A common problem in energy and natural resources transactions, whether the transaction in question is an acquisition or new development, is the failure to adequately address intellectual property issues at the outset of the project. With parties often concentrating on the more apparent financial, regulatory and environmental issues of the project being developed or acquired, the future implications of not having appropriately reviewed and secured intellectual property rights are often overlooked. However, almost all aspects of power generation and transmission asset design, development and construction are in fact subject to intellectual property protections, and IP implications should be part of any project strategy from the beginning in order to minimize future costs and maximize economies of scale.
Designs, drawings, engineering and fabrication specifications, reports and computer models, just to name a few items common to energy and natural resources transactions, are all subject to copyright protection, and in some instances may also be subject to patent or trade secret protection. Under the copyright laws of the United States (and many other developed nations), the actual authors of the copyrightable works own all of the rights unless the author expressly gives them away through license or assignment. While there is assignment by operation of law for copyrightable works created by employees, there is no automatic assignment for works created by third parties. Thus, the ownership and all rights of use of copyrightable works created by third party contractors and vendors will remain with the contractors and vendors absent express language in the contract transferring rights to the project owner.
The New Project Development Perspective
Our experience has shown that typical energy and natural resources agreements, particularly those initially drafted by third party service providers, do not contain rights for project owners that are sufficiently broad to cover likely future uses – in terms of both the description of the work product licensed or assigned, and the scope of permitted uses. For example, if an engineering services agreement grants to a project owner a license to copy the design drawings that are produced, the project owner will not have a clear right to take any action other than to literally copy the design drawings, and the project owner will receive no rights to any works created other than those specifically identified in the contract. The project owner would be prohibited, among other actions, from modifying or creating derivative versions of the design drawings, embedding portions of the design drawings into other documents, or sublicensing the use of the design drawings to any third party (such as another service provider participating in the project).
Many project owners overlook these intellectual property issues and do not focus on their potential future needs, such as:
- creating training materials or operator manuals;
- modifying designs;
- providing materials from one vendor to another vendor;
- changing contractors during the project and having the new contractor use and/or complete the initial contractor’s design documents;
- hiring a third party to operate and maintain a power plant;
- replacing components for the repair or upgrade of a power plant; or
- using current designs for future projects.
Each one of these actions requires that the project owner have broader rights than the ability to merely copy the materials produced by the third party service provider. Further, the particular documents or materials licensed to a project owner may be insufficient in and of themselves. It is important to consider whether, for example, there will be the need for any underlying methodology or analyses of the contractor.
Our experience has shown that when owners have to go back to third party service providers to get additional rights or materials after agreements have been executed, it can be a costly experience, and in some cases, the third party service provider may flatly refuse the additional requests. Project owners are in a much better position to negotiate for all of their current and potential future needs at the outset of a transaction when the leverage is still more in favor of the project owner. Particularly in the current economic times, a contractor will be far more motivated to grant broader rights if that is what is necessary to close the deal. Once the contract is signed, however, there is far less incentive, and perhaps even a powerful disincentive, for contractors to give up additional rights.
The Acquisition Perspective
Consideration of intellectual property issues is equally important when acquiring power generation, transmission or related assets. It is crucial to conduct intellectual property due diligence as part of the overall initial due diligence efforts, which will ensure that the future owner of the asset has all of the rights it needs to receive full use and enjoyment of the assets being acquired, without unexpected costs down the line. If the due diligence reveals that the third party service provider agreements for the original design, development and construction of the asset being acquired do not provide sufficient scopes of use as discussed above, time will be needed to negotiate with the service providers to secure the missing rights.
In addition to considering third party service provider agreements for the “main” asset (such as a power plant), attention must also be paid to agreements for ancillary intellectual property and technology such as software that is used to control a facility, or even the physical computers themselves. Our experience has shown that in many cases the acquisition target does not even know exactly what intellectual property and technology it has, and that the relevant agreements are in disarray, particularly when multiple sites are involved. Often these types of agreements are not assignable without third party consent, and consent is not always readily given. While this can be a minor annoyance in the case of readily available “off the shelf” technology, it can be a major issue if mission-critical technology was custom-developed.
The volume of intellectual property and information technology assets in an acquisition should not be underestimated. The purchase by a major U.S. utility company of a fleet of non-nuclear power generation facilities and related assets worth over $1 billion involved: (a) the identification and transfer of over 750 personal computers and other items of scientific and/or information technology hardware spread across more than 15 locations; (b) the identification and transfer of more than 100 commercial software products; (c) the identification and assignment of multiple patents and trademarks; (d) the review of more than 50 intellectual property and information technology contracts, of which at least half required consent to assign or a renegotiation of the agreement; (e) the negotiation a significant information technology transition services agreement with the seller; (f) the negotiation of a third party consulting services agreement; and (g) the creation of an RFP for, and the negotiation of, a multi-million dollar software development and maintenance agreement for a custom energy management system. It took three intellectual property attorneys more than six months to complete all of the tasks. Had intellectual property issues not been part of the initial due diligence, the entire acquisition could have been significantly delayed and the purchaser’s ability to receive the full benefit of the energy assets would have been greatly diminished.