Aside from being faced with considerable public resistance and environmental impact studies, there are also a number of legal issues to consider when exploiting shale gas. The inevitable advances in drilling technologies, many specifically targeting the areas of public concern, could lead to significant gains for those holding the patents but also give rise to potential IP disputes. We have sought to outline below the challenges and possible courses of action for companies exploring the shale gas industry at this time.
Rights to resources, incentives and community benefits
A significant practical challenge for shale gas exploitation in European jurisdictions is that the rights to natural gas resources below the ground generally vest in the state rather than the landowner. It will be necessary to communicate other, more indirect economic benefits that local communities could enjoy. Cuadrilla is the leading mining & exploration company engaged in the shale gas field in the UK. Its experience in Lancashire, UK, is instructive.
In September 2011, Cuadrilla published a report1 that it commissioned about the benefits to the Lancashire economy from a single, representative test well, at Preese Hall. Alongside the benefits it set out, it also detailed its investment in the technology, with:
- 17% (just under £2m) being spent in the Lancashire region;
- about 50% being spent in the rest of the UK; and
- about 33% being spent overseas.
Cuadrilla also made a point of stating how many jobs it estimated would be created in Lancashire and in the wider UK from its test well operations. Making this sort of case will be an essential feature of the shale gas experience in Europe including in the UK. Recently, and as mentioned previously (see BBC Article 5 March 2014), the potential sites in the North West of England were found to be up to four times larger than previously thought, and so while the above figures point towards a great benefit for both the local and the wider economy, it seems to be not too farfetched to say that such benefits may also be even greater.
Commercial arrangements and IP issues when exploiting shale gas
Intellectual property (IP) rights can protect technology and provide a basis for its commercialisation, with key IP for the oil and gas industry being patents, confidential information, copyright and design rights. There are various factors to consider when deciding on the best way to exploit IP, including available resources, costs and complexity of the manufacturing process and strength of the IP rights and indeed those of competitors. The degree of risk or reward that a party wishes to assume will essentially determine the decision.
There are various ways to acquire the necessary IP including:
- ‘Doing it yourself,’ i.e. researching, developing and exploiting the technology yourself, where strong IP can be exploited and attracts investment, but research and development to a market ready technology can be expensive, slow and risky, especially if you do not have an existing franchise or presence in the relevant geographic area. However, control is maintained together with all reward.
- Purchasing the IP or a company with the IP, where company acquisition can be driven by an IP portfolio or technical expertise. Possibly subject to the same constraints as ‘doing it yourself.’
- IP partnerships, where parties work together under either a collaboration agreement or joint venture. Partnering allows the burden of invention, evaluation, development and exploitation of IP to be shared, and may include:
- Collaboration agreements, requiring arrangements for co-operation between parties to be detailed within a contract including provisions for monitoring progress such as monthly written reports and milestones, dispute resolution mechanisms and termination of the agreement.
- Joint ventures, which are useful where it is impractical or risky for the IP owner to enter the markets alone and are a method for sharing the risk. Appropriate due diligence is important and particular considerations include conflicts of interest, delegation of management to a Board of Directors, whether there should be a shareholders' agreement or Articles of Association, cultural differences, deadlock and ways out of the venture.
A number of fundamental IP issues need to be addressed for either arrangement, such as who will own the IP resulting from the collaboration, who can exploit the resultant IP and how the benefits of exploitation should be shared, and whether there are any restrictions on exploitation of the IP. Joint ventures and collaborations require careful documentation, including as to entitlement to any IP rights (current and future rights, and possible licences), accurate descriptions of envisaged work and scope, respective research, funding & production duties, consideration of possible moral rights and requiring disclosure of any inventions. More open-ended projects may also require flexibility should objectives change based on progress and for recognising when the partnership comes to an end.
- Competition issues are important because IP rights are intrinsically monopolistic. Under Articles 101 and 102 of the Treaty on the Functioning of the European Union (and national implementations of the same, such as the UK's Competition Act 1998), restrictive agreements could be found void with fines imposed and possible damages awarded in the English courts.2 There are potentially applicable block exemptions for technology transfer, research and development, and certain vertical agreements. These block exemptions can be highly technical and require consideration at the negotiation stage.
Issues with multi-jurisdictional agreements include enforceability, managing expectations, cultural differences, obtaining support and IP law variations.
- IP licensing, which is a permission from one party (the licensor) to another party (the licensee) to do something that, without the licence, would be an infringement of the licensor’s IP. The terms and conditions are usually negotiated directly between the licensor and licensee, and can vary significantly depending on the parties' relative bargaining strengths and the particular circumstances. The three main types of licence are exclusive, sole and non-exclusive licences. The following may also be in IP licences: permission to sub-license and restrictions as to territory, field of use, distribution channel and use of IP. There are various key terms which may need addressing in a licence such as transferability of the licence, permission for third parties to manufacture and sell products, importation of protected products, incorporation of IP into other work or combining it with other IP, improvements and subsequent IP, license back provisions and compatibility of the products with other devices or platforms.
- In partnerships, licences may be necessary in relation to using pre-existing IP (with or without modification), developing new IP and exploiting resultant IP. For example, the party that develops the IP may own it (default statutory position unless agreed otherwise) or the funding party may lay claim to rights and/or there may be pre-existing IP incorporated. There could be an exclusive licence granted for the relevant party to use the developed product and a non-exclusive licence for the relevant party to use the other IP embedded in the product.
Alternatively there could be licensing-in of IP, which allows for the picking of ‘best of breed’ technologies from other sectors, but royalties can be expensive and licence terms restrictive. Licensing requires consideration of responsibility for maintenance and support regarding, for example, rectification of faults or errors, improvement of features and adaptation, and provision of technical assistance, as well as prosecution or protection of IP.
- Cross-licensing involves an agreement between two competitors in the products covered by the agreement where one party grants a licence to the other in exchange for the other party also granting it a parallel licence. For example, two companies may own patents for different aspects of the same product. By cross-licensing, each party maintains the freedom to bring their products to market. It is important to ensure no violation of competition law, in particular Articles 101 and 102 of the Treaty on the Functioning of the European Union.3
- There may also be provision in an IP licence for sub-licensing where the licensee may provide licensed IP to another party; for example, to a component supplier to enable parts to be manufactured in a particular way. Permission for sub-licensing must be granted within the licence. Where there is a right to sub-license, the licence may contain certain terms that must be "carried-through" to the sub-licence. The sub-licensing provisions need careful drafting to ensure that the sub-licensee is only able to use the IP as specifically envisaged, that there will not be breach of the original licence, and that the sub-licensor does not lose the competitive advantage obtained from the original licence.
It will normally be appropriate to consider including various protection mechanisms within a licence, such as indemnity against infringement of third party IP rights, limitations or exclusions of liability, and an escrow agreement (for source code). In addition, consideration should be given to the following: disclosure and assistance, exclusivity, enforcement of IP rights, trade mark requirements, exploitation, guarantees, restrictions on customers, no challenge clause, agency, non-solicitation and construction of facilities.
- Consideration for a licence can take the form of buy-out licensing (up-front payment, or an annual charge or payment on milestone dates) and/or contingent licensing (royalty based on sales, usage, running royalty or minimum royalty). It may in some cases be desirable for an IP owner to provide a licence free of charge in return for another form of consideration, e.g. exclusivity for the supply of its products for a particular programme or an exclusive right to support the products while in service. Royalties may be paid based on, for example, net sales value, fixed payment per unit of product, non-cash consideration, combination products or minimum royalties. It is also important to remember to factor in sub-licensees.
When dealing with patents and trade secrets:
- In order not to jeopardise the chance of obtaining a valid patent for an invention, details of it should not be divulged to anyone before filing the patent application, unless they agree to keep the invention secret. A properly drawn up non-disclosure agreement (also known as a Confidentiality or NDA Agreement) should be used.
- Confidential information is information that must not be divulged without permission from the disclosing party, and can include commercial/trade secrets, general information having the necessary quality of confidence, and know-how. For example, in English law information deemed to be confidential protects information that is confidential in nature (having ‘the necessary quality of confidence about it, namely ... not ... something which is public property and public knowledge’4) and disclosed ‘in circumstances importing an obligation of confidence’ ).5(held to include customer lists6 and commission rates 7, and there must also be use or disclosure of the information, either threatened or actual). When protecting confidential information, use an appropriate and well-drafted non-disclosure agreement (NDA), and ensure that the quality and purpose of the NDA is appropriate. If an obligation of confidentiality is breached, move fast and take legal advice as delay may lead to loss of an opportunity to address the issue. Key clauses in NDAs include careful definition of the confidential information, with the normal exclusions being prior knowledge, public knowledge, independently developed and disclosed by a third party. Other clauses can provide for equitable relief, an appropriate period of confidentiality, court ordered disclosure, and choice of law and dispute resolution.
- A practical approach is introducing NDAs at an early stage, keeping records of what has been disclosure to whom and tracking use of confidential information.
- Various other mechanisms may also be available. For example, in the UK the Patent Box (Finance Act 2012) is a possible corporation tax relief on profits from exploiting patented inventions, being phased in from 1 April 2013. It potentially gives incentives to companies carrying out research and development in the UK in the form of tax relief on profits from patented inventions.
There are various laws and statutory provisions relating to ownership of IP rights. For example, in the UK under s7 of the Patents Act 1977, a patent may be granted to the inventor/joint inventor, the person entitled to the whole of the UK property in invention at the time of invention (by agreement or by rule of law), or the successor in title to either of the aforementioned. Joint ownership is particularly a patent and knowhow problem, with affected areas including joint research agreements, and inventions shared by employees of different companies. Patents do not require a unique owner. In the UK, a co-owner needs other co-owners’ permission to assign or license, but not to exploit the invention themselves. Under s37 of the Patents Act 1977, the Comptroller has discretion as to determination of the right to a patent after its grant. Different rules in different territories can cause confusion and lack of cohesion. The risks include difficulty exploiting patents commercially and costs.