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By Nushin Huq
March 4 — As the price of oil has fallen, an increasing number of intellectual property suits, especially patent infringement complaints, have been filed among oil field service and equipment companies.
A direct result of falling oil prices, patent suits in the oil and gas sector have been steadily increasing since late 2014, Paul Morico, deputy department chair of Baker Botts LLP's intellectual property section, told Bloomberg BNA.
Morico's group tracks which cases are filed every day and, “You'd struggle to find this many cases in the previous 18 months,” he said.
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“What's significant is that these are competitor cases,” Morico said. “These are industry leaders suing each other. Those are the serious patent infringement cases.”
Since a patent is a legal monopoly, Morico added, these cases are about market share. With a shrinking market—a result of low oil prices—it's a matter of companies fighting one other to get or keep market share.
For example, in January, Smith International, a subsidiary of oil field services company Schlumberger, sued another oil field services company, Baker Hughes, for willful patent infringement (Smith International Inc. v. Baker Hughes Incorporated, D. Del., 1:16-cv-00056, 1/29/16).
“You're talking about the number one and number three players in energy services suing each other,” Morico said.
“It's a natural evolution of what I would to expect to see with oil prices,” Tom Walsh, a principal in the Dallas office of Fish & Richardson LLP, told Bloomberg BNA. “This is an area where you have a lot of competition, you have people that have patent portfolios, and as the projects have gotten less available, these companies are using their patents as an asset to attempt [to] offset some of the economic losses they're seeing because of the price of oil.”
Patents also serve as an important marketing tool when companies are competing for a smaller pool of available projects, Walsh said. “They can say, ‘Here look, we have this patented technology, and we can do something no one else can do’,” he said.
The rise in patent cases in this sector can also be linked to the tremendous increase in the number of patents issued in the energy industry—especially for hydraulic fracturing. Walsh pointed to a paper published in 2014 that stated the surge in patents awarded to companies in this field almost doubled over a decade.
“We've had an increase in the number of patent cases we've been asked to handle, either by patent owners or someone accused of patent infringement,” Lisa Meyerhoff, a partner at Baker & McKenzie LLP, told Bloomberg BNA.
“That definitely includes companies in the oil field equipment or service provider part of the industry,” she said. While there's been a steady stream of troll cases, the bulk of cases Meyerhoff sees are from companies in the oil-and-gas sector.
“I have seen an increase from last year into this year,” Meyerhoff said. “A pretty big jump, especially in Texas. Which isn't surprising since there's so many oil companies and so many oil field services companies located in Texas.”
A company's patent can be a large line item asset, and protecting it can be especially important if a company wants to be in a position to sell a division or even the company itself three or four years from now, Meyerhoff said. Sometimes, it's a matter of priorities.
“Companies say, ‘We only have ‘x’ amount of money to spend in a downturn, you know, when the price of oil is really low, we're going to hold off on other types of business litigation',” Meyerhoff said. “‘But we're going forth with patent infringement lawsuits, to protect our assets, to protect our market share’, etc.”
It's difficult to calculate the number of patent infringement cases in support of anecdotal evidence that the number of suits is increasing for upstream companies. Meyerhoff said even if an energy company is named in a patent infringement suit, that doesn't mean it is related to energy.
“You would have to literally look at what the patent subject matter or technology was to be able to say that these were all energy-related or not,” Meyerhoff said.
An analysis of patent infringement cases by Bloomberg BNA using the keywords “oil and gas” showed the number of suits slowly rising since the financial crisis of 2008. However, with the sharp drop in oil prices in 2014, the number of cases more than doubled.
Although there was a slight dip in 2015 for the number of these case from all U.S. District Courts, the number continued to rise in the Eastern District of Texas, a venue preferred by patent owners to file suit. Over 40 percent of patent infringement lawsuits are filed in that court.
Patent cases have been rising significantly since the mid-2000s—driven both by a change in law, which requires companies to be sued separately in patent cases, but mostly because of cases filed by patent trolls, Morico said. Before the downward turn in the energy industry, patent trolls were eyeing it. Oil was at an all-time high, and energy companies were seen as having deep pockets.
In December 2013, Acacia Research Corp., a non-practicing entity (NPE), opened an office in Houston to focus on intellectual property in the energy sector.
Depending on who you speak with, the number of patent infringement cases filed by NPEs has remained steady, or fallen slightly, over the last few years.
Some patent cases can be awarded compensation going back as much as six years—before the collapse of prices—making patent cases against energy companies still profitable, Meyerhoff said.
Once oil prices began dropping, there was a pivot—from NPEs trying to capitalize on the money that was being made in the energy industry to competitor-on-competitor fighting for market share and survival in a low-priced energy market, Morico said.
“The fact that these are meaningful cases being brought, in my view, is a direct consequence of the downturn in the oil prices,” he said.
The last time Morico saw industry leaders such as Schlumberger, Halliburton and Baker Hughes sue one another in patent cases was in the mid-to-late 1980s, another low period for oil prices.
“Halliburton and Schlumberger really went at it but, in the ‘90s and 2000s, you didn't really see it, the companies were pretty much at peace with one another,” Morico said. “Now you're seeing them, as the market's getting bad, going after one another.”
What has changed from the 1980s is the advent of inter partes review proceedings (IPRs) at the U.S. Patent and Trademark Office. IPRs offer a cheaper, alternative route to going to court to challenge the validity of patents — and have a reputation for frequently resulting in invalidity findings.
“Almost in all of these cases, you're seeing IPRs being filed,” Morico said. “This is causing some of these cases to go away, or to be stayed. You see the defendants come out swinging pretty heavily in response to these cases. They have a little more at their disposal than three or four years ago.”
Patent cases can last a long time: typically three-to-five years and sometimes longer.
“You usually don't go after a competitor lightly, and the fact that defendants are being aggressive in their response, to me, suggests that the industry is not happy that they've gone down this road,” Morico said.
Business has driven them to file these cases. So in competitor-on-competitor lawsuits, it's rare to see one just pull the plug, irrespective of what happens in the market place, Morico said.
To contact the reporter on this story: Nushin Huq in Houston at firstname.lastname@example.org
To contact the editor responsible for this story: Mike Wilczek in Washington at email@example.com
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