Patents and Confidentiality in the Canadian Oil Patch

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March 23, 2022

Over the past decade, there have been several Canadian patent cases that have turned, in large part, on the issue of whether a patent was invalid due to the inventor’s prior public disclosure of their invention. An analysis of the decisions issued by the courts in these cases reveals a number of key issues that will determine whether or not a prior disclosure is considered to be capable of invalidating the underlying patent.

Background

In Canada, one of the grounds on which a patent can be invalidated is that the patent was “anticipated” by a public disclosure of the patented invention that occurred prior to the filing date.  The Patent Act provides a one-year “grace period” for disclosures that were made by the applicant or by a person who obtained knowledge, directly or indirectly, from the applicant.  For example, if an inventor were to disclose their invention in such a manner that it became available to the public, so long as they filed their Canadian patent application no later than one year after the disclosure then they would not be prohibited from obtaining a patent.

Criteria for Anticipation by Prior Disclosure

The Supreme Court of Canada has held, in Apotex v. Sanofi-Synthelabo anticipation through prior disclosure is established when the following two criteria are proven:

• public disclosure: the subject matter of the invention was publicly disclosed; and
• enablement: the public disclosure would have enabled a person skilled in the art of the patent to practice the subject matter of the invention.

Anticipation by Prior Use or Sale

One way to prove that a patent has been anticipated is to establish that a prior use or sale of a product amounted to an enabling disclosure of the patented invention.  It is important to note here that sale to the public or use by the public is not, by itself, sufficient to prove anticipation.  It must also be shown that the sale or use provided the necessary information such that a person skilled in the art could find the invention without the exercise of inventive skill.

A person seeking to impeach a patent on this basis need not show that widespread sales took place; a single unconditional sale can be sufficient. Additionally, it is not necessary to demonstrate that a particular purchaser did or would have actually conducted an analysis of the product so as to perceive the nature of the underlying invention; it is sufficient that the purchaser could have done so.

Defences to Anticipation by Prior Disclosure

A patentee, when faced with an attack on its patent based on its own prior disclosure, may choose to argue that its patent is nevertheless valid because its prior disclosure was:

• subject to a duty of confidentiality; and/or
• an experimental use.

The following cases involving prior disclosure attacks on oil and gas patents illustrate how questions of confidentiality and experimentation have been addressed by Canadian courts.

Weatherford v. Corlac

In Weatherford v. Corlac, the patent in question was for a stuffing box used in the heavy oil industry in Alberta. During development of the invention, the patentee sold models to two companies for testing in the field. The patentee, in responding to an attack based on anticipation, argued that its disclosures were subject to an implied duty of confidentiality.

The trial judge agreed with the patentee, holding that a duty of confidentiality could be implied from the circumstances. The trial judge made the following specific findings:

• there was an expectation of confidentiality in view of the relationship that the patentee had with each customer;
• the parties shared a “common cause”, namely solving a particular problem and had a relationship of trust and co-operation that led to an expectation of confidence;
• the patentee’s disclosure was for a limited purpose;
• there was no evidence with respect to what third parties may have been told;
• observation of the units would not have disclosed anything about its inner workings; and
• although people working in the field did not think there was a confidentiality obligation, those further up the corporate ladder thought there was confidentiality.

This decision was upheld on appeal to the Federal Court of Appeal.

Wenzel Downhole v. National-Oilwell

Wenzel Downhole v. National-Oilwell involved a patent for a bearing assembly for use in the drilling of oil and gas wells. The defendants argued that the patent was invalid for anticipation based on the fact that the patented assembly was rented by the patentee to a customer for more than one year prior to the filing date. In response, the patentee argued that the rental was not invalidating because:

• there was not a sufficient teaching of the subject matter of the patent;
• the disclosure was confidential; and
• the use was experimental.

On the issue of sufficiency, the trial judge held that the rental did constitute an invalidating disclosure since the test for anticipation was objective rather than subjective. More particularly, it was irrelevant whether or not a real person fitting the description of the hypothetical person skilled in the art was actually present at the drilling site and whether they actually dismantled the tools and examined them. All that mattered was that the rented tools were available for more than a visual inspection and that if a person skilled in the art of the patent had been present they would have been able to perceive the subject matter of the patent through an examination of the tools.

Turning to whether or not the customer’s use of the patented invention was subject to a duty of confidentiality, the trial judge held that the relationship at issue was nothing more than a commercial arrangement that was not subject to such a duty. The trial judge, Justice Snider, was particularly influenced by the lack of evidence that people present on the job site such as the rig operator or rig crew would have understood that they were under an obligation of confidentiality.

Dealing lastly with the issue of experimental use, Justice Snider held that a use would only be experimental if it were viewed as such in the mind of the user. In the case before her, the assembly was not a prototype and so the use was not experimental. The fact that that the assembly was new did not make it experimental since, in the words of the trial judge “everything new must be used for a first time”.

Varco v. Pason

Varco v. Pason involved a patent for a braking system for use in an automatic drilling system. The defendant alleged anticipation based on a third party’s use of the patentee’s prototype on an oil rig for more than one year before the filing date of the plaintiff’s patent application.

At trial, the inventor testified that he explained the invention in very general terms only, he personally performed all test drilling, the apparatus was locked when not in use and the inner workings of the apparatus were not accessible or viewable.

The trial judge also accepted the plaintiff’s evidence that:

• the agreement between the patentee and customer was to test the device;
• it was only after the product was tested that the customer agreed to pay for the use during the test period; and
• testing was necessary to determine if the invention worked.

The trial judge held that there was not only an absence of an enabling disclosure but also that the parties intended to keep the invention confidential.  It is interesting to note that the trial judge reached these findings despite the absence of a confidentiality agreement and despite any evidence as to industry practice or corporate understanding.

Packers Plus v. Essential Energy

Packers Plus v. Essential Energy involved a patent on a method of fracturing an oil and gas wellbore. The defendant alleged that the patent was anticipated by the inventor’s disclosure of his invention to two potential customers and also the plaintiff’s performance of a total of three jobs for these customers, all more than one year before the Canadian filing date. In response, the plaintiff argued that the disclosures were subject to an implied duty of confidence and that they were, in any event, experimental and therefore non-public disclosures.

At trial, the patentee relied upon the fact that there had allegedly been some discussions regarding confidentiality before the inventor disclosed his ideas to a customer and that the proposals that it provided to customers were marked with a notation that they were confidential and not to be disclosed outside of the customer’s company.

However, the inventor also conceded that a confidential label was sometimes attached to documents or drawings that were not really secret. For example, such notices sometimes appeared on drawings of parts that could be purchased from third parties or on information that was already in the public domain. Additionally, the inventor conceded that whether something was truly confidential sometimes required a judgment call on the part of the recipient.

Expert witnesses tendered by the parties had conflicting opinions as to the existence of an implied duty of confidentiality. The plaintiff’s expert relied upon codes of conduct that he believed were in force in the oil and gas industry in the early 2000’s and which, in part, obligated a company’s employees to preserve not only the company’s confidential information but also confidential materials received from third parties.

In response, the defendant’s expert testified that in the oil and gas industry a company wishing to preserve the confidentiality of their work typically required that other parties enter into written non-disclosure agreements before being given access to such work. This expert also testified that simply marking documents as “confidential” did not create an obligation on the part of the recipient to keep such document confidential. Lastly, the expert testified that there was no industry standard in 2001 that would require an operating company to preserve the confidentiality of a service company’s equipment or methods.

Turning to experimental use, the inventor testified as to his view that all three jobs were experiments despite the fact that none of the documents between the plaintiff and its customers identified them as experimental. In response, one of the defendant’s experts testified that if a service company in the oil and gas industry were truly conducting an experiment, they would specifically advise the operator of this fact, offer a discounted price for the job, prepare a summary of the work to be conducted, test alternative hypotheses, ensure that a senior company representative was on site and prepare a detailed analysis of the results. None of these conditions was satisfied by the three jobs.

After reviewing the parties’ evidence and arguments, the trial judge held that the prior disclosures related neither to experiments nor to confidential communications. Although the inventor may have believed that the jobs were experimental, there was no corroboration of that belief in the documents nor was there evidence that one would reasonably expect that the jobs were experimental.

On the issue of confidentiality, the trial judge accepted the evidence that the oil and gas industry was highly competitive and that operating companies had the upper hand when dealing with service companies. As such, if the plaintiff wanted to obtain an agreement from its customers as to confidentiality, it had to do more than simply mark some documents as confidential.

Conclusions

Several lessons can be learned from a review of the above decisions.

First, Canadian courts have recognized that experimentation is sometimes necessary in order to verify the safety and efficacy of a product or method. Therefore, in the right circumstances, an inventor will be able to successfully argue that any disclosure that occurred as a result of the conduct of an experiment should be treated as a non-public disclosure. However, an inventor would also be well-advised to carefully document its work so as to make it clear that the work is experimental. This would include, at a minimum, advising the customer, in writing, that the work is experimental. Ideally, the inventor would also document the details of the hypotheses being tested and the results obtained.

Second, an inventor should ideally obtain a written acknowledgement of confidentiality from a planned recipient before making any disclosure of an invention.

Third, even if an inventor has taken the above precautions, they should still file a Canadian patent application no later than one year after any disclosure in order to take advantage of the grace period provided by the Patent Act.

Fourth, in litigation involving a potentially invalidating disclosure by an inventor more than one year before the Canadian filing date, each party should carefully consider leading evidence regarding the nature of the disclosure, documentation relating to the disclosure, the persons who were present during any disclosure and their access (or lack thereof) to the tools or methods being used, and the standards within the industry regarding the confidentiality of communications. 

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