29 August 2013

Innovation Patents

The Advisory Council on Intellectual Property (ACIP) has released a 56 page Options Paper [PDF] as part of its consultation regarding innovation patents.

In reporting on initial consultation - alongside the September 2012 IP Australia Innovation Patents – Raising The Step consultation paper - ACIP comments that
Several clear themes have developed from the submissions and roundtables as follows:
  • The innovation patent system is widely seen as being useful, but it is hard to quantify if it is actually stimulating innovation by Australian SMEs. 
  • The level of innovation is widely seen as too low, though there is no clear indication of how the level can be raised or to what level it should be raised. 
  • There are significant concerns regarding the costs for enforcement and the inappropriateness of the remedies give the low level of innovation.
ACIP articulates three options for the innovation patent system
Option A – No change 
The Raising the Bar Act has made substantial changes to the legislation supporting the innovation patent system as outlined briefly in Appendix 7. It is reasonable to see how these changes interact and bed down before making any more changes to the system. If the innovation patent system is changed again in the immediate future, then it will not be easy to predict how these new changes will interact with those in the Raising the Bar Act. Hence, it will be difficult to determine the collective impact that these new changes might have on the system. 
The March 2013 report on The Economic Value of the Australian Innovation Patent by Verve Economics assessed the potential economic aspects of the innovation patent system. Part of this assessment was done via a survey of 3,195 Australian inventors  who had protected their innovations with innovation patents. A total of 517 surveys were returned which is a response rate of about 16.2%. Tellingly, only 10% of the respondents were large firms (firms with 200 plus full-time employees), whilst 45% of the respondents were individuals. The remaining respondents were SMEs broken down into 16% small firms (5-20 full-time employees) and 30% medium firms (21-200 full-time employees).  Also, nearly 37% of the respondents identified themselves as operating in the manufacturing sector. 
While not all of the comments received portrayed the innovation patent positively, the majority of comments portrayed innovation patents in a positive light. The comments also showed that inventors mainly use innovation patents for traditional purposes and the use of innovation patents adds value to their firms. This study also found that the weighted average value placed by inventors on each of their innovation patents was approximately $895,000—a not inconsiderable valuation, though perhaps not a fully credible valuation due to the fact that it was self-assessed. 
As noted in Part 2.3, the objective of the innovation patent system is to stimulate innovation in Australian small and medium enterprises (SMEs). The Verve survey has shown that individuals and SME user-groups appear to be generally satisfied with the innovation patent system—albeit this survey occurring prior to the full impacts of the Raising the Bar Act being felt by users of the system. 
Option Option B – Abolish the innovation patent system 
Issues that support abolition 
There are a number of issues relating to the innovation patent system that support the abolition of the system in Australia. These issues are as follows:
  • The system is under-utilised—only about 300 innovation patents are certified each year from about 1,400 innovation patents that are granted—clearly most innovation patentees do not seek certification. Also, there are about 26,000 complete patent applications filed each year in Australia—granted innovation patents represent only about five% of this total. 
  • The system is not achieving its intended goals or policy outcomes (e.g. the large portfolios of certified innovation patents held by large companies and the large number of granted divisional innovation patents with standard patent parents). 
  • Case law indicates that sophisticated users are strategically using the system with no quantifiable benefits flowing to the public. 
  • Interest groups (e.g. innovation patentees, patent attorneys and lawyers) agree that the system stimulates innovation but there is no reliable and quantifiable evidence available to corroborate this view. 
  • The system creates uncertainty and increases legal costs because of the very low inventive threshold and the fact that an innovation patent doesn’t need to be certified (and once certified, is very difficult to revoke). 
  • There is a perception that a lot of ‘poor’ quality, uncertified innovation patents are being granted and put on the Register of Patents. These granted patents are ‘devaluing’ Australia’s patent system. 
  • The United Kingdom has looked into utility models and rejected them due to increased uncertainty and legal costs. 
  • There are alternative ways to protect lower level innovations (e.g. designs law or competition law). 
  • The innovation patent system is unique to Australia and very few of our major trading partners have utility models. Hence, the innovation patent system does not encourage Australian innovators to focus on international opportunities.
Issues that contradict abolition 
There are also a number of issues that contradict any proposal to abolish the innovation patent system in Australia. These issues are as follows:
  • If the system is abolished, sole inventors/self-filers and SMEs might be discouraged from entering the patent system because the inventive threshold for a standard patent is too high and the standard patent system is seen as being too difficult to navigate without expensive professional help. 
  • Innovation patents are a form of personal property—they are an asset and can be used to obtain funding. 
  • Higher level inventors who fail to satisfy the level of innovation for a standard patent can still get some protection/reward for their commercially-valuable innovations if they convert their standard application to an innovation patent. 
  • Even allowing for the Verve report, there is a lack of credible information available on how SMEs are using the system—abolishing the system might remove IP protection that is really useful to SMEs. 
  • Abolishing the innovation patent system will re-establish the ‘gap’ between the designs system and the patents system that was first identified by the Franki Committee and endorsed by ACIP in their Review of the Petty Patent System. 
  • It is arguable that the public mischief caused by having uncertified innovation patents on the Register of Patents may not be as great as is popularly made out since more than half of all innovation patents cease within three years of their date of filing.
Replace the innovation patent system 
It may be possible to replace the innovation patent system with an alternative system for protecting low-level inventions. Both the Franki Committee and Uma Suthersanen have investigated options for doing this. 
In paragraph 42 of its Report on the Law Relating to Designs – First Term of Reference, the Franki Committee recommended that any new designs legislation should contain the following definition of design: “Design” means features of shape, configuration, pattern or ornament applicable to an article, being features which in the finished article can be judged by the eye of the Court, but does not include a method or principle of construction. At paragraph 45 of this report, the Committee elaborated on this definition in the following terms:
We feel that protection should be available on as broad a basis as practicable and, provided that the ordinary requirements of the community and industry are not unreasonably impeded, we can see no real reason why all features of shape or configuration, whether they serve a purely functional purpose or not, should not come within the definition of design. We do not propose that the function itself should be capable of protection by way of the designs legislation but simply that function should be no bar to the registration of particular features of shape or configuration as a design provided that the design is new or original and otherwise registrable.
The Committee also recommended in paragraph 45 that the legislation should contain the following provision: An application for the registration of a design shall not be refused nor shall a registered design be invalid on the ground that the design consists of or includes features of shape or configuration that serve only a functional purpose. 
The Australian Government did not endorse the Franki Committee’s recommendation in this regard. The designs legislation was not amended to include a functional design, though other recommendations relating to the petty patent system were implemented. Suthersanen suggests that ‘subpatentable’ inventions can be protected by fitting such products into existing IP categories—such as under the designs system.She believes that this can be achieved by changing the designs legislation to allow for the protection of a ‘functional design’ as presently exists in the UK. Under subsection 1C(1) of the current UK Designs Act, a right in a registered design ‘shall not subsist in features of appearance of a product which are solely dictated by the product’s technical function’. This UK definition contrasts with the definition of a design under Australian law wherein a design, ‘in relation to a product, means the overall appearance of the product resulting from one or more visual features of the product’. As can be seen, there is some flexibility for ‘functionality’ under the UK legislation which is absent from the Australian legislation. 
Many countries and jurisdictions have a general unfair competition law which is based on fault or wrongdoing. As an alternative to protection under designs legislation, Suthersanen also suggests changes to competition law to protect ‘subpatentable’ inventions. This suggestion is based on the creation of an anti-copying right or a misappropriation tort. 
However, such an approach has been rejected by the Australian courts. In Moorgate Tobacco, Deane J. of the High Court of Australia said: 
The rejection of a general action for “unfair competition” involves no more than a recognition of the fact that the existence of such an action is inconsistent with the established limits of the traditional and statutory causes of action which are available to a trader in respect of damage caused or threatened by a competitor. Those limits, which define the boundary between the area of legal or equitable restraint and protection and the area of untrammelled competition, increasingly reflect what the responsible Parliament or Parliaments have determined to be the appropriate balance between competing claims and policies. 
Gibbs C.J., Mason, Wilson and Dawson JJ agreed with these conclusions. 
Option C – Change the innovation patent system 
Recent changes 
There have recently been significant changes to the innovation patent system due to the final implementation of the Raising the Bar Act on 15 April 2013. An overview of these changes can be found in Appendix 7. In summary, these changes can be collated into four broad subject areas as follows:
  • Changes to divisional application - Section 79C has been amended so that the deadline for filing a divisional innovation patent is three months after advertisement of acceptance of the earlier application (where the earlier patent is a standard patent) or no later than one month after the advertisement of certification of the parent patent (where the earlier patent is an innovation patent). This amendment will prevent applicants strategically filing divisional innovation patents during court or opposition proceedings, as happened, for example, in the Delnorth case. 
  • Sufficiency - There have been various amendments made that have tightened up on the disclosure requirements for an innovation patent specification—especially those relating to subsections 40(2) and 40(3). Whilst these amendments have no bearing on whether an innovation patent is granted, they have made it more difficult for an innovation patent to get certified—especially for self-filing and self-prosecuting applicants who often file specifications with a minimal disclosure of their innovation.  
  • Inventiveness threshold (usefulness, common general knowledge, public information) - There has been an increase in the inventiveness level applicable to innovation patents due to the removal of the geographical restriction on common general knowledge used for assessing whether a difference over the prior art involves no substantial contribution to the working of the invention. However, it may take another 24-36 months for these amendments to ‘bed down’ and enable an estimation of the quantum of the increase. 
  • ‘Balance of probabilities’ test - The ‘balance of probabilities’ test only applies to questions of fact and is most relevant for determining questions of novelty or innovative step. It requires examiners of patents to weigh up all of the material before them and decide, on balance, whether an objection is more likely than not to be applicable. Another way of viewing the balance of probabilities is to ask whether the objection is highly plausible, more probable than not, or prima facie reasonable in the context of the material being considered. Questions of law are not subject to assessment by the balance of probabilities test.
Raise the level of innovation 
As stated earlier in this Paper, ACIP has found general agreement that the current level of innovation is too low. ACIP is not surprised by this finding since the innovation patent system provides protection for very small differences that would not, of their own accord, sustain an inventive step. However, there is no agreement within the stakeholder group as to what is an appropriate level of innovation. 
Stakeholder suggestions include having a test of ‘not clearly obvious’ although it is difficult to see how a Federal Court judge would be able to distinguish between what is obvious but not clearly obvious. The LCA, FICPI and IPTA suggest a test of assessing the substantial contribution in question against the relevant prior art so that the substantial contribution would have to make a substantial contribution to the working of the prior art. It is not entirely clear how this would differ in practice from the existing test. 
Regarding the LCA submission, they are suggesting that a test be developed that addresses the perceived issues arising out of the Delnorth decision but which remains less onerous that the inventive step requirement. They believe that this could be achieved by amending subsection 7(4) of the Patents Act to permit direct reference to the common general knowledge alone or in combination with any one of the kinds of information set out in subsection 7(5). 
Another alternative test suggested by IPTA is to apply the test of inventiveness applicable under the Patents Act 1952 so that the level of innovation would be by reference to what would be obvious having regard to common general knowledge in Australia. This test may have an advantage since it has been the subject of previous case law and there may be some certainty associated with it. On the other hand, current practices relating to the quick retrieval and use of digital information may generate difficulties in distinguishing between what is generally known and what information can be very readily converted into what is known. 
A proposal to raise the level of innovation to the inventive step level has been thoroughly consulted on by IP Australia with its Raising The Step proposal. A majority of the submissions to this proposal did not endorse the change. The general consensus of respondents to either the ACIP Issues Paper or the Raising The Step paper is that raising the level of innovation to inventive step level will act as a disincentive for innovation and R&D. A common thought was that such a change will effectively render the system entirely impotent. 
ACIP has spent considerable time wrestling with this issue. If the level of innovation is raised to the ‘inventive step’ level, then the innovation patent system is rendered ineffective and it might as well be abolished. If the level of innovation is raised to an intermediate level, then it is difficult to conceive of a suitable test that will be easily understood by users, IP professionals, patent examiners and the courts. In any event, history has shown that it may take a decade or more for the legislative provisions defining the new level of innovation to be tested in the courts. In the interim there will be some uncertainty as to required level of innovation. With these options in mind, ACIP invites further stakeholder comment on their preferred option for the level of innovation and how this option will make the innovation patent system more robust. 
Reduce remedies 
It is widely accepted that IP enforcement costs are high. As noted in Part 4.4, nearly half of all comments and submissions made to ACIP were related to relief from infringement. There was widespread agreement in these comments/submissions that the remedies available to an innovation patentee are not appropriate given the low level of innovation required to pass the innovative step threshold. However, a number of stakeholders had opposing views. Whilst they agree that enforcement costs are high, they also believe that reducing the remedies (e.g. by removing injunctive relief—the most common form of remedy sought) would reduce the attractiveness of innovation patent system. It might also drive undesirable behaviours. 
A possible solution to this conundrum could be to remove the possibility of seeking injunctive relief from those innovation patents that are not being commercially exploited. Alternatively, the term of injunctive relief could be reduced by an amount equal to the delay in seeking certification. Both options give encouragement to innovation patentees to use their patents and undesirable behaviours—such as delaying infringement actions for as long as possible to maximise the value of any possible compensation—are discouraged. 
Limit the monopoly 
An alternative to raising the level of innovation might be to limit or restrict the monopoly of an innovation patent to a single embodiment. This single embodiment would only be protected to the extent that it was actually disclosed or illustrated in the innovation patent specification as originally filed. No alternative constructions, mechanical equivalents, or other variations would be protected. If such a proposal is implemented, it will have a beneficial impact on reducing the uncertainty inherent to the innovation patent system. The major issue identified by some stakeholders underlying these concerns about uncertainty is that the vast majority of innovation patents are never examined. Hence, the exact extent of the monopoly that may potentially be protected by these innovation patents is uncertain. If the monopoly is restricted to a single embodiment fully disclosed in the specification, then an interested party can better predict the extent of the potential monopoly and make a more informed commercial decision based on this prediction. 
Change processes – formalities check, compulsory certification 
ACIP has considered changing the processes for granting an innovation patent— specifically, ensuring that each innovation patent application has at least one claim prior to it proceeding to grant. Also considered was a proposal for compulsory examination, either before grant, or within three years of the date of grant. These proposals were both mentioned earlier in Part 4.3. 
ACIP, however, has some concerns with the compulsory examination proposal since it will substantially increase the costs of obtaining an innovation patent. Such a move could be seen as directly hindering or restricting access to the system by individuals and SMEs. 
Change the name of the right 
ACIP received a number of comments from stakeholders attending the roundtables that the name ‘innovation patent’ is confusing. There is a general perception within the broader community that a ‘patent’ has some form of legally-enforceable right. Unfortunately for innovation patents, this perception is incorrect since an innovation patent has no enforceable rights until after it has been examined and certified. As indicated in Part 3.1.1, nearly five out of every six innovation patents do not gain enforceable rights. Hence, the stakeholders believe that the term ‘patent’ should not be applied to these applications as it is inconsistent with public perceptions. These stakeholders suggest using a different name for the IP right or swapping the terms so that an innovation patent does not take up the name ‘patent’ until after it is certified. 
There is no doubt that there are some very sophisticated users of the system (e.g. the patentees that have portfolios of five or more certified innovation patents that were discussed in Part 3.1.4). However, it is clear from the written submissions and roundtable discussions that a significant number of individuals and SMEs are generally ill-informed of the advantages and disadvantages of using the innovation patent system. 
IP Australia’s website has a lot of information about filing for the appropriate IP right. This information outlines some of the benefits and limitations of the innovation patent system.  It is arguable whether this information is being accessed/understood by Australian individuals/SMEs. Perhaps other communication channels may be needed to get the information disseminated to this audience or use group.  Recommendation 7 from ACIP’s Review of the Petty Patent System included a sub-recommendation that ‘Examination may be requested at any time, but not later than 3 years after the application was filed.’ The Government did not accept that insisting on substantive examination would be appropriate since it would add significantly to the ultimate cost for applicants who may be willing or unable to bear this cost, given the low probability of them being involved in litigation. 
At the present time, the sole exclusions are plants and animals, and the biological processes for the generation of plants and animals, except if the invention is a microbiological process or a product of such a process.ACIP has considered broadening this list of exclusions from the innovation patent system. Appendix 3 provides a list of the exclusions from the utility model systems of a number of Australia’s important trading partners. 
A number of these utility model systems exclude methods and/or process (e.g. China, Japan, the Republic of Korea, Germany, Indonesia and Italy). ACIP considers that methods and processes could be excluded from the innovation patent system because the very nature of the innovation means that these sorts of subject matters are very difficult to reverse engineer—unlike, for example, the situation for devices and mechanical hardware. As such, there is an inherent protection available for innovators who develop new methods and processes. Furthermore, given the low level of innovation required to get an innovation patent certified, there appears to be little benefit to the broader society in granting innovation patents for these subject matters. 
ACIP also considers that chemical compositions and pharmaceuticals could be excluded from the innovation patent system. This would align the innovation patent system with the utility model systems of Japan, the Republic of Korea and Italy. Appendix 4 shows that there have been comparatively few innovation patents granted for pharmaceuticals and cosmetics since the system began in 2001 (less than 1.5% of the total grants). This point was made by Medicines Australia in their submission to the Raising The Step proposal. They also commented that the medicines industry relies primarily on standard patents to protect patentable inventions. If all of the categories including chemical compositions are considered, then the innovation patent grants in these categories only cover 3.25% of the total grants.In any event, ACIP also considers that these sorts of innovations are more appropriately protected under the standard patent system. Such an exclusion would also remove any possibility that the innovation patent system could be used for ‘evergreening’ purposes—this was one of Alphapharm’s concerns raised in their submission to the Raising The Step proposal. 
Lastly, ACIP considers that the innovation patent system could exclude software (i.e. computer-implemented inventions) from the list of patentable subject matters. ACIP notes that Japan and the Republic of Korea already exclude computer software from their utility model systems. ACIP believes that software patents require a comparatively low level of financial contribution by an innovator. Also, it is difficult to conduct a proper evaluation of the prior art base since a significant portion of the software is commercially developed for a client on a bespoke and confidential basis. As such, it is never ‘published’ and hence is not formally part of the prior art base. 
Limit access to the innovation patent system 
ACIP has considered whether measures should be taken to limit access to the innovation patent system. The provisions of the Paris Convention for the Protection of Intellectual Property (Paris Convention) obligate Australia, as a signatory to the Convention, to provide no less favourable treatment to foreign applicants than it provides to Australian  applicants. On this basis, it would arguably be inconsistent with the Paris Convention provisions if access to the innovation patents system was restricted solely to Australian applicants and to applicants resident in Australia. Alternatively, ACIP has considered whether the innovation patent system could be restructured so as to exclude applications from all but individual applicants and SMEs. Such a restriction would be consistent with the objective of the innovation patent system to stimulate innovation in Australian SMEs.  The difficulty with this approach would be how to perform the ‘exclusion’ without creating undue bureaucracy. ACIP notes that the recent changes to the R&D Tax Incentive Program could provide a suitable model.  Under this program, R&D tax incentives are available to entities with an aggregated assessable income of less than $20 million in an income year. An entity’s assessable income is aggregated with the income of its affiliates, entities that it is affiliated with and entities connected with it so that the rules cannot be easily circumvented by diverting income to an associated entity.