21 June 2020

COVID Update – Likely Hit to Australian and NZ Patent Filings Now Evident

Virus pursuitFor the past two months I have been tracking Australian and New Zealand patent filings to see whether there is evidence of any impact of the COVID-19 pandemic on new applications in either country (see here for my April report, and here for my May report).  Given the relatively short period between lockdown and the end of April, I had been looking at weekly variations, which might give an early indication of any downturn, but at the same time are more susceptible to short-term fluctuations that may obscure an underlying trend.  Now that the economic impact of the pandemic has spanned more than three months, I have switched to looking at monthly filing numbers.  On this time scale, figures for May show clear signs of a decline in patent filings in both Australia and New Zealand, compared to 2019, and it seems possible that there was a COVID-related drop in filings in Australia in April also.

The recent falls in Australian standard patent applications, and New Zealand complete applications – which make up the majority of filings in each country – are substantial.  In Australia, standard patents filings in May were down by over 14%, year on year, while the corresponding drop in New Zealand filings was over 20%.  There was an even larger decline in provisional application filings in New Zealand, at around 43% year on year for May, although the number of provisional filings is so low that this figure is subject to large fluctuations even at the best of times.  (Fun facts: the greatest number of provisional applications filed in New Zealand in a single month over the past 20 years was 141, which occurred in August of 2006; and the last time the number exceeded 100 was in July of 2013.)

Interestingly, filings in Australia of provisional and innovation patent applications show somewhat different behaviour.  As it happens, Australian provisional filings have been below 2019 levels every month, but they have been less below in more recent months than back towards the start of the year.  However, improvements up until April appear to have stalled, and possibly reversed, particularly for new applications filed during May using the services of patent attorneys.

Innovation patent filings have completely bucked the trend.  Every month, the number of innovation patents filed this year has been significantly higher than for the same time in 2019, with total filings year-to-date up by about 50%.  Last month (i.e. May 2020) there were 221 new innovation patent applications filed, which is the tenth highest monthly total since the system commenced in 2001!  (Fun fact: the greatest number of innovation patent applications filed in a single month was 369, in July of 2016.)  However, this innovation patent boom has been driven primarily by Chinese applicants, which may serve to mask any decline in filings by applicants from Australia and other countries.

A decline in filings is obviously not good for patent attorneys, but we should not forget that it is not great for IP Australia, either, which operates on a cost recovery basis such that the overwhelming majority of its operating expenses are covered by the fees paid by users of the patents, trade marks, registered designs, and plant breeder’s rights systems.  Over April and May, I calculate that patent filing fees received by IP Australia were down by nearly A$200,000 on the same period in 2019.  While this is not particularly significant in comparison to its annual budget of just over A$210 million, my guess is that the drop in patent filings is only the tip of the iceberg as IP rights owners make tough cost-cutting decisions.  Furthermore, reduced filings today will have follow-on effects in reduced future revenue from examination, acceptance, and maintenance fees.

Australian Standard Patent Applications Have Declined

The chart below shows the percentage changes in Australian standard patent and provisional applications between 2019 and 2020 for the months from January to May.  Standard patent applications – which include Australian national phase filings of international applications previously filed under the Patent Cooperation Treaty (PCT) – started the year strongly, 5.6% higher than in 2019, although much of this gain was offset by weaker filings in February.  It is in the past two months (April and May) that a stronger impact is observed, likely influenced by the COVID-19 pandemic and associated economic downturn, with standard application filings down 8.8% and 14.2%, respectively, on 2019 numbers.

AU Standard and Provisional filings - monthly changes

Provisional filings, on the other hand, have been weaker every month this year than in the equivalent periods of 2019, but have been less weak in the past two months than earlier in 2020.  This is in part due to the activities of self-represented applicants.  While filings overall were down over 2019 in April and May, self-filed applications – which make up between a quarter and a third of all provisional filings – were actually up by about 5%.  This may be due to backyard inventors having extra time on their hands during lockdown!

Chinese Applicants Driving Innovation Patent Filings

The following chart shows the percentage changes in Australian innovation patent applications between 2019 and 2020 for the months from January to May.  The months of March (196 filings) and May (221 filings) are both in the top 20 of all time (i.e. since commencement of the innovation patent system on 24 May 2001).

AU Innovation Patent filings - monthly changes

The increase in innovation patent filings so far this year has been driven primarily by Chinese applicants, and does not appear to be related to the COVID-19 pandemic.  Between January and May of 2019, there were 379 innovation patent applications filed by Australian residents, and 119 by Chinese residents (applicants from the US were a distant third, with 37 filings).  Over the same period this year, innovation patent filings by Australian applicants were down slightly, to 366, whereas filings from China more than tripled, to 385.  In a break from past behaviour, however, innovation patent filings by Chinese applicants are increasingly being made through registered attorneys.  In 2019, 79 Chinese-originating innovation patent applications were filed using the services of attorney firms, while 40 were not.  In 2020 the ratio has further increased, with 272 applications filed through attorney firms versus 113 that were not.

Recent Decline in New Zealand Applications

The chart below shows the percentage changes in New Zealand complete and provisional applications between 2019 and 2020 for the months from January to May. 

NZ Complete and Provisional filings - monthly changes

Similarly to Australia, complete patent application filings in New Zealand – which again include national phase filings of international applications previously filed under the Patent Cooperation Treaty (PCT) – started the year strongly, 21.6% higher than in 2019.  Numbers fluctuated between February and April, however there was then a significant year-on-year decline, of 20.6%, in May. 

While there was a large fall, of 43%, in New Zealand provisional filings in May, compared to the previous year, it is difficult to assess the significance of this, given that fewer than 100 New Zealand provisional applications are filed each month, and the numbers are therefore susceptible to fairly large relative fluctuations.

‘Original’ Application Drafting and Filing by Attorneys

For many Australian and New Zealand patent attorneys, the preparation and filing of ‘original’ applications – i.e. those based on new inventions developed by (mostly) domestic clients – is an important part of their business.  Most of these applications involve a number of hours of professional work, possibly including searching and/or advice on patentability and strategy along with drafting a patent specification for the new invention.  Often a provisional application will be filed initially, which may form the basis for further applications, in Australia and elsewhere, that will be filed and prosecuted over a number of years.  Changes in the volume of original filings may therefore have a substantial long-term impact on the business of attorney firms, particularly those that are more heavily reliant on domestic client work.

As the chart below shows, 2020 did not get off to a good start for original application filings, even before the coronavirus crisis struck.  The chart shows the percentage changes between 2019 and 2020 of Australian and New Zealand original applications filed by attorneys for the months from January to May.  Here, an ‘original application’ is defined as any application (mostly provisionals) that does not claim the benefit of any earlier filing date. 

Original attorney filings - monthly changes

Original filings in Australia were down by nearly a third in January, and while the situation seemed to have improved over the subsequent months, that trend reversed in May.  It is possible that many of the original applications filed in March and April were based on work that commenced earlier in the year, before the full economic impact of the COVID-19 pandemic became apparent.  If so, then the reversal in May could be the first indication of a more sustained downturn as domestic businesses dealing with economic hardship cut back on R&D and other expenditure relating to the generation and protection of new IP.

It is more difficult to draw inferences from the filings in New Zealand, due to the small numbers involved.  The total number of original filings by attorneys at the Intellectual Property Office of New Zealand (IPONZ) each month varies from a little under 30 to a little over 50, meaning that relatively small fluctuations in numbers can result in large percentage changes.  Even so, it is clear that original filings in New Zealand for 2020 are so far well down on the same period in 2019, and that May has been the worst month to date.

Decline in Filing Fees Received by IP Australia

It is not only patent attorneys that are affected financially by downturns in patent filings.  The following chart shows the changes in patent filing fees (in Australian dollars) received by IP Australia, comparing 2019 to 2020 for the months from January to May.  These figures assume that all applicants file using ‘preferred means’ (i.e. electronic filing), which should be the case for the overwhelming majority of applications, since this filing method is both cheaper and easier than any alternative.  Currently, the fee for filing a standard patent application is A$370, for an innovation patent application A$180, and for a provisional application A$110.  Over the period from January to May 2020, the total decline in revenue from patent filings fees was nearly A$160,000 compared with the same period in 2019.

IP Australia monthly fee changes

While A$160,000 is not a significant proportion of IP Australia’s annual budget of over A$210 million, it is likely that a decline in patent filings is indicative of a wider range of cost-cutting in companies’ IP expenditure.  For example, Australian trade mark filings for April and May appear to be down by about 14% compared to the same period last year.  Existing patent applicants may also be electing to allow some applications to lapse, through non-payment of examination, acceptance, and/or maintenance fees.

There are also long-term implications for IP Australia in a downturn in filing numbers, and an increase in lapsing applications, in terms of a reduction in the significant revenues generated from annual maintenance fees over a patent’s lifetime.

It is interesting to compare IP Australia’s situation with that of the USPTO.  In a recent letter to senior members of the judiciary committees in the US House of Representatives and the Senate [PDF 3.1MB], USPTO director Andrei Iancu has warned of a drop in revenues from patent filings and other fees due to the COVID-19 pandemic.  According to information provided in that letter, April 2020 trade mark filings at the USPTO were down by 6.4% on 2019, while patent filings were down by 3.8%.  It therefore appears that, on current data, the impact on IP Australia may be, if anything, even greater than at the USPTO.

Conclusion – Is the Worst Yet to Come?

A number of Australian patent attorneys with whom I have spoken in recent weeks have indicated to me that they remain busy, and that their businesses have been performing fairly well – even as they have mostly been working from home in less-than-ideal circumstances.  This may be true.  There are other sources of work to keep attorneys busy, not least of which is the ongoing prosecution of existing applications that are currently undergoing examination.  The total number of standard patent applications filed in Australia grew relatively strongly between 2016 and 2018, which is the period most likely to be feeding present examination activity.

When it comes to new filings, however, the data is telling a different story.  For standard patent application filings – most of which originate overseas, with over 90% of all Australian and New Zealand applications being filed by foreign residents – the year started reasonably well, being slightly up on 2019.  However, the signs are now that these filings are weakening.  A decline in new filings will not only impact revenues in 2020, but will lead to fewer examinations, and less prosecution work, in future years.

Furthermore, original applications – the vast majority of which are provisional applications filed by domestic residents – were already down at the start of 2020, and gains made up until April now appear to have been arrested, or perhaps reversed.  For those attorney firms with a substantial dependence on a domestic client base, weak demand in 2020 will have an impact not only this year, but in the years to come, as a result of a reduction in corresponding national and international applications.

A downturn in filings in 2020 will also present challenges to the Australian and New Zealand IP offices, of which the immediate decline in revenues derived from filing fees may be the least significant.  While IP Australia projected some weakening in standard patent application filings in its most recent draft Cost Recovery Implementation Statement (CRIS), it also projected increased demand for PCT, trade mark, and designs applications.  All of these projections are starting to look optimistic in light of the unforeseen impact of the COVID-19 pandemic.  This will affect future sources of revenue, and staffing requirements (e.g. for examination of applications), even when (or, perhaps, if) filing activity recovers once the current crisis subsides.

The one potential ray of light, an increase in innovation patent applications, is really nothing of the sort.  It has been driven primarily by Chinese applicants, which is hardly an endorsement of a system that was intended primarily to benefit smaller Australian businesses.  And, with the innovation patent system set to be phased out from August 2021, any prospect of an innovation-patent-led recovery must surely be short-lived!


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