From the highest courts of the US judicial branch to the C-suite, contests involving patents have recently come to the fore in the innovation-hungry US oilfield services industry, even as filings and litigation have recently declined.
In the past few months, the US Supreme Court has ruled on two disputes involving oilfield services firms, providing guidance on the extent to which patent protection applies beyond US borders and reaffirming a controversial process by which a patent’s validity is reexamined. The decisions come as companies adopt a more tactical approach in their pursuit and defense of intellectual property (IP).
The most recent ruling, which came in June, found that Schlumberger’s geophysical services subsidiary WesternGeco could recover lost profits for infringement abroad of four of its US patents by rival Ion Geophysical. The technology in question involved control systems for marine seismic streamer steering devices, separately falling under WesternGeco’s Q-Marine brand and Ion’s DigiFin brand. Ion was shipping the components overseas to customers, which then assembled the technology for their own use.
The first chapter of the saga came in 2012 when a federal jury ruled in favor of WesternGeco in its infringement suit against Ion, finding that the practice caused WesternGeco to lose multiple survey contracts. The case was turned on its head, however, when an appeal by Ion resulted in the US Court of Appeals for the Federal Circuit reversing the lost profit award. A subsequent appeal by WesternGeco elevated the case to the US Supreme Court.
While Ion’s appeal was pending, the companies were involved in separate proceedings, initiated by Petroleum Geo-Services, that challenged the validity of the WesternGeco patents before the Patent Trial and Appeal Board (PTAB) under a process called inter partes review (IPR). Challenged in the other US Supreme Court decision this year involving oilfield service firms, IPR is a procedure that takes a patent challenge to the US Patent and Trademark Office (USPTO) rather than before a jury in a district court.
The PTAB invalidated the four patent claims that formed the basis for the federal jury verdict, and, upon appeal by WesternGeco, the Federal Circuit in May determined that three of the four patents were invalid.
Meanwhile, in the original case, the US Supreme Court in June ruled in a 7–2 decision that infringement did occur under Section 271 of the Patent Act—which covers the exporting of components for a patented invention for assembly abroad—and that WesternGeco was in fact entitled to lost-profit damages for infringement. The court determined that “the conduct in this case that is relevant to the statutory focus clearly occurred in the United States.”
In a subsequent statement to JPT, Schlumberger said it was “pleased” with the high court’s decision. “More importantly,” the company said, the ruling “reinforces our position that, as a technology innovator, we receive the full protection of the Patent Act against those who infringe US patents.”
However, the Federal Circuit in July denied WesternGeco’s petition for a rehearing on the PTAB’s decision to cancel its patent claims. Ion said it will seek a new trial related to the damages.
“I don’t like the idea of being able to sue for infringement of a US patent when the infringing activity takes place elsewhere,” commented Peter L. Brewer, patent attorney at Thrive IP. Brewer, a degreed petroleum engineer, has filed patent applications in numerous countries, represented clients ranging from individual inventors to big oilfield service firms, and litigated in the USPTO.
“What would prevent a company in another country from suing in that country based on conduct that takes place exclusively in the US? It is a bad precedent,” he said.
Challenging IPR
The IPR procedure, envisioned as a more efficient way of settling patent challenges at the administrative level, was considered by the US Supreme Court in Oil States Energy Services v. Greene’s Energy Group. IPR was established in 2012 following US Congress’s passage of the America Invents Act.
IPR is only instituted if a challenge shows “a reasonable likelihood that the petitioner would prevail with respect to at least one claim challenged,” meaning frivolous cases can be rejected before they become an issue for patent owners.
This first step is thought to curb suits from notorious “patent trolls,” which acquire large numbers of patents, provide no products or services using the patents, and then use sue-and-settle tactics to profit from supposed infringers.
A panel of three patent judges then determines whether claims to a patent are valid. Those critical of IPR have referred to the PTAB as a patent “death squad” given the frequency at which they have overturned patents. Brewer believes the IPR process has become a heavy-handed way for larger companies to keep smaller companies from reaching the courthouse and having a jury decide the issues.
“Statistically speaking, the chances are much better of invalidating a patent in one of these IPR proceedings than before a jury, and there are some evidentiary reasons for that,” said Dean Lechtenberger, partner at global law firm Winston & Strawn. A former drilling engineer, Lechtenberger has first chair experience in IPRs. “But the long and short of it is, patent judges aren’t necessarily impressed by that fancy gold star and blue ribbon that come on an issued patent and are far more experienced in dealing with patent claim construction and invalidity issues.”
During the same year IPR was established, Oil States sued Greene’s Energy for infringement of a patent related to technology that protects wellheads from hydraulic fracturing stimulation fluids, and Greene’s Energy countered by bringing forth IPR proceedings. While a district court ultimately sided with Oil States’ claims of infringement, the PTAB invalidated the patents, nullifying the court’s ruling.
Oil States appealed by questioning the validity of IPR under Article III and the Seventh Amendment of the US Constitution, claiming that patents are a private property right and entitled to the same legal protection as other property—a trial by jury. The PTAB’s ruling, however, was affirmed by the Federal Circuit, prompting Oil States to petition the US Supreme Court for a hearing. The high court in April ruled that the granting and re-examination of patents are public rights, and the USPTO can review its own patent decisions.
“I have no problem with IPRs and reexamination procedures or the PTAB as a reviewing agency,” said Brewer. “But I do have a problem with litigators weakening the patent system, and the US economy in the process, by allowing an infringer to bypass the court system by running back to the Patent Office first. Once suit is filed, the IPR process should be foreclosed.”
“There seems to be a pendulum within patent law that swings back and forth about every 10 or 20 years,” said Brewer. “For a time, the courts and legislature will be pro-patent, and innovation is encouraged. Then, for a time, the courts and legislature are anti-patent and seek to rein in the ability of innovators to obtain and enforce patent rights. We are in the latter condition right now, and it is hurting innovation. Many companies are now choosing to file first in Europe or not file at all.”
Changing US Patent Activity
Schlumberger also received publicity this year when it was reported that several of its patents related to hydraulic fracturing technology were being challenged by Halliburton. Schlumberger responded in kind, resulting in 11 patents being challenged between both companies. However, the two parties agreed to drop all of their IPR petitions in June after reaching a settlement, Schlumberger confirmed to JPT. Both companies declined to comment on the settlement terms.
This is an example, noted Brewer, where having a large portfolio of defensible patents is beneficial, as it creates the opportunity for settlement through cross-licensing.
In a different kind of contest set outside the courtroom, Halliburton has recently taken the lead on total patents granted per year, which spiked for the company by about 175% during 2012–2017, according to data compiled by IFI Claims Patent Services, which maintains a global patent database. Schlumberger, meanwhile, leads in total patents granted during the past decade (Table 1). For Halliburton, racking up patents is a way of flexing its innovation muscle vs. its competitors.
Halliburton credits its patent bounty to the wholesale changes it made to its re-search and development (R&D) program earlier this decade. During 2010–2014, the program hired some 2,000 people, the majority of whom were from outside of the oil and gas industry and held master’s degrees or PhDs. Overseeing the overhaul was Greg Powers, Halliburton’s vice president of technology since 2010, who explained that “when you hire smart people who come from other industries, they bring a lot of new ideas.” Acquisitions have played a role in the rising patent count as well.
In addition to Halliburton and Schlumberger, Baker Hughes (or BHGE, as of now), Shell Oil, and Chevron USA have received the most patent grants over the past decade (Fig. 1). Combined grants among those five firms rose steadily during 2008–2017, but IFI projects a decline in 2018 reflecting a drop in filings 2–3 years ago as underlying R&D investment fell during the depths of the oil price downturn.
Despite the high-profile disputes, patent litigation has also slowed since the downturn, Lechtenberger noted. “All the companies had cash flow issues, and the last thing they wanted was expensive litigation.” Many were willing to just “kick the can down the road” and put off litigation entirely.
But those who participate in R&D and invest in patent protection “are driven crazy” by the idea that they could be competing against their own technology, Lechtenberger said. As a result, licensing agreements—including complex cross-licensing agreements—have become more common in place of attempting to kick competitors out of a market.
Such complex agreements are “a sign of the sophistication of the in-house legal teams who, looking at it from a business standpoint, see that as a better resolution than getting into expensive litigation,” Lechtenberger said.
Managing a Big Patent Portfolio
IP portfolio management tools have also “become much more sophisticated in the last 10 years,” which has allowed for “relatively easy budgeting, execution, and quality assurance,” said Al Riddle, BHGE associate general counsel, intellectual property. “Overall, I think companies are much more strategic in determining where they will file for protection to maximize the potential value of both the technology and IP portfolio.”
Baker Hughes combined with GE’s oil and gas division last year, creating a portfolio of more than 16,000 granted patents and published patent applications. The combined company is now expected to be spun off in the next 2–3 years as part of GE’s effort to “make its corporate structure leaner and substantially reduce debt,” the company said in June.
Given the still-newly combined portfolios, the company remains “focused on assuring the right resources are used to protect the right technologies,” Riddle said. But BHGE doesn’t “take the decision to eliminate IP protection on a technology lightly, especially if it’s a technology that has yet to take off due to current market conditions or business strategies—because those can always change.”
Riddle noted that companies “are developing a better understanding of the data around the patent application process.” They “can better track pendency, rejection, and appeal success rates with specific examiners and understand the evolving laws in countries around the world. Using such data to better decide where to spend time trying to get granted, appealing, or abandoning a patent can allow for a more strategic use of resources.”
Most data are available via a USPTO database called Public Patent Application Information Retrieval (PAIR), which maintains public information about US patents and patent applications. “Various entities will pull data from PAIR and provide certain analytics for, among other things, [the time it takes] for examiners to review cases, [the] likelihood [that] examiners allow cases on a first or second review, and [the] likelihood of success on appeal,” Riddle said.
Outside the US, determining where and to what degree protection should be sought depends on the strength of IP law in the country where the product or process will be put to use. This is especially the case for emerging digital technology.
“Many countries have laws which, though continuing to evolve, make patenting computer-enabled inventions challenging.” Riddle said. “As a result, strategies vary country by country, and that has to be taken into account when drafting new applications, considering alternative protections such as trade secret, or relying on copyright protections.”
For technologies digital or otherwise, “there are countries where it can take 10 years to get a patent granted,” he said. “Other locations have a lack of experienced examiners, or costs to maintain a patent are excessive. No two countries have the same enforcement rules and models.
“As a result,” Riddle said, “in order to have a complete IP protection strategy, it is necessary to not only understand the underlying technical innovations to protect but also the markets where they will be manufactured and deployed to ensure we protect in the appropriate jurisdictions and avoid nonproductive spend.”