The importance of IP in Australia

With an increase in patent activity across the globe, we ask if businesses need to be concerned with their intellectual property.

update With an increase in patent activity across the globe, and businesses preparing to compete in expanding international markets, we ask if businesses need to be concerned with their intellectual property.

The horror stories are out there. In 2003, thousands of New Zealand and Australian businesses were caught off guard when US/Canadian company DE Technologies (DET), moved to enforce a patent it held on a method of conducting ecommerce.

DE Technologies sent letters to companies in Australia and New Zealand alleging patent infringement of a method of ecommerce used extensively for Internet-based transactions -- chiefly credit card payments -- demanding a US$10,000 licence fee, and a 1.5 to 2.5 percent fee from each transaction. Panic and outrage quickly followed.

The vast majority of businesses to receive letters from DET were small- or medium-sized businesses, many who depend on online credit card payments for their primary source of income. None of them could afford to challenge the patent in the high court but as the outrage attracted more and more attention, it began to raise hackles in bigger ponds.

At the time, the Australian Defence Force was buying Seasprite helicopters via secure ecommerce gateways from the Ministry of Defence in the UK. Theoretically, because the transactions were being done on a gateway that infringed DET's patent, the government was going to be forced to pay a 2.5 percent fee each time -- this would undoubtedly amount to huge sums of money.

All of a sudden organisations in the US were threatening to hold up goods on the wharves unless DET's annual licence fees were paid, says Matthew Tutaki, now head of government IP advisory body Sanseman Government, who at the time led the campaign against DE Technologies. "Once you receive an infringement notice it becomes next to impossible to overturn the patent, even if you have 'prior art'. You actually have to go to the High Court to challenge it. This can cost hundreds of thousands of dollars in fees" he says. (Prior art differs between countries but it generally refers to: "any body of knowledge relating to your research that exists prior to the completion of the research or the filing of a patent application.")

In this instance the Australian Government was compelled to intervene. Senator John Tierney brought the issue to the Senate in August 2003, demanding the right of the Federal Government to protect Australian business in the face of anything considered as a predatory trade practices.

In the end, says Tutaki: "The government sent a clear message that if you try and do this sort of thing the full weight of the government will come down on you. However, it could be two or three years before we find out what the next one could be. You don't find out about them until the infringement letter arrives."

Patent trolls
Business process patenting is perhaps one the most controversial examples of patenting seen today. The US patent system, and especially business process patenting, has received huge criticism. Even with the emerging Australia United States Free Trade Agreement (AUSFTA), the clarity of Australia's position in regard to business system patenting remains somewhat cloudy and relatively untested.

Despite this, the level of activity surrounding patenting claims has increased dramatically over the past few years. Described as "patent trolls", the practice of acquiring patents and explicitly pursuing a return through threats and litigation is increasingly common -- especially in the US. At any time the majority of established IT companies are likely to be engaged in a range of IP battles. Even today Dell continues court proceedings with DE Technologies over these same patent issues. With lots of little software developers springing up all over the place to take on the big boys, it invariably becomes cheaper for the big boys to settle out of court.

Interestingly, almost all of the employees at DE Technologies, as it turns out, were patent attorneys, Tutaki says. "I think that we would be naive if we didn't think that people will come in and steal our stuff, particularly our knowledge. Knowledge is the thing that has the most value and currency in the world today. It gives us a semblance of 'do we understand what these things are? Do we understand what the impacts of patents are on business here in Australia, and do we understand what's going on the greater world?'. The simple answer was we didn't. It caught everybody off guard," he says.

Mismanaging IP
IP tends to be a technical function tacked on to the end of a project rather than something that is integrated, says Peter Franke, principal of Watermark, Australia's oldest patent and trademark attorney firm. "I don't think companies are completely unaware of the importance of IP but its not core to their plans -- which is fine if you're a lumber yard but if you're developing new products, the business you're in is generating IP, and it needs to be core to your business strategy."

"It's certainly the big bad world," says Franke. "If you look at the ICT industry leaders, and even more so the software space in Australia, [and then] if you look at companies like Microsoft, IBM, and Intel, they are very significant patenters. I'm sure Microsoft has a few physical assets but most of their valuation has virtually nothing to do with these; the cash flows they generate are from their intellectual property."

Many larger organisations employ dedicated managers to ensure their IP responsibilities are in order. In countries more sophisticated than Australia a dedicated IP manager can be the norm, whereas this is still quite uncommon here, says Franke. "In Europe, Japan, or the US, it's a major undertaking in any number of corporations [to have an IP manager] -- and not necessarily huge ones. It provides an internal focus, both for education, advice, and to keep it on track. Like anything in business, if there is noone responsible for it -- despite the best intentions in the world -- it tends not to get done or [it] gets less attention than it could," Frank says.

For business owners it comes down to understanding and practicing the discipline of building a business strategy which incorporates an intellectual property strategy. In the same way you wouldn't become a property developer without any understanding of how you might finance it, similarly, if you're going to build a technology business you want to have a plan as to what IP you're going to protect and your strategy for doing that.

Franke says IP really needs to be embedded as part of a company's management mindset. "Smaller software developers, for example, either have an inflated view of the difficulty and cost of getting protection, or imagine they will worry about it later on and spend their money elsewhere," he says.

Protecting what we know
Education on IP issues is a challenge taken up by IP Australia, which goes to some effort to promote understanding of intellectual property issues and the organisation's activities. IP Australia issues patents in this country and offers extensive resources to businesses. As well as fact sheets, an annual regional road show, and a variety of speaking engagements, it has launched "SmartStart", a recently released Web site that seeks to promote and assist new businesses in the management of IP.

"We run a very strong public awareness campaign," says Caroline McCarthy, director of international policy at IP Australia. "There is a whole range of methods that we use for disseminating this information. We've had an extremely good response to SmartStart, we're very pleased with that. It seems to be a user-friendly tool that people are really embracing, especially when starting up a business."

"We think that through all of these awareness campaigns, tools, and facilities that we are providing to Australian business, they should be getting enough information. Of course they should talk to advisors about their specific issues, but within the Australia business community awareness should be developing quite strongly," McCarthy says.

The problem goes much deeper than that, warns Watermark's Franke. "Getting it into the mindset of managers in general can be a problem. It's more often there in a negative way -- 'oh dear this might be someone else's IP' -- but there is a lot of upside in thinking about how you can better leverage IP. I'd like to see it permeate through the business schools at university and MBA courses to a greater extent than it does," he says.

What becomes clear is that some of these IP issues are only now starting to be explored by companieshere. And with Australia entering into a growing number of FTAs, IP looks set to become a much larger issue with time as opportunities for Australian businesses grow and free competition opens up our own markets.

A growing international drive to unify under more "international" patent laws also puts Australia into complex negotiation with a multitude of international interests.

In the case of the already controversial business process patenting, the Advisory Council on Intellectual Property (ACIP) found in its 2003 report titled: Report On A Review Of The Patenting Of Business Systems: "ACIP . . . believes that any adverse impact from a small number of patents for business systems . . . is not sufficient to justify the costs and level of uncertainty involved in removing their patentability. However, the potential exists for such patents to become of such economic significance as to warrant further analysis. ACIP therefore recommends that the situation be closely monitored."

This has to bring relief for many to see that the situation is being closely monitored but what it really serves to highlight is just how important an understanding of IP can be for Australian businesses. No one may know where the "next one" is coming from but a business that understands how IP impacts its particular area, that can leverage its own innovation, will be solidly positioned.

A competitor in this day and age doesn't just mean one company versus another. It can come right down to country against country. Businesses really have to begin to ask themselves if they understand what intellectual property represents for them. Do they know how to adequately protect their IP and do they adequately understand how to export that IP outside Australia to a greater international market? Invariably, businesses overseas will be taking this same approach to Australia.