The success and failure of Steve Jobs

December 12, 2011

A review of Walter Isaacson, Steve Jobs: The Exclusive Biography, Little, Brown, London 2011.

By Julian Thomas

Malcolm Gladwell’s recent New Yorker piece (14 November 2011) offers a familiar, contrarian view of Steve Jobs’ career and significance. The key theme is drawn from Walter Isaacson’s extraordinary new biography: the dazzling successes of Jobs, together with his signal failures as a technology entrepreneur, were not the result of great vision or technical genius. Instead, Jobs’ significance lies elsewhere. He was an adept appropriator of other people’s ideas. He unfailingly recognized failure in other people and things. He had a perfectionist love of “closed systems” — that is, he could not relinquish control over the uses and applications to which Apple’s devices might be put. So the machines that Jobs introduced and helped invent – the computers, phones, tablets, and music players – embodied both his strengths and weaknesses; they were and are distinguished by being both brilliantly designed and obstinately difficult to adapt, extend, or modify.

The last three decades of computer history, and the debates that have raged over innovation and control in the technology business, are the background to Isaacson’s book. In a sense he has written, almost inadvertently, a biography of a certain kind of intellectual property. The foreground narrative is a rich new source of Jobs folklore, and this is what occupies Gladwell, and presumably many other readers. Some, maybe most, of these new stories confirm the nightmarish picture of Jobs’ manic, profligate pursuit of technical innovation. Again and again, Isaacson’s protagonist drives himself and others to extraordinary lengths by his oppressive, relentless, contemptuous, and sometimes ridiculous perfectionism. Towards the end of the book, Jobs’ expresses his disappointment in President Barack Obama, whom he thinks is reluctant to offend people. “Not a problem I ever had”. In Gladwell’s version, Jobs’ real significance is as a flawed example of a specific kind of technology developer and marketer. He is the archetypal ‘tinkerer’, not an original inventor, but an improver and tweaker of other people’s ideas. His skills are ‘editorial’, not inventive; his products are derivative, their development driven not by an original vision on Jobs’ part, but by his caustic, unerring grasp of the weaknesses of his competitors. Nothing Jobs did, in this account of things, was entirely new. The Mac’s great original selling points, its graphical user interface and bitmapped screen, were borrowed from technology developed by Xerox. The first versions of tablet computers were produced elsewhere, as were smartphones and music players.

Jobs’ tale, then, is about adaptation and appropriation, and these attributes, for Gladwell, turn out to be the essence of economic progress. Far more than the breakthroughs of visionary inventors, it was the work of engineers and technology entrepreneurs in taking ideas from elsewhere and improving them that powered the industrial revolution in Britain through the nineteenth century. As a tinkerer in this vein, Jobs achieved great things. But his tinkering has an unusual characteristic: his perfectionism, which was necessary to his success, also led him to jealously refuse others the freedom to adapt and modify that he enjoyed.  He was a tinkerer who perversely created obstacles to the tinkering of others, whether amateur users, or firms wanting to make products that would work with his. He resisted suggestions that the early Apple computers should include more (or any) expansion ports for third party add-ons; he struggled with the idea and consequences of licensing operating systems at Apple and NeXT; he tied the iPod to the iTunes store, and would not allow other music stores access to the device. And now, in the case of the newer iPhone and iPad, the development and distribution of third part applications is strictly controlled through the App Store. At the same time, Jobs is enraged when others copy his ideas: he sues when Microsoft copies the Mac’s “look and feel”; he goes ballistic when Google launches the mobile operating system Android, which he believes steals ideas from the iPhone.

So in Gladwell’s account, Jobs was an innovator who lacked the modesty and self-awareness to understand his own role and achievement. He was a ‘tweaker’ (no dishonor in that) who imagined himself a visionary. Famous from early on for his “reality distortion field,” he deceived himself, and became an innovator who stood in the way of innovation. Other contemporary commentators on technology have taken this theme further: Jonathan Zittrain’s The Future of the Internet (And How to Stop It) presents the iPhone as the ultimate ‘tethered device’, designed to ensure Apple’s control over users’ applications and content. For Zittrain, the iPhone is a salutary contrast to the ‘open’ architecture of the classic PC, which, for all its faults, could be far more readily adapted and modified by users and third party businesses. Here we find an old line of argument, that “openness” (and the associated goodness of “open source”) is the real recipe for innovation and inexpensive distribution. In the case of computing, it’s hard to argue with: even deep within the iPhone, there is POSIX, and elements of BSD Unix. The striking thing is that the closed iPhone has itself sparked an amazing wave of innovation. Whole new kinds of software, including locational media and games, educational, creative and social software, have been developed, and are readily and cheaply available for Apple’s devices. The good thing for everyone is that all this new software is now also spreading to a host of other phones and tablets, including the freely licensed (if not precisely open source) Android machines.

Isaacson’s book participates fully in the “closed system” narrative. But it also presents the elements of a more complex and interesting picture, of someone who did possess an unusual intuition for the design of useful machines; and of someone who modified his business strategies as his career progressed. Jobs did want control, and more of it than many of his customers would like, but he also realized he had to make the iPod compatible with Windows machines, and he opened the iPhone to third party developers after originally resisting the idea. He obviously hated Android, but he knew also that Apple had to compete with it. If he was a tweaker, he was (to use a metaphor that would not usually be applied to a Californian) in the Shane Warne league. But I’m not sure that tweaking aptly describes what Jobs did. It should not be difficult to acknowledge that he, together with many others, created novel things, even if they did so on the basis of the work many others had done: after all, that is usually the way. Some of this creating certainly involved adapting, or ‘editing’, but it also required acts of imagination. Gladwell’s generally precise language is vague when he describes Apple’s famous appropriation of the graphical user interface from Xerox: he says Jobs “borrowed the characteristic features of the Macintosh — the mouse and the icons on the screen” — from the engineers at Xerox PARC”.  Whatever that sentence means, in fact Apple successfully and almost completely transformed both the mouse and graphics: the machines it produced in the following years were clearly major advances on Xerox’s Star.

Anyone interested in contemporary debates over innovation and intellectual property will have their own reading of Isaacson’s book, and their own sense of the stakes in Steve Jobs’ daring adventures. Some of the most interesting elements of the story concern the way Jobs re-organised Apple around his characteristically ambitious and romantic idea of connecting the humanities with technology. In a couple of presentations he used the image of an imaginary intersection between two streets: ‘liberal arts’ and ‘technology’. Design and engineering were to be deeply connected in the conception of new products, even if that meant that everything was more difficult, more protracted, more risky, and more expensive. Sometimes in his career Jobs overcooked the aesthetics, but Apple’s results in the end justified the effort. Like much else in Jobs’ story, ideas and aspirations of this kind help us think again about the assumptions we make about computers and their places in our lives, about the relations between technical and creative innovation, the unexpected places we find novelty, and the persistent question of who owns what.

 

Julian Thomas is Director of the Swinburne Institute for Social Research

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Genes, Patents, Divisive Debate

August 26, 2011

By Dr Chris Dent

The recent discussion around the patenting of genetic materials is remarkable for its stridency. Witness, for example, the current Senate Committee review of the Patent Amendment (Human Genes and Biological Materials) Bill 2010. This post is not to add another voice that speaks the “truth” of a particular position but it is a step back to consider a key principle that constrains the nature and content of other participants.

My perspective is that the debate invites passionate responses because it is sited at the junction of four different (and competing) bodies of knowledge and/or practices:

  • patent law;
  • the science of genes;
    • the nature of entities that seek to commercialise advances in the sciences; and
  • the politics of public health.

Taken together, these different bodies mean that the debate is (necessarily) incomplete.

Patent law

This is not the place for a detailed exploration of patent law. It is sufficient to say that the system started over 400 years ago in a time without significant state infrastructure or a scientific world view that privileged rigorous experimentation (outside the alchemists and their alembics). Since then, the system has adapted to multiple new technologies, different understandings of economics and varied forms of governance. As a result, it is now a complex beast that has highly technical understandings of what is “novel” and “inventive” (both of which are tested against the “prior art” but what constitutes the prior art for each test is different). The law has been developed, in part by the legislature, in part by the courts (to fill the gaps left by Parliament), and in part by the patent office (to fill gaps not yet considered judicially). It is itself, a regulatory technology aimed at encouraging innovation – there is no should about it. There are just rules.

But, some will say, the patenting of genetic material is against these rules, that a genetic invention is not “an artificially created state of affairs”. The problem here is that there is no statement of Australian law saying this. Until an appellate court (to respect the doctrine of precedent) or the Parliament says otherwise, these patents may be granted – whether they are valid depends on a court ruling. It may be stretching it to apply the maxim nulla poena sine lege, but without clarity that such patents are invalid, innovators in the area of gene science are equally allowed to seek a patent for a development with industrial application that has not been forbidden.

Science of genes

Of the four bodies of knowledge, this is the one I know least about. It is, however, central to issue of the patentability of genetic materials. I am not even going to attempt a summary of it. I will, however, assert that it takes years of university training to be an expert in the area – in the same way it takes years of training to understand the nuances of patent law. Even a judge ruling on a dispute over a patent over genetic material does not, despite the best efforts of the professors who act as witnesses, become expert in the science generally – though she or he may have a good grasp of the specifics of the invention in question.

Nature of organisations

Not all organisations that seek to commercialise innovations are profit-driven companies. Those that are have a focus on providing a return on the investment of the owners of the firm. Two issues arise from this. First, it is these entities that the rationale for patents is aimed at. Patents, under current economic theories, are to encourage investment in research and development. Other types of organisations also have a role in the development of genetic innovation, like small start-ups and universities. Neither of these are beholden to shareholders; however, it is not clear that either are immune from a desire to gain patents – in order to gain future funding or for profile purposes. The second matter of importance is that it takes skill to successfully run a company (whether it be research intensive or not) – skills that have developed over years in business. For someone outside business to dictate how to make a profit in a competitive industry is as disrespectful as to accuse a geneticist of not understanding the science of genes.

Politics of public health

The politics of public health relates to the way in which the debate occurs in practice. People and organisations (including government agencies) express an opinion, sometimes backed up by evidence sometimes not, in the public domain – talk-back radio, newspapers, in response to government publication and in Senate Committee hearings. The debate is not a free-for-all; there are (often unspoken) rules and forums of engagement. The debate is also coloured by party political affiliations and economic policy perspectives (including higher education funding and costs of healthcare borne by taxpayers). As with the other three bodies of knowledge, the development of policy by those internal, and external, to the government is a matter of learnt practices – to acknowledge, and accommodate, the interests of diverse stakeholders is not a straightforward task.

My perspective

A key feature of the debate is the dominance of binaries. Much of the discussion focuses on, for example, patent protection versus competition; consumers versus companies; or simply right versus wrong. The approach of this post appears to add another: those within/trained by a particular body of knowledge versus those outside that discourse. The additional binary, however, offers an acknowledgment, and explanation, of the incompleteness of the debate.

The additional binary encapsulates and explains the others as each of these discourses has its own central “truth” that guides the actions of its members. The exclusionary nature of these bodies of knowledge produces an awareness of the “other” – those who remain uninitiated and outside the discourse. That is, the difference in truths and language means that there is a limited capacity for communication with those outside each body of knowledge – an outsider cannot easily comprehend the intricacies of patent law or the science of genes; they can understand it in broad terms (so the communication does not fail totally), but not enough to allow full communication.

In short, the limited understanding across discursive boundaries may be seen in terms of incompleteness or “failure” – there can never be complete, or total, communication. Unless all participants are schooled, to the same extent, in all aspects of the debate, there will always be a degree of miscommunication. Tied to this is that the purposes of the participants differ: the motives of a geneticist are different, for example, than those of a lawyer. The differences in constitutive actions renders problematic the pursuit of complete understanding. This acknowledgement that the debate is (necessarily) incomplete should not be seen as a negative. That there is no resolution itself acknowledges the ongoing processes of governance.

The acknowledgement that the debate is, and will be, incomplete does not mean progress will not be made. There is, after all, no such thing as the “perfect” law; there is, as a consequence, law reform. Of course, progress in this context is a contingent term – what represents progress for one side may be seen as a backward step for the other. Nonetheless, the more communication that acknowledges issues of communication (and this may include the use of empirical research to demonstrate or discount a discourse-bound assertion) the greater the potential for shared fragments of understanding. The competing motivations and practices of the different bodies of knowledge problematises the possibility of total understanding – the efforts that go to shared knowledge and practices offer common ground and a reduction in the issues of translation across discourses.

Chris Dent is a senior research fellow at the Intellectual Property Research Institute of Australia at the Melbourne Law School

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For an example of recent discussion on gene patenting see Fortnightly Review author David Brennan’s recent piece in The Conversation.

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Review: “How SMEs Exploit their Intellectual Property Assets: Evidence from Survey Data” by Gaetan de Rassenfosse

May 6, 2011

By Shaun Larcom

Why does a firm apply for a patent? Using data from an international survey of firms conducted by the European Patent Office, de Rassenfosse answers this question with some interesting results, particularly in relation to how motivations differ by firm size. As expected, he finds most firms, regardless of size, primarily use patents to protect their technology from imitation. However, he finds small and medium enterprises (SMEs) are much more motivated by monetary reasons, while large firms are more motivated by a desire protect their freedom to operate. But perhaps most importantly the paper highlights the importance of patents as a signalling device for SMEs in attracting finance to commercialise their inventions.

The survey analysed by de Rassenfosse asked firms who had applied for a patent to rate a series of statements to determine their motivations. The ratings ranged between 1 (completely disagree) to 6 (fully agree) and included: imitation (I patent mainly to prevent imitation by competitors); secrecy (I will not patent an innovation that I can keep secret); freedom (I patent mainly to protect my freedom of operation); investors (I take patents in order to convince investors or banks of the value of my invention); and licensing (I take patents in view of licensing).

Source: de Rassenfosse (2010), p20.

As expected and visible above, the most popular motivation was to protect against imitation.  Taking the mean score, this was followed by freedom of operation, attracting investors, and then licensing. In relation to company size, the share of SMEs taking patents for what de Rassenfosse terms monetary reasons (attracting investors and seeking to licence their products) is considerably higher than larger firms – 40% for SMEs in contrast to 15% for larger firms. In addition to preventing imitation, larger firms were mainly concerned with protecting freedom of operation.

His econometric analysis largely confirms that the firms’ stated motivations for patenting align with their actual behaviour. For instance, he finds that firms that take patents with the motivation of attracting investors have a lower share of their patent portfolio unused and more patents that are used internally, as would be expected. More interesting is his analysis of how firms actually use their patent portfolios. He found that SMEs utilise their patents more than large companies and he provides two explanations. First, SMEs are more selective in what they patent given the costs involved, and second, large companies apply more for freedom to operate motives, therefore leaving a greater percent dormant.

While not the focus of the paper, the importance of freedom to operate is worthy of comment, as it suggests that many firms, particularly larger ones, use patents for defensive reasons rather than to exploit their technology. This supports the tragedy of the anticommons thesis advanced by Professor Michael Heller at Columbia University.  His work suggests that too many patents can actually lead to less innovation in fields such as biomedical research due to competing property rights and a lack of co-ordination. Curiously, this dataset suggests that larger firms attempt to deal with the anticommons problem by taking even more patents that they let lie dormant. Apart from the obvious welfare losses brought about by excessive patenting, this dataset confirms that larger firms are more able to defensively patent than smaller firms.

As the title of his paper suggests, de Rassenfosse focuses on analysing the motivations of SMEs, particularly by generating revenues through licensing agreements and in attracting investors. He finds that nearly half of those SMEs sampled take out patents for these reasons.

Worldwide royalty and licence revenues were estimated at around US$100 billion in 2005, and de Rassendosse finds that SMEs have a higher per cent of their patents licensed than larger companies. This result is perhaps not particularly enlightening as it is well known that licensing agreements are a useful method used by smaller firms to generate cash flows, whereas larger firms are more able commercialise and market inventions in-house. Of note however, is the degree licensing differs between Europe and the United States. Considering willingness to licence and the size of the patent portfolio, he finds the share of patents licensed by European SMEs is significantly lower than United States SMEs, which he suggests is due to inefficiencies in the European market for technology.

Perhaps the most interesting element of his paper is the analysis of why using patenting to attract investors is such an important motivator for SMEs rather than larger firms. Citing the literature, he highlights the importance of asymmetric information in the R&D process and the signalling effect of patents, especially for SMEs. The concept of asymmetric information applied to R&D suggests that inventors are more knowledgeable about the likelihood of success and market potential than potential investors. The argument goes that external investors have trouble differentiating between profitable and unprofitable inventions and will therefore not invest in R&D or require a significant risk premium. While large firms have the ability to finance R&D internally, this is often not an option for smaller firms, and as a consequence they must rely on external funders. Here patents can play a significant role.  Smaller firms can use patents to serve as a credible signal that reduces information asymmetry.

De Rassenfosse argues that by taking out patents on promising innovations, the inventor can reveal credible information to investors, which helps them differentiate profitable and unprofitable projects. This suggests that the signalling effect for some firms is more important than preventing imitation, and his results support this conclusion. He finds a negative correlation between the motivations of attracting investors and secrecy, suggesting that firms, particularly SMEs, are willing to disclose extra information and bear patenting costs to attract investors even when there is no need in terms of keeping their technology secret. As concluded by de Rassefosse, this makes it all the more important to ensure that the threshold for granting patents is high, and he would no doubt welcome the intentions behind the Intellectual Property Laws Amendment (Raising the Bar) Bill. Raising the bar on patents has the effect of reinforcing the credibility of the signal a patent can provide, which de Rassenfosse has shown to be particularly important for smaller firms in accessing finance.  As he concludes: ‘The more informative the signal, the more confident investors and the more information asymmetry is reduced.’ (p.13)

Gaetan de Rassenfosse, How SMEs Exploit their Intellectual Property Assets:  Evidence from Survey Data, Intellectual Property Research Institute of Australia Working Paper (IPRIA) No. 8/10, December 2010.

Shaun Larcom is a PhD candidate in Law at University College London’s Centre for Law and Economics

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Patent, Trade Mark, Enforcement – the whole kit and caboodle, all in one exciting Bill…

April 7, 2011

By Kimberlee Weatherall

At an IP Academics’ conference in early February, I remember Professor Di Nicol asking, rhetorically, ‘where has all the patent reform gone?’ Di pointed out that we’d had any number of ACIP Reports, ALRC Reports (like that on Gene Patenting), and IP Australia Discussion Papers, all with no actual legislation resulting.

No more.

No doubt many are already aware of the Intellectual Property Laws Amendment (Raising the Bar) Bill. An exposure draft for this Bill was released by IP Australia on 3 March, with comments due last Monday, 4 April. The provisions of the Bill have been discussed at some length elsewhere, too, including some very interesting, thorough discussion of Schedule 1 on the Patentology blog.

In summary, the Bill has 6 Schedules, and mostly deals with patent, although it has some important Trade Mark bits too.

  • Schedule 1 is meant to be about ‘raising the quality of granted patents’, but, in short, it’s about standards for granting a valid patent. It covers everything from changing the way prior art is considered in assessing whether a patent has an inventive step, making the requirement of usefulness a bit more real by requiring a ‘specific, substantial, and credible use’ for the invention; to the effective abolition of ‘fair basis’ and its replacement with a concept of ‘support’ drawn from European law.
  • Schedule 2 proposes a new research exemption in patent, something that has been discussed for years now and is long overdue, to be honest.
  • Schedule 3 is meant to be about ‘reducing delays in resolution of patent and trade mark applications’, which seems to be mostly about finding ways to speed up patent and trade mark oppositions. I’m not entirely convinced the proposals will work, not least because I can’t see anything there that really deals with extensions of time in opposition proceedings that can really extend the time of an opposition. In any event, the proposed changes mostly create a framework within which more detailed regulations will be made. It is hard, therefore, to predict the ultimate outcome of these reforms.  Perhaps more important (and likely more effective) are the proposed amendments to divisional patent applications. ‘Divisionals’ happen (in general) when a patent application is ‘split’ into more than one application. The basic idea is fine, of course, but it can be used in all kinds of interesting strategic ways, including, at the moment, splitting an application off into a divisional when the main application is opposed by someone else – thus getting a patent through faster without the opposition applying to it. Under the proposed changes, applicants will only be able to file divisionals up to the date by which oppositions have to be filed. So, at least if an opposition is filed at the very end of the opposition period, it won’t be possible to split off a divisional patent to avoid the impact of a patent opposition. There are a few other strategic moves that are discussed in the Explanatory Memoranda which will be precluded by this change. The change seems fair to me.
  • Schedule 4 is about ‘assisting the operation of the IP profession’ – and deal with patent attorney privilege (like legal privilege, but for patent and Trade Mark attorneys) as well as some disciplinary stuff, and material about registering attorney firms. Potentially interesting stuff in there that tries to define what counts as giving ‘intellectual property advice’ – raises interesting questions about what bits of what attorneys do, don’t count as giving legal advice.
  • Schedule 5 is about enforcement. It makes some substantial changes to enforcement at the border, mostly by introducing a requirement that people whose goods are seized on the insistence of a trade mark or copyright owner will now have to positively claim their goods (rather than having them returned as a matter of course if legal proceedings aren’t commenced within 10 days by the IP owner). We also have a full re-write of the trade mark criminal offences (creating two levels, summary and indictable, like in the Copyright Act), and the addition of additional damages for ‘flagrancy’ in civil proceedings.
  • Schedule 6 is (allegedly) about ‘Simplifying the IP system’. It covers a miscellaneous collection of stuff, including (a) giving jurisdiction over design matters to the Federal Magistrates’ Court, (b) amending secret use in patent law, (c) ‘fixing up’ aspects of the grace period in patent; (d) a new system to allow the Commissioner to revoke acceptance of a patent prior to grant; and (e) repealing the requirement in s 45 for a patent applicant to inform the Commissioner of the results of certain searches,

With such a smorgasbord of issues, it’s hard to know what to comment on. Much of what I might otherwise have said about the patent stuff has already been said by Patentology: that attempting to raise the bar in inventive step is a good idea but the amendments probably don’t go far enough; that the change in the usefulness requirement is good for biological type inventions where patents have been granted for fairly speculative ‘uses’. (I disagree with Patentology about experimental use I have to say – I think we need the exception in there, although I dread it’s going to end up being narrowly read by our courts).

But here’s a couple of things that haven’t been discussed in the Patentology comments or by Warwick Rothnie:

First, we have a pretty complete re-write of the trade mark criminal offences here, using that awful, awful style of criminal drafting that seems to prevail at a Federal level these days (if you remember the new copyright criminal offences, introduced in 2006, you’ll get the picture – pages and pages of text and none of us any the wiser about what it means because you have to go to the Criminal Code to even begin making any sense of it). I suppose we should be grateful that there’s no proposal here to introduce Infringement Notices, as we had in copyright back in 2006 (then again, it would be hard to justify introducing infringement notices in trade mark when they haven’t even been used in copyright for years after coming into the legislation, wouldn’t it?). But two things are really interesting about the trade mark criminal offences. First, some of the offences apply a standard of ‘negligence’ to the mental element. Thus it will be a summary offence to apply a mark to goods, being negligent as to whether the mark is, or is substantially identical to, a registered trade mark. The first problem is – why would negligence be an appropriate standard here at all? Well, so I thought the Explanatory Memorandum might help here. So I went to look, and it says this:

‘It is appropriate to have a lower fault element of ‘negligence’ for the circumstance elements of the offences because of the unique nature of intellectual property rights. Despite the clear legal position that intellectual property is a form of personal property, evidence has shown that some people see the violation of intellectual property rights as trivial and a ‘victimless crime’. Such attitudes may extend to an unacceptable failure to ascertain the factual circumstances in which their conduct would be criminal. However, consistent with the general approach taken to other forms of personal property, and to copyright goods, a person who uses a registered Trade Mark (what could be another person’s property) should be under an objective obligation to check that the mark is not registered. Otherwise, the effectiveness of the deterrent is undermined, with the risk that intellectual property rights are less protected than tangible property rights. The introduction of an objective negligence standard will assist the effective administration of justice and perform an important educative role in ensuring that people take intellectual property crime seriously.’

OK – what? So hang on, failing to check the trade marks register when you’re applying a mark to goods could be a criminal offence, because one ought to check the register? And we want it to be criminal because that will ‘perform an important educative role’? Last theory on this kind of thing I read suggests over-criminalising behaviour that the average person does not think as criminal is not likely to increase respect for either trade mark law or criminal law.

And I still don’t even know what it means to be [criminally] ‘negligent’ about whether your mark is identical to a registered mark. Doesn’t ‘negligence’ import some kind of understanding of what would be considered appropriate standards of behaviour (you know, reasonable man/woman and all that?) And if that’s true, what is the standard of vigilance about branding activity that is considered socially acceptable these days? Is Woolworths criminally negligent for using ‘honest to goodness’, that being the trade mark of some organic supplier or other? Honestly, I wonder whether they really think these things through sometimes.

Something else that hasn’t got a lot of comment is this new customs scheme for requiring people whose goods are seized to actively claim their goods. I don’t know, and I’ve not thought it through sufficiently, but I wonder whether that is consistent with Article 55 of TRIPS, that says goods shall be returned if the IP owner doesn’t commence proceedings to continue the suspension. I mean, I know that you can have further customs procedures without breaching TRIPS (you can have payable duties and the like), but can you impose a further element (this claim scheme) that is clearly geared entirely towards assisting IP owners in enforcement and that leads to forfeiture, effectively on the grounds of claimed infringement, without legal proceedings? I’m not at all sure about that.

Here’s another interesting little beastie in the Bill. Proposed s 50A of the Patents Act. This would give the Patent Commissioner power to revoke an acceptance any time before grant. The explanatory memorandum says it will help with admin type problems, but it seems to me that it might be used like the equivalent Trade Mark Act provisions are being used – as a kind of opposition-lite, where a prospective opponent writes to the Commissioner asking them to exercise their discretion to revoke – without going through the full opposition process. I see the potential for more strategic game playing, even as the Bill has tried to remove other parts of the Act that have facilitated various interesting patenting and patent dispute strategies.

Overall, too, I wonder about some of the moves in patent. It feels like IP Australia has deliberately sought to shift Australian law closer to European patent law – for example, using European language in relation to support and other documentary requirements. Why Europe? Why European law in particular? Aren’t we meant, under our Free Trade Agreement with the US, to be ‘endeavour[ing] to reduce differences in law and practice between [Australia and the US], including in respect of differences in determining the rights to an invention, the prior art effect of applications for patents, and the division of an application containing multiple inventions’? (AUSFTA Article 17.9.14). I mean, I’m not a big AUSFTA fan, as you may know, but this does look quite a lurch in a different direction, which makes you wonder whether Article 17.9.14 has any relevance at all…

One more thing worthy of comment – Item 86 in Schedule 6 amends, and broadens, another copyright exception. This is the one found in the Patents Act s 226, and allows reproduction and other uses of documents open to public inspection. I’ve said it before, I’ll say it again. Every time the government decides it is going to create a new little copyright exception so it can do something it needs to do, it really ought to be asking itself: why do I have to do this? And wouldn’t it make more sense to introduce a general, fair-use type exception? Honestly???

Kimberlee Weatherall is a senior lecturer at the University of Queensland

This article was cross-posted here at LawFont

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Patent fees as a tax on so-called ‘monopoly rents’: a response

March 17, 2011

By Assoc. Prof. David Brennan

In his post Shaun Larcom explains the findings of Gaetan de Rassenfosse and Bruno van Pottelsberghe. Their research shows that great variation exists between territories as to patent fees, but that variation does not appear to cause a commensurate impact on patenting activities as between territories. This reveals that demand for patent applications and patent renewals is inelastic (i.e. unresponsive to price change) and the authors observe that this did not mean that patent fees were an ineffective policy tool, but that ‘a change in fees must be sufficiently large to have observable effects’. The question is put by Larcom: what is a socially optimal fee structure? Larcom argues that patent fees could have a taxation role, targeted at ‘the monopoly rents that accrue to patent holders’. For the reasons stated here it is argued that this should only be done if a conscious policy decision has been made to reduce the incentive effects of the patent system.

Deciding whether to have a property system of patents for inventions entails social choices.

The primary social choice is whether or not to institute patent property. Over time it has been largely accepted that temporally limited property rights for inventions confers net social benefit by providing measured incentives to accelerate the rate of technological progress, and to provide those incentives in such a way that they are conditional on full disclosure. The rationale is economic. The promise of being able to appropriate value from market demand for the patented technology per se is intended to have stimulating effects upon conduct likely to yield more technological progress – such as investment in R & D. After the patent term expires, the disclosed technology is absent any property rights.

Another social choice is how to conduct a merit assessment of that which is patentable. It has been long agreed that patents for existing or obvious technology is unjustifiable. Such grants do not stimulate worthwhile progress and restrain existing trade. It is largely accepted that best practice involves assessing the merit of inventions the subject of a patent application, and the written application itself, prior to grant. Such assessments are complex. The exercise involves integrating technologies that are at the edge of human understanding with a body of difficult law. Employing sufficient quality human capital to administer a patent system is expensive. How is a nation’s patent office to be properly funded?

The current IP Australia fee structure to acceptance for a standard patent is between about $1000 and $2000 depending upon the circumstances of the particular application. (For example the acceptance fee of a patent application with more than 20 claims entails $100 for each claim in excess of 20.) The current IP Australia fee scale for standard patent renewal is

5th anniversary $250

6th anniversary $250

7th anniversary $250

8th anniversary $250

9th anniversary $250

10th anniversary $450

11th anniversary $450

12th anniversary $450

13th anniversary $450

14th anniversary $450

15th anniversary $1,020

16th anniversary $1,020

17th anniversary $1,020

18th anniversary $1,020

19th anniversary $1,020

If term extended, $2000 for each anniversary during the period of extension

What should underpin the setting of such fees? In my view it should simply be to fund the patent system by a user-pays principle.

Because a patent office is expensive, it needs to be funded. While inventors can use the patent system, they do not need to. For example sheer secrecy and/or merely first-to-market advantage provide alternative means to confer comparative advantage upon inventors. If an entity relies on patent incentives and avails itself of the patent system, it is apt that the entity pays for the system. Patentees derive a clear private benefit from the system. But the total fee take should not be more than that required to properly fund the patent office.

What is the extent of such use in any given case? Given that the direct users of the patent system are mostly patentees, the extent of any use must be measured by degree of reliance on the patent system. The logic underpinning the current fee structure reflects this thinking. Most obviously, the more patents applied for and renewed, the greater will be the fees payable by a user. But extent of use can be differentiated, and usage pricing accordingly discriminated as between individual usages. For example X and Y might each apply for and be granted a respective patent. X has invented an improved device for which there is no market demand; X might maintain the patent for short time and then surrender it. Y has invented an improved pharmaceutical which is heavily demanded; Y might obtain a term extension of the patent. X and Y are each required to pay quite different total fees to IP Australia in relation to their patents. This is because while each has used the patent system in relation to their respective patents, the extent of patent system use of X and Y is very different. On user-pays principles, Y should make a bigger contribution to the running of the patent office because the extent of its reliance on the system is higher than X.

There may be very good arguments for revising overall fee levels to ensure that a country’s patent office is properly resourced and employing sufficient numbers of talented people. However it seems that the basic features of total fees being no more than that amount necessary to fund such a system, and fee pricing set on the basis of a user-pay principles, are sound. In contrast Larcom’s idea is that patent fees should also be a tool to tax (so-called) ‘monopoly rents’ accruing to patentees. This seems less desirable unless an informed policy decision has been made to reduce the incentive effects of the patent system.

Underlying Larcom’s approach is the philosophical view that ‘optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders’. A person owning a patent is not a monopolist any more than is a person owning a block of land – indeed the land owner has stronger property rights than a patentee. Once the basic social choice is made to have a patent system, its justification is the incentive effects of the promise of patent property. Property, while central to the operation of many markets, is a concept defined in law. The defining attribute of property is the owner’s entitlement to exclude the world from carrying out certain activities, and to secure the assistance of the law in carrying out a decision to exclude. Exclusive rights therefore require most third parties desirous of lawfully exploiting the patent resource to bargain with the owner. In that licensing bargain, the owner is able to appropriate to itself some of the value accruing from a third party licensee’s exploitation. Value will be appropriated by the patent resource owner which is vastly in excess of the marginal cost to it – typically zero – of providing of the patent resource. This is an inherent feature of patent incentives in the first place. The promise of appropriating some third-party value from the licensing of an owned patent resource with a zero marginal cost of provision is the very incentive which justifies the patent system.

Therefore if (as Larcom says) ‘optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders’, and if that is to be done (as Larcom suggests) by changing the law so as to tax through patent office fees that appropriated value, such taxation must reduce the incentive effects of the system.

It is far from clear that current patent incentives are excessive and require such a change. Whether or not existing incentives are excessive such as to create ‘monopoly rents’ and misallocations of resources is highly contestable. Is there evidence, for example, of over-investment in R & D caused by such excessive incentives? This uncertainty is especially so given that the promise of the patent system enables a prospective patentee to invest in different avenues, knowing that one commercially successful patented technology can offset expenditures in avenues that prove unsuccessful. It is equally unclear that there are strong policy justifications that patentees’ revenues should be subjected to higher taxes than others engaged in industry – whether those industries are intellectual property dependant or not. While the patent system should be self-funding through fees set under sensible user-pay principles, taxing patentees more highly than others in industry should not be considered unless an informed policy decision has been made to reduce current patent incentives.

David Brennan is an Associate Professor at the Melbourne Law School

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Review Article: The role of fees in Patent Systems: Theory and Evidence by Gaétan de Rassenfosse and Bruno van Pottelsberghe de la Potterie

March 4, 2011

By Shaun Larcom

In many countries, including the United States, patent filings have soared, and there are severe backlogs.  Also, there are questions being raised over the quality of incoming patent applications.  Within this context Gaétan de Rassenfosse and Bruno van Pottelsberghe look at patent fees and how they can be used as a policy tool in a recent working paper published by the Centre for Economic Policy Research.  Their work looks at how the magnitude of fees has changed over the last couple of centuries in the United States, how fees vary considerably between jurisdictions, how fee changes affect the number of applications, and finally what an ‘optimal’ fee might look like.  The authors note that patent fees are generally applicant friendly and priced with administrative cost recovery or international harmonisation in mind.

We learn that the first U.S. Patent Act of 1790 set fees of around $5 per application, which was intentionally low, to simply cover the cost of issue.  However, three years later the fee was increased to $30 to make it comparable to European systems, and presumably well above administrative cost recovery.  After this, while fees in the United States increased in nominal terms, they stayed much the same once adjusted for general price inflation until the 1960s at around $600.  In this decade they increased significantly and since then have broadly stayed the same, once adjusted for general price inflation and now stand at around $2500.

The authors argue, however, that this presents a misleading picture.  They consider that a better measure of the relative price of fees is one that is adjusted for increases in wealth, or increased potential earnings from patents.  When the fee is deflated using GDP per capita, which accounts for increases in total income, rather than just price increases, patent fees in the United States are at an all time low and are approximately one tenth of 1800 level (see chart below).  As we have become much wealthier, fees as a proportion of total income that can be expected from an average patent is the lowest it has ever been.

Evolution of United States application fees adjusted for income: 1790-2005

Source: de Rassenfosse and Bruno van Pottelsberghe 2010, p6.

The second thing we learn from their work is that fees vary considerably across nations.  To take the two extremes, total patent fees are more than five times more expensive in Japan than in Switzerland.  However, the authors look deeper at cross-country comparisons.  They point out that these costs need to be weighted for market size, as patent protection in a large economy can be more cost effective than in a small economy even though fees might be higher.  For instance, even though Finland has similar fees to the United States the Finish market is more expensive to protect in relative terms as its market is many times smaller than the United States.  Once they account for market fee costs to market size, a very different picture emerges.  China and Japan, two of the countries with the highest nominal fees are among the cheapest on per capita basis, and the Nordic countries are among the most expensive.  They also find that the European market is up to 13 times more expensive to cover compared to the United States even after accounting for the cost savings brought about by London Agreement, which reduced the translation requirements for patent validation procedures in key European countries.

The authors also look into how fees may affect the number of patent applications. Surveying various studies, including their own, that look at the effect of fee increases or decreases on patent applications.  While the results vary, changes in fees seem to have a small effect on patent applications, which is not surprising as the fee is likely to be a small component in overall application costs.  In their own work, which uses data for 26 years from the European Patent Office, Japanese Patent Office, and United States Patent and Trademark Office they estimates a long-term elasticity fluctuating around -0.30.  These results suggest that a 10 per cent increase in fees should lead to a 3 per cent fall in patent applications over time. The authors point out that because an increase in fees lowers demand by a smaller relative amount than the increase in revenue, higher fees would actually increase the patent office’s income.

Given that patent offices could easily increase their revenues by charging higher fees suggests that governments are IP friendly and see the benefits generated by the monopoly power of a patent as greater than the costs it imposes on consumers.  Alternatively, they may not have thought of using patent fees as a policy tool.  The authors argue that issues associated with the applicant’s behaviour and welfare issues are rarely considered.  After surveying the literature, they also find that work by economists has focused on the optimal length and breadth of patents, and studies on the optimal fee policy are scarce.

It is well understood that patents have the potential to generate high levels of R & D in new technologies that may benefit not only the holder but society as a whole.  However, we also know that these benefits are not without cost, as patents also explicitly generate monopoly power which can see high prices and other detrimental effects that results in some consumers unable to buy or use the new technology.  With this in mind, the authors survey the relevant economic literature.  Gans et al (2004) suggests the socially optimal level fee structure is initially low, but that renewal fees are as high as possible such that the inventor would be willing to undertake the inventive activity in the first place.  Others, such as Baudry and Dumont (2009) suggest initially low patent fees but a sharp increase in a final fee around year 14.  Such fee structures are aimed at inducing the necessary investment while minimising the social costs of a patent.  That is, high renewal fees may have the ability to avoid excessively long patents from a social perspective.

From an economic point of view the optimal innovation policy would aim to ensure that new technologies are developed but that costs associated with monopoly power are minimised.  We know how to achieve this, at least in theory.  Optimal innovation policy would aim to eliminate the monopoly rents that accrue to patent holders.  In economics, the term rent has a specific meaning, and can be defined as the difference between the price someone is willing to receive to conduct an activity versus what they actually receive.  For instance, a mining company would be willing to invest in a new mine at a certain ore price, if this price doubles, the increase in profit brought about by the price rise is rent.  The economic argument goes that even if all this rent is taxed, the mining company would still invest in the new mine and make profits, but that the risk adjusted profits would be no greater than if the capital was employed elsewhere.  While estimating economic rent is not easy, it is possible.  The Australian government has been calculating and taxing economic rent generated by offshore petroleum producers for decades.

The work by de Rassenfosse and van Pottelsberghe puts patent fees into a historical, international and economic perspective.  We learn that patent fees as a proportion of potential income generated is at an all time low.  From their survey of the literature we also find that patent fees have the potential to be an important policy tool for innovation policy, but that up until recently this has been ignored.  Indeed, fees could be used as a tool to tax economic rents generated by patents, or to reduce the life of a patent, while still encouraging investment in R & D.

Gaétan de Rassenfosse and Bruno van Pottelsberghe de la Potterie, The Role of Fees in Patent Systems: Theory and Evidence, June 2010, Centre for Economic Policy Research Discussion Paper Series No. 7879.

Shaun Larcom is a PhD candidate in law at the University College London’s Centre for Law and Economics

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Finding the best model to exploit Australia’s inventive talent

September 23, 2010

By Dr Russell Thomson

On 29 July 2010, the Melbourne Institute held a forum to discuss the following questions – “What is the best business model for a small, isolated economy with considerable R&D talent? Do we attempt to commercialize on-shore or license to overseas experts? If the latter, what is the best strategy for ensuring that we receive an equitable return? If the former, how can we do this better?”  For copies of the presentation, please click here.

Three eminent speakers offered a wealth of insights on this important policy issue. Mr Terry Healy bought insights from his unique vantage as special counsel with one of the world’s leading public sector research organisations–CSIRO. Mr Terry Stinson represented a private sector viewpoint as the CEO of Orbital Engine Corporation the firm with the largest automotive R&D facility in the country. Finally, Associate Professor Beth Webster from IPRIA gave us the perspective of a policy oriented academic.

Mr Healy expressed a general preference to see IP applied to create new and strengthened business activity within Australia, suggesting that to deliver benefits like better health, better jobs, better energy supplies, and better communications almost always required application of technology in Australia. Mr Healy also suggested that more should be done to support Australia’s excellent R&D capacity. One important reform he nominated was the need to clarify research exemptions (i.e., freedom to operate) for Australian scientists, noting that such a reform would also be an important step in making Australia an attractive location for foreign R&D.

Given Terry Healy’s experience on the now famous wireless patent litigation, he argued that generating returns through licensing is far from easy. To recap, CSIRO developed the wireless technology back in 1993. Having been unable to convince industry majors of the merits of the technology, CSIRO supported the establishment of a start-up company called Radiata which they granted a non-exclusive peppercorn licence to the technology. Once an “almost commercial” prototype chip was developed, Radiata was bought by a foreign firm (for $600m). The Australian technology, developed at CSIRO is today embedded in wireless products by all the major manufacturers around the world.

While consumers around the world are benefiting from this Australian made technology, Healy argued the outcome from the perspective of CSIROs mandate to undertake research for the benefit of Australia was not optimal – with minimal royalties and no onshore industry established. After industry around the world refused to accept licences, CSIRO made the decision to begin what was to become a long and expensive litigation that ultimately was resolved via settlements with considerable royalties paid to CSIRO. From a corporate strategy perspective, Mr Healy emphasised that Australian technology owners must be willing to defend patents in the USA. Importantly he considered that failure to defend the wireless patent would have a negative spillover effect on other patents in the CSIRO portfolio

Mr Stinson then shared his insight into commercialization strategy from the perspective of the private sector. Mr Stinson described that licensing technology exposed Orbital to considerable competition from technological substitutes–importantly being the technological benchmark is not sufficient for success. He also highlighted the importance of offering support such as the supply of spare parts and a physical presence in the marketplace.

Some of the issues raised by Mr Stinson resonated with those of Mr Healy. Both the wireless technology and Orbital fuel injection technology demonstrated limitations of relying solely on licensing to generate returns from Australian innovations. This indicates somewhat of a paradox: on the one hand licensing is seen as a means to avoid the difficult and expensive steps of development and establishing manufacturing, on the other hand in order to strike a licensing deal a technology needs to be on the market and supported with for example spare parts. A conclusion might be drawn that internal commercialization and licensing to third parties can be complementary strategies. Certainly it seems that when it comes to identifying an optimal strategy for commercialization Australian technology, it is definitely not a case of one size fits all.

Another lesson from the Orbital success story seemed to be the need to manage not only the IP model, but also understand the ultimate sources of demand. In their case shifts in emissions legislation generated shifts in demand and provided a window of opportunity. Orbital is also now aiming to generate growth through the application of their technology in alternative fuels.

The final speaker, Associate Professor Webster, discussed the issue of commercialization from a public policy perspective. As well as outlining a framework of policy options she offered some concrete policy suggestions. She argued that Australia has moved through three broad policy approaches. In the 1980s, it tried to establish new downstream industries to exploit technology created. A later approach has been to prioritise research in areas where downstream industries and commercialization capacity already exist, such as mining and agriculture. Today, policy acknowledges that Australia cannot specialize in all areas of commercialization in every industry and recognises the importance of engaging effectively with the international value chain.

Professor Webster left us with some concrete policy suggestions. First, she highlighted the need to reform the global intellectual property rights system to reduce costs and reduce inefficient strategic ‘game playing’ and increase global harmonisation. Second, to continue to support informal networking including student and researcher exchanges. Third, she advocated a large tax concession on licence fees from public sector research organizations and universities paid by Australian firms. This, she argues, avoids ‘double payment’ for technology which is already paid for through tax revenue. Finally, she argued that earmarking funding for university technology transfer offices rather than forcing them to be self financing would help clarify their primary objective of getting technology into the marketplace, rather than generating returns to survive.

Dr Russell Thomson is a Research Fellow with the Melbourne Institute of Applied Economic and Social Research

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Genes, Patents, Justice and Commonsense

May 20, 2010

By Dr Leslie Cannold and Prof Luigi Palombi

Patentability is synonymous with invention. Unless this fundamental threshold of patent law is reached the grant of a patent is invalid. Every law student knows this, and presumably Professor David Brennan does, too.

Professor Brennan (here) suggests that our arguments lacks a “sound basis,” are “backward-looking” and “beg questions of coherence.”  Yet he supports none of these contentions with either argument or evidence.

For instance, he says in support of his backward looking charge that, “the justification for patents unambiguously rests at a point in time prior to the existence of such technology.” If anything, this statement would seem to serve those who believe the current law needs updating in line with developments in genomics not foreseen or intended by the original framers of intellectual property law. He claims we are “incoherent” (by which he seems to mean inconsistent) because of his presumption that we do not support the patenting of fish as well as human genes. This was not a question we addressed in our piece, but in fact we do believe no patents should be granted on products of nature, including the unimproved genes of fish. So goes the inconsistency charge.

We could go on, but the central flaw in Brennan’s response is that he declines to respond to the kernel of our argument: that it is legally and morally impermissible to patent human genes because of the unacceptable costs of so doing for Australian taxpayers and patients. Instead, he advances the same tired and unsubstantiated claim that patenting genes must be allowed because “… investment in R&D is commercially risky [and] it will only be undertaken if the promise of a commercial return exists for success.”

This contention is demonstrably false. A recent US government review of genetic testing concluded that “the Federal Government [not the private sector] is the major funder of basic research and likely the major funder of basic genetic research.” Furthermore, history shows that a patent award is not a required inducement for medical inventors. Some of the greatest medical breakthroughs of the 19th and 20th centuries were made without a patent being contemplated or sought. Pasteur, Curie, Fleming, Florey and Salk made their medical inventions without seeking patents. Aspirin was developed in 1898 by Bayer chemist Felix Hoffmann when German law forbade the patenting of a chemical substance. In fact, prior to 1978, it was impossible to patent a pharmaceutical substance in most European countries, yet much of the bounty of modern day medical science accrued before this time.

Recent rulings suggest the existing intellectual property framework may be adequate to ensure human genes isolated from the body are not granted patents. A recent ruling by a forty year veteran judge of the US federal court confirmed, the BRCA 1 and BRCA 2 gene mutations linked to breast and ovarian cancers are not patentable. This is because existing patent law already restricts patents to inventions, not discoveries, and (luckily for them) biotech companies are not the “first and true inventor[s]” of gene mutations that cause disease like breast and ovarian cancer. Judge Sweet found that the “claimed isolated DNA [of the BRCA genes] is not markedly different from native DNA as it exists in nature.” A similar point was made in a 1989 a US federal court judgement that found, on the basis of “the overwhelming evidence, including Amgen’s own admissions,” that, “human erythropoietin (uEPO) and isolated erythropoietin (rEPO) are the same product”. The point, conveniently overlooked by Brennan, is that genes are informational and the information remains identical regardless of the physical location of the gene itself.

If it is the case that existing legal and policy settings in Australia undercut the ability of inventors to create without the prospect of being rewarded by a patent—as Brennan claims—we need to remember that this situation is remedial, not inevitable. Policy-makers could, and we believe should, alter such settings to ensure inventors are incentivised to pursue the knowledge necessary for medical advances, and systems in place to ensure the conversion of medical discoveries into bedside benefits for patients.

Those who believe human genes identified or isolated by corporations should be patentable would do well to reply to such claims by playing the ball, not the person. It is they who must explain how patenting genes is consistent with the existing intellectual property legal and policy frameworks and why, despite demonstrable and serious negative consequences, this framework should be applied to decisions so critical to the preservation of equity and public health.

Dr Leslie Cannold is an author and medical ethicist. Dr Luigi Palombi is director of the Genetic Sequence Right Project at the Australian National University and author of Gene Cartels.

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Genes, Patents and Polemic

May 6, 2010

By Associate Professor David Brennan

Leslie Cannold and Luigi Palombi in their piece “Patent rubbish for companies to own genes” (published by Fairfax Media on 27 April 2010) attack the grant of gene patents in strong terms; the patents are said to ‘put lives at risk’. It is, however, contestable whether many of their claims have a sound basis. The authors’ stand-point on patents is largely backward-looking. They ask why people, described as ‘victims’, should be deprived of a beneficial technology because of an inability to pay a patent licence fee. In so asking they gloss over that the justification for patents unambiguously rests at a point in time prior to the existence of such technology. Patents are granted to provide a reason for private investment to flow into research and development to address practical problems which have no obvious solution. People can use their inventive abilities to try to improve overall welfare. Resultant solutions might be a more energy-efficient solar cell, or a cure for Alzheimer’s disease, or any other form of technological progress. Because investment in R&D is commercially risky, it will only be undertaken if the promise of a commercial return exists for success. Hence in the prospectus of a typical Australian biotech start-up company, a patent portfolio will feature as the company’s core future asset.

While patent rights in important technologies do impose costs on society, if those technologies were not developed, society is the net loser. Imposing the restriction of patent rights so as to spark improved technologies has long been considered a price worth paying, rather than society going without those technologies altogether. The cost concerns that the authors highlight pertain to the inability of some users to access patented technologies. Those legitimate concerns can be, and have been, addressed by a mix of government subsidies to users, laws compelling patentees to grant licences on reasonable terms, and legal freedoms for experimental use.   

Moreover, in striking a cost-benefit balance, patent law has consistently rejected broad rights on discoveries pertaining to natural phenomena. Such discoveries are not in themselves practical solutions. Only if a discovery can be put to some practical use can there be an invention fit for patent protection, and then the protection is usually confined to that solution. Therefore, Amgen’s discovery relating to the human gene encoding for erythropoietin (EPO) – a natural protein that promotes the production of red blood cells and thereby treats anaemia – gave Amgen no rights whatsoever in the EPO gene naturally present in a person. Amgen did not ‘own’ your EPO gene. Rather what patent law essentially gave to Amgen were rights related to the manufacture of synthetic EPO to be used as a treatment for anaemia. It was a treatment not previously available to sufferers. Likewise, the controversial Myriad patents give Myriad no ownership of any gene occurring naturally in a person’s body. What patent law can validly confer upon Myriad are rights related to testing for a genetic predisposition to breast or ovarian cancer, being a diagnostic not previously available to women.

The authors’ focus on human gene technology begs questions of coherence. It implies that R&D to develop a cure for Alzheimer’s should be not given patent incentives if that research (like Amgen’s) is directed to genetically engineering a treatment from a human gene. But what if the research is directed to genetically engineering a treatment from a fish gene? It is unclear whether the authors’ view is that patent incentives should be denied for both types of research, or simply the former. But even if the suggested denial is only for human gene derived cures, the interests of society are not well-served by curtailing patent incentives for private R&D into the pursuit of any Alzheimer’s cure. If there is to be a patent system, it seems absurd that incentives will be extended for (say) an improved clothes peg, but not for a human gene derived Alzheimer’s cure. There is a Senate Committee currently considering the submissions from those who (like the authors) argue that patent incentives should be curtailed for private endeavours to develop such a cure. It is appropriate for the Committee to most carefully consider those submissions, because it must work out what those submissions are really saying. Are they saying that we as a society cannot have that cure? Or that we should not have that cure? Or that we will get that cure anyway by faster and less costly means?

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The US Invalidation of Myriad’s Breast and Ovarian Cancer Genes

April 9, 2010

By IPRIA researcher, John Liddicoat

Australia – Patentability of Genes?

A term of reference for the current Senate inquiry into gene patents includes whether naturally occurring gene sequences should be excluded from patentable subject matter. A trigger for the Senate inquiry was that Genetic Technologies, the exclusive licensee of Myriad’s breast and ovarian cancer genes in Australia (BRCA1 & 2), sent infringement notices to some of Australia’s leading cancer research and treatment institutes.

USA – Gene Patent Invalidated

However, Myriad’s BRCA gene patents have since been invalidated by a US court in Ass’n for Molecular Pathology v. United States PTO, Myriad Genetics 2010 U.S. Dist. LEXIS 30629 (S.D.N.Y. Mar. 29, 2010) (Myriad). Subsequently, the invalidation of Myriad’s BRCA gene patents in the US by an American district judge is topical but also causes us to reflect on the state of our own law and question whether the same outcome could be reached here in Australia. The US litigation should inform the current Australian inquiry of approaches to patent law amendments.

The United States Patent & Trademark Office (USPTO) had, prior to the decision, assumed for around 30 years that gene patents, even those with sequences that were identical to naturally occurring genes, constitute patentable material. The recent decision Myriad overturns this assumption.

The Decision

The primary issue in Myriad was whether per se product claims for isolated, and/or purified gene sequences, identical to those in nature, satisfied the products of nature doctrine; there was also an issue of whether diagnostic comparisons of sequences satisfied as a patentable method, but this article will focus on the product claim. The doctrine, which is a product of a series of Supreme Court cases from over 100 years of section 101 of Title 35 U.S.C interpretation, was succinctly articulated by the US Supreme Court in
Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127 (U.S. 1948)  (Funk) as, ‘manifestations of laws of nature [are] free to all men [sic] and reserved exclusively to none’.

In the landmark case of Diamond v. Chakrabarty, 447 U.S. 303 (1980) the US Supreme Court held that manifestations of natural laws are patentable products when they contain ‘markedly different characteristics from any found in nature’. Subsequently, one of the pivotal arguments in Myriad was whether isolated and/or purified BRCA sequences contain markedly different characteristics to naturally occurring DNA.

Myriad’s primary argument was that the chemical nature of isolated and purified DNA is different compared to its natural counterpart. In particular they argued that cDNA (an “artificial” creation) which is isolated and purified, when compared to genomic DNA is physically quite different. In his decision, Sweet J did find that naturally occurring BRCA DNA had undergone very similar chemical changes in vivo to the creation of cDNA but in deciding whether the isolated sequence had markedly different characteristics focused not on the DNA’s physical composition, but on its function.

Sweet J held that DNA’s function as a carrier of information – directing the production of RNA and proteins – is the relevant characteristic for naturally occurring DNA sequences that must be distinguished. Subsequently, if an isolated and purified gene, that is identical to a naturally occurring sequence is used to make cDNA, RNA or a protein, and the natural characteristics embodied by the sequence do not change, what is being claimed is a product of nature and therefore unpatentable.

Sweet J’s emphases on DNA’s information based characteristics as opposed to its physical characteristics might be most contestable aspect part of his judgment. But beyond the above reasoning, there are several other intriguing aspects to Sweet J’s decision; it is a summary judgment and 20 of the 152 pages in the judgment are devoted to the relevant molecular science.

In view of what is in the judgment, there is more to be articulated about how different isolated sequences may be from their natural counterparts. Similarly there are more detailed arguments to be made about the law, especially about the uniqueness of DNA compared to other chemicals and whether a DNA patent must have a differently encoded function, but we will have to wait for the appeal before we see these issues resolved in full.

Could it Happen in Australia?

s 18(1)(a) of the Patent Act (Cth) dictates that to qualify as patentable subject matter an invention must be a ‘manner of manufacture’ within the meaning of s 6 of the Statute of Monopolies. Relevant to gene patents that mimic nature, the High Court in National Research Development Corporation v Commissioner of Patents (1959) 102 CLR 252 (NRDC) has held that to be a patentable manner of manufacture, the invention must ‘consist in artificially created state of affairs’.

In an opposition hearing Kirin-Amgen Inc v Board of Regents of University of Washington (Kirin), the Deputy Commissioner of Patents found that isolated and/or purified DNA satisfied the artificiality requirement from NRDC. Kirin is not a judicial decision, but it does represent IP Australia’s and the conventional wisdom on naturally occurring gene sequence patents.

Moreover, the High Court in NRDC also explicitly diverged from Funk stating that ‘laws of nature’ is too vague a term and only confuses the issue of patentable subject matter. Consequently, a product of nature doctrine has never been found in Australia and accordingly, Australia does not have a judicial history defining the boundaries of such a doctrine.

A result of the rejection of laws of nature doctrine means that an argument emphasising the information and functional aspects of DNA as a product of nature is unlikely to succeed because there is no ‘manifestations of nature’ argument to rely upon. Similarly, in regards to artificially, there is no requirement for markedly different characteristics and as such, genes isolated from their natural environment, regardless of physical changes, will likely pass this low threshold test. Nonetheless, taking advantage of a US expert commentator’s title in a review of Sweet J’s decision, maybe ‘Pigs Fly’ from the US to Australia.

What appears for certain is that the patenting landscape of genes in the US is changing. With Re Kubin last year ostensibly raising the bar on inventive step (or non-obviousness as it is known in the US) and now Myriad, Australia does appear to be diverging from the US in terms of patent laws for biotechnology. If the Senate inquiry wants to prevent patents for naturally occurring genetic sequences, perhaps they should take a more technology neutral stance and consider whether specifically including a US style products of nature doctrine is the way to achieve this.

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