By Jill McWhirter, Scott Greer, and Peter Berg, with valuable assistance from Tiffany Penner, King & Spalding LLP
Large-scale energy projects rely on proprietary technologies and intellectual property (IP), perhaps as much as they rely on steel and concrete. As the energy transition gains steam this year and in coming years, the IP rights underlying the technologies that will drive the movement—many of them novel and only now in development—will become even more critical. To succeed in this rapidly changing environment, project developers focused on green energy and cleaner fuels must understand the fundamentals of IP rights. Project developers who master IP rights and obligations related to their projects can create powerful business models for long-term success.
IP as it relates to energy projects takes a myriad of forms. IP rights could exist in any of these scenarios:
- a unique and patentable technical process by which a marketable product—like a cleaner fuel source—is created from raw components and sold;
- a specialized design that enables a facility to commercialize a proprietary technical process at scale; or
- a new procedure that improves the efficiency or effectiveness of an existing technical process, thereby creating a competitive advantage and commercial opportunity.
IP is fundamental to the novel and cutting-edge technologies and concepts currently being exploited and developed that will be necessary in the emerging green energy economy.
Of course, the entities or individuals that conceive, create, and develop these technologies and have ownership rights to the applicable IP will seek to protect those rights to the fullest extent. This creates a dynamic for negotiation among the owners of the IP—the licensors—and the parties that aim to capitalize on those ideas, concepts, and inventions by turning them into large scale projects—the licensees. A project developer falls into the latter camp.
While project developers often have significant technical know-how, insight, and experience, the individuals or entities that are developing the technologies (the licensors) are rarely the same individuals or entities that are commercializing and exploiting those technologies into large-scale projects (the licensees). This dynamic creates a tug-of-war relationship between the licensors, those parties interested in retaining as much ownership as possible (to increase their own opportunity for profits), and the licensees, those parties that rely on exercising the ownership rights of others to create a tangible product (to generate their own returns). Appropriately balancing these competing interests is at the heart of energy transition.
This tug-of-war between licensor and licensee is not new; it has been critical to successful energy projects for many years. Still, there are many pitfalls for both a licensor and a licensee that are often given too little consideration or, worse, completely overlooked. In our experience, licensors are typically more astute as to IP issues, perhaps because creating and protecting IP rights is central to their business model. Licensees, on the other hand, sometimes give too little attention to IP issues and protections, perhaps because they are deeply concerned with the countless other risks and demands inherent in any project.
Unfortunately, mistakes in the area of IP are often detrimental to project developers. The stakes are large, and the risks can be enormous. At best, mistakes can lead to confusion, unplanned costs and delays. At worst, some mistakes could divide the successful from the unsuccessful during energy transition.
This article briefly discusses some IP concepts that all project developers should consider as they negotiate agreements for energy transition projects: ownership, licensing, infringement protection and confidentiality. These concepts are fundamental to all energy transition project agreements that involve engineering, procurement, construction, operation, maintenance and repair.
Securing Necessary IP Ownership
As mentioned above, licensors want to retain as much ownership rights as possible. This includes the IP that the licensor owned before the project—often referred to as “background IP”—and the IP that the licensor may create and develop during and after a project. At the same time, project developers must retain the scope of ownership rights in IP necessary to successfully build and operate their projects.
The associated risks can be significant. If a project developer allows a licensor to retain ownership rights in newly developed IP, as opposed to just background IP, the licensor could commercialize those ownership rights in newly developed IP in a way that damages the project developer’s business. For example, consider a project where the licensor develops a novel method that makes a technical process more efficient, but this IP is developed while engineering and building the project. This would presumably lend a commercial advantage to the project developer, who owns the project on which this newly developed method is first implemented. In this situation, the project developer would want to ensure that the IP rights to the novel method are not shared with its competitors. Protecting the project developer’s long-term profitably is at stake. This consideration is particularly important in energy transition, as novel technologies and methodologies are sure to emerge while projects are fine-tuned and improved.
Project developers should also ensure that they obtain ownership rights in the work product developed by the licensor in relation to the project. This work product can take many forms. Obvious examples include the detailed drawings and specifications that are particular to a project and are needed for its successful construction, operation and maintenance. One common pitfall is linking the transfer of work product ownership rights to the licensor’s receipt of payment.
While linking payment and work product ownership may be logical as a conceptual matter, it is rarely clear from a project development agreement that a particular payment obligation covers a particular work product. For example, project developers rarely compensate an engineer by the drawing. Instead, most construction-related contracts employ complicated payment methodologies that will make it thoroughly unclear when a payment is for a particular work product. Consequentially, tying ownership rights to payment receipt can make a project developer’s rights unclear. This uncertainty can be detrimental to a project developer who needs to terminate an engineer and take ownership of the work product mid-project. In that situation, the parties may not agree about what work product the project developer owns or can share with a replacement contractor to complete the project.
In summary, project engineers who appropriately navigate these issues and negotiate to retain sufficient ownership rights over IP developed before, during or in relation to a project are best positioned to succeed during energy transition.
Optimizing IP Licensing Rights
The primary method of exploiting one’s IP interests is through licensing those rights to others in exchange for compensation. Project developers should seek to obtain enough licensing rights to successfully develop, complete and operate projects without disruption. Conversely, licensors will want to limit those licensing rights to both protect their IP and maximize opportunities to earn profits from the IP.
Licensing issues also pose significant risks. In our experience, project developers too often fail to obtain enough licensing rights to ensure that they can successfully navigate risks and issues that can arise on a given project.
One common pitfall is obtaining licensing rights from a licensor that the project developer cannot transfer or sublicense to others, if needed, to successfully complete and commercialize a project. Licensors will often insist on limiting the transferability of the license granted to the project developer (again, to maximize the revenue it can gain from its ownership). If not properly structured, transferability limitations can cause problems for a project developer. For example, such limitations would hinder project developers who intend to sell projects to an investor, which is a common motivation of project developers and one we expect will motivate many projects during energy transition. In this scenario, limited transferability rights could give the licensor significant leverage over the project developer, perhaps requiring it to obtain the licensor’s consent to consummate the sale. At worst, the situation could result in the project developer’s inability to successfully market and sell the project.
Another significant licensing pitfall relates to the licensor’s right to terminate the license. We often see licensing agreements that entitle the licensor to terminate the license for any “material breach” of the license agreement by the project developer. This can become problematic if an alleged breach of confidentiality occurs during project execution or operation, for example. If not properly structured, the licensor may have the opportunity to argue that even an inadvertent disclosure of confidential information gives rise to its right to terminate the license needed for the project developer to build and operate its facility. If an inadvertent disclosure occurred during operation of a large facility, for example, a licensor’s broad termination right could lead to the suspension of operation, loss of enormous revenues, and other significant consequences.
In summary, project developers should be wary of agreement terms that limit their right to transfer licensing rights or give the licensor broad disclosure termination rights.
Guarding Against IP Infringement
Another vital consideration is the need to guard against the impacts of a possible infringement of third-party IP rights during a project. An infringement suit or related issue can easily lead to project disruption, as well as significant costs and delays. We expect this issue will be important in energy transition, given the natural and substantial incentives that will arise for improvements to competing technologies.
Project developers should carefully consider the person or entity that will protect the project developer in the event of such an infringement, by way of indemnity or otherwise. One useful tool in the project developer’s toolbox is the opportunity to retain an overarching indemnity protection (often referred to as a “wrap”) from the entity selected to design and build its project—for example, an EPC contractor. This wrap indemnity obligation from the project contractor can be in addition to or in place of an indemnity obligation from the technology licensor. However, an indemnity obligation owed from the project contractor can be more useful and reliable to the project developer than an indemnity obligation owed from the technology licensor. Through careful planning, an infringement “wrap” can be obtained on most projects without any meaningfully increased expense.
In summary, as project developers rush to lead the energy transition movement, project developers should consider the need for infringement protection and construct deals that protect against the impacts of infringement throughout the project lifecycle.
Balancing Work Product Confidentiality Interests
Navigating work product confidentiality is as important to successful project development as properly structuring the ownership, licensing, and infringement protections of the IP embedded in that work product. Like the issues previously discussed, confidentiality presents competing interests and room for negotiation. Consistent with the licensor’s desire to protect its ownership interests, the licensor may seek broad confidentiality terms with strict and limited abilities to disclose work product to third parties. Conversely, the project developer, as licensee, will need to ensure that its project is not hamstrung by overly broad confidentiality obligations and limitations.
The appropriate balance between the licensor’s and project developer’s interests will depend on the circumstances of each project. Where a project relies on widely used technologies, the licensor’s need for broad confidentiality obligations is limited. Project developers should be reluctant to accept confidentiality obligations where there is little need for them. Likewise, with respect to more traditional energy projects that are part of existing energy industries, confidentiality provisions that govern all work product on a project are overly protective of the licensor. In less developed energy industries, like those that will form the energy transition movement, licensors have a more salient need for confidentiality. Still, project developers must not accept overly broad confidentiality protections that will potentially jeopardize their project.
One situation where the scope of confidentiality is extremely important is preliminary development agreements and studies, such as front-end-engineering-and-design (FEED) agreements. Overly broad confidentiality restrictions in these agreements can reduce or even eliminate the project developer’s options for building their project. Agreeing to blanket confidentiality restrictions on all work product produced under a FEED agreement “weds” the project developer to the engineering firm or other entity producing that preliminary design. This can lead to substantially increased costs, longer schedules and increased risk profiles for the project developer.
In summary, balancing the need for confidentiality protections against the risks inherent in overly broad confidentiality obligations will be fundamental to projects during energy transition. Project developers should seriously consider the risks involved in confidentiality obligations at the outset of negotiations.
As energy transition gains steam in the coming years, the IP rights underlying the technologies that will form the pillars of the transition—many of them novel and only now in development—will be of paramount importance. To succeed, project developers steering these projects to market will need a strong grasp on IP ownership, licensing, infringement protections and work product confidentiality. Failing to appreciate these concepts can lead to significant consequences for any construction project that relies on technology.
Those who have invested significant time and enormous resources to develop the IP embedded in these technologies, the licensors, will understandably want to protect those inventions, know-how and ideas that require significant time and enormous resources to develop. At the same time, project developers must insist on rights to the IP that underlie their projects to enable their facilities to be successfully designed, built and operated without significant risk. The owners of the technologies that drive energy transition will aim to exploit those interests to the maximum extent and are sure to do their utmost to protect those ownership rights. To succeed, project developers who participate in the energy transition must keenly understand the risks involved in IP ownership, licensing, infringement protection and confidentiality.
About the Authors
Jill McWhirter, a partner in King & Spalding LLP’s Houston office, identifies and solves cutting-edge intellectual property issues in complex commercial and technology-based transactions as well as in restructuring matters.
Scott Greer, a partner in King & Spalding LLP’s Houston office, focuses exclusively on construction law and leads the firm’s worldwide Energy and Construction transactional practices.
King & Spalding LLP’s Houston-based senior associate Peter Berg represents owners, developers and lenders in their global on-shore and off-shore construction projects, ranging in value from $100 million to over $10 billion.