Intellectual property

Overview
One of the most interesting features of the Cutler Report for lawyers, legislators and owners of inventions and innovative processes is its discussion in relation to the relationship between intellectual property (IP) protection regimes and incentives to innovation.
Broadly, the Report observes that:

• the current Australian system of IP protection, while originally devised to encourage the development of new IP which would not otherwise exist, has now instilled monopoly rights in rights owners and hampers incentives to future innovation;
• in particular, the ease with which software and business method patents are granted, the ambiguity of their definition and an increasingly relaxed application of the ‘inventiveness’ requirement has created uncertainty regarding the delineation of competing rights;
• philosophically, IP should be determined as a feature of economic rather than legal policy. As such, lawyers and the regulatory framework should offer an important and supportive (but not necessarily predominant) role; and
• the rising cost of enforcing IP rights through the current system of litigation represents an inefficient form of dispute resolution and favours litigants with large financial resources. To mitigate this, a system of ‘appellate double jeopardy’ should be adopted as a disincentive to excessive appeals brought by well-funded organisations.

Balancing rights and incentives
The Report notes that left to its own devices, the free market does not generate ideal incentives for information and knowledge innovation. This is certainly true. If there were an absence of IP rights, the ease of duplication, copying and leveraging of fresh ideas and business applications by others, including competitors – especially in the current technological and digital age – would be troublesome. At best, they would offer a developer of IP-rich innovation questionable returns on its investment and poor incentives to development.

In response to a need to generate such incentives, protective legal rights such as copyright and patents emerged. As a general theory, these concepts represented a way of protecting and rewarding innovative investment while preserving incentives for further development.
While the Report acknowledges that an imperfect system of incentivisation is preferable to none, it suggests that the current system has now instilled monopoly rights in IP owners, which rights are being widely used for defensive purposes and “generally allow [IP owners] to price [their IP] above the marginal costs of its provision, which is often near zero”.

The Report observes that the current system fails to recognise the importance of the cumulative development of IP – that is, the principle that for innovation to occur most efficiently, various bodies of work must be allowed to leverage and build upon each other.

As such, the Report proposes that it is critical to now rebalance the protective rights of IP owners with the need to preserve opportunities for, and remove the obstacles to, future innovation.


Software and Business Method Patents
The Report observes that the ease with which protective IP rights can be obtained has become a significant impediment to innovation. It notes that this is particularly the case in relation to patent rights, where:

• ambiguity in relation to the definition and boundaries of patent rights is creating confusion vis-à-vis prior and competing claims;
• judges have abandoned the traditional gatekeeping requirements of patent eligibility, leading to a general acceptance of items not historically considered patentable, such as software and business methods; and
• the patent eligibility tests of non-obviousness and analogous use have been significantly relaxed to a point where they risk being meaningless.

A related concern is these developments have contributed to a ‘patent thicket’ in software, prompting large corporations to accumulate software patent pools which are largely then held for defensive purposes. It also observes that the more patents in a market, the grater the reluctance of new firms to enter that market and the greater the delays experienced in obtaining funding.

The Report indicates that the inventive steps required to qualify for patents should be restored to a considerable burden and the resulting patents better defined, to minimise litigation and maximise opportunities for forward innovation.

IP rights as a function of economic policy
Having regard to the US experience, the Report notes that software and business methods patents are “unusually liable” to litigation. A sub-category of the business method patent is the finance patent, which is essentially patent protection afforded to a method of finance. Software, business method and finance patents are all more frequently litigated than a conventional chemical patent. The suggestion is that the Australian experience may be even more concerning, considering the threshold level of invention for patent eligibility in Australia is lower than in other countries.

The Report notes that the Advisory Council on Intellectual Property is currently considering the issue of patentable subject matter, however queries the extent to which the simple removal of certain subject matters from patent eligibility can now address the current difficulties.

Firstly, Australia may be realistically constrained to retain specific areas of technology within its patent system by virtue of its obligations under the Trade Related Aspects of Intellectual Property Rights (TRIPs) code and the Australia-United States Free Trade Agreement (AUSFTA). The Report acknowledges that there are, of course, creative measures that could be taken to restrain patent eligibility in a TRIPs-compliant way, such as introducing minimum development costs.

However, any such proposals would need to be conscious that they did not set the bar too high so as to discriminate against proposals that were truly innovative, but simply could not demonstrate a level of quantifiable investment in them.

A more fundamental problem however, is that IP policy is being managed as a legal issue instead of being correctly viewed as “most fundamentally an aspect of economic policy” (albeit one that operates through the legal system). The Report observes that copyright and patent policy is not currently determined by economic policy but dominated by IP practitioners and the beneficiaries of the IP system. Accordingly, it proposes that a shift is required, similar to that which occurred when trade practices policy ceased to fall within the purview of the Department of the Attorney General and subsequently became a Treasury matter.

In short, the Report recommends that economic considerations should prevail in determining IP policy, with lawyers and the regulatory framework assuming an important and supportive (but not necessarily predominant) role.

Enforcing IP rights

Enforcement, costs and litigation
The Report is critical of the current method of enforcing IP rights and suggests it is an inefficient way of resolving commercial disputes as to the nature and extent of such rights.

Noting the high and rising costs of enforcement, it proposes that modern litigation is ill-suited to resolving complex business disputes. Also, it observes that the litigant with greater financial resources enjoys (or at least, is often perceived as enjoying) a distinct advantage, irrespective of the actual merits of a case. The result is diminished confidence in the enforcement system itself.
While the Report endorses IP Australia’s submission that litigants should use litigation more selectively and responsibly, it predicts that such initiatives may have little impact on the behaviour of large corporations who deploy IP litigation strategically against smaller entities. As such, the Report recommends that legal procedure reflect some proportionality between legal costs and the amounts at issue in the relevant dispute.

While as a concept this is certainly desirable, some further thought will need to be given to how such controls are achieved in a tangible and practical sense. Indeed, the need for creative and more efficient forms of dispute resolution has been the subject of much debate and many law reform proposals. The Report appears to recognise this. While welcoming some initiatives currently underway, it acknowledges “a long history of modest outcomes from reviews of legal procedure”. In this context, it proposes that some radical experiments may be justified (such as the adoption of a European civil law-style system of case management), at least in some selected areas.

Appellate double jeopardy
In the interim, the Report recommends a simple procedural rule of ‘appellate double jeopardy’ be adopted to level the playing field between large and small firms in IP litigation. That is, each party in an IP-related dispute would enjoy the right to elect not to appeal the finding of a court of first instance, except where a prospective appellant fully funded the costs of both itself and its opponent. An election in favour of the rule would be binding on both parties and neither could appeal a first instance decision without meeting all their opponent’s costs.

The proposal is an interesting one. It is understandable, given the concern that large corporations have the resources and energy to pursue a claim until it secures its desired result, with little regard for the costs of litigation. A small business, however, needs to pick its battles carefully and apply a rigorous cost-benefit analysis to its involvement in lengthy litigation. A rule such as appellate double jeopardy would certainly assist (although not necessarily always succeed) in mitigating a large corporation’s propensity to fight to the death as a given matter of internal policy.

Unfortunately, the Report does not elaborate on how those costs would be determined and what would be the measure of costs that a party would be entitled to recover under this rule. Also, it is unclear whether the Report anticipates that this rule would extend to a party’s internal management costs, time and expense, which is often difficult to quantify yet one of the most significant differentials in litigation capacity between a large, well armed corporation and a small, thinly resourced business.

A further aspect that is not investigated is how this proposed rule would interact with the existing body of law regarding costs, particularly where an appellant is ultimately successful on appeal and the first instance decision is set aside. Intuitively, it sits contrary to the general legal principle (and its intuitive sense of fairness) that costs should follow the event. However, the Report’s position may be that the process of IP litigation is so in need of streamlining that the normal legal rules should be displaced and a successful appellant should still pay all costs of the appeal, as a matter of greater public policy.

Recommendations
The IP-related recommendations of the Report are:

• a review of patent law to restore the inventive step requirement to a more considerable level and ensure that resulting patents are well defined, to minimise litigation and maximise future innovation opportunities;
• renewed emphasis on IP policy as economic rather than legal policy, with professional practitioners and beneficiaries of the IP system involved in, but not necessarily determining, IP policy-making; and
• a new system of appellate double jeopardy to rebalance the rights between large and small litigants and encourage a fairer system of dispute resolution in relation to complex IP-related business disputes.

While further detail would have been welcome in relation to the last of these, it is difficult to disagree that any of these recommendations reflect highly valued and desirable objectives. The real challenge will lie in determining their most effective form of implementation, so as to strike a proper balance between protecting rights owners while ensuring that sufficient incentives still exist for current and future innovation.