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Rob Facob, Eifion Morris
9.1 Intellectual property rights are often overlooked in offshore construction contracts with most parties believing that they are simply ‘somebody else’s problem’. However, get intellectual property wrong and it can affect all parties involved in the project, from the Feed consultant that submits the original design, to the Contractor (and Subcontractor) that incorporates the design into the work, to the Company (and operator) itself that uses the finished work, to the lender that has financed the project. For example, incorporating third party intellectual property into the design without the owner’s consent can result in the suspension of the project, or worse, the cancellation of the project. Third party intellectual property issues are rarely identified at the design or construction stage. Typically they are only identified once the work is in operation in the field, by which time alterations to the work are difficult, both physically and financially.
9.2 However, if you get intellectual property correct it can be extremely lucrative. The owner of the intellectual property effectively holds the keys to the technology. If third parties want to access the technology they need to get a copy of the key from the intellectual property owner. This means that the owner can block competitors from using the technology or demand a substantial income stream by way of royalties from licensing the technology.
9.3 This chapter discusses intellectual property rights in detail, providing practical guidance at each stage of the construction process to limit the intellectual property risk.
9.4 Intellectual property rights grant the owner a monopoly over innovation. However, the scope of the monopoly very much depends on the intellectual property right concerned.
9.5 The following intellectual property rights may exist in an offshore construction project.
9.6 Patents create a monopoly right over inventions and advancements over the technology currently known. Patents are registered rights and, generally, grant the owner a 20 year monopoly (subject to payment of the relevant renewal fees). In return, the owner must disclose how its technology works so that everybody is free to use it after the 20 year period ends. Patents do not only cover novel products but also novel processes. As an example, a patent could cover a novel turret mooring system or even a liquefaction process.
9.7 Confidential information or trade secrets are unregistered rights and are an alternative to patent protection. Provided the information is disseminated under a strict duty of confidentiality then the information can be used whilst remaining a secret to the wider world. The downside is that if the information is leaked to the wider public, then the monopoly is destroyed overnight. As an example, seismic data may constitute confidential information.
9.8 Design rights protect the overall appearance or shape of a novel product. There are many different types of design right (registered/unregistered, national/European-wide) each of which is governed by different rules. For example, the monopoly granted to a design right could last up to 25 years but could also be as short as three years. As an example, the shape of a vessel’s hull or layout may be protected by design right.
9.9 Copyright protects the expression of an idea as recorded in a permanent form; generally speaking, this will be text or drawings. Copyright is a very powerful intellectual property right because it is a right that arises automatically (you do not need to register it) and it lasts a very long time (sometimes as long as 80 years after the death of the creator). In relation to construction contracts, the type of things protected by copyright will be design drawings, data tables, charts and project reports.
9.10 Trade marks allow customers to identify the company behind the product or services being offered. An operator may have their name on the side of the vessel, which allows the rest of the world to know who is responsible for the operation. An EPIC contractor will have its own branding, which is likely to be included on its website, invoices, marketing and other materials.
9.11 The challenges faced with ensuring that a unit can successfully operate offshore are immense. It is not just a case of taking technology that successfully works onshore and integrating it into your offshore work. The conditions offshore make tasks such as offloading, storage and liquefaction, which would be relatively easy onshore, a much greater challenge. For example, offloading onshore will involve two static objects. With offshore offloading, at least one of the objects (if not both) will be constantly moving due to tidal effects in the ocean, resulting in the distances between the two objects constantly changing. This makes offloading a much trickier task. Further, the conditions in one ocean might be different to the conditions in another, which means that a solution that works in one offshore location may not work in another offshore location. Constraints such as weight, stability, space and access all add to the difficulty. Key technology is likely to be created to overcome these challenges, which is protected by intellectual property rights.
9.12 Whether these innovative solutions can be incorporated into the work will depend on who owns the underlying intellectual property rights. As the owner of the intellectual property you can block your competitors from accessing the technology, forcing them to devise their own novel solutions to the problem, which in turn makes their business less cost-effective. As part of any bidding process, you automatically have the upper hand as your tender alone includes the protected technology. Further, you alone have the power to grant licences permitting third parties to use the technology. This means that you can dictate the price. Further still, you have an asset that you can use as a bargaining chip for cross-licensing of other ‘must have’ technology.
9.13 If you are not the owner of the key intellectual property, you are at a major disadvantage. You need either to negotiate with the intellectual property owner to ensure that you get a licence to incorporate the technology into the work or you need to go to the expense of designing around the intellectual property to ensure that the technology in the work does not infringe the intellectual property. The consequences of infringing third party intellectual property rights can be draconian and expensive (see paragraph 9.52 below).
9.14 One of the reasons why intellectual property is perhaps not given the attention that it deserves is that parties often take comfort from incorrect assumptions relating to intellectual property. Below are a few of the more common misconceptions to do with intellectual property.
9.15 A company may believe that its technology is protected by a worldwide patent. There is no such thing as a ‘worldwide patent’. Patents are national rights and therefore the scope of protection of each patent is limited to the country granting the patent. It is possible to apply through the WIPO (the Worldwide Intellectual Property Organization) for a bundle of national patent rights. However, applying for a patent through WIPO is simply an administrative process resulting in the grant of a number of national patent rights.
9.16 Whilst it is potentially possible to apply to every country in the world for a patent, the cost of doing so would be astronomical. Even the largest multi-national companies do not have worldwide patent protection. Countries are chosen based on a cost-benefit analysis. For example, how important is it to a company involved in offshore construction to have a patent in the landlocked countries of Bolivia, Tajikistan or the Czech Republic? Unless a key competitor manufactures in these countries, the value of such a patent would be negligible.
9.17 A company may believe that the law governing any intellectual property rights is dictated by the flag of the vessel. The flag of a vessel does dictate the law to be applied on the vessel. Therefore, the law of the flag may specify that that flag state’s intellectual property rights do apply on board. However, if the vessel is within the territorial waters, or even exclusive economic zone, of another territory then the intellectual property rights of that jurisdiction apply. For example, a Norwegian drilling unit will infringe UK intellectual property rights if it uses the intellectual property without consent in the UK or within UK waters. The laws of England and Wales or Scotland apply in this regard.
9.18 A company may consider that it owns all of the intellectual property rights because it commissioned the Feed. The original owner of the intellectual property will be the person that created it (the Feed Contractor) not the commissioner (the EPIC Contractor or the Company). In order for the commissioner to own the intellectual property, it will need to be assigned to him in writing and signed by the person that created it.
9.19 The commissioner may be able to argue that he has an implied licence to use the intellectual property strictly in relation to the specific work and for the contemplated project. However, this implied licence may not extend to any modification to the Feed or if the work is later used in a different location. The implied licence is almost certainly not going to extend to the use of the design in another work to be used in a different project.
What if a company has made several changes to the original design? Is this sufficient to avoid infringement of any intellectual property rights? When it comes to copyright, design or patent infringement the number of changes that have been made to the original is irrelevant.
9.20 When it comes to patents, what is important is whether the revised design still falls within the patent claims. Patent claims are purposefully drafted widely to capture obvious modifications and, generally speaking, extend the scope of protection far wider than the way the technology is actually being used by the patent owner.
9.21 When it comes to copyright, what is important is whether a substantial part of the design document has been copied. Under English law, a ‘substantial part’ is a qualitative and not a quantitative test. Therefore, the number of changes made does not necessarily result in avoiding infringement.
9.22 When it comes to design rights, what is important is whether the revised design creates the same ‘overall impression’. Again, this is a qualitative not a quantitative test.
9.23 It is a common belief that if one party has a warranty/undertaking from the Feed and/or the EPIC contractor (an ‘IP warranty’), it will be unaffected by any intellectual property issues. Warranties are a statement of fact given at a specific time, typically the date of the contract, by one party of a contract to another. If those statements turn out to be false, then the party relying on the warranty can bring a breach of contract claim against the party giving the warranty and could be compensated in damages.
9.24 An IP warranty is a contractual assurance from one party to the other that certain facts in relation to intellectual property are true, for example that all registered intellectual property has been renewed, or that the intellectual property does not infringe third party intellectual property. When it comes to intellectual property warranties, breaches tend to involve the unauthorised use of third party intellectual property. This means that separate infringement claims can be commenced by the third party against anyone that is using the intellectual property, regardless of whether that party has the benefit of a warranty. Injunctions can also be granted ceasing the entire project until the claim is resolved.
9.25 The Company may have an IP warranty from the EPIC contractor, who in turn may have a warranty from the Feed contractor. However, warranties are only as strong as the weakest warranty in the chain. For example, perhaps the Feed contractor is an individual located in a defendant friendly jurisdiction with no money. Enforcing the breach of contract or an English law judgment against the Feed contractor might be problematic. However, if the Feed contractor has no money, then whilst insolvency might beckon for the Feed contractor, the remedy does not compensate those higher up the warranty chain. Further, there may be a warranty cap in the contract, namely, a maximum liability in the event of a breach of warranty. Who will pay the excess if this cap is exceeded?
9.26 Warranties can also include limitation language (’so far as I am aware’, ‘to the best of my knowledge’, ‘I have not been threatened with’), which can limit the exposure of the party giving any such warranty.
9.27 Even if the warranty chain is strong and the cap is large, problems can still arise. A breach of intellectual property could result in the suspension of the project until technology is developed that designs around the intellectual property. Whilst the warranty may result in financial compensation, does it make up for the delay and additional management time that is utilised in finding a solution, as opposed to working on the next project? What about the reputational risk that results in a public announcement that the project has been suspended as a result of intellectual property infringement. Will this affect you getting new business in the future?
9.28 Even the lender is exposed. Whilst the lender may have taken security over the work enabling it to sell the work to third parties to recover the debt following a breach, how is the value of the work affected if it is injuncted and cannot be used in certain territories?
9.29 A patent gives you the right to exclude others from using your invention. It does not mean that your use of your invention does not infringe any third party rights. Whilst you may have a patent over the technology, you may still need to use third party technology in order to utilise your own protected technology. For example, if your technology is an improvement over existing technology, you may still need to use the existing protected technology as part of your solution. You will need to obtain consent from the third party before you could utilise your own technology.
9.30 It is often thought that just because you have commissioned/constructed a previous work to the same design, you have the right to create a second work to the same design without infringing any intellectual property rights. That is not necessarily the case. It will depend on who owns the intellectual property. It might be that you were given an express or implied licence to use the intellectual property in the first work. However, that does not automatically mean that you can use the intellectual property in the second work. The contractual provisions between you and the intellectual property owner will be key in this regard.
9.31 The starting point for any offshore project is typically the feasibility study, which is sometimes included within a pre-Feed study. The Feed Contractor will then develop the concept into the Feed document, which will contain estimates of weight, dimensions, materials and equipment, together with main elements of the basic design. However, the Feed package will often fall short of a complete basic design ready in all respects for detailed engineering. The Feed package will therefore be built up by the various EPIC contractors to turn the Feed into a workable product. This process inevitably results in additional design elements being created by the EPIC Contractor. Intellectual property rights can therefore be incorporated into the work during each stage of construction. As a result, each and every contract should contain intellectual property provisions stating, for example, who is responsible for ensuring consent has been obtained to use any third party intellectual property, who shall be the owner of any intellectual property rights created during performance of the contract, who is responsible for registering those rights, and who will enforce them against third party infringers.
9.32 The contractual definition of ‘Intellectual Property Rights’ in an offshore construction contract is typically very wide to ensure that it captures all of the intellectual property used in relation to the work. This ensures that the relevant parties (EPIC contractor, EPIC subcontractors, operator, Company etc) can use all of the intellectual property in the work to fulfil their obligations under the relevant contracts.
9.33 A typical definition may look like this:
‘Intellectual Property Rights’ means patents, copyright, trade marks, moral rights, domain names, goodwill and the right to sue for passing off, rights in designs, rights in computer software, database rights, confidential information (including know-how and trade secrets) and all other intellectual property rights, in each case whether registered or unregistered and including all applications and rights to apply for and be granted, renewals or extensions of, and rights to claim priority from, such rights and all similar or equivalent rights or forms of protection which subsist or will subsist now or in the future in any part of the world.