Monday, November 25, 2013

TPP and patentable subject matter

U.S. Foreign PolicyThe Trans-Pacific Partnership (TPP) talks involve delegations from Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Right now a TPP Chief Negotiators summit is drawing to a close in Salt Lake City, Utah.

The talks are technically conducted in secret. However there seems to be a constant stream of leaked drafts and other documents. This in turn leads to a lot of comment from civil libertarians, fugitives and academics.

The latest document I came across is the confidential draft treaty chapter from the Intellectual Property group. It sets out the combined positions of all the parties as they were by the end of August 2013. Assuming this document is not a complete fabrication, what are the parties saying about the sort of technology that should be eligible for patent protection?

Patentable subject matter

The text contains the provision that:
'each Party shall make patents available for any invention, whether a product or process, in all fields of technology, provided that the invention is new, involves an inventive step, and is capable of industrial application'. [Article QQ.E.1]
This provision makes sense. Those familiar with TRIPS (agreement on trade-related aspects of intellectual property rights) will see a passing similarity with TRIPS Article 27.

There is a slight divergence in policy between Australia and New Zealand. Australia would like to add that 'patents shall be available for any new uses or methods of using a known product'. New Zealand would not.


The text proposes that:
'each party may exclude from patentability inventions, the prevention within their territory of the commercial exploitation of which is necessary to protect ordre public or morality, including to protect human, animal or plant life or health or to avoid serious prejudice to nature or the environment, provided that such exclusion is not made merely because the exploitation is prohibited by their law'. [Article 2].
No parties object to this statement, which is not really surprising.

New Zealand already has this provision in the Patents Act 2013 section 15. Australia has just concluded consultation on whether or not to exclude inventions from patentability where commercialization would be wholly offensive to the Australian public.

Subject matter exclusions

Most countries, with the exception of the United States, would like to exclude some subject matter from patentability.

New Zealand and Australia would like to be able to exclude:
  • plants and animals other than microorganisms;
  • diagnostic, therapeutic, and surgical methods for the treatment of humans or animals; and
  • essentially biological processes for the production of plants or animals, other than non-biological and microbiological processes for such production.

These exclusions go beyond what is currently in section 16 of the New Zealand Patents Act 2013. The current provisions relate to humans only. Are we going to see New Zealand law amended to exclude patents for diagnostic, therapeutic and surgical method for the treatment of animals?

New Zealand wants to amend the text to require parties to 'provide for the protection of plant varieties either by patents or by an effective sui generis system or by any combination thereof'. This makes sense. Australia and New Zealand already have separate legislation for plant varieties.

Computer programs

All parties agree that they should make patents available for any invention in all fields of technology.

One of the parties to the agreement, New Zealand, has taken the position domestically that a computer program is not an invention. Section 11 of the New Zealand Patents Act 2013 says so. The logic is that if you assume that a computer program is not an invention in the first place then you don't have to make patents available for it.

As I have said in an earlier post, New Zealand will continue to grant patents for inventions that make use of or involve a computer program. It is the underlying technical function of the code that is patentable, rather than the code itself. New Zealand will continue to allow patents for technical functions that software code causes a processor to perform. New Zealand will continue to grant patents for computer-implemented inventions.

So what do other countries think? Are software patents a huge problem elsewhere? Is New Zealand's approach the way forward that every other country will rush to adopt?

Well, Mexico proposes an exclusion for:
'diagrams, plans, rules and methods for carrying out mental processes, playing games or doing business, and mathematical methods as such; software as such; methods to present information as such; and aesthetic creations and artistic or literary works'.
You can read into that what you will. No other countries, even New Zealand, seem to want a specific exclusion for computer programs in the text of the treaty. This seems strange. If New Zealand has adopted this exclusion based on defensible sound policy, then why not join Mexico and suggest that this exclusion be included in the treaty text? Maybe the exclusion is not based on defensible sound policy.

Either the parties to the treaty (other than Mexico) have no issue with computer-implemented inventions. Or they each consider that the issue can be dealt with under their existing frameworks.

Further steps

I guess we wait and see the outcome of the next round of talks. There doesn't seem to be anything surprising or alarming in the approach of the parties to patentable subject matter. It's simply a matter of sitting back and waiting for the next leak.

Photo courtesy of author Rick Galvan under Creative Commons licence.

Wednesday, November 20, 2013

Black hole expenditure

Puppies We each have our own version of a black hole. In my home I'm sure there is a black hole that removes random items from my kids' LEGO sets, last season's garments from my wife's wardrobe, and random socks from my sock drawer.

The Inland Revenue Department (IRD) has yet another version of a black hole. Black hole expenditure is defined in the discussion document as:
'business expenditure that is not immediately deductible for tax purposes and also does not form part of the cost of a depreciable asset for tax purposes, and therefore cannot be deducted over time as depreciation'.

Patents and plant variety rights

There is a proposal to allow depreciation of capitalised development expenditure that:
  • relates to an invention that is the subject of a patent or patent application; or
  • a plant variety that is the subject of plant variety rights.

Capitalised development expenditure will be allowed to be depreciated over the legal life of the asset to which it relates.

It's good that the IRD is consulting on this issue. They seem to have forgotten about registered designs (design patents). Those who work with them know that a significant amount of R&D cost is spent on technology for which registered design protection is obtained, or at least applied for.

Unsuccessful R&D

Some capitalised development expenditure may not give rise to a valuable asset. A valuable asset here is one that is depreciable for tax purposes. Or an asset that is non-depreciable for tax purposes because it does not have a finite useful life that can be estimated with a reasonable degree of certainty (eg know how).

The discussion document outlines a proposal to allow a person a tax deduction for capitalised development expenditure they have incurred if:
  • the intangible asset has been derecognised prior to it earning income;
  • the person intended that the expenditure would lead to an item of depreciable intangible property; and
  • no other deduction has been allowed.

Getting the incentives right

There's a risk of perverse incentives here. The discussion paper notes that:
'allowing immediate deductibility of unsuccessful capitalised development expenditure would create a perverse incentive for taxpayers not to complete marginal projects because, when the value of exploitation is low or uncertain, immediate deductability of unsuccessful capitalised development expenditure may be preferred by the taxpayer over depreciation of successful capitalised development expenditure.'
This has got to be weighed up against the greater risk that:
'businesses may be incentivised to complete projects that (ignoring tax) have been discovered to be inefficient, simply to avoid black hole treatment of sunk capital expenditure'.
My view is that abandoning inefficient projects is a prudent thing to do. It's a hard thing to do. A bit like drowning puppies. But it has to be done. I can't see any perverse incentive in doing that.

Further steps

The IRD is looking for submissions on the proposed reforms by 17 December 2013. I expect that feedback on the reforms will be largely positive from those doing R&D. Supporting business growth and innovation by changing 'black hole' tax treatment of R&D expenditure can't be a bad thing.

Photo courtesy of author Niall Kennedy under Creative Commons license.

Sunday, November 17, 2013

New Zealand prepares for SAP & SEP

e-commerceIntellectual property law is replete with acronyms. Commerce Minster Craig Foss recently added two more. We are now going to have a single application process (SAP) and a single examination process (SEP) for New Zealand and Australian patent applications.

The press release is a little bit tabloid in that the title 'Single trans-Tasman patent application approved' doesn't quite match the story. There is no single patent application. Merely a process for filing two applications.

A recent Cabinet paper and Regulatory Impact Statement (Cabinet paper) seeks approval to implement the SAP and the SEP for New Zealand and Australian patent applications, and to develop a bilateral arrangement between the two countries.

Single Application Process (SAP)

New Zealand and Australia are two separate countries. They have separate application processes. Under the new regime, patent applicants will continue to file separate patent applications in each country if that is what they want to do.

If the SAP goes ahead, patent applicants wanting to cover both countries will have the option of using a single SAP portal in New Zealand or Australia to file a pair of applications. The New Zealand application will be referred to the Intellectual Property Office of New Zealand (IPONZ) for examination. The Australian application will be referred to IP Australia for examination.

One of the benefits of the SAP stated in the Cabinet paper is cost savings to applicants. The information required to file the pair of applications will only need to be provided once [para 99]. We are told that this will provide data entry time savings to patent attorneys which may result in cost savings to applicants through reduced patent attorney fees [para 100].

There will be set-up costs and ongoing administrative costs that are not quantifiable [para 101]. Taxpayers are reassured that these costs are going to be recovered through increased patent application fees. Details of fee increases are not yet available, but are an important factor in whether or not there are in fact cost savings to applicants.

Single Examination Process (SEP)

If implemented, the SEP will see corresponding applications referred to a single patent examiner who will examine both applications simultaneously. The examiner could be based in either New Zealand or Australia [para 26]. The applicant does not choose. The examiner assigned to a pair of applications will be determined by agreement between IP Australia and IPONZ [Recommendations #3).

The SEP ends when the pair of applications has been accepted or refused [para 27]. All processes following acceptance or refusal (including grant) will be handled separately by each office. Hence there will still be separate New Zealand and Australian patents granted.

The Pilot Programme

The SAP is likely to be rolled out in 2015. An SEP pilot program will run for 18-24 months once the SAP is implemented. The SEP pilot program will then be subject to a review to determine whether it is worthwhile to implement fully. We will then be either fully implementing SEP or pulling the plug.

We haven't been told how corresponding applications will be selected for the SEP pilot program. The Cabinet paper states that the pilot program will involve 'a small number of corresponding applications' [128] and that it will run long enough to 'ensure that there are sufficient applications processed to provide meaningful information' [129].

There is no detail available yet about the selection criteria that will be applied to pairs of patent applications in order to enter the SEP. Will patent applicants elect to enter the SEP? Or will SEP be imposed on them? Is filing under SAP a pre-requisite for entry into the SAP? Or are they independent?

The legislation proposed empowers IP Australia and IPONZ to proceed without applicant consent. I guess it will depend on the level of interest in SEP. If there is not a large uptake then pairs of applications will be placed in the SEP program against the wishes of applicants.


About one third of Australian patent applications have a corresponding application in New Zealand. Examination timeframes in Australia are longer than those in New Zealand. IP Australia will be able to utilise IPONZ examination resources 'to ensure operational efficiencies can be maintained at least over the medium term' [para 31].

So which cases will IP Australia offload to IPONZ?

The New Zealand Patents Act 2013 will impose a change in examination to include examination for inventive step as well as novelty. IPONZ examiners will require significant training to examine patent applications under the new legislation [para 34]. This would suggest that suitable candidates for SEP would be 'easy cases', national phase entries with no inventive step issues.

As noted in the Cabinet paper, there will be significant differences between New Zealand and Australia on the criteria for granting a patent. The New Zealand Act contains legislative exclusions for methods of medical treatment, methods of diagnosis and computer programs. The claims in each of a pair of patent applications may be completely different.

I always thought that the invention is defined by the claims. A pair of applications with different claim sets relate to a different inventions. This would suggest that suitable pairs of applications are ones that claim subject matter in chemical, mechanical and electrical art areas that do not fall within New Zealand's excluded categories.

A further point to consider is that IPONZ views the SEP as an opportunity to leverage off IP Australia's examination experiences. This in turn will make it easier to bring IPONZ examiners up to the requisite standard for examining patent applications [para 113]. IPONZ intends to hire new examiners to deal with increased work volumes [para 118].

Patent applicants with a pair of applications will need to weigh up the benefits of entering the SEP program against the risk that their patent applications will be used to train IPONZ examiners. I can certainly see the benefit for IP Australia and IPONZ of SEP. It is the advantage for patent applicants that is not immediately clear to me. The SEP pilot program will be an interesting one to watch.

Photo courtesy of author Garfield Anderssen under Creative Commons license.
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