Patent Policy - ACS Publications - American Chemical Society

11 Patents and Licensing in the Petroleum Industry THOMAS H. WHALEY

Downloaded by UNIV OF ROCHESTER on January 19, 2018 | http://pubs.acs.org Publication Date: June 1, 1978 | doi: 10.1021/bk-1978-0081.ch011

Texaco Development Corporation, 135 E. 42nd St., New York, NY 10017

The petroleum industry i s a complex and fascinating business. It deals with a finite natural resource which most of us take for granted. We've always lived in the age of oil and it's d i f f i c u l t for us to imagine any other way of life. When you think of the oil business, what comes to mind? Probably oil wells, pipelines, tankers, oil refineries, petrochemicals plants, and service stations. The oil business is all this and much more. An integrated oil company, such as Texaco, is involved in all phases of the business, from the exploration for oil deposits to marketing the f i n a l products to the consumer. There are six principal fields of operation i n which the integrated oil company participates: Exploration, D r i l l i n g and Production, Transportation, Refining and Manufacturing, Petrochemicals, and Marketing. The petroleum industry is doing a marvelous job of coordinating these operations, employing a large scale, highly efficient logist i c a l network to deliver an abundant supply of products to consumers at relatively low prices. It i s estimated that we have now in the United States in proven o i l f i e l d s , reserves of o i l equal to or greater than the amounts that already have been produced. The problem i s that the o i l l e f t in many of the o i l fields i s not readily produced. It is entrapped in the geological formation, or "sand", by strong capillary forces which resist displacement by other f l u i d s . Enhanced o i l recovery methods are now at the forefront of research and development efforts of the major o i l companies and of many smaller organizations as well. Some of the older fields have been water-flooded to strip the sands of some of their residual o i l . Conventional water flooding, however, s t i l l leaves more than half of the original o i l i n place. Detergents and other chemical additives are being 0-8412-0454-3/78/47-081-115$05.00/0 © 1978 American Chemical Society Marcy; Patent Policy ACS Symposium Series; American Chemical Society: Washington, DC, 1978.


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t e s t e d i n many f i e l d s t o improve the e f f i c i e n c y o f the waterflood operations. Other methods o f improving o i l recovery are being d e v e l oped o r are a l r e a d y i n o p e r a t i o n . Some methods use l i q u i d s o l v e n t s f o r the o i l ; some employ carbon d i o x i d e , steam, o r hydrocarbon vapors; some use combinations of these m a t e r i a l s , i t should be p o s s i b l e bv the use of v a r i o u s enhanced o i l recovery methods t o recover n e a r l y a l l the o i l from a given r e s e r v o i r . The o i l i n d u s t r y i s a c t i v e l y pursuing a l t e r n a t i v e sources of f o s s i l f u e l s , such as, petroleum from Athabaska t a r sands i n Canada; hydrocarbon f u e l s from o i l shales i n Colorado, Utah and Wyoming; and f u e l gases and motor f u e l s from c o a l . I t i s o n l y a matter o f time u n t i l the p r i c e o f o i l w i l l make the p r o d u c t i o n o f each o f these a l t e r n a t i v e sources o f f u e l economical. As you no doubt already know, there i s a move a f o o t i n t h i s country t o d i v e s t the o i l companies o f t h e i r i n t e r e s t s i n c o a l . Such a move, i f s u c c e s s f u l , would l i k e l y prove very unfortunate, s i n c e the o i l companies have the technology f o r b e t t e r c o a l u t i l i z a t i o n . These companies developed t h i s technology independently and on t h e i r own i n i t i a t i v e s . It is s i g n i f i c a n t t h a t the f i r s t commercial s c a l e , h i g h pressure c o a l g a s i f i c a t i o n p r o j e c t , a 160 ton per day p l a n t i n Germany which has now been i n o p e r a t i o n f o r over a month, uses the Texaco C o a l G a s i f i c a t i o n Process. T h i s i s p a r t i c u l a r l y s i g n i f i c a n t i n view o f the h i s t o r y o f c o a l g a s i f i c a t i o n , f o r i t was the Germans who, i n the l a t e t h i r t i e s d u r i n g World War I I , f i r s t produced motor f u e l s on a l a r g e s c a l e from c o a l v i a c o a l gasification. The scope o f r e s e a r c h and development c a r r i e d out by the o i l companies covers a wide area o f s u b j e c t s and i n v o l v e s a broad spectrum o f s c i e n t i f i c d i s c i p l i n e s ranging from microb i o l o g y t o n u c l e a r p h y s i c s . Sometimes there are unexpected f a l l o u t b e n e f i t s t o other i n d u s t r i e s , such as a s t r a t i f i e d charge i n t e r n a l combustion engine, an improved i g n i t i o n system, a waste d i s p o s a l process f o r paper m i l l wastes, and a smoke f i l t e r f o r d i e s e l engines, a l l of which were by-products o f r e s e a r c h i n an o i l company l a b o r a t o r y . Other areas a t the f o r e f r o n t o f R&D today, a s i d e from petrochemicals, are new and b e t t e r r e f i n e r y c a t a l y s t s , and processes t o improve both y i e l d s and q u a l i t y o f petroleum products and t o e l i m i n a t e a i r p o l l u t i o n . Waste treatment p r o cesses and c o a l u t i l i z a t i o n methods are a l s o r e c e i v i n g a g r e a t d e a l of a t t e n t i o n from the o i l i n d u s t r y . The a i r and water are kept c l e a n e r , the q u a l i t y and value o f products improved, p e t r o leum s u p p l i e s augmented and extended, and the consumer d o l l a r s t r e t c h e d f u r t h e r , a l l - as a r e s u l t o f research and development. Patents h e l p a company to r e a l i z e a r e t u r n on i t s R&D expenditures. The general p o l i c y o f the petroleum i n d u s t r y i s to p r o t e c t i n v e n t i o n s and investments i n r e s e a r c h and development

Marcy; Patent Policy ACS Symposium Series; American Chemical Society: Washington, DC, 1978.


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by systematic and aggressive patent programs. Patents p r o t e c t processes and products f o r a company's own use and, i n the case of products, o f t e n provide a competitive advantage i n the consumer market. You are made aware o f some of the patented products by a d v e r t i s i n g programs. You know, f o r example, that one brand o f motor o i l i s s a i d to g i v e the m o t o r i s t increased gasol i n e mileage because i t contains patented f r i c t i o n m o d i f i e r s . With another brand, engines are kept c l e a n e r and run longer because o f c e r t a i n patented a d d i t i v e s i n the l u b r i c a t i n g o i l s . Top brand g a s o l i n e s keep c a r b u r e t o r s and spark plugs c l e a n and prevent c a r b u r e t o r i c i n g and c o r r o s i o n by the use o f patented additives. The l i c e n s i n g of company owned patents and p r o p r i e t a r y know-how i s common everyday p r a c t i c e i n the petroleum i n d u s t r y . The g e n e r a l p o l i c y i s t o make technology a v a i l a b l e to q u a l i f i e d a p p l i c a n t s through l i c e n s i n g a t reasonable r o y a l t y r a t e s . Aside from a few exceptions, patented processes, compositions, and apparatus are a v a i l a b l e to others i n s i d e or o u t s i d e the i n d u s t r y . Some o l d e r and w e l l e s t a b l i s h e d processes are a v a i l a b l e f o r l i c e n s e a t standard r o y a l t y r a t e s . Process r o y a l t y r a t e s are commonly based on the q u a n t i t y processed, that i s , b a r r e l s o f feed stock s u p p l i e d to a c a t a l y t i c c r a c k i n g u n i t , o r the amount o f product, f o r example, pounds o f toluene produced. In the case o f chemicals o r c a t a l y s t s , the r o y a l t y may be based on pounds o f chemicals used or produced or on the net s a l e s p r i c e o f the product. Apparatus may be l i c e n s e d on a per u n i t b a s i s . Royalty r a t e s and other d e t a i l s o f l i c e n s e agreements a r e determined by n e g o t i a t i o n . The r o y a l t y r a t e o f t e n i s determined by the value o f the technology t o the l i c e n s e e . Since most companies are both l i c e n s o r s and l i c e n s e e s , the p r e v a i l i n g view i s t h a t the terms of a l i c e n s e agreement should be such t h a t i t i s a good business d e a l f o r both p a r t i e s . A survey by Business Week (1) i n d i c a t e s that the petroleum i n d u s t r y spent something over $750 m i l l i o n i n 1976 f o r r e s e a r c h and development. Funds f o r the r e s e a r c h e f f o r t o f the petroleum companies are, however, being r e s t r i c t e d due to the tremendous demand f o r new c a p i t a l investment i n every area of the b u s i n e s s . T h i s need f o r investment c a p i t a l r e s u l t s i n a cutback i n s e r v i c e s , such as r e s e a r c h and development, and consequently, i n o b t a i n i n g p a t e n t s . As a r e s u l t , the number of patents i s s u e d to the f i v e most a c t i v e o i l companies decreased a t the r a t e of about s i x percent per year from 1974 t o 1977. A survey by C i t i b a n k (2) showed t h a t f o r the p e r i o d 1970 t o 1975 the c a p i t a l o u t l a y s o f 37 United States-based o i l companies exceeded t h e i r a v a i l a b l e cash flow. In 1975, f o r example, the cash flow s h o r t f a l l amounted t o more than 10 b i l l i o n d o l l a r s . Changing economic c o n d i t i o n s and the increased dependence o f the United States on f o r e i g n o i l have created a demand f o r enormous amounts o f c a p i t a l and f o r new r e f i n e r y p r o c e s s i n g equipment and petrochemicals p l a n t s . Nearly 60 percent o f the



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c a p i t a l and e x p l o r a t o r y expenditures of Texaco {3) f o r the 12 months ended September 30, 1977, were f o r producing o p e r a t i o n s . About 35 percent went f o r manufacturing and petrochemicals p l a n t s , with the remaining 5 percent covering a l l other c a p i t a l expenditures. As a r e s u l t o f t h i s squeeze on c a p i t a l , there has been a s h i f t i n emphasis i n R&D programs i n the o i l i n d u s t r y over the past s e v e r a l years. Fundamental r e s e a r c h and even long-term a p p l i e d research are being phased out i n favor of product r e search and other near-term a p p l i e d r e s e a r c h , such as enhanced o i l recovery p r o j e c t s and environmental programs. T h i s s h i f t i n emphasis i n r e s e a r c h expenditures i s not l i m i t e d to the p e t r o leum i n d u s t r y , as i s brought out i n an a r t i c l e i n a recent Wall S t r e e t J o u r n a l (4). A consequence of the shortage of c a p i t a l has been i n c r e a s e d p a r t i c i p a t i o n i n i n d u s t r i a l R&D by the F e d e r a l Government. In the past few years i t has become a major source o f c a p i t a l i n the a l t e r n a t i v e energy f i e l d s , p a r t i c u l a r l y i n the area of c o a l utilization. In the n o t - t o o - d i s t a n t f u t u r e , i f not today, only the F e d e r a l Government may be able to f i n a n c e the l a r g e c o a l conversion p l a n t s needed to r e p l a c e o i l and n a t u r a l gas as industrial fuels. When a company accepts government f i n a n c i n g o f a development p r o j e c t , i t s patent and l i c e n s i n g program i n t h a t area w i l l have to be r e c o n c i l e d with government patent and data p o l i c i e s . In d e a l i n g with Government agencies, such as the Department of Energy (DOE) f o r f i n a n c i n g R&D, i t i s necessary to n e g o t i a t e the terms a f f e c t i n g the ownership o f patents and the c o n t r o l o f data and l i c e n s i n g r i g h t s . Dr. Betsy Ancker-Johnson, i n 1976, when she was A s s i s t a n t S e c r e t a r y f o r Science and Technology a t the Department of Commerce, i n commenting on the l a c k o f u n i f o r m i t y o f p o l i c y among the more than 20 government agencies funding R&D, estimated t h a t some 30,000 c o n t r a c t s per year must be n e g o t i a t e d with these agencies. Some o f these agencies a c q u i r e t i t l e to a l l i n v e n t i o n s , but may waive t i t l e to p r i v a t e s e c t o r c o n t r a c t o r s under c e r t a i n c o n d i t i o n s . Others acquire only a l i c e n s e to n a t i o n a l and s t a t e agencies, while s t i l l others permit a waiver of r i g h t s a f t e r an i n v e n t i o n i s made under the c o n t r a c t . As s t a t e d by Dr. AnckerJohnson, these n e g o t i a t i o n s have "placed an enormous and needless burden on both the agencies and t h e i r c o n t r a c t o r s " (5). Representative Ray Thornton (D-Ark.) on A p r i l 6, 1977, i n i n t r o d u c i n g a b i l l , H.R. 6249, to e s t a b l i s h a uniform patent p o l i c y (6) f o r i n v e n t i o n s r e s u l t i n g from f e d e r a l l y funded R&D, said: "Determining patent r i g h t s when an i n v e n t i o n i s the r e s u l t of f e d e r a l l y funded r e s e a r c h has become i n c r e a s i n g l y complex". Anyone who has been i n v o l v e d i n government c o n t r a c t s must c e r t a i n l y agree with t h a t . The Thornton B i l l was r e i n t r o d u c e d J u l y 28, 1977, as H.R. 8596 and i s now pending before Congress. D e t a i l s o f t h i s b i l l are the subject o f another paper (7) i n t h i s symposium.



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Under the Thornton B i l l the c o n t r a c t o r would r e t a i n t i t l e t o a l l patents r e s u l t i n g from f e d e r a l c o n t r a c t s and grants and may be r e q u i r e d t o l i c e n s e others under c e r t a i n s p e c i f i e d s i t u a t i o n s designed t o safeguard the p u b l i c i n t e r e s t . I b e l i e v e t h a t Dr. Ancker-Johnson i s c o r r e c t i n s t a t i n g (8) t h a t the c o n t r a c t o r g e n e r a l l y i s w i l l i n g t o l i c e n s e t h i r d p a r t i e s without a F e d e r a l requirement t o do so. Meanwhile we must l i v e with the patents and data clause requirements o f the v a r i o u s government agencies as they a r e today. When a company enters i n t o a c o n t r a c t w i t h DOE f o r the development o r l a r g e - s c a l e demonstration o f one o f i t s promising p r o p r i e t a r y processes, i t i s i n danger o f l o s i n g p r o p r i e t a r y r i g h t s i n both i t s i n v e n t i o n s and i t s data, o r know-how. Both patents and know-how are important l i c e n s i n g a s s e t s . Standard patent clauses i n DOE c o n t r a c t s p r o v i d e t h a t the t i t l e i n i n v e n t i o n s made " i n the course o f o r under the c o n t r a c t " i s i n the Government (9). Any i n v e n t i o n which i s f i r s t a c t u a l l y reduced to p r a c t i c e under the c o n t r a c t a l s o belongs t o the Government (10). T h i s means t h a t the Government may get t i t l e to i n v e n t i o n s made p r i o r t o the c o n t r a c t , but f i r s t a c t u a l l y b u i l t and used during the course o f work under the c o n t r a c t . Thus, the Government may a c t u a l l y o b t a i n t i t l e t o patents on i n v e n t i o n s made p r i o r t o the Government c o n t r a c t . The r e a l i n c e n t i v e i n e n t e r i n g i n t o an R&D c o n t r a c t i s t h a t the work under the c o n t r a c t w i l l l e a d t o commercial p l a n t s . For example, l e t ' s suppose you have developed a new process. I t looks good i n the l a b o r a t o r y , but before the process can be s o l d or used commercially, a demonstration p l a n t must be b u i l t . Your company i s unable t o r a i s e the money f o r the demonstration p l a n t , but the government agency i s both ready and w i l l i n g t o help w i t h f i n a n c i n g the p r o j e c t . Now, suppose t h a t d u r i n g the course o f the c o n t r a c t , the process i s f i r s t a c t u a l l y reduced t o p r a c t i c e . The government agency may get t i t l e t o a l l your i n v e n t i o n s , whether p r e v i o u s l y patented o r not, unless a waiver o f t i t l e was negotiated i n t o the c o n t r a c t . Now l e t us assume the process proves t o be a great success and i t looks as though 20 t o 30. f u l l s c a l e p l a n t s w i l l be b u i l t i n the United States and p o t e n t i a l l y t h a t many more abroad. Your company does not have the a v a i l a b l e c a p i t a l t o b u i l d the p l a n t s . I t developed the process, but the best i t can do i s t o p a r t i c i pate i n one o r two p l a n t s . O r d i n a r i l y , i t could expect a good flow o f l i c e n s i n g revenue from a l l the other p l a n t s . But the investment r e q u i r e d i s so l a r g e t h a t the only p l a n t s t h a t w i l l be b u i l t are l i k e l y t o be financed a t l e a s t i n p a r t by v a r i o u s government agencies. The Government has r i g h t s t o your patents and t o the data ( H J developed under the c o n t r a c t and, under the usual c o n t r a c t p r o v i s i o n s , i t may extend these r i g h t s t o o t h e r s . Even i f you have been able t o n e g o t i a t e a waiver o f t i t l e , the Government r e t a i n s an i r r e v o c a b l e , r o y a l t y - f r e e l i c e n s e t o use the process f o r Government purposes and can extend the r i g h t t o


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states and municipalities. So, you're l e f t i n a worse position than your competitors. You spent the seed money and they reap the harvest. There are some ways to get around this dilemma in negotiating contracts which are too involved to go into in this paper, except to say that you may negotiate, for example, to retain foreign licensing rights; you may r e s t r i c t release of data by limited rights provisions in the contract; and you may be able to assert a background patents position through requiring licensing under these patents at reasonable royalty rates (11). As you can see, the various factors mentioned are forcing reassessment of R&D and patent p o l i c i e s . F i r s t of a l l , i t i s important to try to identify promising inventions which were made prior to a government contract as inventions actually reduced to practice before work i s commenced under the contract. Patent applications covering these inventions should be already on f i l e before work begins under the contract. Close cooperation between the patent attorney and the research director should pinpoint those inventions which should be actually reduced to practice prior to a contract, then determine what acts are necessary to develop an actual reduction to practice of the important inventions with minimum R&D time and expense. The need for additional capital for R&D efforts in the private sector is abundantly apparent. It is hoped that Congress w i l l adopt a policy toward inventions resulting from Governmentsponsored R&D which w i l l permit industry to accept Government funding without fear of loss of i t s related proprietary technology as contained in patents and licensing rights. Abstract Competition in the petroleum industry necessitates large expenditures for research and development. Patents are essential to protect these investments. Active research i s carried out in the areas of exploration for petroleum deposits, data processing procedures, petroleum production techniques, offshore oil producing equipment, enhanced oil recovery methods, refinery and petrochemical processes, catalysis, new products, and improved fuels and lubricants. Extensive licensing of patents and know-how relating to improved hydrocarbon processing methods has been customary in the oil business for many years. Licensing royalties and terms usually involve lengthy bargaining. Licensing revenues are often plowed back into research resulting in continuing opportunities for employment of professional chemists and engineers. However, with government-financed contracts, r e s t r i c tive and regressive regulations pertaining to inventions, coupled with other requirements, such as environmental impact statements and increased taxation and equipment costs, have resulted in a decrease in private venture capital needed for research.


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Literature Cited 1. 2. 3. 4.


5. 6. 7.

8. 9.

10.

11.

"Survey of Corporate Research and Development". Business Week, June 27, 1977, p. 75. Energy Newsletter, Citibank, V o l . XII, Number 3, 1976. Granville, M. F., Presentation before the O i l Analysts Group of New York, November 17, 1977. Lynch, Mitchell C., "Backing Off Basics", The Wall Street Journal, October 18, 1977. Gibney, LingYee, C&E News, October 11, 1976, p. 18. Congressional Record, H3149, A p r i l 6, 1977. Latker, N. J., "Federal Patent Policy and H.R. 8596", Symposium on Patent Policy, 175th National Meeting of the American Chemical Society, Anaheim, California, March 13, 1978. Gibney, LingYee, Supra, Note 5. "Patents, Data & Copyrights & Related Matters", 41 CFR Part 99, Related Parts, Effective July 13, 1977, Energy Research & Development Administration, Washington, D.C. 20545. Alleman, Robert Ν . , "Government Incentives/Disincentives", Les Nouvelles, Journal of the Licensing Executives Society, V o l . XII, Number 4, (December 1977), p. 259. Haughey, Charles, S., "Effect of Government Data Policies", Les Nouvelles, Journal of the Licensing Executives Society, V o l . XII, Number 4, (December 1977), p. 262.

Biographic Notes For over 30 years, Thomas H. Whaley has been involved f u l l -time with patent work in the petroleum industry. For the last 10 years he has served as General Patent Attorney for Texaco Development Corporation. He is active in several professional societies and is the inventor or co-inventor on over 25 U.S. patents and their foreign counterparts. Mr. Whaley's academic training was obtained at the University of Colorado and the University of Michigan, where he was awarded degrees in chemical engineering, and at New York University where he was awarded his Bachelor of Law degree. RECEIVED June 20, 1978.


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