Recent research indicates that start-ups that engage with the patent system enjoy substantial benefits, so why do so few European businesses get involved? Lack of access to third-party expertise may be a big factor
Although instinctively those inside the IP bubble would say that, on balance, start-ups and small and medium-sized enterprises (SMEs) benefit from engaging with the patent system, actually proving the notion is tricky. Ultimately, the best way to do it is probably to look at the entities that do file for and receive patents in order to see what happens to them. Recent research from the United States indicates that the effects are, indeed, positive.
The bright side
A paper entitled The Bright Side of Patents – written by Joan Farre-Mensa of Harvard Business School and Deepak Hegde and Alexander Ljungqvist of New York University’s Stern School of Business, and first published in December 2015 – focused on all the first-time patent applications that were filed at the US Patent and Trademark Office by start-ups from 2001 onwards, which received a preliminary decision by 2009 and a final decision by the end of 2013. The total number of assets covered was 45,819. What the authors found led them to state: “Our analysis shows that patent approvals help startups create jobs, grow their sales, innovate and eventually succeed.” The key points included the following:
- The approval of a start-up’s first patent application increases its employment growth over the next five years by an average of 36%.
- The effect on sales growth – a 51% increase – is even larger.
- A first patent grant also has a strong causal effect on a firm’s ability to continue innovating, increasing both the number of subsequent patents that the business is granted (by 49%) and their quality (the average number of citations per subsequent patent increasing by 27%).
- Approval of a patent application increases a start-up’s probability of securing funding from venture capitalists over the following three years by 2.3 percentage points, which is a 53% increase over the unconditional probability.
- Patent grants more than double the probability that a start-up is eventually listed on a stock exchange.
Previous research in both the United States and Europe has also shown that start-ups with patents tend to be more attractive to investors than those without them – especially where the patents in question are thought to be of high quality.
Brexit blues for the UPC
The UK referendum on whether to remain in or leave the European Union will take place on June 23. The UK IP Office has stated that the Unified Patent Court (UPC) Agreement will not be ratified before the vote takes place. If the British decide to remain, it will presumably be ratified shortly afterwards. With Germany now planning ratification by the end of the year, that would mean the UPC coming into force sometime in March 2017.
What happens if the United Kingdom decides to leave, though, is another matter altogether. Upon such a vote, the government would need to negotiate the country’s departure. While that is happening the United Kingdom would remain an EU member state and one of the three – alongside France and Germany – whose ratification is needed for the UPC to come into force. Thus, should the United Kingdom vote to leave and then decide that it could not ratify, the UPC would be delayed until Brexit was concluded.
Of course, there would be nothing to stop a departing United Kingdom from ratifying the UPC Agreement, but politically it would be an explosive thing to do; while practically it would create more negotiation work, given that as soon as the United Kingdom had ratified it would need to begin to work out its departure. So, in effect, a leave vote on June 23 delays the UPC not by months, but by years. Although it is hard to predict what such a delay could lead to, it is not beyond the bounds of possibility that certain countries may reconsider; while Germany would not have ratified at all and would be under no obligation to do so. Many in the country may feel that it might be a chance to rethink whether to bother.
Patent owners inside and outside Europe – not to mention law and attorney firms, and many other service providers – have spent a great deal of time and money making sure they are ready for the UPC. They now face the possibility that this investment will all go to waste. Opinion polls in the United Kingdom suggest that the referendum result is currently too close to call. The campaign proper begins in April and patents will play absolutely no part in it. But there will be plenty of people inside the patent world waiting for the result with fraught nerves.
Europe missing out
SME and start-up owners of high-quality patents seem to enjoy a wide range of advantages, including quicker sales and employment growth; greater opportunities to find investors and access capital; better exit chances; more monetisation and other value creation options; and wider non-monetary strategic choices (eg, freedom to operate, collaborations, open innovation). Given this, why are so few start-ups and SMEs engaged with the patent system, especially in Europe?
One answer, of course, is that for a large number of businesses, patents are unnecessary. If you are not doing R&D, if innovation is not your game, then they will probably not be an issue. And in broad terms, that probably applies to most smaller companies – young and old. This, though, still leaves plenty that probably could benefit from patents, but do not own them. So why are these entities so reluctant to get involved?
One possibility is down to ignorance. Owning patents might make a huge difference to a business; but if no one tells the management, then how will they know? In Europe, this could be a particularly big issue.
Recent data on patent attorneys entitled to prosecute patents at the European Patent Office, put together by Patent-Pilot, shows that there are currently around 10,000 of them in the 38 European Patent Organisation member states (with a combined population of 500 million plus). Over half of these are in just two countries – Germany and the United Kingdom – while 25% work in industry. In Spain and Italy – big countries with large populations and important economies – the ratio of patent attorneys per million of the population is under 10; even in France it is under 15.
Table 1. European patent attorney numbers in selected European Patent Organisation member states (source: Patent Pilot)
Patent attorneys per million inhabitants
A question that immediately springs to mind is: what incentive do the 177 patent attorneys servicing Spain’s 46.2 million population have to go out and engage with the country’s innovative SMEs and start-ups, to talk to them about IP strategy and to offer them cut-price deals? They surely have more work than they can do as thing stand; they don’t need any more. The same applies to the 470 patent attorneys looking after the needs of over 60 million Italians; not to mention Portugal’s 40 attorneys and Greece’s 24.
Even in Germany and the United Kingdom – with ratios of 45.6 patent attorneys per million of the population and 32.1 per million respectively – there may still be plenty of instructions without having to go out and engage with potentially difficult start-up and SME clients which have little money and sometimes over-inflated views of their inventiveness.
If start-ups and SMEs are to consider whether patents should be factored into their business strategies, it is vital that they know what the options and benefits are. Right now in Europe, it is hard to see where that information is coming from – unless business owners go out and look for it themselves. The basic narrative about patents is that they are expensive and time consuming to get, and hard to enforce; and there is some truth in this. But, as the Bright Side of Patents study shows, there are also significant upsides that could make a major difference to their owners’ fortunes.
“What incentive do the 177 patent attorneys servicing Spain’s 46.2 million population have to go out and engage with the country’s innovative SMEs and start-ups?”
Currently, though, there are few people in Europe with any financial incentive to be proactive and to go out and spread the good news about patents in comprehensible, accessible language, while also offering affordable rates.
Quite what the solution is to this is hard to say, but perhaps more competition for work among attorneys might shake up the situation in certain jurisdictions. Alternatively, maybe all European patent attorneys should have to do a certain amount of pro bono work each year to maintain their status; or perhaps the development of a new type of non-technical, strategic IP professional qualification might work. What seems certain, though, is that as things stand, a lot of European SME and start-up companies are missing what could be big opportunities because they do not even know they exist. This must be having a detrimental effect on a European economy that needs as many boosts as it can get.