02 July 2017

How ‘Rational’ Are Australian Patent Applicants?

SharkLast Tuesday night, I watched episode 2 of season 3 of the Australian version of the reality TV program for entrepreneurs seeking investors, Shark Tank.  The episode featured a husband and wife team, Margaret and Peter Powell, who were after funding for their ‘Catch’n’Release’ anchor retrieval system.  Their ingenious mechanism – that immediately impressed all of the ‘sharks’, along with many viewers including me – enables an anchor that has become caught under coral to be dislodged and retrieved without damaging the reef.  Everything was going along swimmingly, until the question of patent protection was raised, and the Powells revealed that a patent application was filed in 1999, and now has less than three years to run.  Four of the five ‘sharks’ very quickly declared themselves ‘out’.

This got me thinking about what motivates Australian innovators to file patent applications.  Obviously Peter Powell never intended that it would take him so long to develop and prototype his invention, or that it would be over 17 years and require the mentorship of a celebrity entrepreneur before he could finally secure a manufacturing deal and bring a product to market.  With the benefit of 20/20 hindsight, it is clear that the Powells would have been better served by waiting to apply for their patent until they were further along the development path.  No doubt, however, they would have had the usual concerns that the invention might be intentionally or inadvertently publicised, appropriated by someone, or independently developed elsewhere, if they did not move to secure their rights at the earliest opportunity.  In other words, they might have been motivated more by fear, uncertainty, and doubt, than by a rational business strategy.

When economists refer to ‘rational choice’, or ‘rational actors’, they are talking about a theoretical construct that is assumed to take account of available information, such as probabilities of events, and potential costs and benefits in determining preferences, and to act consistently in arriving at a self-determined best choice of action.  This is not, of course, how real people generally behave.  Real people often fail to obtain and take into account all of the available information, make little or no effort to determine probabilities, costs, and benefits, and allow their decisions to be swayed by emotional considerations.  Often, the more important the decision, the less likely it is that an individual will make a rational choice (in the economic sense). 

Large corporations, on the other hand, tend to perform somewhat better in the ‘rational choice’ stakes.  For example, a wealthy multinational corporation such as Google, IBM, Microsoft, or Apple, has little to fear over a decision about whether or not to file a patent application for a particular invention – the fate of its entire business hardly depends upon a single patent.  A corporation is better-served by developing a strategy or formula for determining when it will, or will not, file for patent protection, based upon extensive information, experience, and sophisticated advice to which it has ready access.

It therefore seems to me that if we want to know what ‘rational’ behaviour looks like when it comes to Australian patent filing, we should look at how foreign applicants (which accounted for 91% of all standard patent application filings in Australia in 2016, according to IP Australia’s Australian Intellectual Property Report 2017) act.  By comparing the behaviour of Australian applicants against this standard, we might be able to get a sense of just how rational, or otherwise, is their decision-making.

When I did this, I found that the behaviour of large Australian firms (defined as those having 200+ employees) very closely follows that of foreign applicants.  Small-to-medium enterprises (SMEs) appear to be slightly less rational, while private individual applicants (the category into which the Powells fall) exhibit significantly different, and clearly sub-optimal, behaviour.

Decision Points

There are a number of decision points in the patent process, at each of which the applicant (or, later, patentee) has an opportunity to make a rational choice about how best to proceed.  The most important, and readily observable, of these are:
  1. the decision to file a patent application in the first place (obviously we cannot observe the cases in which a decision was made not to file, although we can make some inferences about the quality of a decision to go ahead based on the subsequent fate of the application);
  2. whether to apply for a standard patent or an innovation patent (although in the present article I will be looking only at standard patent applications, I hope to return to innovation patents in a follow-up post);
  3. whether to request examination of the application, either voluntarily or when this becomes necessary following a direction from the Commissioner of Patents, or to allow it to lapse at this point;
  4. whether to continue to pursue acceptance of the application in the event of an adverse examination report, or to abandon it; and
  5. whether or not to pay the annual fees necessary to maintain the application or patent, once these become due.
It is also possible for an applicant to voluntarily withdraw an application at any time, and for a patentee to surrender a patent.  However, compared to any of the above mechanisms for allowing the application or patent to die a natural death, these are negligibly rare events.  Patent oppositions also raise numerous further opportunities for decision-making, but are again relatively rare in the overall picture.

As I have already noted, in 2016 international applicants were responsible for 91% of all standard patent applications filed in Australia.  Nearly half of these originated in the US, with Japan, Germany, the UK, Switzerland, China, France, the Netherlands, Canada, and Sweden rounding out the top 10.  Foreign applicants will almost invariably have filed somewhere other than Australia – at the very least in their home country and/or some larger market such as the US or Europe.  It is fair to conclude, then, that only a small minority of these non-resident applications would be filed in Australia because this country represents a larger market for the respective invention than the applicant’s home market.

Therefore, when a foreign applicant files in Australia – and, indeed, makes subsequent decisions in relation to the application – it will generally be with the benefit of information gleaned from filing elsewhere, and in support of some specific strategy targeting the Australian market and an Australian patent.

Survival Rates of Australian Patents and Applications

With this in mind, I used the data available in the 2017 edition of IP Australia’s IP Government Open Data (IPGOD) set to determine and plot the ‘survival rates’ of standard patents/applications in Australia.  I define the ‘survival rate’ to be the fraction (or percentage) of applications (and, subsequently, patents) that remain live as a function of the time since their original filing date, i.e. the commencement of the maximum 20-year term of the patent.  Advantageously, the IPGOD includes information that enabled me to separate this data into international applicants, Australian large firms (200+ employees), SMEs (entities with fewer than 200 employees), and private individual applicants. 

I included data for all applications filed under the present Patents Act 1990 (i.e. since 30 April 1991), and for which all of the necessary information for the analysis was present in the data set: a total of 346336 applications, of which 306221 are by international applicants, 5211 by Australian large  firms, 18580 by Australian SMEs, and 13564 by private individuals.  The results are shown in the chart below.
Standard Survival
The general characteristics of the results may be explained as follows:
  1. survival rates in the first 18 months after filing are very high, because there are few events that would trigger a decision to maintain or abandon an application during this period;
  2. in the period between 18 and 36 months, the primary cause of attrition is applicants electing not to request examination when directed to do so by the Commissioner of Patents;
  3. between 36 and 48 months, attrition is due to applicants choosing either not to request examination or, where examination has been requested, to abandon the application following one or more adverse examination reports;
  4. annual ‘steps’ resulting from non-payment of maintenance fees commence at 48 months (note that up until 2012, the first maintenance fee was not due until five years after filing, so in this data set there is still a larger step-down at 60 months than at 48 months);
  5. beyond 48 months, the ‘slope’ between steps is due primarily to applications abandoned after receiving adverse examination reports;
  6. after around nine years from filing, almost all surviving cases have been granted, and there is therefore very little further attrition in-between the annual maintenance fee due-dates; and
  7. almost all surviving applications expire at 20 years – although an extension of time of up to five years is available for some pharmaceutical patents, the numbers are so low as to be invisible of the scale shown above, and I have therefore not bothered to include the extended period.

Behaviour of Australian Applicants

The first observation I would make in relation to the above results is that the behaviour of international applicants and Australian large firms is almost identical up until 60 months (five years) from filing.  After this, the international applicants are more likely to intentionally lapse a case by non-payment of annual fees (i.e. they have larger ‘steps’), while the Australian firms appear to have more cases lapse in examination (i.e. they have steeper ‘slopes’ between the steps).  Overall, however, the large Australian firms maintain a slightly higher proportion of their patents over time, which is perhaps unsurprising considering that the Australian market is likely, in many cases, to be of greater importance to Australian firms than to foreign companies.

Applications by Australian SMEs show lower survival rates than those of foreign companies and Australian large firms in the early years.  This appears to be due initially to electing not to request examination, and then subsequently more to adverse examination outcomes than decisions not to pay maintenance fees (i.e. more of the attrition beyond 48 months occurs in the ‘slopes’ between annual ‘steps’, with the ‘steps’ themselves being generally smaller than those of either international applicants or Australian large firms).  This suggests that SMEs are more likely than large firms to file applications in which they have no continuing interest after 2-3 years, and/or which fare poorly in examination.  Both of these might be regarded as ‘errors’ in the original decision to file that result from inadequate business forecasting (i.e. filing for inventions that turn out to be of little or no commercial interest) and/or incomplete information (i.e. knowledge of the relevant prior art and other factors that might prevent commercially-useful patent rights from being obtained).

Ultimately, however, the proportion of SME patents maintained long-term, i.e. for 15 years or more) is almost identical with that of foreign applicants.  This suggests that SMEs are performing reasonably well in identifying and protecting their most long-lived and commercially important inventions, although Australian large firms (which should be the better comparator) do better in this regard.

Not surprisingly, the performance of private individual applicants is worst of all.  Within five years, fewer than a third of their applications/patents survive.  Many are abandoned upon being directed to request examination, and many of those that are examined lapse after receiving adverse reports.  Barely a third (33.9%) of applications filed by individuals ever result in granted patent rights.  Thus, an overwhelming majority of the effort and expense of applying for a patent is wasted by individual applicants.

When, and How Often, Are Patents Granted?

The chart below shows the rate of grant of patents over the ten years following filing, again broken down by international, Australian large firm, Australian SME, and Australian individual applicants.  The grant rate is here defined as the proportion of patents that are ever granted, over time, independently of whether or not they are subsequently terminated prior to the expiry of their maximum 20-year term.
Standard Grant Rate
Once again, the behaviour, and outcomes, of international and Australian large firm applicants is almost identical in the early years.  While international applicants actually obtain a patent in a slightly higher proportion of cases than Australian large firms, as we have seen above the Australian firms are more inclined to maintain the patents they do receive over the longer term.

It is interesting that while Australian SMEs are less likely to obtain a granted patent, and individuals are successful in only around a third of cases, both categories of applicant are more likely to receive a patent earlier, i.e. in under three years, than either international or Australian large firm applicants.  One possible explanation for this is that SMEs and individual applicants may be more likely to file directly in Australia, rather than via an international application under the Patent Cooperation Treaty (PCT), such that their applications are in the system earlier than those of foreign and larger firms.  However, under long-standing Patent Office practice this should not affect when a direction to request examination is issued.  Additionally, smaller applicants may be more inclined to request examination voluntarily, and/or to expedite examination, in order to obtain an outcome at an earlier stage for some real or perceived benefit, such as securing investment.

I would note that obtaining earlier grant of a patent should not necessarily be regarded as a good or desirable thing, from the perspective of ‘rational’ decision making.  The benefits of having an early granted patent, rather than a pending application, may lie more in perception than reality, yet the costs are certainly real.  Informed and sophisticated applicants, who may have corresponding applications proceeding in other jurisdictions, and be in a position to assess the likely outcome of Australian examination for themselves, will generally choose to allow an application to follow its natural course, and avoid bringing forward the associated costs where there is no pressing reason to do so.

Summary of Applicant Behaviours

The above analysis of filing and examination behaviour, and patent survival rates, strongly indicates that Australian private individual applicants make relatively poor decisions in relation to standard patent applications.  In this category of applicants, it appears that many applications of low quality and/or value are filed, as evidenced by high early abandonment rates and poor examination outcomes, using the behaviour of international applicants as a benchmark.

At the other end of the spectrum, Australian large companies exhibit behaviours that are almost identical to international filers, and while they actually obtain a patent in a slightly lower proportion of cases, they tend to maintain their Australian patents for longer.

Australian SMEs fare worse than foreign companies and Australian large firms in relation to early abandonment and examination outcomes, however when they do obtain granted patent rights, their maintenance behaviour is similar to that of international and large Australian patentees.

Overall, around 60% of all standard patent applications filed in Australia result in granted patent rights, however this figure is dominated by international applicants, which are now responsible for over 90% of Australian applications (on 2016 figures).  Australian large firms obtain patents in 56% of cases filed, while Australian SMEs are successful 47% of the time.  Australian private individuals fare very poorly, securing a granted patent from only around one in three (34%) applications filed.

Conclusion – Better Education & Information Needed

International filers in Australia almost invariably have the benefit of quality professional advice, either in-house or through external counsel in their home country, as well as from Australian attorneys engaged to assist with local filing and examination procedures.  The same is generally true of Australian large firms.  Furthermore, it is my experience that Australian SMEs usually seek professional assistance for preparation, filing and prosecution of patent applications.  However, whether they are willing to pay for additional services such as prior art searching, novelty analysis, and more general strategic advice, varies considerably depending upon the sophistication and financial position of each SME, as well as the importance they attach to the management and protection of intellectual property in the business.

As a broad but, sadly, too valid generalisation, private individuals are least likely to consider their broader strategic and commercial objectives or to pay for anything more than basic application drafting and filing services (if they seek professional assistance at all), and are most likely to proceed with applications that are of little value or are directed to unpatentable ‘inventions’.  Unfortunately, this category of filers, despite their poor outcomes, are responsible for 36% of all Australian-originating applications (13,564 from a total of 38,052) in my data set.

Improving information and education about intellectual property generally, and patents in particular, remains a challenge in Australia.  For too many Australian innovators, particularly among individual inventors and in very small companies, strategic management and protection of IP is something that is still considered only as an afterthought, or as an expense to be minimised, rather than a core element of business strategy.  Until innovative individuals and companies in this country develop a more sophisticated understanding of IP, and the role it can play in supporting business success, I expect that we will continue to see evidence of resources being wasted due to poor decision-making in this area.


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