The Australian economy is dominated by SMEs, which account for 99 per cent of all companies, and thus have the potential to play a key role in re-building post-COVID-19.
As we look for ways to build the post-COVID-19 economy, a recent comprehensive study by the European Patent Office (EPO) has provided some insights on the positive role that innovation and Intellectual Property (IP) rights plays in increasing profitability and creating jobs.
The EPO study of more than 127,000 companies found that those companies that held at least one IP right, whether it be a patent, trade mark or design, generated 20 per cent higher revenues per employee than their counterparts without any IP rights. They also paid their employees 19 per cent more, and had more than 2.5 times the number of employees.
For those companies that held patents rights, their performance was substantially better, generating 36 per cent more revenue per employee, paying their employees at least 50 per cent more, and having more than five times the number of employees.
The econometric analysis allowed the results to be stratified based on company size, and this analysis indicated that SMEs were by far and away the main beneficiaries of IP rights. In terms of numbers, around 9 per cent of SMEs held at least one IPR, and less than 1 per cent owned a patent. In contrast, around 55 per cent of large companies held at least one IPR with 18 per cent owning a patent. Despite the low numbers of SMEs holding at least one IPR, they gained much more from this than larger companies, with the average revenue per employee gain of 67 per cent compared to 18 per cent for large companies.
The overarching conclusion of their analysis was that ownership of IPRs, specifically patents, trade marks and designs, was strongly associated with improved economic performance at the individual firm level and that this association was especially strong with SMEs.
Perhaps most telling was that for SMEs that owned patents, trademarks and designs, their revenue per employee was double that of their competitors without any IP rights.
Clearly holding intangible IP rights has very tangible benefits for the rights holders, especially SMEs.
The EPO study is certainly a very comprehensive and compelling study, where they combined IPR portfolio data with economic data pulled from the ORBIS financial database to study more than 127,000 companies (~85 per cent of which were SMEs) in 28 EU states, from 2007 to 2019 (thus spanning the GFC). The study used two complementary analysis methods and calculated descriptive statistics, as well as using a powerful econometric analysis model to study country level and firm size level effects.
Writing as an ex-statistics lecturer, it was particularly warming to read the EPO methodology, including the discussion around the choice of the outcome measures and use of panel regression to control for factors that could have affected economic performance, to “isolate” the relationship between IPR ownership and firm performance.
These results also compare favourably with earlier studies. In 2016, Farre-Mensa of the Harvard Business School was lead author on a NBER study which investigated whether patents helped start-ups grow and succeed. The study analysed all patent applications filed in the US between 2001 and 2014 and found that the start-ups that obtained patents recorded 51 per cent sales growth, a 36 per cent increase in jobs, and double the likelihood of an eventual listing on a stock exchange. Earlier research by Mann and Sager in 2006 came to a similar conclusion, and rather interestingly found these benefits could be reaped through the granting of just one patent.
These results robustly show that SMEs and start-ups that focus on innovation and obtaining IP rights reap the rewards of improved revenue and growth.
The Australian economy currently ranks a lowly 87th in the Harvard Atlas of Economic Complexity. This is particularly appalling given Australia is ranked as having the 8th richest economy.
Australia could thus do well to actively encourage innovation and the uptake of IP rights to strengthen and build the post COVID-19 economy. Not only is this likely to generate greater revenue and jobs, these innovative companies would create a more diverse and robust economy.
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Before a trade mark is adopted, searches should be conducted to check whether anyone else has registered or is already using a similar mark. It is also important to consider whether the proposed mark is sufficiently “distinctive” or unique to be registrable. This will depend on whether other businesses are likely to need to use the proposed mark in respect of their own goods and services.
The following examples are generally not considered to be distinctive:
- Descriptive words that have a direct reference to the relevant goods/services. This also applies to minor misspellings or variations of descriptive words.
- Geographical names that have an obvious or potential connection with the relevant goods/services.
- Surnames, depending on the commonness of the surname and whether the goods/services are very specialised or commonplace.
- Single letter marks, unless the mark is stylised in a unique manner.
- Combinations of numbers that have a meaning or relevance in the marketplace.
- Logos that are simply an ordinary depiction of the goods or consist of a very simple design.
If the Trade Marks Office raises a “distinctiveness” objection, it may still ultimately be possible to obtain a registration by filing evidence of use of the mark to show acquired distinctiveness. However, preparing this type of evidence can be time-consuming and costly with no guaranteed outcome. It is consequently preferable to consider the question of distinctiveness prior to adopting and commencing use of a new mark.
Examples of distinctive marks include:
- Invented words with no meaning.
- A mark that is emotive or allusive but not directly descriptive of the relevant goods/services.
- An unusual combination of words or a clever play on words.
- Two letter marks and three letter marks, unless the letters have a descriptive meaning or are commonly used acronyms or abbreviations in the relevant industry.
- Combinations of letters and numerals, unless the combinations are commonly used to indicate characteristics of the goods such as size or quantity. .
- Stylised logos.
As the question of distinctiveness can be subjective, an option that may be worth consideration is to file an application for the proposed mark through the fast-track “headstart” system. “Headstart” applications are assessed within 5-10 days (sometimes even sooner) and so we can find out very quickly whether a distinctiveness objection is likely to be raised. “Headstart” results will also provide an indication of whether there are conflicting similar marks that may pose an obstacle to an application. Once “headstart” results are issued there is a further 5 day period to decide whether to proceed with formally filing the application.
Distinctive marks are easier to register and enforce. It is consequently beneficial to invest some time selecting a mark that is unique and, ultimately, likely to be more memorable in the marketplace.
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Patent term extensions (PTEs) are available in many countries and can be used to extend patent life to compensate patent holders for the time lost waiting for regulatory approval of a new drug.
Currently, PTEs are not available in China. However, it’s positive to note that PTE provisions have recently been passed into legislation in China through the fourth amendment of the Patent Law, which will take effect on June 1, 2021.
A number of issues around the proposed PTE program remain pending or unresolved but will be addressed by the amended Rules for the Implementation of the Patent Law (‘the Rules’). The amended Rules will be further explored once they are released.
Article 42 of the fourth amended Patent Law covers extensions, and is translated as follows:
42. ……. In order to compensate for reductions in patent term arising from regulatory review and approval of a new drug in China, the Patent Administration Department of the State Council, at the request of the patentee, may extend the term of an invention patent related to the new drug which has received regulatory approval. The term extension is no more than five years, and the total remaining term from the regulatory approval should not exceed 14 years.
The draft Rules suggest the extension is available for a drug product, a method for preparing the drug or a medical use of the drug. It also indicates that the new drug covers three types of drugs: chemical drugs, biological products and Chinese medicine.
Notably, the draft Rules clarify that the new drug-related invention patent refers to a patent related to the active ingredient of the new drug that receives regulatory approval for the first time by the Drug Supervision and Administration Department of the State Council.
However, we think there is a need for further clarification on the scope of the active ingredient, particularly on whether the term active ingredient refers to the active moiety and its salt, ester or crystal forms on a broad construction, or whether it is limited to the active moiety itself on a narrow construction.
Timing for Filing a Request for PTE
According to Article 42 set out above, the patentee cannot file a request for PTE before a new drug containing the active ingredient receives regulatory approval in China.
The draft Rules prescribe that the patentee must file a request for PTE with the Patent Administration Department of the State Council within three months from the date the new drug receives regulatory approval.
Furthermore, a request for PTE will need to be filed at least six months prior to the patent expiration date. With the amended Patent Law in China coming into force on June 1, it seems likely that certain pharmaceutical patents will miss the time limit for filing a request for PTE if the patent expires before December 1, 2021. No retrospective remedy is available.
Needless to say, it is essential for the patentees to monitor these time limits if considering a request for PTE.
Request for PTE Requirements
According to the draft Rules, applicants should satisfy the following requirements when filing a request for PTE:
- In the case that there is more than one patent related to a new drug, a request for PTE may be filed for only one eligible patent;
- In the case that a patent covers multiple drug products, the patent term may be extended on the basis of only one drug product;
- A patent term extension has never been applied to the patent; and
- The remaining term of the patent must not be less than six months.
We don’t believe these requirements prevent the patentee from filing another request for PTE based on a different patent (for example, a patent that claims different subject matter such as a preparation method and a medical use), in case a request for PTE based on one eligible patent (for example, a patent that claims a drug product) fails, but this needs confirmation.
It is also unclear if the regulatory review and approval period for a crystal form of the active ingredient can serve as a basis for a PTE, wherein an earlier product containing an amorphous form of the active ingredient previously received regulatory approval.
The second requirement arises when more than one drug product becomes subject to regulatory review and approval. Clarification is required on whether the one drug product that serves as a basis for a PTE request is meant to be the first one that receives regulatory approval.
Calculation of the Extension Term
According to the draft Rules, the extension term is equal to the period between the filing date of the patent and the date on which a new drug receives regulatory approval, reduced by five years.
Limited Protection Scope During the Extension Term
Compared to full protection afforded during the standard patent term, a more limited protection will be available during the extension term. Protection will be limited to only the new drug that receives regulatory approval and its approved indications (see Rule 85 item 6 of the draft Rules).
In response to the newly-introduced patent term extension program, a patent linkage system will be concurrently established in China. Given the huge potential market in China, it is critical for innovator and generic pharmaceutical companies to be prepared for these changes.
Madderns will endeavour to produce further explanatory articles in this series following this introduction, to ensure we can help provide a full picture of the changes which lie ahead.
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On 27 February 2020, amendments to the Australian Patents Act 1990 introduced, among other things, a new objects clause, providing a framework within which the provisions of the Patents Act are to be considered.
Section 2A states that:
“The object of this Act is to provide a patent system in Australia that promotes economic wellbeing through technological innovation and the transfer and dissemination of technology. In doing so, the patent system balances over time the interests of producers, owners and users of technology and the public.”
For the first time since its introduction, the objects clause has been referenced in a decision of Australia’s High Court, no less.
In Calidad Pty Ltd v Seiko Epson Corporation  HCA 41, the question of whether the sale of a patented product exhausts the patentee’s exclusive rights in that product was considered.
The product in question was a printer ink cartridge, the subject of patent protection, and the question being considered was whether the resale of a refurbished and refilled cartridge by a third party was an infringement of the patent.
The High Court held (in a 4-3 majority) that the patentee’s rights in the specific cartridge are exhausted upon the first sale of that cartridge and that there was, in this case, no infringement1.
In reaching this decision, reference was made to this new objects clause.
The Decision at  states that:
” It may be taken from the object stated in s 2A that one component of that object is to ensure the efficiency of the market economy. This topic has been dealt with earlier in these reasons. Another is to encourage innovation. This latter objective is achieved by ensuring that a patentee is rewarded for the often considerable efforts and expense which have contributed to a useful invention. That reward is obtained on the sale of a product on terms for which the patentee has negotiated. There is nothing in the Patents Act 1990 to suggest that a patentee is to be rewarded more than once.”
The Explanatory Memorandum2 in reference to the proposed introduction of the objects clause stated in paragraph 10 that:
“10. The introduction of an objects clause will clarify the underlying purpose of the patent system and over time will reduce uncertainty in the operation of the Patents Act. It will also provide broad guiding principles that will help ensure that the patent system remains adaptable and fit-for-purpose as new innovations are developed in the future.”
However, when the objects clause was being considered for introduction into the Patents Act, a number of parties, including the Institute of Patent and Trade Mark Attorneys of Australia (IPTA) expressed concerns that the introduction of an objects clause as proposed would have the potential to be used to restrict the scope of patents and patentable subject matter. In particular, it stated that:
“… despite comments suggesting the contrary in the Explanatory Memorandum, it is clearly intended to significantly change the manner in which judicial patent decisions are made in relation to many aspects of patent validity, including the assessment of patent eligible subject matter and inventive step. In particular, the introduction of the word ‘technological’ to qualify the term “innovation” has the potential to cause significant misunderstandings and significant harm.” 3
While many of these concerns were raised in the context of patentability issues, the principle extends to the general application of the objects clause and in particular, to its judicial application in patent decisions.
Now that specific reference to Section 2A has been made by the High Court, It will be interesting to see how this is used by other courts in the future to shape their decisions, and whether the concerns raised against the introduction of the objects clause of acting to dilute patent rights will come to be realised.
1. For more on this aspect of the case, refer to this article written by Madderns’ Dr Kin Seong Leong.
2. Explanatory Memorandum, Intellectual Property Laws Amendment (productivity commission response part 2 and other measures) Bill 2019.
3. Institute of Patent and Trade Mark Attorneys of Australia (IPTA), Submission to the Senate Economics Legislation Committee, Inquiry into the Intellectual Property Laws Amendment (Productivity Commission Response Part 2 and Other Measures) Bill 2019, [Submission no. 50], 15 August 2019, p. 8.
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Many years ago, the great philosopher Plutarch raised the following scenario:
The ship wherein Theseus and the youth of Athens returned from Crete had thirty oars, and was preserved by the Athenians down even to the time of Demetrius Phalereus, for they took away the old planks as they decayed, putting in new and stronger timber in their places, insomuch that this ship became a standing example among the philosophers, for the logical question of things that grow; one side holding that the ship remained the same, and the other contending that it was not the same. (Plutarch, Theseus, 75AD)
In simple words, does an object that has had all of its components replaced remain fundamentally the same object? Or is it a new object? If it is a new object, what is the threshold or requirement for the object to change from the original to a new object?
The High Court of Australia has had a hand in deciding whether modifications made to an original patented product to enable its re-use have amounted to the making of a new infringing product, as we explain below.
Fast forward to 2020, and we have judges staring at printer ink cartridges. Not exactly a traditional ship of Theseus moment, but no doubt the recent High Court decision of Calidad Pty Ltd v Seiko Epson Corporation  HCA 41 gives us a rare glimpse into the ship of Theseus dilemma, during which the High Court decided by slim majority, that the patent “exhaustion doctrine” should be applied instead of the “implied licence doctrine”, and that repair and modification do not create a new product.
The “exhaustion doctrine” decrees that the patentee’s exclusive rights with respect to the whole or part of a product covered by that patent are exhausted upon first sale; whereas the “implied licence doctrine” finds that an implied licence to use the product with certain implied conditions arises upon the sale of patented goods to purchaser (examples of implied conditions might be that the product cannot be sold “second hand” or that the product cannot be modified in any way for re-sale), and that the implied license continues after the first sale.
The High Court’s decision is an important one and has long-term ramifications, unless of course the Australian Parliament decides to amend the Patent Act. It is expected that the decision will set a precedent for a long time to come.
A bit on the background: Epson sells printer ink cartridges. After the ink has been used, the cartridges are discarded and replaced by a new one. Ninestar collects used cartridges and modifies them to be re-filled for re-use, and thereafter, Calidad sells the re-filled and modified cartridges. Generally, the modifications involve creating a hole in a side of a cartridge, injecting ink through the hole, sealing the hole, and modifying or replacing the memory chip of the cartridge. There are a few different versions of re-filled and modified cartridges.
In the first instance, the Primary Court found some cartridges infringed, some did not. The Court of Appeal then held that the modifications that were made were not authorised by any implied licence, and the making of the modifications amounted to a “making” of a new product or a re-making of the original. As such, all of the re-filled cartridges were held to infringe the patentee’s rights.
On further appeal to the High Court, the findings of infringement by both of the lower courts were overturned and in so doing, has changed what was previously and widely understood as the law in Australia, by creating a precedent that the “exhaustion doctrine” should apply in such circumstances.
For the time being, the question as to whether the ship of Theseus is new or not will remain a philosophical one, but that in a patent infringement case, there is a very real answer. The key take away for this High Court decision is that the “exhaustion doctrine” now applies in Australia and the repair and refurbishment industry will likely benefit, and in turn, the public will benefit as well.
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