A profession transformed

How Australian IP firms have re-vamped their business models in the face of economic conditions and regulatory reforms, and what this means for practitioners and clients

In recent years Australian patent attorneys have been engaged in what many outside observers might well regard as a radical experiment in the provision of professional services. From what was a staid collection of traditional partnerships and equivalent structures, since 2013 the profession has transformed through incorporations, public listings, acquisitions and mergers, to one in which nearly one-third of all patent attorneys registered under the joint Australian and New Zealand regulatory system are employed by firms owned by companies listed on the Australian Securities Exchange (ASX).

While the public listing of legal service providers generally – or IP specialist firms in particular – is not unprecedented, the Australian patent attorney profession has taken the model a step further, with individual listed companies owning not just one, but multiple, operating firms. To complicate matters further, the firms within each of these groups have continued to operate independently of one another in the provision of professional services and, indeed, to compete with each other as well as other firms in the marketplace.

To many onlookers, this may seem confusing or raise concerns around issues to do with conflicts of interest, duties to clients or governance. However, there is an economic, political and regulatory context in which the transformation of the Australian patent attorney profession occurred. Understanding that may help to make recent changes in the profession more comprehensible and to alleviate some concerns.

Innovation performance

Australia has a problem with innovation. It was ranked 20th in the 2018 Global Innovation Index (GII) (co-published by Cornell University, the European Institute of Business Administration Business School and WIPO), which ranked 126 economies based on 80 indicators, ranging from IP filing rates to mobile-application creation, education spending and scientific and technical publications. With this ranking, Australia fell well behind numerous countries with smaller populations, including the top three, which were Switzerland, the Netherlands and Sweden.

However, it is even more telling that Australia languished in 76th place in the 2018 GII innovation efficiency ratio, which is a measure of how much innovation output an economy achieves in return for its innovation input. Australia’s efficiency ratio was just 58%, below the median of 61% and well behind those countries that are most effective at converting innovation input into output (eg, Switzerland (96%), Luxembourg (94%), China (92%) and the Netherlands (91%)). This poor result was due to a combination of excellent performance on innovation input – on which Australia ranked 11th – and a lacklustre performance on innovation output – on which it ranked 31st.

On the input side, Australia performed particularly well on measures of human capital and research, which include investment and performance in education and R&D, where it ranked third. However, on the output side the country performed especially poorly on measures of knowledge absorption (ranked 46th), innovation linkages (52nd) and knowledge diffusion (92nd).

An inability to convert great advantages in education and idea generation into effective innovation outcomes seems to be endemic in Australian culture. This problem is no better exemplified than through the recent prime ministership of Malcolm Turnbull. In September 2015, when Turnbull replaced Tony Abbott as prime minister of Australia, a wave of positive sentiment swept through the country’s innovation community of entrepreneurs, scientists, researchers, technologists, investors and associated professional services providers (including patent attorneys). This was partly because many of those people viewed Turnbull as a kindred spirit who had personal, hands-on experience as an investor in technology businesses and a generally progressive and positive attitude towards science, technology and innovation. In addition, Turnbull’s first major policy announcement was an investment of A$1.1 billion over four years in a national innovation and science agenda, in which he called for an ideas boom to replace the mining boom (and, more generally, Australia’s reliance on primary industry for exports) and declared his desire to see a cultural shift to embrace risk-taking and destigmatise failure.

Over the subsequent three years, however, most of that initial positive energy dissipated, to be replaced with disillusionment and disappointment, as talk of innovation at the top levels of government petered out to no more than a whisper. When Scott Morrison deposed Turnbull in August 2018, amid concerns that Turnbull’s more progressive outlook was not popular with the conservative coalition government’s base of supporters, it appeared that innovation had disappeared almost completely from the agenda. In announcing his new cabinet, for example, Morrison did not name a single minister with the word ‘innovation’ in their title. Instead, he appointed a minister for industry, science and technology and a minister for small and family business, skills and vocational education. The word from insiders in Australia’s capital, Canberra, was that the innovation agenda had already been quietly shelved once the government realised that it actually scared most voters, rather than exciting them. Morrison was simply finishing the job. In addition, along with a number of other populist policies, the strategy worked – in a surprise result that ran contrary to almost all expectations, and professional opinion polls, the Morrison government was re-elected in May 2019 with an enlarged majority.

Many Australians, it seems, are averse to the risk and change that is associated with innovation. Respective Australian governments have become averse to making overt efforts to change such anti-innovation attitudes because there are no votes in it – at least, not in the marginal electorates on which they rely to remain in power.

Figure 1. Originating patent applications by domestic applicants using a registered patent attorney or firm

Originating patent applications by domestic applicants using a registered patent attorney or firm

Originating patent applications by domestic applicants using a registered patent attorney or firm

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/

Patenting activity

This article is not about what Australia needs to do to bring about a cultural change around innovation, it is about the effect that the existing culture has had on the patent attorney profession in Australia. A hint as to the relationship may be found among the detailed innovation indicators in the GII, which include a measure of the number of patent families filed by nationals in two or more offices, relative to gross domestic product at purchasing power parity in (US$) billions. Australia scored just 1.0, significantly behind New Zealand (2.6), Canada (2.2), the United Kingdom (2.0), the United States (3.1), Japan (12.9) and South Korea (14.6), to name just a few of the 27 economies that had a superior performance in this measure.

Clearly, in failing to follow through on innovation, Australia has also failed to generate, identify and protect associated patentable intellectual property. Since assisting clients with these aspects of their business is the bread and butter of patent attorney services, it stands to reason that this should have some effect on the profession.

To illustrate just how significant this effect has been over the past two decades, Figure 1 shows the number of originating Australian patent applications filed by domestic applicants using the services of a registered patent attorney or firm. ‘Originating’ means that the application makes no claim to priority from any earlier application and is thus, typically, the first application filed by the applicant in respect of an invention. In the Australian system, a substantial majority of these are provisional applications, although they also include applications for standard patents and for the second-tier innovation patents. To a large extent these applications are a proxy for prospective new innovation arising from Australian individuals and organisations. They are also a proxy for the level of new patent advisory and drafting work flowing to Australian patent attorneys.

As Figure 1 shows, although there was significant growth in the number of Australian originating applications before 2000, this was followed by a sharp decline. A brief recovery was followed by a further fall between 2005 and 2012, which represented a reduction of nearly 1,000 originating applications (approximately 22%) of new patent advisory and drafting work coming to the patent attorney profession. This had an effect that lasted for many years, because a decline in originating applications in the present results in a corresponding reduction in future follow-on Australian and international patent applications, patent examination work and other advice and services associated with the patent lifecycle. Since 2012 there has been a slight recovery, although the average annual growth rate in originating applications over this period has been just 1.7%.

Non-resident patenting activity

The other major source of work and income for Australian patent attorneys is associated with applications filed in Australia by foreign applicants. Filing – and the subsequent prosecution – of such applications is conducted almost exclusively by registered attorneys, due to a requirement for applicants to provide a mailing address in Australia (or New Zealand) along with statutory restrictions on the provision of services relating to patent procurement by unregistered persons. Most of this work is carried out on instructions from associates (ie, private practice patent lawyers, attorneys and agents) in other countries, although some large corporates with substantial global portfolios instruct their national agents directly, usually via an in-house IP department.

Figure 2 is a chart of the total number of standard patent applications filed each year (including both direct and Patent Cooperation Treaty (PCT) national phase filings) by non-residents since 1995. The chart shows three periods of growth, separated by downturns likely associated with global economic factors (ie, the ‘dot-com’ crash of the early 2000s and the global financial crisis of 2007 to 2008). During the period from 1995 to 2000, the average growth rate was around 10.5%; in the next growth period, from 2003 to 2007 it was just under 6%; and in the current period, commencing in 2009, it is just 3%. The sharp increase in 2013 and corresponding dip in 2014 is an artefact of the commencement of the Raising the Bar patent law reforms, which caused many applicants to advance national filings in Australia, where possible, to get in ahead of the higher patentability standards introduced by the changes.

It is apparent that following each major economic disruption over the past two decades, the new normal for foreign applicants seeking patent protection in Australia has been associated with a lower rate of annual growth than had previously been the case.

Figure 2. Standard patent applications by non-residents, including direct and PCT national phase filings

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/

Challenges for growth

With the advent of the crisis in 2007 – if not before – any growth forecasts that Australian patent attorney firms may have prepared based on the past performance of the market became meaningless. The double-digit growth of the 1990s or even the strong single-digit growth of the mid-2000s, have not returned, and show no signs of doing so. Looking at recent numbers, it will be many years before the volume of originating patent work returns to 2005 level. Overall growth in the market for patent attorney services has been languishing below 3% ever since.

This stagnation has been exacerbated by the fact that before 2013 Australian patent attorney firms faced stringent limits on their freedom to restructure their organisations, and to raise capital to implement the kinds of IT processes and business transformations that might have assisted them in taking on these challenging market conditions. As they were prevented by legislation from incorporating, Australian patent attorneys were forced to operate as traditional partnerships or through broadly equivalent trust structures. With profitability often being – at best – stagnant and the primary sources of finance for investment in significant projects being debt, additional capital injections from existing principals and buy-in by new principals (resulting in a dilution of distributed profits), successfully driving any real change or strategy for growth was extremely difficult within most firms. Many senior employed attorneys, who saw themselves on track for partnership before the global financial crisis, found that offers were no longer forthcoming.

Incorporation, public listing and acquisitions

Solicitors had been permitted to incorporate in Australia since the early 2000s and some patent attorneys had since been lobbying quietly for similar reforms in the legislation governing their profession. With the Intellectual Property Laws Amendment (Raising the Bar) Act 2012, this finally came to pass. While the primary purpose of the act was to raise various standards for obtaining IP rights in Australia, Schedule 4, entitled “Assisting the operations of the IP profession”, provided for the registration of incorporated patent attorneys. An incorporated patent attorney is a company that is registered with the Australian corporate regulator, has at least one patent attorney director and is subject to provisions of both the Corporations Act 2001 and the Patents Act 1990.

Following the commencement of the new regime on 15 April 2013 many firms swiftly took advantage of the opportunity to incorporate, primarily by replacing traditional partnership or trust structures with private company structures in which the former partners or trust unit holders became, instead, company shareholders. In this way, firms were able to access various benefits of incorporation, including greater flexibility in capital raising and management of revenue, while also retaining the option to continue operating substantially as they always had.

While an incorporated patent attorney is required to have at least one patent attorney director, there is no requirement that any of its shareholders be patent attorneys. Indeed, the shares in a private incorporated patent attorney firm may be owned by any suitable entity, including another company. The relevance of this would be clear to anyone who had been watching developments in the UK profession, where the IP firm Murgitroyd, headquartered in Glasgow, become a wholly owned subsidiary of Murgitroyd Group PLC in 2001, a company newly listed on the Alternative Investment Market of the London Stock Exchange. Australia had also previously seen public listings of law firms Slater & Gordon and Shine Corporate.

Therefore, not everybody was surprised when leading firm Spruson & Ferguson became a wholly owned subsidiary of Australia’s first public IP firm holding company, IPH Ltd (ASX:IPH), which was listed on the ASX in 19 November 2014, raising A$169 million through its initial public offering. However, what was not initially apparent was how the success of Murgitroyd might be replicated in the very different Australian market. Being situated in Europe, Murgitroyd had the advantage of the European patent system providing a much larger market for services across all member countries of the European Patent Convention and a regional patent office in the EPO that is a member of the group of the five largest offices globally. While Spruson & Ferguson already operated a number of subsidiaries in Southeast Asia, most of its Australia-based attorneys could only practice before the Australian and New Zealand patent offices. Growth within the Australian market – which was something that IPH shareholders might well have expected it to deliver – would not be easy to achieve.

A big part of the solution to this challenge was a strategy of acquisition. However, in pursuing this approach IPH pioneered a unique model of group ownership. In August 2015 IPH acquired the Brisbane-based firm of Fisher Adams Kelly (FAK), but rather than merge this acquisition into Spruson & Ferguson, the two firms continued to operate independently of each other, maintained their separate brands and even competed against each other.

The group ownership model was again applied by IPH to its acquisition of Pizzeys in September 2015. Subsequent additions to the group have included Callinans (by way of an acquisition by FAK, to form FAK Callinan), Cullens and New Zealand-based firm AJ Park. In February 2018 FAK Callinan and Cullens were fully merged into Spruson & Ferguson. The Australian and New Zealand stable of IPH now comprises Spruson & Ferguson, Pizzeys and AJ Park, which continue to provide IP services independently of, and in competition with, one another, despite their common ownership.

The success of IPH – at least in initial capital raising and in creating an advantageous exit strategy for some of the more senior partners of Spruson & Ferguson – naturally inspired others to follow suit. In November 2015 Shelston IP became the founding member of the new ASX listed Xenith IP Group Ltd (ASX:XIP). Xenith went on to acquire Watermark in November 2016 and Griffith Hack in February 2017. All three firms now within the Xenith group continue to provide IP services independently of, and in competition with, one another.

In August 2016 QANTM IP Ltd (ASX:QIP) became Australia’s third listed IP firm holding company. This was the result of an agreement reached between Davies Collison Cave (DCC) and FPA Patent Attorneys (formerly Freehills Patent Attorneys), whereby QANTM acquired both firms when it listed on the ASX. As with the other listed groups, DCC and FPA continue to compete in providing IP services independently of one another.

Concerns

Unsurprisingly, these unprecedented events caused some consternation among patent attorneys, lawyers, clients and regulators. Some attorneys and IP lawyers were concerned about the loss of a clear career path to equity partnership within the listed group firms (although, as the earlier analysis shows, such career paths may have been illusory for most, in any event). Some clients were concerned about whether being answerable to outside shareholders would cause firms within the listed groups to lose focus on client service and lead to pressure to raise fees. Across the board, there were concerns about whether these new structures would lead to conflicts of interest, not only in relation to clients of nominally independent and competing firms within each listed group, but also between attorneys’ duties to clients and the firms’ duties to shareholders.

For their part, the listed group members and holding companies asserted that no such conflicts existed, and it must be said that there is no evidence to suggest that this is not the case. Under the Code of Conduct that applies to registered patent and trademarks attorneys – which is a legally binding statutory instrument – the primary duties of a registered attorney are to act in accordance with the law, in the best interests of clients, in the public interest and in the interests of the profession as a whole. Each of the three listed holding companies clearly identified these duties in its respective prospectus, informing potential shareholders that its attorneys’ professional obligations would override any duty to shareholders in the event of a conflict between the two.

Further, the most recent incarnation of the Code of Conduct – which was promulgated in 2018 – was developed following extensive consultation with stakeholders to include provisions specifically addressing the group ownership model. Under these provisions, the onus is on members of an ownership group that assert independence from one another to ensure that their provision of attorney professional services is genuinely independent, such that no legal conflict nor breach of fiduciary duty arises as a result of different firms within the group acting for clients whose respective interests may be in conflict. All registered attorneys are also obliged to inform clients about their ownership and incorporation status, and to identify other members of any ownership group to which they may belong. As an additional safeguard, firms within an ownership group may not act for adverse clients in relation to formal proceedings (eg, litigation or an opposition or other administrative matter before an IP office or tribunal) without the fully informed written consent of both clients.

Figure 3. Originating patent applications by domestic applicants using a registered patent attorney or firm, by firm size

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/ and Trans-Tasman IP Attorneys Board, Register of Attorneys, available here: www.ttipattorney.gov.au/resources/find-an-attorney

Figure 4. Originating patent applications by domestic applicants using a registered patent attorney or firm, by firm ownership status

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/

Client response

Despite substantial regulation of the operations of the profession, some concerns remain about the effect of firm consolidation, common ownership and public shareholding on competition, quality of service provision and career opportunities for patent attorneys. While it may still be too early to tell how these corporate experiments will play out, there is some data that suggests a shift in client preferences for service providers that predates the public listings and is perhaps being accelerated by the changes.

Figure 3 charts the number of originating Australian patent applications filed by domestic applicants using the services of a registered patent attorney or firm, showing the decade from 2009 to 2018 and broken down according to the size of the firm responsible for the filings. Four categories of firm are distinguished:

  • ‘micro’ firms, being those that employ between one and three registered patent attorneys;
  • ‘small’ firms, of between four and nine patent attorneys;
  • ‘medium’ firms, of 10 to 24 patent attorneys; and
  • ‘large’ firms, having 25 or more patent attorneys.

Historical records of attorney employment are not readily available, and sizes are based on the number of attorneys registered at each firm according to the Trans-Tasman IP Attorneys Board records, as of June 2019, with the exception of FAK Callinan and Cullens, which are both classed as medium firms based on their size at the time of the merger into Spruson & Ferguson in February 2018.

Figure 5. Standard patent applications by non-residents, including direct and PCT national phase filings, by firm size

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/ and Trans-Tasman IP Attorneys Board, Register of Attorneys, available here: www.ttipattorney.gov.au/resources/find-an-attorney

Figure 6. Standard patent applications by non-residents, including direct and PCT national phase filings, by firm ownership status

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/

From Figure 3 it is apparent that although total filings have been relatively static between 2009 to 2018, micro firms have made significant gains in market share, largely at the expense of medium and large firms. The abrupt drop in medium firm filings – and the corresponding gain in large firm filings – in 2018 is due largely to the absorption of FAK Callinan and Cullens (both medium firms) into Spruson & Ferguson (a large firm) during that year, and does not reflect any significant change in trends of applicant behaviour. The overall trend away from larger firms in favour of smaller ones – and particularly micro firms, many of which are solo practitioners – appears to predate firm incorporations, public listings or the formation of ownership groups.

Figure 4 further explores the same filing data, broken down into filings handled by firms that are now members of listed groups versus those handled by firms that are now privately held. The trend of firms in listed groups losing market share to privately held firms is consistent with the fact that the firms acquired by the three public holding companies have generally fallen into the medium and large categories, while the privately held firms include all of the micro firms. While there is no clear indication in the data that listings and acquisitions have caused any increase in the rate of decline in market share of firms in ownership groups, there is certainly no sign that these strategies have done anything to arrest the decline.

Figures 5 and 6 show the total number of standard patent applications filed each year (including both direct and PCT national phase filings) by non-residents between 2009 and 2018 broken down by firm size and firm ownership respectively. On these absolute scales the relative gains of smaller and privately held firms, relative to larger and listed firms, seem less dramatic than for the domestic filings shown in Figures 3 and 4. However, when the numbers are viewed in terms of growth, the underlying trends become much clearer.

Figures 7 and 8 show the same non-resident filing data, but in terms of growth relative to the start of the period shown, in 2009. Filings by micro firms almost doubled over the decade to 2018 while, at the other extreme, large firms achieved only a 20% gain. Since the overall growth in non-resident filings over this period (as shown in Figure 2) was 28%, it is apparent that large firms lost market share to medium, small and micro firms. As in the data shown in Figure 3, the drop in medium firm filings – and the corresponding gain in large firm filings – in 2018 is due largely to the absorption of FAK Callinan and Cullens into Spruson & Ferguson.

Similarly, firms now in listed groups lost market share, achieving only 14% growth over the decade, while privately held firms achieved 72% growth in non-resident filings. In this data, there is arguably some evidence that public listing and subsequent acquisitions, which could affect filings from 2015 onwards, have had a negative impact on the market share of firms that are now held within listed groups. If so, this increased decline would largely reflect Australian firm selection decisions being made by foreign patent attorneys and agents on behalf of their clients.

Figure 7. Growth in standard patent applications by non-residents, including direct and PCT national phase filings, by firm size

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/ and Trans-Tasman IP Attorneys Board, Register of Attorneys, available here: www.ttipattorney.gov.au/resources/find-an-attorney

Figure 8. Growth in standard patent applications by non-residents, including direct and PCT national phase filings, by firm ownership status

Source: IP Australia, IP Government Open Data, 2019 release, available here: https://data.gov.au/

Latest developments

The experiments with restructuring and consolidation within the patent attorney profession, which began with the listing of Spruson & Ferguson via IPH Ltd in November 2014, are ongoing and far from complete. In the most recent developments, commencing in November 2018, the QANTM and Xenith groups proposed a merger that would have brought Shelston IP, Watermark, Griffith Hack, DCC and FPA together in a single group. During the process it emerged that IPH had also been courting QANTM, but was rebuffed. IPH subsequently acquired 19.9% of Xenith, just below the 20% threshold that would have obliged it to declare a hostile takeover bid under ASX rules. This initiated a brief tussle, through which IPH, with its substantially larger market cap and greater liquidity, was easily able to outbid QANTM for the opportunity to acquire Xenith.

In a review of the proposed acquisition, the Australian Competition and Consumer Commission found no basis for objection, stating that “a merged IPH and Xenith is likely to continue to face competition from a number of alternative large and medium suppliers, including QANTM and other firms”. On 31 July 2019, following a unanimous vote of Xenith shareholders to accept the IPH offer, the Federal Court of Australia approved the acquisition, which will reduce the number of listed groups from three to two and create an IPH mega-group comprising Spruson & Ferguson, Pizzeys, AJ Park, Shelston IP, Watermark and Griffith Hack. Whether clients who, on the above data, appear to be gradually deserting some of the firms in this group will consider this to be a positive or negative development remains to be seen.

Figure 9. Number of patent attorneys employed across listed group and privately held firms

Figure 10. Timeline

Patent attorney profession remains strong

The Australian market for patent attorney services has presented significant challenges of volatility and low growth for nearly two decades. Signs are not good for any improvement on the domestic front in the foreseeable future, with few apparent prospects for the kind of cultural change that would improve Australia’s innovation efficiency. The current federal government lacks any credible or coherent policy on innovation and indeed appears to consider any discussion of innovation as threatening to its base of supporters.

There is also little evidence to suggest that incoming work from foreign applicants (ie, exported services) will compensate for the slow domestic market. Growth in non-resident patent filings is as low as it has ever been during any relatively stable period, and this is without considering the substantial downwards pressure that some of the larger international users of the Australian patent system have been placing on pricing from Australian service providers for some years now (ie, much of the work that now exists is less profitable than it once was).

On the positive side, the filing data indicates that following a period of volatility during the GFC, the market is relatively stable and sustainable. The profession is relatively small – there are only about 800 registered patent attorneys working in private practice across Australia and New Zealand – and there remains ample work for those who are content with the status quo and are not overly concerned with growth. However, for larger firms, and particularly those in the listed groups that are ultimately answerable to shareholders, the difficulties in generating growth in a low-growth market remain significant. Diversifying through R&D tax advisory, commercialisation, IP valuation and other ancillary services, is one strategy that a number of firms have deployed in an attempt to address the challenge, with mixed results to date.

Clients should keep in mind that the expertise and experience in the Australian profession, particularly in the well-established medium and large-sized firms, remains as high as ever. Concerns around potential conflicts and governance issues within ownership groups have sometimes been overstated and should not be a major consideration for most clients. If anything, the obligations associated with public listing have increased transparency within the listed group firms. In these challenging times, client acquisition and retention will only become more important for those firms that are currently bleeding market share. Australia should be a buyers’ market for IP services.

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