27 January 2014

Australian Government Looking Into the ‘Patent Box’

Check boxAustralia’s assistant treasurer, Arthur Sinodinos, has confirmed that the government will be looking into the possibility of introducing so-called ‘patent box’ tax breaks.

I have written about patent box schemes before (incidentally, the name comes from the box provided on tax forms for companies to claim the benefit).  Such programs, which provide reduced tax rates (typically between 5% and 15%) on income attributable to patented IP, have been introduced in a number of countries, including the UK, the Netherlands, Belgium, France, Ireland, Spain, Luxembourg, Switzerland and China.

In the United States the Manufacturing Innovation in America Act of 2013 (HR 2605), which would provide for a patent box tax reduction, was introduced in the House of Representatives on 28 June 2013, and is currently before a congressional committee.  (I note, however, that GovTrack.us gives the legislation only a 1% chance of getting past committee, and a 0% chance of being enacted!)

Potential patent box rules will be proposed by AusBiotech and the Export Council of Australia, and will considered as part of a planned government review of research and development later this year.

I am pleased to see that a review that includes consideration of a patent box scheme will be going ahead, and I am hopeful that it will report favourably on the proposal.  I am in favour of a patent box tax reduction in Australia for two reasons:
  1. I believe that it provides the right incentive for commercial innovation, by rewarding not only investment in R&D (as existing grant and tax relief programs do), but more specifically R&D which results in protectable intellectual property which is then actually protected and successfully commercialised; and
  2. with a number of other developed economies providing patent box tax incentives, Australia places itself at a competitive disadvantage as a location for conducting research, development and manufacturing if it does not do likewise.

Australia’s Mixed History of Innovation

With the past weekend having marked the passage of Australia’s national day, it is an apt time to consider the country’s record of innovation.  Interestingly, Fairfax Media outlets ran not one, but two, separate features on Australian inventions: Don’t Forget the Ingenuity and What Will we Think of Next

Between them, these two articles highlight the following Australian contributions to the world: penicillin; polymer banknotes; HPV vaccine Gardasil, the bionic ear; Wi-Fi technology; the Relenza flu drug; the ResMed sleep apnoea treatment device; the wine cask; the KeepCup; the power board; Google Maps; the Hot Spot system for visually detecting an ‘edge’ in cricket; the Fairlight music synthesiser; the black box flight recorder; the car baby capsule; Aeroguard insect repellent spray; the Hill Hoist rotary clothes line; the car-based utility vehicle (‘ute’); and the paper notepad.

However, a number of these items were included on both lists, some would be better described as having an Australian connection or contribution rather than ‘being’ Australian, and one of the articles includes some ring-ins that were not invented in Australia, but which we have culturally ‘adopted’ (ugg boots and the portable cooler popularly known by the Australian brand name Esky) or which really cannot be counted as ‘inventions’ (the beach house and the feature film).  Some are widely recognised as missed opportunities – the inventor of the power board, Frank Bannigan, has been reported as saying that the failure to patent the product has probably resulted in the loss of millions of dollars in royalties alone.

Australia Needs to Step-Up on Innovation

While many important innovations have come out of Australia over the years, it has to be said that if we cannot even fill two feature articles with really well-known and significant home-grown inventions, we have some work ahead of us.  Thomas Edison no doubt had days when he had more good ideas than this before he had even sat down to breakfast!

This paucity of recognised inventions is not the result of any lack of ingenuity, intelligence or education – it is well-recognised that there is no shortage of these qualities in Australia.  In my line of work I meet with smart, innovative people all the time, and I can tell you that our quiet, leafy suburbs are full of them!

The bigger problem is a failure to follow-through.  Innovation is process, and invention is just one of the early steps.  Turning an idea into a successful commercial product requires time, money and commitment, and Australia has just not embraced these steps in the process in the way that, say, the US has over the course of its history.  The reasons for this are no doubt complex and deep-seated within the culture, and no single magic bullet exists to change everything overnight.  But it is the role of government to ask ‘what can we do, within reason, to assist Australian innovators in becoming successful commercialisers?’

I happen to believe that patent box tax incentives are one thing the government can usefully provide.

It is interesting to note the way in which individuals and companies in the US embrace the patent system in a way that their Australian counterparts simply do not.  US Patent Office statistics for 2013 indicate that around 164,000 patents were obtained by US entities, while fewer than 2,500 were issued to Australian applicants.  That is around five times as many US patents per capita out of the US as compared with Australia.  You might argue that this makes sense, considering that the US applicants actually live and operate in their own home market, except that when it comes to innovative new products, the Australian market is itself dominated by imports, when what we really need to do is to grow exports.  And while US applicants still account for around 50% of all US patent filings, in Australia only around 15% of standard patent applications are filed by local entities.

Conclusion – In Support of a Patent Box for Australia

While it is obviously impossible to assert a cause-and-effect relationship between inventiveness, patent filings, and commercial success, these things are undoubtedly correlated, and the US has historically excelled at all of them.  The Australian government could therefore, in my opinion, do a lot worse than to provide Australian companies with a financial incentive to patent their inventions (preferably internationally, as well as locally), and to commercialise those patented technologies.

That is exactly what a patent box scheme does.  A reduced rate of tax is paid specifically on those profits that can be attributed to the presence of one or more patented inventions in a product.  Thus to obtain the benefit, a company has to do two things – it has to patent its inventions, and it has to successfully commercialise the patented technologies.  Furthermore, the inventions cannot be trivial, in the sense that a tax reduction will only be obtained if the market is willing to deliver higher profits to the innovator on the basis of the patented features of the product.

Of course, it has to be said that a scheme which encourages companies to apply to patents will also be a good thing for patent attorneys!  But, setting aside pure self-interest for a second, that is surely something else that would be beneficial for Australia, which also needs to develop and maintain world-class service industries supported by a base of local economic activity.

So, what do you think?  Is a patent box tax scheme appropriate for Australia?  And if so, what should be its parameters?  Let me know in the comments.

Image Copyright (c) 123RF Stock Photos


arachne said...

So the same guy passionately in favour of expanding patentable subject matter to include business methods, is also passionately in favour of a patent box. hmm.

Hypothetically, if both manner of manufacture cases currently in the courts (RPL and Research Affiliates) were won by the patent applicants, what percentage of new patent applications would you guess to be made in the field of business methods? I would guess that every single entity in the banking/financial sector would be racing to get a patent and effectively halve their tax bill (this might perhaps benefit Australian patent attorneys somewhat). And you thought Chinese being granted a few hundred innovation patents was an egregious example of gaming the system.

The timing of this proposal is convenient. If the patent box were put in place concurrently with the expansion of patentable subject matter to include business methods, treasury would be unable to accurately predict how much potential tax revenue would be lost from the flood of new patentees from the financial sector.

As an aside, I get very weary of the same handful of 'great Aussie inventions' being trotted out, as a half-hearted lament about the stifled Aussie inventor. From the statistics I recall, Australians are (per-capita) fairly average when it comes to invention; trying to spin it that Australia is amazingly inventive and is only being held back by lack of is boring and disingenuous.

I would be not at all surprised if the patent box had almost no effect on the level of investment in the manufacturing and high tech sectors, while profit generated in other sectors were simply trucked right through the massive loophole this would create.

Caveman_Bob said...

Research Affiliates and RPL don't relate to business methods - Grant is not being overturned by either of these cases. You are either being disingenuous yourself, or you need to look more closely at the cases and revise your argument.

At first glance, however, I do agree that there would be a real risk that a patent box could be exploited ('gaming the system'). There are obvious issues with innovation patents, both with the grant after formalities examination, and with the low standard of innovation required. There could also be issues in determining whether a particular product or later modification actually falls within the scope of the 'patented IP'.

arachne said...

The term 'business method' is a useful shorthand for methods and schemes that are currently not patentable in Australia. Although this includes the literal 'methods of doing business', its definition is not limited to just this. Of course, most applicants want to distance their application from this characterisation because of current Office practice. If you have a term that is better suited feel free to share. If these cases end up in the High Court their outcomes will carry more precedence 'weight' than Grant on general 'business method' cases (except the cases that are closely analogous to Grant).

Caveman_Bob said...

Well, the typical term is 'computer-implemented inventions.' It's generally split away from the concept of 'business methods' - even the EPC separates the concepts of computer software and business methods.

Saying that the term 'business methods' is short-hand for 'methods and schemes that are currently not patentable in Australia' doesn't get us very far - something like the loyalty card scheme in Welcome Real-time, for example, would clearly be a business method but is also patentable in Australia (based on existing law).

The only business methods we can confidently say are not patentable in AU are 'pure' business methods such as the asset protection method in Grant.

Robert said...

This is an interesting idea, but with the current state of the Australian patent system it has unintended consequences written all over it.

I agree with arachne that, if the RA and RPL patents are upheld, the main beneficiaries of the patent box (aside from patent attorneys) will most likely be big companies who patent their business methods purely to get the tax break.

Grant is a red herring. Sure, you can't patent a "pure" business method, but if RA/RPL are patentable I'm sure a smart lawyer could work out a way to patent a particular set of computer-implemented processes for carrying out pretty much any kind of business method, including Grant-style methods. Since the point of the patent wouldn't be the usual goal of covering as much ground as possible while remaining valid, but just covering the way the patentee actually intends to practise the "invention", it wouldn't matter if it was so narrow that it could never be successfully asserted against anyone else - all you want is the tax benefit you get from using it.

Software patents would be a problem too. The standard of inventiveness required for a software patent is so low that you would be able to take almost any program, design a few unusual features into it, come up with some tenuous rationalisation for the benefits of this "invention", take out a patent claiming the process it implements *as a whole* then get a tax credit for selling it. Again the patent could be useless as a monopoly, but you're never going to use it to sue anyone.
I'd pity anyone trying to sift through IPA's database to avoid infringing a genuine patent after a few years of this.

Of course there'd be anti-avoidance provisions, but it would take a pretty subtle anti-avoidance provision to exclude the above situations without a lot of collateral damage. The UK patent box's anti-avoidance provisions wouldn't do it; they focus on the way the patent is used or licensed, not on the nature of the patent itself, and don't seem to have any scope for dealing with patents generated purely for tax advantage. Not that you'd necessarily want tax officials to be counting patents in or out based on their own assessment of patent quality.

Maybe there's a way to make the patent box work for Australia, but it will need to be designed with a clear view of the kinds of activity it wants to encourage and the kinds it doesn't, and with an effective way of distinguishing between them. At the very least, we should give the UK patent box a chance to prove itself before we do anything similar.

Unknown said...

I would not describe myself as 'passionately in favour of expanding patentable subject matter'

Yes you are. The administrative branch of the law (IP Australia) interprets and executes the law. Apparently you don't like how the law is being interpreted, you want the law to be interpreted differently to include a broader range of patentable subject matter. You can split hairs and if you want, but I'm going to call a spade a spade.

There is a difference between 'unpatentable' in principle, and 'unpatentable' in the sense of 'not granted by IP Australia'.

No, sorry, you don't get to decide what is patentable or unpatentable 'in principle'. That is the job of IP Australia. If a decision gets appealed, the court will provide clarification of the law. There will always be some ambiguity in the law; decisions on RA and RPL are not going to change that. It is IP Australia's job to resolve that ambiguity, and when necessary get guidance from the courts or changes in legislation.

I believe that it has resulted in a number of decisions which are contrary to the existing law

It's funny how you can be so sure about the law of manner of manufacture that you know when a decision by IP Australia is contrary to the law (a very serious accusation), yet there is significant divergence of opinion on the subject. For example, the Federal Court judge in RA found decisively that the claimed invention was not a manner of manufacture. Your admitted self-interest in the outcome RPL makes your rhetoric ring quite hollow.

Unknown said...

Arachne, what you say here is simply wrong.

Under our system, the legislature makes law, and the courts both interpret and make law, depending upon the circumstances. You might have noticed that even governments sometimes have to go to court to resolve disputes over the correct interpretation and/or legality of their own laws (viz, the recent ACT marriage equality legislation).

Adminstrative bodies, such as IP Australia, administrate. They are not a 'branch of the law'. Their decision-makers, for the most part, are not even legally-qualified.

You are, however, right that 'I' do not get to decide what is patentable or unpatentable in principle. That is the job of the courts. What I said was not that I decide, but that there is a difference between the law (i.e. legal principle) and administrative practice. This is self-evidently true. The Commissioner of Patents was wrong to reject the NRDC application and the IBM curve-drawing application, for example. More to the point, however, the Commissioner never 'sought guidance' from the courts in these (or any other) cases. The decisions arose because, eventually, an applicant appealed a rejection. The same can be said for RA and RPL Central. Furthermore, most judicial developments in the patent law occur in the course of disputes between commercial parties in which the Commissioner of patents is not even involved.

Finally, it is not a 'very serious accusation' for a legal professional to express an opinion on the law, within the bounds of their expertise. Providing such advice is, of course, a major part of the role of the legal professions. In every case in which there is a 'winner' and a 'loser' (i.e., in every case) someone went into open court and argued either that the position held by the other side is contrary to the law, or that they have their facts wrong, or both.

When I gave my original professional opinion to my client in the RPL Central matter, it was that the invention was patent-eligible. The Patent Office then rightly (in my opinion) certified the claims. When 'manner of manufacture' was raised in opposition, I again gave my professional opinion, which was that nothing in the law had changed (which, given that the Grant decision predated the original application, and that there had been no further relevant decisions of the courts, was obviously true).

When the hearing officer found the claims invalid, I again gave my professional opinion, which was that the decision was wrong. My opinion has now been confirmed by a Federal Court judge. Sure, the Commissioner has appealed -- but guess what my professional opinion is on that?! (Hint: it hasn't changed.)

Of course, if you don't believe I have any expertise in any of these matters, you don't have to read my blog (and you certainly shouldn't engage me if you ever need a patent attorney). You can get ill-informed opinion all over the internet, and authoritative commentary in any library. It's entirely your choice. (Just be careful of the CCH patents commentary, since I am currently updating that one).


Unknown said...

Well, I think we've both had our say, and other readers can decide for themselves. I have no desire to delete dissent (or, really, for you to stop reading and commenting). I welcome and enjoiy the cut-and-thrust of the debate so long as it remains reasonably civil.

I do just want to note that you did, in fact, originally refer to IP Australia as 'a branch of the law'. You have subsequently edited the comment (and I do not doubt your good faith in making a correction), but that is the version I was responding to. However, I freely admit, and apologise for, my error in misquoting 'get' as 'sought'.


Unknown said...

Yep, I made a 'ninja edit' (i.e. edited within 2 minutes of posting; hence why the post doesn't indicate it was edited) to change the word 'law' to 'government' (plus to fix all the html mistakes and other typos). I assumed that was the version you saw.

Unknown said...

you are wrong. any idiot could see that IP Australia has NOT been interpreting the law according to how the law was meant to be interpreted.

Unknown said...

IP Australia has been a total nonsense in recent years, anyone with minimal legal knowledge could see that.

Unknown said...

Wow, we have a veritable genius here who knows (with absolute certainty) better than the entire administrative body tasked with interpreting and executing patent law in Australia. I hope you can enlighten us with more than a single sentence as to why your interpretation is necessarily correct. Feel free to add in specific examples of occasions when the Office has made the wrong decision. Thanks.

Unknown said...

A 'veritable genius'? Yes indeed.

Not only do i have examples of examiners 'making the wrong decision' but also examiners being completely ignorant of the law.

Unfortunately you are not going admit the faults of IP Australia even if i could show proof of their wrongdoings. its politics, enough said.

Unknown said...

I will readily admit faults of IP Australia if presented withwith supporting evidence. IP Australia is run by humans who are indeed fallible. A broadside attack that IP Australia is interpreting the law incorrectly will require a commensurate level of evidence to support such an assertion.

Unknown said...

I m not saying that IP Australia is biased one way or the other, but when decisions come from examiners regularlly that do not follow the guidance of the law set by precedent, then this would hint at an additional influence rather than just the coin toss of 50/50 calls (political, cultural or otherwise).

Unknown said...

One thing that must be mentioned is that, while the merits of the patent box can be debated, countries that have already implemented a patent box system, such as the UK, have already benefitted from it in that Glaxo has now set up an R&D facility there which they would otherwise not have done.

A patent box that gives tax benefits on royalties paid for licensing of patents held onshore is one thing, but a patent box that gives additional tax credit if the patented technology was developed onshore, will definitely serve to boost the development of &D, and hopefully technology transfer to the country's workforce, and the downstream industry that it brings with it.

Unknown said...

IP Australia is not the only office to have taken a "proactive" approach on the limits of patent-eligibility.

The Canadian IP Office went its own way with the Amazon '1-click' case, until put back in its place by the Federal Court and the Court of Appeal. And the UK IPO also adopted a practice that was more restrictive than the authorities suggested, until rebuffed by the High Court (twice, within the space of about a month).

IP Australia differs in that it has actually had a win, with Research Affiliates (although this is now in the hands of the Full Court), and that its cases are still ongoing.

I do wonder whether it can be coincidence that all three offices make up the so-called 'Vancouver Group', and that they all seemed to adopt similar changes in practice at around the same time.

Unknown said...

Indeed. If Australia does get patent box legislation, we may have to nickname it the Fear of Missing Out (FOMO) Act 2014!

Unknown said...

It seems that this 'Vancouver group' would never stop appealing to the courts? I guess your clients would either have give up on obtaining the patent or they will, most definitely go bankrupt from dealing with IP australia's endless appeal?

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