IP value in the lands down under

In December 2015 the incoming Australian administration of Prime Minister Malcolm Turnbull launched its National Innovation and Science Agenda, “to create a modern, dynamic, 21st century economy for Australia”. While noting that “the opportunities for Australia have never been greater”, with businesses enjoying “unprecedented access to the global economy through… trade agreements with China, Japan and Korea” and “more than half the world’s middle class already [living] in our region”, the plan recognised that the country’s poor performance in several key areas were holding it back.

Significantly, the plan pointed out that although Australia is home to several of the world’s highest-rated universities, it has been “falling behind on measures of commercialisation and collaboration, consistently ranking last or second last among OECD countries for business-research collaboration”. Moreover, Australian investors’ “appetite for risk is lower than in comparable countries, which means Australian start-ups and early stage businesses often fail to attract capital to grow”.

To solve these problems, the plan committed A$1.1 billion (approximately US$830 million) to incentivise innovation, entrepreneurship and early-stage investment, and to encourage collaboration between industry and the research sector.

Across the Tasman Sea, similar measures are being implemented to improve opportunities for early-stage innovation in New Zealand. In its 2016 annual budget, the government pledged a total of NZ$761.4 million (approximately US$535.5 million) for a variety of innovation-focused initiatives, with a target of increasing annual science-related investment to NZ$1.6 billion by 2020.

Though barely mentioned in either government’s missive, IP strategy clearly has a fundamental role to play in this. While neither country is likely to attract prodigious volumes of patent filings from foreign entities, given their limited market size, concern is mounting that local businesses and research organisations have little to show in terms of a global IP footprint, despite high levels of public funding.

Down under, it’s different

To understand this situation, we need to look at the specific conditions in which Australia and New Zealand find themselves. While these are two of the most highly developed countries in Asia-Pacific, they are also two of the most sparsely populated. Their economic success has been built on rich natural resources and sustained investment in primary industries – farming, fishing, forestry, mining and, of course, tourism – rather than the low-tech, high-tech manufacturing mix for which their much more densely populated neighbours further north are famous.

Intellectual property has typically featured low down the list of priorities for most Australian and New Zealand businesses, if it even appears at all – although the emergence of new innovation-driven industries and the accompanying policy agendas are gradually changing attitudes. Despite this, Australia and New Zealand both boast sophisticated IP systems, as well as long-established, highly regarded IP legal professions, modelled on the United Kingdom’s common law framework.

On the surface, then, it would seem that Australasia has plenty of strategic IP expertise on hand. However, this is largely concentrated in private practice (a sector which has seen plenty of innovation of its own) and on rights procurement and dispute resolution, rather than in a corporate setting where value creation is the name of the game.

“I would characterise the level of strategic IP sophistication among Australian companies and rights holders as medium, perhaps low, especially when compared to counterparts in the United States and Europe,” admits Brendan Cheong, manager, patents and technical IP at Rio Tinto in Brisbane. “While it is difficult to directly ascertain what various Australian companies are doing in terms of IP strategy, an indirect measure of IP strategy sophistication among them could perhaps be made by looking at the prevalence – or lack thereof – of Australian in-house and externally contracted IP professionals servicing Australian companies in such a function.” Nonetheless, there are signs that this is gradually changing for the better. “IP awareness is, in my opinion, sharply on the rise among Australian companies,” adds Cheong. “Accompanying this is a rise in awareness of the need to have a strategy towards intellectual property.”

Rob McInnes, partner at DibbsBarker in Sydney, suggests that the lack of IP awareness in the early-stage space may in large part be down to typical staffing practices. “Australian start-ups sometimes find their executives by looking for Australian expats who have joined multinational groups, worked overseas and risen to middle or upper middle management positions in the relevant technology sector,” he says. “These executives are then put in charge of technology start-ups, but their skills in R&D, marketing or general management may not have included IP management.”

While he acknowledges that this observation was much more common in years gone by and that the situation has improved somewhat more recently, the problem is even greater in the segment that most Australian and New Zealand businesses fall into: “If there is a yawning deficit in IP management here, it’s in the medium-sized businesses, the everyday trading and service businesses. These typically have nobody responsible for intellectual property and very often they are totally unaware of even the simplest trademark issues, let alone the more complicated principles of IP management.”

Brett Lunn, managing partner at FB Rice in Sydney, agrees that despite some encouraging signs, Australasian businesses and research institutions as a whole remain less sophisticated than their counterparts in North America, Japan, Korea and Western Europe when it comes to taking a strategic approach to their IP assets. “I have seen enormous strides taken in the last 25 years and do have optimism that intellectual property is now seen as a core issue for many Australian CEOs and institutional leaders,” he says. “However, most other countries now understand this importance, so Australia needs to do more just to keep up with other national economies. The realisation is probably not yet there in some quarters that we are in a race that has no end – in other words, we need to keep improving year on year in our approach to innovation and use of intellectual property.”

Lunn reports that businesses in some of Australia and New Zealand’s most important areas for future growth have shown themselves increasingly adept at recognising IP value and managing IP assets accordingly. “The situation does differ greatly across different industry sectors,” he explains. “The Australian biotech sector, for example, is quite sophisticated in its use of IP assets and is becoming increasingly so. However, we have relatively few large tech companies and the reality is that most Australian companies are small to medium-sized enterprises (SMEs). Not all, but many SMEs devote little time to IP issues, and many cling to outmoded views around how IP assets can and should be utilised. There is a continuous need for education in this regard.”

Many of the region’s most promising inventions – and the start-ups built around them – have emerged from public sector research. However, here too there is a disconnect: although large amounts of taxpayer money are pumped into this kind of high-value innovation at the institutional level, there is a sense that more could be done to find commercial applications and ensure that Australians and New Zealanders see some return on their investment.

Figure 1. Filing locations of patent applications filed by Australian research organisations 2000-2014

Source: PATSTAT Spring 2015 edition

Figure 2. Collaborations with Australian research organisations by country of PCT co-applicant

Source: PATSTAT Spring 2015 edition

Figure 3. Forward citations received by PCT applications filed by Australian research organisations

Source: OECD Citations September 2015; PATSTAT Spring 2015 edition

Return on investment

Aside from the primary industry base and the advanced IP service provider market, another idiosyncrasy of the Australasian IP landscape is that the lion’s share of investment in high-value, high-tech innovation is taking place in the publicly funded research sector, rather than in private sector enterprises. The issue facing Australia and New Zealand is how to guarantee that some return is made on the significant sums of public money spent on R&D. If this is to be done through implementation in products and services, then appropriate IP protection and business partnerships must be secured. There have thus far been a few notable successes in commercialising or monetising public IP assets – CSIRO’s assertion of its wireless networking patents in the United States being one example which is likely familiar to IAM readers.

However, although Australia and New Zealand rank among the world’s top public spenders on R&D, their output in terms of IP assets appears low. It was against this backdrop that IAM hosted the southern hemisphere’s first-ever IPBC event in November last year. Held in Melbourne, IPBC Australasia attracted around 200 delegates and speakers from Australia, New Zealand and the rest of the world. Reflecting the local market, most attendees were from the start-up and research sectors, with a significant number of large corporates also represented.

Speaking at the event, Adam Liberman, vice president of Coherent Cloud and formerly general counsel and IP manager at CSIRO, noted that only 1.8 patent applications are filed for every A$1 billion of Australia’s gross domestic product. “That’s just not good enough,” he argued.

Figure 4. New Zealand patent application volumes 2015-2016

Figure 5. New Zealand patents granted 2015-2016

Source: IP Office of New Zealand

Figure 6. Australian patent filings – PCT versus direct

Source: IP Australia, Clarivate Professional Services

Figure 7. New Zealand patent applications by origin 2015-2016

Source: IP Office of New Zealand

First, build a strategy

The issue of converting innovation into economic value cannot be solved simply through patent filings. This is a lesson which China has learned the hard way: the slew of incentives it provided for many years to encourage filings has resulted in what many analysts regard as a tsunami of low-quality patents.

Panellists at the first session of IPBC Australasia 2016 – entitled “To be an innovation-led company, you need a world-class IP strategy” – were in broad agreement on this point. “Just patenting everything is not an IP strategy,” Cheong, who participated in the session, pointed out. “You need to know why you need a patent in the first place.” Fellow panellist Jane Perrier, special counsel for intellectual property at Telstra, similarly stressed that patents are not always the best protection option from a commercial perspective; depending on your organisation’s main lines of business, they may not be worthwhile at all. “Some of our most valuable assets, such as databases, can’t get protection under IP laws, so we often have to rely on other methods, such as trade secrecy, contracts and licensing,” she explained.

This was echoed by Derek Minihane, vice president at Sydney-based medical device maker Cochlear. “When selecting investment opportunities, the most important thing isn’t patents,” he said, while discussing collaboration and commercialisation strategies during the event’s final session. “It’s whatever offers us an economic moat.”

In the opening session Joo Sup Kim, vice president, intellectual property at LG Electronics, also highlighted the importance of aligning IP strategy with the needs of the wider business, noting that sometimes purchasing patents from outside the company can prove more effective. He gave the example of LG’s purchase of a portfolio of organic light-emitting diode-relevant patents, which enabled the company to commercialise some of its technology and integrate it in products more rapidly.

However, alignment of intellectual property and overall business strategy is in short supply at many antipodean businesses. “Australian companies would benefit from having a more strategic, coordinated and realistic approach to their obtainment and use of IP assets,” admitted Cheong. “Integration of intellectual property into the fabric of a company’s business, together with a clearly articulated IP strategy, will allow Australian companies to make quicker, more practical, more consistent IP-related decisions which are better aligned with their core business objectives.”

Monetisation and collaboration

The possibilities of putting an actual dollar value on IP assets in order to transact them in the way Kim described was a recurring theme throughout the event and was the focus of the third session – “Cashing in on IP development”. This panel also explored the pros and cons of patent monetisation as a route for rights holders – especially those in the public sector – to realise value from their R&D investments. However, prospective patent buyers and NPEs looking for assertion partners should not focus too much attention on the Australasian markets just yet – unless they have more than straight patent licensing in mind.

“The NPEs and aggregators aren’t often an option for us,” argued Alastair Hick, director of Monash University’s commercialisation arm, based in Melbourne. “Our ultimate aim is to turn our research into technologies that can benefit society, not just to use it to get licensing revenue.” He stressed that IP value can enhance reputation and industry profile, as well as the bottom line, and that rights holders should identify all these possible benefits when attempting to evaluate their assets. “Australasian universities want to play a more active role getting their intellectual property out there and developed,” Hick pointed out, adding that the quality of the opportunity is what attracts multinationals to work with the Australasian research sector, but that government grant rounds are often seen as too slow, thereby dulling their competitive edge.

Open innovation and industry-academic collaboration offer another route for Australasian rights holders to leverage their assets and commercialise their research. ‘Co-opetition’ – working with third parties, including competitors, to advance one’s own objectives – was mentioned more than once at IPBC Australasia. In a market with many smaller under-resourced players, and with much of the valuable technology in the hands of research organisations lacking in commercial nous, collaborations and co-opetitive partnerships appear key to securing the region’s innovation-led future.

Lunn thinks that an even more fundamental approach is required before Australasian rights holders can begin to benefit from IP-based collaborations, patent monetisation and other advanced facets of IP strategies. “While some companies and institutions are excellent, I would step back and say that there firstly needs to be a greater focus on identifying innovations which are then protectable as IP assets,” he explained. “Australia still underperforms in taking the opportunity to protect the intellectual property it is generating.” Again, this comes down to education ‒ particularly in the SME space ‒ and promoting awareness that IP assets can and do have significant value: “Increasing realisation of strategies that look at IP assets not simply as tools that can be enforced in courts, but that have value in other ways, should by definition see more value being generated.”

Figure 8. Top Australian research organisations by patent applications 2000-2014

Source: PATSTAT Spring 2015 edition

Figure 9. PCT applications filed by Australian research organisations 2000-2014

Source: PATSTAT Spring 2015 edition

Figure 10. Top Australian research organisations by in-force patents filed 2000-2014

Back to basics

The Australian government appeared to adopt this kind of back-to-basics approach in August 2015 when it asked the Productivity Commission – its principal review and advisory body on matters of microeconomic policy – to carry out an inquiry into the state of the country’s IP system.

The commission published its final report at the end of last year and summed up its findings as follows: “Australia’s patent system grants exclusivity too readily, allowing a proliferation of low quality patents, frustrating follow-on innovators and stymieing competition.”

In terms of raising patent quality, the report recommends that the government “increase the degree of invention required to receive a patent, abolish the failed innovation patent [ie, utility model], reconfigure costly extensions of term for pharmaceutical patents, and better structure patent fees”.

These recommendations have been a cause of concern for many rights holders and service providers (although a suggestion in an earlier draft of the report to rule out patent protection for software inventions has been dropped, to much relief in the rights holder and service provider communities). The proposed abolition of innovation patents – Australia’s answer to utility models – seems slightly puzzling, insofar as applications for this class of IP right have been rising.

“Overall, it is clear that the commission’s recommended programme of reforms is intended to result in there being fewer patents, by making it harder to obtain a standard patent, impossible to obtain an innovation patent and more expensive to maintain a patent once granted,” explained Mark Summerfield, author of the Patentology blog, at the time of the report’s release. “It is very difficult to argue with the recommendations, if you accept the [commission’s] underlying assumptions about patent ‘quality’ and ‘value’, along with their general principle that ‘targeting socially valuable and additional innovations is a necessary condition for the patent system to meet the principles of a well-functioning IP system’. On this basis, we would only ever want to grant patents for the very best, most challenging and most socially valuable inventions. Clearly, however, no patent system in the world meets this objective.”

The government is now considering the commission’s findings, with the possibility that some of the recommendations may be implemented into law and policy in the future.

Figure 11. Provisional patent applications and innovation patent applications in Australia 2006-2015

NB: An innovation patent is analogous to the utility models and ‘petty patents’ offered in certain other jurisdictions. It has a lower application fee than a standard patent, a term of up to eight years and does not require examination unless it needs to be enforced. A provisional patent application allows applicants to claim an early priority date before filing a standard or innovation patent.

Source: IP Australia

In conclusion, it might appear that the Australian government’s efforts to improve the country’s innovation capacities could end up making IP protection more restrictive and more difficult to obtain. “The Productivity Commission’s report was disheartening for anyone who understands the importance of intellectual property in transforming the Australian economy so that we can prosper without relying on digging up natural resources and shipping them overseas,” says McInnes. “The report’s overall premise seems to be that we should assume that Australia will always be a consumer of intellectual property owned overseas, so our focus should be on paying the least amount possible for these foreign-owned IP rights rather than facilitating and incentivising innovation here. At the very least, we need to address and reverse the kind of scepticism about IP rights that is reflected in the Productivity Commission’s report.”

While Lunn agrees that the commission’s report will be seen as problematic by some rights holders and IP professionals, he believes the onus is still on those stakeholders themselves to improve the level of IP sophistication in the region. “Ultimately, government needs to ensure that the regulatory framework and economic policies are supportive of innovation, innovative companies and IP generation,” he says. “No doubt there is work to do on that front in Australia, but the expectation should be on business and our leading institutions to take the opportunities that are available rather than simply waiting for government to do their part. Intellectual property is obviously critical in many instances to ensuring that innovation is successfully commercialised.” Where government does have an important role in this regard is ensuring that Australia’s IP system is world class, he adds. “The recent recommendations of the Productivity Commission, at least in regards to patents, seem to me counter to this goal. The government’s response to those recommendations is awaited with interest and will be critical.”