Feb. 24, 2015, http://www.ogj.com/articles/2015/02/epp-anadarko-others-form-ngl-pipeline-joint-venture.html.
5 BP and Sinopec Set up Joint Venture Marine Bunkering Business, May 19, 2015, http://www.bp.com/en/global/corporate/press/press-releases/bp-and-sinopec-set-up-joint-venture-marine-bunkering-business.html.
6 PwC, Opportunities in Adversity: A New Dawn for Oil and Gas 11 (2015), http://www.pwc.com/en_GX/gx/oil-gas-energy/publications/pdfs/pwc-opportunities-in-adversity-a-new-dawn-for-oil-and-gas-report.pdf.
7 Tech. Licensing Corp. v. JVC Ams. Corp., No. 12cv01444 (N.D. Ill. Jan. 18, 2013).
8 787 F.3d 1379, 138384 (Fed. Cir. 2015).
9 856 F. Supp. 2d 661, 66669 (D.N.J. 2012).
10 See, e.g., Texas Uniform Trade Secret Act, S.B. 953 (enacted May 3, 2013) (codified at Tex. Civ. Prac. & Rem. Code tit. 6, § 134A.002(6)) (“'Trade secret' means information, including a formula, pattern, compilation, program, device, method, technique, process, financial data, or list of actual or potential customers or suppliers, that: (A) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” (emphasis added)).
11 Id.
12 Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 875 (5th Cir. 2013).
13 Id. at 87576.
14 See Vesta Corp. v. Amdocs Management, Inc., No. 3:14cv1142HZ (D. Or. Jan. 13, 2015).
15 See, e.g., Halliburton Energy Servs., Inc. v. Axis Techs., LLC, 444 S.W.3d 251, 254 (Tex. App. 2014).
16 Roe v. Nano Gas Techs., Inc., No. 14cv13790, at 12 (E.D. Mich. Apr. 29, 2015).
17 Id.
18 Id. at 2.
19 Wellogix v. Accenture, 716 F.3d 867
Originally printed in Law360 (www.law360.com). Reprinted with permission. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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