Australia looks set to rethink its utility model regime after study suggests net cost to the economy

Australia’s Advisory Council on Intellectual Property (ACIP), an independent body, has recommended that the government consider abolishing the second-tier ‘innovation patent’. The recommendation comes on the heels of a study by IP Australia’s Office of the Chief Economist, which cast doubts on how effective the system is in fulfilling its goal of stimulating innovation among the country’s SMEs.

Innovation patents issued in Australia are akin to what are typically known as utility models elsewhere. Valid for eight years, the rights are laudibly intended to give SMEs a quick and inexpensive way to protect incremental technological advances. Rather than showing an inventive step, applicants only need to show an 'innovative' step – defined by IP Australia as a “difference that makes a substantial contribution to the working of the invention”. There is no substantial examination before grant, but in order to be enforceable, an innovation patent must be examined and certified by IP Australia. Crucially, an innovation patent owner can seek the same remedies against infringement as the holder of a standard patent, including damages, account of profit and injunctive relief. The “very low” standard for patentability combined with the available enforcement options makes the innovation patent a very powerful tool; one that many say has become too powerful.

The secondary patent level has been a bit of a muddle in Australia, with the innovation patent supplanting the petty patent in 2001, only to attract widespread criticism several years later. The ACIP’s review process began back in 2011, and after several rounds of public consultations, it released a final report last year. The report neither recommended the system’s retention nor its abolition, reasoning that “ACIP was unable to discover any empirical evidence to enable an assessment of how effectively the system was meeting [its] objective” (of stimulating SME innovation). In the past year, however, new data has become available though the publication of the IP Government Open Data project. IP Australia’s Office of the Chief Economist then analysed the data for evidence to make just such an assessment.

The results, published on May 25, are damning. To quote the report at length: “Only 23 SMEs have become moderate users of the innovation patent system, filing at least 5 innovation patents, with at least one enforceable right, and entering the patent system via an application for an innovation patent. The average SME or private inventor files once and never again [74% of those that have filed for at least one innovation patent], does not receive any enforceable right (83%), and lets their patent expire early because they see its value at less than the A$110-A$220 [approximately US$85-US$170] cost of renewal (78%).” A full three-quarters of SME or sole inventor applicants, the report said, file one innovation patent, and then never file an innovation patent – or a standard patent – again.

Moreover, the study found that while SMEs and lone inventors bear 95% of the regulatory costs of the system – about A$10 million (US$7.7 million) per annum – the benefits of innovation patents accrue disproportionately to big companies. Case in point, Patentology blogger Mark Summerfield’s review of Apple’s Australian patent strategy back in 2012. The Californian company was at that time the single biggest user of the innovation patent system, holding 5% of all certified innovation patents in force. According to Summerfield most of these were filed not to protect incremental improvements, but rather to gain temporary protection for pending standard patent applications, pointing toward a “strategy of building up a portfolio of robust and rapidly enforceable rights in the short term, with a view to longer-term protection of inventions where warranted”. However, while Apple certified almost all of its innovation patents, thus making them enforceable, the total rate of certification was just 20%. According to IP Australia, large corporates held “the greatest portion” of certified innovation patents, meaning that in theory most of the value generated by the system has gone to them.

In recommending that the government consider abolishing innovation patents, ACIP concluded that “the private gains from innovation patents are likely to be offset by the uncertainty costs to consumers and producers”, and that the system as a whole “is likely to result in a net cost to society”.

It would be fascinating to see a similar economic analysis of the biggest utility model regime of them all, that of China. IP Australia’s study points out that there is some empirical evidence that second-tier patent systems can benefit developing countries that are in the technological 'catch-up' phase. Still, many observers have wondered whether the prevalence of utility model patents (and their tax-advantaged nature) is holding back overall patent quality in China, and whether utility models’ contribution to the country’s huge filing volume serves to obscure the truth about the level of innovation that is occurring there. We know that some of the largest users of the system are huge enterprises like the State Grid Corporation of China, Midea and Gree Electric; it would be instructive to see, as we now can for Australia, how much of the costs and benefits of these patents fall on large and small companies, and whether they stimulate any innovation at all that wouldn’t otherwise have occurred.