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CHAPTER 10
Intellectual property rights
A Introduction
10.1 Intellectual property (or ‘IP’) is a subject which is not often front of mind of parties to FPSO charters. Indeed, in the wider maritime and energy industries the subject has traditionally been an afterthought when technology and designs are developed, built and then operated. This can be problematic, as IP rights are highly relevant in the marine and energy industry and in particular in relation to FPSOs. As vessels, FPSOs are complex and are heavily reliant on advanced technologies. This requires one or both of two things: the design and generation of new IP and/or the licensing of existing third-party IP. 10.2 The existence and source of the pressures to reduce carbon emissions in the hydrocarbon industry have been discussed more generally in the earlier stages of this book.2 The main – if not the only – way to do this across the entire energy industry, but particularly in relation to FPSOs, is with technological innovation. Potential solutions are being developed constantly, but steps include innovation in carbon capture (such as from exhaust gases) and reinjection, the use of electric energy for operational power requirements (such as from shore, batteries, floating wind or gas turbines) and digitalisation leading to increased efficiencies. That innovation creates valuable IP to be protected and enforced. 10.3 However, although FPSO design is relatively mature, it is not just decarbonisation which is causing innovative developments to be made and valuable IP to be generated. The incremental improvements to technology, in particular those which give rise to relatively small but still important efficiency increases, can be protected and exploited. In maturing markets, it is often these types of improvements which are closely guarded. A reason that IP is sometimes overlooked is because rights owners may not be aware that there is any IP subsisting in the subject technology. This can be due to a failure to conduct a proper IP audit. As discussed later in this chapter, IP arises in designs, design documents (including specifications and drawings), patentable products and processes, as well as valuable brands. In addition to the decarbonisation examples referred to earlier, good examples in the context of FPSOs include the complex mooring systems, in relation to which multiple patents exist and which will likely also be protected by design right/copyright and confidential information/trade secrets.3 In addition, topside technologies such as separation systems (say, for example, those including molecular sieves) and dehydrationPage 159
- 1. Which party or parties own(s) the IP in anything that is developed or created (bearing in mind here the complex nature of the technologies);
- 2. Who has a right to use that IP or any pre-existing IP that is being brought into the project, and on what terms;
- 3. Whether one party will indemnify or protect the other in the event that the latter is found to infringe the IP rights of a third party by using technology supplied by the former;4 and
- 4. The protection of confidential information.
(i)
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Patents
10.7 Patents are registered rights that protect new and non-obvious inventions – products or processes for doing something – for 20 years from the date of filing. They are monopoly rights in the sense that copying of a patent is not required to infringe it; in other words, if a product or process falls within the scope of a patent, it infringes irrespective of whether the manufacturer or user is aware of the patent. The ‘grand bargain’ or trade-off for the time-limited monopoly of patent protection is that the inventor must disclose to the world exactly how the invention works, meaning that one cannot protect something via a patent whilst keeping it secret: schematics, calculations and formulae will most likely need to be published. To the extent that something is difficult to patent, hard to reverse engineer and/or longer-term protection is desired, keeping technology a trade secret might be preferred.7
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(ii) Designs
10.8 Designs can be both registered and unregistered and are limited in time, varying from three to 25 years. They protect the appearance of the whole or part of a product. Design rights can be complex. For example, in the UK there are seven separate design rights with slightly different laws applying to each. Registered designs are monopoly rights (see earlier) whereas unregistered designs require copying.(iii) Trademarks
10.9 Trademarks can be both registered and unregistered (the latter being protected under the law of passing off or unfair competition depending on the country) and can subsist indefinitely. They protect signs used in commerce. Anything capable of distinguishing one trader from another can be a trademark, including words, logos, shapes, colours and sounds. Whilst often being seen as more relevant in consumer-facing sectors, trademarks are highly relevant to the FPSO industry. For example, there is an increasing use of brand names for particular technologies or solutions and trademark protection is the ideal way to prevent competitors from taking advantage of them. In the wider marine sector, at least one operator owns registered trademarks for the appearance and colour of its vessels.(iv) Copyright
10.10 Copyright is an unregistered right which exists automatically8 on the creation of a literary, dramatic, musical or artistic work and generally subsists for 70 years from the death of the creator. Whilst perhaps not immediately obviously relevant in the context of FPSOs, copyright can assist in the protection of written materials, including specifications.
(v)
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Confidential information/trade secrets/know-how
10.11 Although not an IP right in the traditional sense, confidential information can be thought of as the alternative to patent protection, assuming that a product or process cannot be reverse engineered. A key reason to choose to protect technology (which might include competitively sensitive manufacturing processes, for example) by keeping it confidential and not choosing to patent it is because patent protection requires the publication to the entire world of how the technology works. This is the trade-off for patent protection discussed earlier. Often patent protection is also difficult or impossible to obtain.
10.12 Instead, confidential information can be protected indefinitely by simply not disclosing it to the public. For example, assume that an FP Contractor or supplier has a method of manufacturing an extremely efficient and long-lasting roller bearing for a turret mooring system. Whilst patent protection might be sought, an effective alternative could be to keep the method secret, thus providing the ‘owner’ of the method with protection not limited by time.
10.13 Confidential information is frequently seen in the definition of intellectual property in agreements (often referred to as ‘trade secrets’ or ‘know-how’) and it is often licensed as if it were a property right. This is not technically the case, but the licensing provision would be seen as a limited consent to use the information/secret. As the ‘licensing’ of this know-how requires disclosure to third parties, it is therefore essential that adequate confidentiality restrictions are put in place in the FPSO charter or whichever agreement under which the information is to be shared. These restrictions will include a requirement for the receiving party to keep the information confidential and also to enter into reciprocal agreements with employees and contractors.
10.14 Actions can be taken against third parties for unlawful disclosure of confidential information. However, the practical protection in law is limited as once the ‘horse has bolted’ it is difficult to recover from the loss of the disclosure, particularly if a competitor has been given access to sensitive material. Nevertheless, if adequate practical and legal controls are put in place, confidential information/trade secrets can be a powerful tool.
10.15 The remainder of this chapter deals with the key aspects of IP clauses found in FPSO charters and discusses the various options available when negotiating them.
10.16 Before considering those, however, it is helpful to reflect on the key parties which may be involved.
10.17 As explained in the introduction to this book,9 the field will often be licensed to an oil and gas company, which will either own the FPSO directly and operate it itself, own the FPSO and delegate operations to a specialist O&M contractor, charter the FPSO from an FP Contractor who undertakes the operations, or lease the FPSO from an FP Contractor and delegate operations to an O&M contractor, who may be an affiliate of the FP Contractor. The vessel itself will either be purpose built or modified from an existing vessel. Design work will therefore be required.
10.18 The basis of design or specification will likely be prepared by the Company. However, the FEED10 and detailed design will be undertaken by the design contractor (which might be the FP Contractor or a related party but may equally be an entirely Page 161
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B Ownership of IP
10.20 There are two main ways that ownership of IP rights must be considered in FPSO contracts. The distinction can be made by considering on the one hand those rights which exist before the start of the project or agreement, and on the other those which come into creation during its course.(i) Background IP
10.21 This is pre-existing IP that belongs to a party before the entry into of, or commencement of work under (depending on the terms), the charter agreement, as well as IP generated independently of the project. The standard provision dealing with Background IP in FPSO agreements, as with most other agreements in other industries where technology is being developed, is that ownership of Background IP remains vested in the party who already owns it. In other words, whoever brings IP to the project remains owner of it. Background IP can include not just that IP which a party owns, but that which is licensed to it. 10.22 A key requirement in relation to Background IP, however, and which is often neglected in agreements, is a licence from each party to the other to use their Background IP for the purposes of the charter. This is considered in more detail later.(ii) Foreground IP
10.23 Although the exact definition of Foreground IP will depend on the drafting of the agreement, this is IP that is generated by a party any time after the entry into or commencement of work under the charter and which arises from that party’s obligations under it. A key example would be the designs for the FPSO (or parts of it). The majority of these will likely be produced by the FEED or detailed designer on behalf of the FP Contractor or the FP Contractor itself. 10.24 An important consideration at this juncture is that, in law, the starting position will often be that an independent party commissioned to create IP will be the owner of it. In the context of FPSOs, this means that a FEED or detailed designer will, in the absence of terms to the contrary, own the IP in those designs. Similarly, if a constructionPage 163
- 1. Option 1: whichever party creates it, owns it
- • First, ownership is commonly allowed to vest in the party generating the IP. Such a commercial approach is relatively easily negotiated.
- • If this option is chosen, cross-licences will be required from each party to the other to allow them to use arising IP for the purposes of the charter. Such a licence is generally limited, in the sense that the licensee is unable to exploit the Foreground IP in its own right or outside of the charter. For example, the licensee would not be able to license the IP to a third party for them to use it outside of the charter agreement. Neither would it be able to use the IP freely on its own projects outside of that specific charter.
- 2. Option 2: joint ownership
- • Second, the ownership of Foreground IP can be shared between a number of parties. This is not recommended, although it is commonly seen as a commercial solution to IP ownership. There are several reasons for this, but often it boils down to the parties simply perceiving joint ownership as the simplest and fairest way to deal with things to get the deal done.
- • However, there are a number of potentially serious consequences of joint ownership of IP rights.
- • Subject to any agreement between the parties, jointly owned IP may only be licensed with the express consent of all joint owners. This creates a practical problem if the parties are in disagreement at any point during or after the initial charter. In essence, a single party can decide to block the exploitation of jointly owned IP. For example, if the parties jointly owned the IP in part of an advanced and valuable turret mooring system, an oil company could decide to block the FP Contractor from allowing a third party – say another oil company – from using that design on another vessel.
- • The same applies in relation to assignments and mortgages of, or charges over, jointly owned IP. This can cause serious issues long after developments are made; the joint-owner can be blocked from raising funds through the transfer of ownership or by leveraging against it as a valuable asset. An extreme example is that an ordinary floating charge over a company’s
assets will cover its IP; being beholden to a third party’s consent to raise finance by leveraging a company’s assets will be an anathema, but could be a reality if joint ownership of IP is chosen.Page 164
- • In addition, jointly owned IP may only be enforced against third parties if all owners are made parties to the proceedings. To the extent that a joint-owner is not made co-claimant, the solution is to make them a co-defendant.
- • Although the parties can agree mechanisms to deal with the various issues arising from jointly owned IP in the charterparty, it can be difficult to legislate for every possible eventuality. It can also be difficult to reach agreement between the parties at the start of a charter, as at early stages of projects it can be difficult to know where the real value in IP assets might sit. As such, parties might sometimes want to wait and see and then discuss commercial terms, rather than agreeing terms which may later prove to be costly up front. However, this should be avoided because it is ripe for dispute.
- 3. Option 3: single party ownership
- • Third, the parties can agree that a single party will own all the IP that is generated in the course of the charter. Whichever party this is will ultimately boil down to negotiating power, but this option can be an elegant solution and potentially more sensible due to the issues with joint ownership.
- • If this route is taken, however, then the licensing provisions will need to be considered carefully to ensure that all parties are licensed the IP owned by that single party for the purpose of constructing and operating the vessel.
- • An alternative option to joint ownership of IP, but where multiple parties have access and control over it, would be to set up a joint venture company to own the IP. In such a case, the FP Contractor, mooring contractor, operator and oil company (for example) own shareholdings in the JV company, which in turn owns the IP in the vessel. A single party (such as the oil company) might have ultimate control over the company, but each party would have the right to use the IP as if it owned it alone. Such an option is much more of a complicated arrangement, but it can be a sensible approach to IP.
C Licensing of IP
(i) Why licensing is important
10.27 Licensing is essential if a party which does not own IP wishes to use it without infringing. The consequences of infringement are dealt with further later; in short, they can be draconian. Damages are by no means the only remedy and injunctions can be ordered to stop the use of infringing technology, resulting in the immediate and lengthy (potentially permanent) pause in operation. 10.28Page 165
(ii) What is being licensed?
10.31 It is important to define precisely which IP rights in which technology are being licensed. In FPSO agreements IP will (if dealt with at all) often be split into the concepts of Background and Foreground IP:- 1. Background IP
- • As noted earlier, Background IP is IP which a party owns or has the right to use before the charter is started or which is generated independently of it. Parties to the charterparty or O&M agreement will require the right to use Background IP from other parties for the purposes of carrying out their obligations pursuant to the agreement. For example, if an O&M Contractor is required to maintain or modify bespoke machinery on the topside which contains IP owned by the owner of the FPSO, the O&M Contractor may need a licence to that IP.
- • In addition to a licence to Background IP owned by one of the parties, an aspect which is often overlooked is the sub-licensing of IP which is merely licensed to a party. For example, say an FP Contractor would like to fabricate carbon capture technology under licence from a third party. The FP
Contractor will need to have permission under that licence to give a separate licence to the construction yard, O&M Contractor and other parties for their use of that technology. The FP Contractor will need to ensure it is permitted to do so under the terms of its existing licence and will most likely provide a warranty and indemnity that it is so permitted (or at least that no IP will be infringed by the use of its Background IP). This is discussed further later.Page 166
- 2. Foreground IP:
- • Foreground IP is often defined as any IP which is created in the course of the agreement. This can often be very valuable. Depending on the agreement it could include the FEED and detailed design, as well as any improvements made during construction and maintenance. In an O&M agreement, it could include important maintenance improvements relevant to (e.g.) efficiency.
- • Foreground IP should therefore be treated with caution in an agreement. For example, if a new system is developed in the course of the FPSO’s design which increases the efficiency of separating the hydrocarbons, then any party not owning that IP will require a licence to use it, at least for the purposes of the continuing design, construction, operation and maintenance of that vessel.
- • Although licences are often seen as ways to prevent inadvertent infringement, i.e. as a legal technicality, they can also be used as an important commercial tool to help determine price.
(iii) Who is the licensee?
10.32 This will likely seem an obvious question, but licences are like any other agreement in that they are constrained by the rules of privity of contract.13 This means that, if the licensee is defined only by reference to a single entity, the licence will not normally extend to affiliates of that entity or its contractors, unless a provision allowing sub-licensing is included. As the key parties to FPSO projects will have complex corporate structures, and because of the proliferation of subcontracting on FPSO projects, the licence must be wide enough to capture all those who will legitimately need to use or have access to the IP. For example, if an FP Contractor is the licensee to key IP and the O&M Contractor is an affiliated entity, if the O&M Contractor is not a party to the agreement containing the licence and the FP Contractor is not able to sub-license to affiliates, the O&M Contractor will not benefit from the licence and may infringe when it (for example) maintains the relevant equipment.(iv) What is the purpose of the licence?
10.33 Many, if not most, IP clauses in FPSO charters will allow the relevant IP to be used for the purpose of the licensee carrying out their obligations under the agreement.Page 167
(v) Are royalties payable?
10.35 Under most IP clauses in FPSO charters the licence will be royalty free. This means that the licensor will not be due any payment, other than that under the agreement generally, for the use of the IP. However, royalties can be a valuable revenue stream and could become more relevant as more innovative technology is developed over the coming years to enable decarbonisation. Royalties can be considered differently to one-off fees for the use of a technology. For example, a payment might be due for every X number of barrels produced by a vessel during its charter. This provides IP-owning parties with potentially very valuable revenue streams.(vi) Where can the licensee use the IP?
10.36 Licences can be limited geographically. As FPSOs can, by their nature, be moved around the world, any geographical limitation to an IP licence can lead to serious consequences. Put simply, should an FPSO be moved outside a location in which the IP is licensed and the FPSO is operated, then it could infringe the IP rights of a third party. In reality, however, the risk posed by this issue is relatively low. Often, there will be explicit reference to geography in the FPSO charters in the form of a ‘worldwide’ licence. However, the licence might be silent as to geographical scope; whilst this could potentially give rise to a dispute, in such a case it might be difficult for the licensor to argue that the scope of a licence was intended to be limited geographically. Nevertheless,Page 168
(vii) How long does the licence last?
10.37 Licences can be of any duration. In the context of FPSO charters, licences will generally be limited in time implicitly by reference to the duration of the project. 10.38 In summary, FP Contractors, charterers and operators should ensure that the scope of the IP licences in the FPSO charter are wide enough to allow them to construct and operate the vessel as it is intended. Those building the vessel might also aim to secure a licence to build subsequent vessels using that licensed IP.(viii) Insolvency
10.39 Problems can arise if a licensor of IP rights becomes insolvent. A key issue will be for the licensee to ensure that they can continue to use the IP. An initial point to make is that the mere insolvency of a licensor (as opposed to its assets being sold to a third party) should not necessarily affect the right of a licensee to use licensed IP. Whilst terms are often negotiated to allow a licensee to terminate a licence if the licensor experiences an insolvency event, it would be unusual for an agreement to specify that the licence automatically terminates. 10.40 However, although the position in other countries may differ, under English law a buyer of IP in good faith without notice of the licence will buy free of it.14 This would mean that a buyer of distressed assets (in this case IP) would not have to honour the licence if it is unaware of it. Various ways to combat such a situation can be employed. First, if the relevant IP is registered (e.g. a patent), then a solution can be to record the licence on the relevant register. This will give notice to the world of the licence and will mean that a buyer in good faith will buy the IP subject to it. Further, if the identity of any potential purchaser becomes known, written notice of the licence should be given as soon as possible. Second, an assignment clause can be included under the licence to provide that in certain insolvency situations the relevant IP is assigned to the licensee for no or a low value. Although potentially a neat solution, a risk associated with it, however, is that it would be deemed a voidable transaction contrary to insolvency laws.15(ix) Alternative to licensing – contractual exclusivity
10.41 An alternative or additional mechanism for controlling the use of technology is to include an express provision giving exclusivity to a particular party. For example,Page 169
D Infringement risk: the limitations of warranties and indemnities
10.42 As noted earlier, whoever owns IP has the right to control how it is used. Without permission to use it, IP can be infringed. In particular, patents, registered trademarks and registered designs, which are monopoly rights, can be infringed even if the user is unaware of the IP right existing.16 10.43 Very often, charters will include warranties that IP being provided by one party to another does not infringe the rights of a third party. Sometimes, an indemnity is also given to provide a remedy in the case of a breach of that warranty or to the extent that any third party takes action whatsoever. These clauses are designed to provide financial protection, should the FP Contractor (for example) find itself on the receiving end of an infringement claim. 10.44 Although helpful in allocating risk to the project, such warranties and indemnities only go so far to protect a party who finds itself a defendant to an IP infringement claim. 10.45 The first issue is that the consequences of infringement can be severe. In the UK,17 and in many countries, remedies include injunctions, delivery-up or destruction of infringing products and damages. This means that the infringement of IP rights can lead to much more than money being at stake: it can jeopardise an entire build or operation schedule or even stop them completely and require extremely costly re-designs. 10.46 The second issue is that, even when considering the financial risk associated with an infringement claim, a warranty/indemnity is only as good as the covenant of the indemnifying party. Infringement claims can be exceptionally costly disputes, often running into the multiple millions of dollars (or pounds), particularly when multiple simultaneous actions are brought around the world. 10.47 A further point in relation to IP infringement is that any third-party claim will likely be brought in multiple national courts simultaneously. For example, action might be taken in the national courts of the construction yard and also the place of operation. This is completely normal in IP disputes as IP rights are national rights and ordinary contractual conflict of laws rules do not apply. On a practical level, most parties to FPSO charters will be used to arbitrating their disputes in private. IP infringement is (generally) different. An infringing party will be likely to litigate in public in the courts, which will include the disclosure process that comes with it. 10.48 For example, assume that a company owns a patent protecting a new method for generating clean energy for providing operating power to an FPSO. If a vessel is then built which infringes that patent, then the patent owner can seek an injunction to prevent the use of that protected technology. Actions might be taken where the vessel has or is being constructed, where component parts have been or are being built, and the placePage 170
1 The authors are a partner and managing associate in the intellectual property department of Stephenson Harwood’s London office.