On December 9, 2010 the Federal Court of Appeal dismissed the appeals brought by Apotex Inc. and the Canadian Generic Pharmaceutical Association challenging the validity of the Data Protection Regulations (referred to as DPR in the decision). These regulations implement Canada's obligations under the North American Free Trade Agreement (NAFTA) and the World Trade Organization's Agreement on Trade-related Aspects of Intellectual Property (TRIPS). Eli Lilly Canada Inc., and Canada's Research-Based Pharmaceutical
Companies had intervened in the proceedings at the Federal Court, and were respondents in the appeal.
The appellants, in two separate proceedings, heard together at the Federal Court level, had challenged the Data Protection Regulations on a number of grounds, shortly after they came into force in 2006. The Federal Court decision, released on July 17, 2009, held that the regulations were valid as being within the regulatory authority under which they were created. The Federal Court also found that the regulations were within the constitutional authority of the federal government, as they fell within the federal Government's federal trade and commerce power. However, the Federal Court did not find that the regulations fell under the federal criminal law power.
In writing for the Federal Court of Appeal, Mr. Justice Nadon held that the Data Protection Regulations were properly within the authority of the Governor in Council, and were in clear accord with the enabling provision of the Food and Drugs Act. The Court held that "It is clear that the data which article 1711 of NAFTA and paragraph 3 of article 39 of TRIPS seek to protect is precisely the type of data in regard to which the DPR offers market protection, i.e. the data found in an innovator's NDS for an innovative drug." The regulations were held to be properly delegated by Parliament to the Governor in Council and held to be intra vires the Governor in Council.
In considering the constitutional issues, the Court of Appeal considered the purpose of the Data Protection Regulations, stating, at paragraph 114, that, "The true purpose of the DPR is not to balance the commercial interests of innovators and generic drug manufacturers, but rather to ensure that Canadians have reasonable access, at reasonable prices, to new safe and effective drugs. In other words, the Regulations as a whole encourage the research and development of new medicines that save lives, prevent diseases, heal and cure, and improve the health of Canadians, who can only benefit from the discovery and development of new medicines after the information and data generated in extensive pre-clinical and clinical trials demonstrate the "innovative drug's" safety and efficacy to the satisfaction of the Minister."
In commenting on the purpose further, at paragraph 117, the Court held that, "The pith and substance of the DPR is to implement article 1711 of NAFTA and paragraph 3 of article 39 of TRIPS so as to encourage the development of new drugs, a valid public health and safety purpose." In considering the constitutionality of the regulations, the Court held that their enactment was a valid exercise of the federal criminal law power contained in subsection 91(27) of the Constitution Act. Having found the regulations valid under the criminal law power the court held that it need not consider whether the regulations may also be upheld under another head of federal power such as trade and commerce. The Court also commented that the Data Protection Regulations do not encroach on matters of provincial jurisdiction, since the provinces have no role whatsoever to play with respect to the approval of the safety and effectiveness of new drugs.
Canada and the European Union (EU) are negotiating an intellectual property (IP) agreement, as part of a broader free trade agreement, which may have great impact in the pharmaceutical and related industries. The Comprehensive Economic and Trade Agreement (CETA) is potentially the most important Canadian IP treaty since the North American Free Trade Agreement (NAFTA).
Negotiations for trade deals differ from lobbying legislators, and results in areas such as data protection or patent term extension that could not be reached by legislation may be reached through treaty. The Canadian government, and perhaps the EU, are still open to submissions, and interested parties should consider communicating their interests before negotiators' positions crystallize. American companies should also consider whether the CETA will bolster their European competitors' legal and strategic position in Canada at their expense.
Intellectual Property and the Trade Negotiation Context
Different results from legislative change? Canada and the EU have been working towards the CETA since 2008. Preparatory documents clearly show both governments' intent that IP will be addressed in the final agreement.
The EU's initial negotiating position strongly supports its international pharmaceutical industry—primarily by requesting data protection and patent term extension—and has implications for the medical device and food
industries as well. Generally, the Europeans are requesting that Canada adopt European standards.
Calls for Canada to adopt patent term extension and enhanced data protection, including pressure from the United States and Europe, are hardly new. So what is different this time? Why might this process result in substantive change where past efforts have failed?
First, treaty negotiation is different from domestic lawmaking. Domestic legislative change is often marked by interest groups competing to negotiate trade-offs in respect of a specific issue through government officials or interested legislators. In the trade context, states are negotiating over a broad range of issues through trade officials.
Put simply, Canada could trade an agreement on IP that satisfies European interests in return for agreement in a separate area that advances Canadian interests. Also, trade officials may give a particular subject area less weight than the officials directly responsible for that area—i.e., a trade official may regard patent and pharmaceutical regulation as simply one area among many that he has to balance, while an official responsible for drug approval may regard pharmaceutical regulation as of fundamental importance.
Interest groups still play a key role in the trade context by affecting—maybe even determining—what a state regards as its self-interest. In the past, industry representatives have sometimes been at the table with the trade officials during negotiations. However, the groups that influence a state's trade interests may be different from those that influence specific domestic issues. Years of building credibility, trust and influence with patent or pharmaceutical policy officials might be of little benefit when the key decision makers are trade officials. Trade officials' perceptions of domestic interests may differ from decision makers with responsibility for specific fields, and trade officials may be less influenced by interest groups perceived as "foreign."
Second, this is a negotiation with the EU. The EU is much larger and more influential than other countries with which Canada has recently negotiated free trade agreements.
If past behavior is a guide, the EU will aggressively pursue the interests of its international pharmaceutical industry, and has the negotiating clout to move Canada towards its positions. For its part, Canada seems intent on securing a deal "deeper and broader" than NAFTA, and may be willing to make significant concessions to reach agreement.
Third, it is 2010. Europe will be seeking concessions taking the present system as the baseline for comparison. A concession by Canada that may have been politically unacceptable in the Canada-U.S. Free Trade Agreement (CUSFTA) and NAFTA negotiations in the late 1980's and early 1990's may now be just one of many topics to be negotiated.
What's on the Table— the Initial Negotiating Positions
A review of the draft chapter on IP reveals that the EU is interested in addressing the entire range of IP topics, from copyright, patents, trademarks and designs to standards for enforcement and border controls, while Canada has minimal demands. The following are the topics on the table of the greatest interest to the food and drug industry.
1) Data protection
This is likely to be a contentious topic, and is one of the few areas where Canada has submitted alternative drafting language to accompany the European proposals.
Canada's data protection regime was amended in 2006 to provide for effective data protection for innovative drugs—"a drug containing a new medicinal ingredient not previously approved in a drug by Health Canada and not a variation of a previously approved drug." The regime gives eight years of exclusivity, and for the first six years a generic is prevented from filing an abbreviated submission—" 6 plus 2" years of exclusivity.
The EU position is that data protection should apply to "data submitted for the purpose of obtaining an authorization to put a pharmaceutical product on the market." In other words, the EU position would eliminate the innovative drugs qualification, and grant data protection widely. Canada, in contrast, would limit data protection to "new chemical entities" where the origination of such data "involves considerable effort."
The EU also wants to extend Canada's data protection regime to 8+2 years rather than the present 6+2. Data protection is to be extended to 11 years if the holder of the basic authorization obtains another authorization
for new therapeutic indications of significant clinical benefit compared to existing therapies.
The Canadian position is that data protection should be a minimum of five years, and that "subject to this provision, there shall be no limitation on any Party to implement abbreviated approval procedures ... on the basis of bioequivalence and bioavailability studies." This would write into treaty a 1999 ruling of the Federal Court of Appeal allowing Health Canada to grant marketing approval for generics based on bioavailability and biosimilarity comparisons to the brand name drug within the data protection period as long as it does not explicitly "rely" on the protected data.
2) Patent term extension – supplementary protection certificates
Canada does not have patent term extension, whether tied to delays in granting patents or for delays in granting authorization for the marketing of pharmaceuticals. Unsurprisingly, the EU would like Canada to implement patent term extension, tied to marketing authorization, through the granting of "Supplementary Protection Certificates." Canada has suggested no relevant language.
Whatever one thinks of patent term extension, the proposed European mechanism seems unrealistic—an extension for "the period that elapses between the filing of the application for a patent and the first authorization to place the product" on the market minus five years (to a maximum of five years). This seems ill-suited for the Canadian context, where there have been cases where the marketing approval comes after the expiration of the first relevant patent. Without the addition of a mechanism to reflect the diligence of the patentee in pursuing marketing authorization, the proposed language seems to be a free pass for applicants to dawdle.
3) Right of Appeal for Innovative Pharmaceutical Companies from Patented Medicines (Notice of compliance) Proceedings
Canada has a patent linkage mechanism similar to the United States', where marketing authorization (a "Notice of Compliance" or NOC) is linked to relevant patents owned by the brand name company. Unlike in the United States, in Canada the proceeding to oppose the issue of an NOC is an application rather than an action, and a loss by the brand name company results in the immediate and irrevocable issuance of the NOC. As a result, while a generic company can always appeal from an NOC proceeding, a brand company effectively
cannot appeal—the NOC irrevocably issues upon a loss, and further proceedings are moot.
The European proposal would oblige Canada to "ensure that the patent holders and the manufacturers of generic medicines are treated in a fair and equitable way, including regarding their respective rights of appeal." Assuming this means that patent holders should have an effective appeal route, it implies that Canada modify its NOC procedures to either delay the issue of an NOC until all rights of appeal are exhausted or allow an NOC to be revoked if a decision favourable to the generic applicant is overturned on appeal.
4) Data Protection and Patent Term Extension for Plant Protection Products
The leaked EU negotiating position also seeks data protection and patent term extension for "plant protection products," a European term for active substances and preparations that protect plants or plant products against harmful organisms.
If a test or study report is necessary for the marketing authorization of the plant protection product, the EU would like a 10-year period of data protection to apply, starting at the date of first authorization in Canada, to be extended to 13 years for "low risk" plant protection products. Canada's position is to grant data protection for agricultural chemical products identically to pharmaceuticals. The EU and Canada's positions on patent term
extension are identical to that for pharmaceuticals.
5) Avoidance of Duplicative Testing
The EU proposals require rules to prevent duplicate safety or efficacy testing on vertebrate animals. Any applicant intending to perform such tests is required to verify that such tests have not already been performed, and if they have "the new applicant and the holder ... of the relevant authorizations shall make every effort to ensure that they share tests..." If no agreement is reached, the new applicant is still entitled to use the test data, but the holder of the authorization is entitled to "a fair share of the costs incurred by him."
6) Border Measures
An irritant in Canadian relations with the United States and Europe is Canadian border measures—measures designed to catch infringing goods at the border before they enter the stream of commerce. The EU is proposing language that would allow customs officials to detain goods suspected of infringing an IP right, either further to an application by a right-holder or on the customs authority's own initiative, even if such goods are merely in passage to another jurisdiction. For example, a drug or active ingredient brought ashore in Vancouver before shipping to the United States could be seized as potentially violating Canadian patent laws even if the product clearly does not infringe any United States law.
7) Right of Information
Rights-holders are often unable to trace counterfeit goods to their source or to detect where the goods have passed in commerce. The EU is proposing a "right of information" which is new to Canada and would provide a
valuable new tool for rights-holders seeking to eliminate counterfeit goods.
This right would be applied against a person (a) who was found to be in possession of infringing goods or using infringing services or providing services used in infringing activities, or (b) a person indicated by a person under (a) to be involved in the production, manufacture or distribution of the goods or services. It obliges such a person to provide information on producers, manufacturers, distributors and previous holders of the goods or services as well as the intended wholesalers and retailers, and to disclose information on quantities and prices.
6) Geographical Indications
The EU proposes language to bolster protection for geographical indications― legal protections for marks that link products to a specific location of origin, such as Parma for ham or Champagne for sparkling wine. This is one of the few sections of the draft chapter that reveals sharp differences between the Canadian and European positions, with both parties submitting substantive language. The Canadian position is terse, affirming the parties' obligations under Trade- Related aspects of Intellectual Property Rights (TRIPs) Agreement and creating lists of European and Canadian products entitled to protection under geographical indications. The European position is several pages long, obliging the signatories to provide effective protection for geographical indications (including sections on rights of use, scope of protection and enforcement), and would establish an institution―a "joint committee"―to monitor compliance, share information and "intensifying their cooperation and dialogue on geographical indications."
7) A New Intellectual Property Institution
Finally, the EU has suggested the creation of a new institution (separate from that proposed under geographical indications) with a view to "supporting implementation of the commitments and obligations undertaken
under" the IP chapter.
With no details provided, this is clearly subject to further negotiation. However, international institutions designed to monitor compliance, exchange information and promote ongoing dialogue have played a critical role in shaping the development of laws, regulations and international cooperation. Such an institution has the potential for driving IP developments long into the future.
Implications, and Spillover to the United States
In the longer term, an EU/Canada free trade agreement may raise an interest in the United States to come to the table to protect American interests. For example, investor protection mechanisms in CETA could lead to American companies being disadvantaged in Canada compared to their European counterparts. The usual solution is either to conclude an EU/Canada/United States agreement or to amend NAFTA to reflect the contents of the CETA.
Negotiations are ongoing with the next round set for July 12–16, 2011. Although discussions are reported to be going surprisingly well, government officials have indicated that they are still interested in feedback from concerned parties, and public scrutiny and criticism of the agreement is just beginning to occur. Companies in the pharmaceutical, food and related industries should monitor developments, consider communicating their interests to responsible officials and be prepared to take advantage of anticipated legal changes if the negotiations progress towards a conclusion.
Time and costs spent searching existing scientific publications and patent registers can avoid costly mistakes when acquiring or licensing technology from a third party or before undertaking a significant R&D program or an extensive patent filing strategy. If the technology in question is anticipated by these earlier publications, then the value of the transaction or the merit of the R&D program or patent filings may be critically reduced.
The need for prior art searching is highlighted in Waikatolink Ltd v Comvita New Zealand Ltd. Comvita had entered into a NZ$3.5m agreement with Waikatolink Ltd (WL) to sell it some honey gel patents and license Comvita to use its "honey IP" for wound and skin care products, including the right to use WL's existing and
future knowledge about the unique manuka factor (UMF) molecule responsible for antibacterial activity in manuka honey. In all the agreement covered 11 patents with an estimated $8.8m annual turnover.
The Tauranga High Court found WL ad engaged in misleading and deceptive conduct by making representations to Comvita that it was on the brink of isolating and characterizing the UMF bioactive compound, when in fact (contrary to the belief of its own key staff) it was not. Only after paying $1.5m to WL as a first instalment under the agreement, Comvita made a Google search and found that the UMF molecule had previously been identified by another party.
Comvita was granted a $1m set-off from the $2m amount owed to WL under the agreement. Justice Harrison commented that with hindsight Comvita had not taken the necessary steps to protect itself in terms of
conducting its own preliminary due diligence.
This need to conduct thorough prior art searching will become more critical in the future because of changes to patent laws that will take effect once the new Patents Bill is enacted in early-mid 2011. The Bill will make significant changes designed to provide greater conformity with aspects of the Australian and United Kingdom
One of the significant changes proposed in the Bill is that the standard of "local novelty" in determining what is relevant prior art for assessing patentability will be replaced with an "absolute novelty" standard. Whereas currently the novelty of an invention is determined by what is known (published or used) in New Zealand prior to the priority date of a patent application, under the Bill the novelty threshold will be widened to what is
known worldwide prior to the priority date.
A further proposed change of the Patents Bill is that examination of a patent application will include a consideration of inventive step and usefulness, as well as novelty. Currently examination is conducted on the basis of novelty only, but the claims of an accepted patent have to be inventive for the patent to be valid. Whereas novelty is determined by whether the proposed invention has at least one new feature over similar technology, inventive step is assessed on whether the proposed invention is an obvious modification of known technology, even if novel. This higher inventive step threshold will make examination more rigorous and
therefore place greater emphasis on carrying out due diligence prior to filing a patent application.
Preliminary searching conducted in-house using one or more of the online patent office databases is strongly recommended before committing to more exhaustive commercial searching conducted by a patent
attorney. The time and cost spent understanding the prior art may prevent you from conducting redundant R&D and/or proceeding with patent filings where protection will not ultimately be obtained, or protection obtained is weak or unenforceable and therefore of little commercial value.
New legislation was promulgated recently following the recent revision of the PRC Patent Law ("New Patent Law"). "Matching rules" will affect the initiative of patent right holders in patent infringement actions in China. More litigation is expected to be initiated by inventors in civil and labour disputes. Foreign invested companies have to negotiate their contract with their employees to mitigate the risk of litigation.
These new legislation includes the Interpretation on the Application of Law Concerning Several Issues in Handling Patent Infringement Disputes ("Interpretation") (effective on 1 January 2010) published by the Supreme People's Court, and more importantly, the revisions of the Rules for the Implementation of the Patent Law of PRC ("Implementation Rules") (effective on 1 February 2010).
I shall briefly present the Interpretation and the Implementation Rules and analyse the new elements they brought to the PRC patent regime.
Most of the guidelines in the Interpretation have already been widely implemented in practice in the past. The Supreme People's Court officially adopted these guidelines as judicial interpretation to support the implementation of the New Patent Law.
1.1 Guideline for damage calculation
Matching rules are adopted in damage calculation. The Interpretation expressly limits the "gains from infringement" to such extent as solely originated from the activities that infringe the rights of the patent right holder, suggesting a dichotomy between the infringer's gains from the infringing products and compensation amount.
1.2 Guideline for claim determination
According to Article 59 of the New Patent Law, the content of the claim determines the scope of protection of patent rights related to inventions or utility model. The Interpretation provides for the following rules:
(i) Free will of the patent right holder. The court shall allow the patent right holder to make changes to his claim(s) before the conclusion of the court debate of the first instance.
In addition, the patent right holder may also request to determine the scope of protection of patent rights based on a subordinate claim.
(ii) Doctrine of estoppels If, during the course of examination or invalidation procedure, a patent applicant or patent owner abandons a technical solution by amending the claim or specifications or by making statement, the court will not uphold its allegation of rights on the abandoned technical solution into the scope of protection of patent.
1.3 Guideline for infringement determination
According to the Interpretation, the principle of literal infringement and doctrine of equivalence are respected.
The court shall examine all the technical features defined in the claim(s) asserted by the patent right holder in order to judge whether the disputed technical solution falls into the scope of patent. If such technical solution lacks one or several technical features as defined in the claim, or includes one or several technical features that are neither identical nor equivalent to that defined in the claim, it shall not constitute an infringement.
1.4 Indirect infringement
The Interpretation provides for the rules of indirect infringement which is not stipulated in the New Patent Law.
The use of a patented product as a component for the manufacture of another product as well as the sale of such manufactured product is considered as use of patent and constitutes patent infringement. However, for an industrial design, the manufacture of another product by using such industrial design product as one of the component will not be considered as infringement if such use is only limited to the technical function of such
product instead of its industrial design.
Joint infringement may be constituted if the party which sells such patented product without authorisation of the patent right holder as well as the party which manufactures another product by using such patented
product has jointly planned for such infringement.
2. The Implementation Rules
The revised Implementation Rules provide for detailed explanations and specifications to smooth the implementation of the New Patent Law.
The following key rules need to be taken into account:
2.1 Inventor or designer financial reward
The former implementing rules of the Patent Law provided that an inventor or designer of a stated owned enterprise was entitled to obtain financial reward for the patent of the technology or design that he or
she had invented or made during the performance of his/her duty. However, no detailed rules were stipulated for other companies than state owned enterprises.
The new Implementing Rules extend the above provision to any type of companies, including private companies.
Unless otherwise agreed or excluded in the underlying contract (employment or services contract) or internal regulations of the company, the company shall financially reward the inventor or designer at least as follows:
• announcement: at least 3,000 RMB (invention) and at least 1,000 RMB (utility model or industrial design)
• exploitation of the patent: at least 2% of the annual operating margin (invention or utility model) or 0.2% of
the annual operating margin (industrial design)
• licence: at least 10% of the royalties
2.2 Genetic resources
The New Patent Law has introduced a disclosure obligation for the application of patents based on genetic resources.
The Implementation Rules define, in Article 26, the following two important terms regarding the genetic resources stipulated in the New Patent Law:
• Genetic resources mean the materials obtained from human body, animal, plants or microbes, etc, which contain genetic functions and which have actual or potential value.
• Invention relying on genetic resource means an invention that utilises the genetic functions of genetic resources.
Moreover, the Implementation Rules specify that when a patent application is made for an invention relying on genetic resources, the applicant shall expressly disclose this issue in the application documents and shall fill out a specific form provided by the patent administration authority.
However, the Implementation Rules fail to clarify issues such as the definition of "direct source" and "original source" mentioned in the New Patent Law.
2.3 Compulsory licence
The New Patent Law stipulates situations which allow the patent authority to grant a compulsory licence:
• a patent right holder fails to exploit or fully exploit his patent without any justified reason within 3 years of the patent grant date or 4 years of the patent application date; or
• the patent right holder has been exploiting the patent rights in a monopolising manner.
According to the Implementation Rules, failure to fully exploit a patent would happen in the event the patent right holder or licensee's methods or scale of exploiting the patent cannot fulfil the need of such patent in
The New Patent Law provides that for public health purpose, the patent authority has the right to grant Chinese companies the licence to manufacture patented medicine and/or export them to countries or regions, with
which China has concluded related international treaties. The Implementation Rules use the definition of pharmaceutical products in the TRIPS Agreement to define "patented medicine". The definition of "patented medicine" include necessary active ingredients and diagnosis kits to be used for making such patented medicine.
The main consequence of the above clarifications on compulsory licence is probably to give the Chinese government further bargaining power prior or during negotiation with the patent right holder on the
exploitation of its rights and to encourage generic companies to apply for grant of a compulsory licence.
On the pharmaceutical front, many companies are diversifying their portfolios in anticipation of waves of patents ready to expire beginning in 2011.
In today’s global economy, there is an increasing convergence of intellectual property and finance. Wall Street is grappling with how, exactly, to recognise the true value of a firm’s intellectual property, even as an increasing share of the market involves intangible assets. Companies are also realising that simply accumulating patents does not necessarily increase their firms’ value, but it is how those patents are used that can attract capital.
Meanwhile, to combat global efforts to contain healthcare costs and massive numbers of upcoming patent expiries, a deflated economy and other market pressures, more drug companies are looking to diversify their portfolios to stay in the black.
On the pharmaceutical front, many companies are diversifying their portfolios in anticipation of waves of patents ready to expire beginning in 2011.
The 2011 “patent cliff” is expected to erode $78 billion in global sales from brand drugs made by companies such as Merck, Teva and Mylan with patents set to expire anywhere from 2010 to 2014. Another $32 billion will be lost from continued erosion of already expired brands. Other factors expected to limit sales include price cuts, reimbursement restrictions, healthcare reforms and growing regulatory pressure to contain costs.
Consultants report that 57 percent of 2008 global pharmaceutical sales will be going off-patent within the next here years, and 75 percent within the next five. A majority of the top industry CEOs interviewed believe diversification – acquiring generic and consumer health companies, for example – is a way out of the crisis facing the industry after a prolonged focus on strategies focused on patent-protected, high-margin products.
To cope with these expected losses, drug companies are considering measures such as manufacturing more generic drugs and/or vaccines and focusing on more specialty care areas. Some companies also hope to make strides in specialist secondary care via the production of biologic therapies in the United States and Europe that could treat diseases such as rheumatoid arthritis and Alzheimer’s. Biologics are expected to grow by $41 billion between 2009 and 2014.
Novartis, for example, plans to cut costs and further diversify its portfolio as it prepares for patent losses on some of its most popular drugs: Diovan for hypertension; cancer drug Gleevec; and hypertension drug Lotrel. The Swiss company has 142 pharmaceutical projects in the pipeline and plans on bringing to market more biosimilars – similar versions of branded biologic drugs that can be sold at lower costs – via its generic division,
Sandoz. It also will produce more generic drugs, eye care products, vaccines and diagnostic products. And it plans to strengthen its commercial position in rapidly growing markets in China, Russia, Brazil and India.
“Novartis remains committed to the core strategy of focused diversification in high-growth healthcare segments” as reported in company sources. Meanwhile, German drug company Bayer is cutting costs and jobs to redirect finances toward investments in developing and marketing pesticides and genetically modified seeds and focus more on emerging markets in Asia. US-based Merck’s growth strategy includes new and mature products, including branded generics and other products through local and regional partnerships or acquisitions.
In 2012, its patents for asthma treatment Singulair and two other drugs expire, with patents for popular drugs such as Propecia, Nasonez, Zetia/Vytorin, and the NuvaRing delivery system set to expire by 2018. But a spokesman stated that the company is “uniquely positioned to outperform the broader healthcare market and create value” because of its broader portfolio of medicines and vaccines, greater geographic footprint in key markets, its strong late-stage pipeline and research organisation, and an efficient customer-centred commercial model.
IP Investment Trends
Many investors are also looking to firms that have well-positioned IP in their portfolio, instead of those that simply accumulate patents. The IP needs to be clear of any risk of infringing on someone else’s product, and it needs to be able to be enforced. Accumulated patents must also be assembled in a logical way that creates something bigger that has the potential to open up new markets.
“A firm and its management which take the time … effort and care to develop strong patents” by working with patent agents/ attorneys, technologists and investing in strong legal filings, signals that the firm is likely a good investment. Patent counsellors work with clients to help them design or improve business processes relating to their IP using patent analytics and database systems.
Particularly in the area of clean technology, there is currently a tendency for investors to be wary of weak IP positions – a view many also take when it comes investing in high-margin biotechnology businesses. Around $13.6 billion in venture capital dollars has been invested in the last five years.
“If you don’t have IP to keep everyone away, then you have nothing” and “You have to have 100 percent assurance … you can stake out your territory” and enforce a patent if necessary. This is particularly important in high-cost industries. “It’s not a question of whether the economy is good or bad, it’s a question of, ‘if I’m going to put $1 million in that company, are there going to be returns?”
There is a distinct relationship between IP and success in capital markets. Companies with solid patent portfolios that managed them well instead of just filing for patents – a process which can be very costly, particularly if the patent does not fit well into a firm’s broader business strategy – were most successful in
There are three key questions an IP holder should ask when determining how to use his or her IP-
• How good and useful is the underlying invention
• How well has that invention been captured in legal documents and is the patent itself strong enough to ward off potential infringers; and
• What is your strategy for extracting the value of the patent.
• If a company is assembling many patents, how do you build them in a way that they have the most value?
My observation, being in this field for over a decade is that “The above cited basic techniques have really just been developed over the last few years”. Those techniques – used to assess the strategic value of a firm’s IP – are now being used by some companies during mergers and acquisitions (M&A) screening.
Firms are looking at who has the best IP, how it is managed and how it fits strategically with what the firm does. Those in charge of M&A are essentially including IP earlier in their due diligence process when considering taking over or merging with other companies than they have done historically.
Technology & services – like that offered by Innoworks Canada Limited (URL http://www.Innoworks.ca ) – is increasingly enabling more efficient IP screening processes. These assessments are growing in importance nowadays, so much of a company’s value or market capitalization is not in tangible assets.
Firms have “historically taken the view of intellectual property towards the end of process if at all and what we see is that an increasing number of companies do, is move that perspective or data point forward in the process, rather than looking at just market share and values.”
Meanwhile, Wall Street is still grappling with how exactly to valuate intellectual property, particularly when it comes to the growing market of intangible IP. Current US accounting rules do not allow firms to record their
patents and intangible IP on their accounting statements until that company is involved in an acquisition transaction with another firm. Yet the cash and intangibles asset categories are increasing on companies’ balance sheets as tangibles like equipment and real estate are decreasing, particularly in today’s sour global economy.
There’s a different perspective these days on where the value is in the business and with intangible assets representing about 81 percent of the S&P 500 market in 2009, according published reports, that is a large percentage of unaccounted for value.
Meanwhile, the Intellectual Property Exchange International (IPXI) – the first financial marketplace for the
trading of patent rights – is scheduled to begin operating at the beginning of next year. The IPXI will work similar to an emissions trading cap and trade system, but without a ceiling of patent rights allowed to be exchanged. IPXI leaders have been in talks with some of the largest IP owners in the world on the design of the system.
Patent trolls – companies or individuals that buy up patents not to use them to innovate but for the sole purpose of enforcing them, also called “non-practising entities (NPEs)” – have traditionally been considered a costly nuisance to technology companies like Microsoft, Apple, Google, Verizon Wireless, but now, some also are perfecting the business model of patent enforcement – and it seems to be paying off. NPEs are essentially monetising their assets – the patents – without any accompanying innovation. Instead, they attempt to force perceived infringing companies into licensing agreements.
As of April 2010, there were over 325 NPEs identified. Since 1985, NPEs have been involved in litigation
with nearly 4,500 different operating companies in more than 3,100 actions; nearly 75 percent of the lawsuits were filed since 2003 alone and some have been successfully into negotiating $ 612 million in settlement.
I look at these NPEs … as a catalyst for the marketplace but believe them to be relatively small and expect them to remain relatively small. They are high-profile examples of the value of individual patent rights. Plus, NPE actions bring more attention to the prospective value of the IP portfolio of those companies being pursued.
It’s bringing some recognition to IP as a valuable asset.