05 November 2019

Australian Senate Condemns the Innovation Patent, but Grants an Extra Six Months on Death Row

Sad GravestoneOn 16 October 2019 the Intellectual Property Laws Amendment (Productivity Commission Response Part 2 and Other Measures) Bill 2019 was passed by the Australian Senate. Among other purposes, this bill includes long-anticipated provisions to phase out Australia’s second-tier patent right, the innovation patent – despite concerted last-ditch efforts by opponents of the move to persuade non-government senators, in particular, to vote against the legislation. This lobbying did not fall entirely upon deaf ears, with Centre Alliance Senator Rex Patrick speaking passionately on behalf of Australian companies that wanted to see the innovation patent retained and unsuccessfully moving an amendment removing the phase-out provisions from the bill.

In the end, however, the Labor opposition voted with the government, thus ensuring passage of the bill, albeit on condition that the legislation be amended to provide for a statutory review to be undertaken to assess the impact on Australian small to medium enterprises of abolishing the innovation patent system, and make recommendations to facilitate access to standard patent protection for small business in Australia. The review is required to commence within three months of the legislation coming into effect, and must be completed within 12 months.

To allow time for the review, the period before the phase-out begins is to be extended from 12 to 18 months. During this period, it will remain possible to file new innovation patent applications. Once the phase-out commences, however, new innovation patents will only be available where they are based on existing applications filed prior to the phase-out date, e.g. as divisional applications or via conversion of pending standard patent applications.

To become law, the bill must still pass through the House of Representatives. However, its passage there is certain, since the government has a majority. The House will sit for the final time in 2019 between 25 November and 5 December, and I anticipate that the bill will pass during this period, and then be sent on to the Governor General for ‘Royal Assent’ (i.e. to be signed into law) before the end of the year. On this timetable, the statutory review will have to commence no later than March 2020, and be completed no later than March 2021. The phase-out will then begin by June 2021.

The Innovation Patent – Reviewed to Death!

The Australian innovation patent system has been almost literally reviewed to death. The first review, by the government’s now-defunct Advisory Council on Intellectual Property (ACIP), was a protracted affair undertaken between 2011 and 2014, which concluded – somewhat inconclusively – that it was not possible to make a recommendation as to whether to retain or abolish the innovation patent system due to ‘a lack of adequate empirical evidence’. In the midst of ACIP’s review, IP Australia published its own consultation paper entitled Raising the Step, proposing that the lower threshold of ‘innovative step’ simply be abolished and replaced with the same ‘inventive step’ test applied to standard patents. Just why IP Australia gazumped ACIP’s ongoing work in this way has never been entirely clear, but ultimately the submissions received in the Raising the Step consultation were forwarded to ACIP for consideration.

Meanwhile, behind the scenes, IP Australia’s Office of the Chief Economist was, unbeknownst to outsiders, undertaking its own research study on the ‘Economic Impact of Innovation Patents’. Based upon a number of econometric models, the study’s findings included: that small-and-medium enterprises (SMEs) and individuals appeared to gain little benefit from the innovation patent system (a majority were one-time users, that never had their patents certified, and allowed them to expire early); that standard patents showed greater correlation with firm survival than innovation patents; that there was generally a stronger positive correlation with R&D expenditure with standard than innovation patents; and that while SMEs and individuals bore much of the cost of the system, most of the benefits accrued to large companies.

Without any prior public exposure or consultation on the report, the IP Australia authors presented their findings to ACIP. As a direct consequence of this presentation, ACIP revised its recommendation, stating that if it had access to IP Australia’s Economic Impacts study during its review it would have recommended that the innovation patent system be abolished. However, since there had been no public release of the Economic Impacts report, nor any public consultation, ACIP additionally recommended that the report be made publicly available. Thus yet another process of public consultation on the innovation patent system commenced.

While consultation on the Economic Impacts study was still ongoing, the Australian government established an inquiry into Australia’s IP Arrangements, to be conducted by the Productivity Commission (PC). Submissions in the Economic Impacts consultation were thus passed on to the PC for consideration in the course of its inquiry. In the PC’s final report, Chapter 8 was devoted entirely to the innovation patent system, concluding with a single recommendation: that the innovation patent be abolished. In its response to the PC report, the Australian government accepted this recommendation, resulting eventually in the provisions to phase out the innovation patent system now included in the Intellectual Property Laws Amendment (Productivity Commission Response Part 2 and Other Measures) Bill 2019.

And yet… consultation on abolition of the innovation patent was not yet concluded! When the bill was introduced, it was referred to the Senate Economics Legislation Committee for inquiry and report, which received 54 submissions and conducted a brief public hearing. The (government) majority of the Committee recommended that the Senate pass the legislation.

What Happened to All the Pro-Innovation Patent Submissions?

It is certainly true, therefore, that abolition of the innovation patent system is not occurring in the absence of consultation. However, what is less widely acknowledged – certainly in government circles – is that the overwhelming majority of input received in all of the reviews of the system has opposed abolition of the innovation patent.  A substantial majority of submissions to IP Australia’s consultation on its Economic Impacts study, across a range of industries, companies, and other stakeholders, supported retaining the innovation patent system, with many also proposing changes to address widely-recognised shortcomings. As already noted, these submissions were passed on to the PC for consideration in its enquiry.

Most recently, of 51 non-confidential submissions received by the Senate Committee, just seven supported abolition of the innovation patent. These included a joint submission from Cochlear and Resmed – listed companies with combined revenues of around US$3 billion, and thus hardly the target ‘market’ for the innovation patent – while one came – unsurprisingly – from IP Australia, and another was from the US Chamber of Commerce, which is not primarily motivated by interest in what is best for Australia or Australian-based businesses. A further three submissions addressed only other aspects of the legislation, and expressed no view on the innovation patent provisions.

There were 41 non-confidential submissions arguing for retention of the innovation patent, a majority of which were from SMEs that have found the system to be of value. However, opposition to abolition of the system came also from industry associations (Medicines Australia, the Australian Industry Group, and the Australian Automotive Aftermarket Association), universities (the University of Sydney, the University of New South Wales, and Macquarie University), legal professional societies (the Law Council of Australia and the Institute of Patent and Trade Mark Attorneys of Australia), and a household-name company (Sunbeam Australia).

Conclusion – a Cynical, Disillusioned View of ‘Consultation’

The Australian innovation patent now numbers among the walking dead. It appears almost certain that the Intellectual Property Laws Amendment (Productivity Commission Response Part 2 and Other Measures) Bill 2019 will become law by the end of the year, and thus that the last ‘new’ (i.e. not divisional, or converted) innovation patent application will be filed some time in June 2021, while the last ever innovation patent will expire no later than June 2029.

The process of the innovation patent’s demise has been tortuous and, from the perspective of an ‘outsider’ such as myself, perplexing and disillusioning. Because, in the end, the ‘insider’ economists – at IP Australia, and the Productivity Commission – got exactly what they wanted, without question or compromise, i.e. the complete abolition of the innovation patent system. This came despite the fact that multiple consultations revealed extensive support for retention of the system. and generated a number of workable proposals to modify its operation to eliminate or reduce the shortcomings that had become apparent with time and experience.

A lowlight of the process was the trumping of ACIP’s three-year review of the innovation patent system, and overruling of its 75-page report, following a single presentation by IP Australia economists of their Economic Impacts study, prior to any wider publication or consultation. In my opinion, that should never have happened. I cannot see that the ACIP members were equipped or qualified to evaluate the complex analysis and results of the study in such a short period, and without the benefit of input from anyone other than the study’s authors. Yet with hindsight it is clear that, from this point, the innovation patent was doomed. The subsequent consultation was subsumed into the PC inquiry, where criticisms of the study, and numerous submissions in support of the innovation patent system, were seemingly dismissed in favour of the PC’s own analysis of the (lack of) value of the system, and benefits of its abolition. Ultimately, it does not appear that the opinion of anyone with a different view mattered very much.

It may be that the end result is the right one, and that Australia will be better off without any form of second-tier patent right. But I, for one, am not satisfied that a persuasive case was ever made for outright abolition of the innovation patent system. Certainly there is anecdotal and empirical evidence suggesting that, with some minor exceptions, the innovation patent system in its current form has not achieved its intended objectives. But this falls far short of establishing that, for example, an improved innovation patent – perhaps in combination with suitable incentives, education and awareness programs to encourage Australian businesses to make appropriate use of the system – could not deliver substantial benefits. I guess that now we will never know.


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