Patents are filed for a number of reasons, whether it be offensive or defensive. But, at some point, there should have been a commercial decision to file a patent to protect an invention that has resulted from research and development (R&D). For this reason, patent filing activity is often used as a proxy indicator for R&D activity. Increased patent filings mean greater R&D activity and, generally speaking, R&D activity brings many benefits to the economy.

IP Australia recently released its Australian Intellectual Property Report 2021 which provides an overview of filing data for patents. It also provides a good review of trade marks, designs, plant breeder’s rights, and a new section covering copyright. Without going into the Report in too much detail, growth in Australian standard patent filings for both residents and non-residents is modest compared to other jurisdictions, and growth in local Australian provisional patent filings is at best stagnant. While the Report focuses only on filings up to 2020, it still provides a relatively complete picture as, in all likelihood, the data for 2020 and 2021 will be seen as an outlier given the impact of COVID-19.

Patents are intangible assets that protect an invention. However, the form that the invention takes can be tangible, such as for a physical product, or intangible, such as for software or IT technologies. For inventions that can be easily reverse engineered, which are typically physical products, patents provide a useful form of protection. For this reason, patents have been used heavily over the past hundred or so years to protect physical, engineered inventions.

A patent also requires that the invention be described in full to be given a limited monopoly right afforded by the patent. But as patents are made public, the details of the invention defined in the patent is made available for all to see including competitors. For an invention that could not easily be reverse engineered, such as for processes or IT-related technology, the publication of a patent application discloses the core of the invention. This publication also removes the ability to use trade secrets to protect the invention.

Problems with patents and why trade secrets may be better

Over the past decade, the value and importance of software and IT-related technology have increased dramatically and now underpins many different technologies, from mining, transportation, logistics, medical and chemical fields. As the importance of software and ITC systems increases, there is a trend where this type of technology is becoming the “core” of many inventions. Take robotics for example, where software improvements can increase the performance of the robot itself even though the physical components of the robot have not changed.

From a patenting perspective, an issue with this is that the “core” of many inventions is tending towards technology areas that can have difficulty in obtaining patent protection. For example, over the past decade, it has generally become more difficult to protect software and some ITC inventions on the grounds of patent eligible subject matter. Similarly, the need to describe in full the invention in a patent has caused some issues with the validity of patents, especially those in the pharmaceutical and biotechnology fields.

An advantage of using trade secrets over patents to protect technology and inventions is that issues such as patent eligibility of technology and patent validity are removed. A properly protected trade secret also does not result in disclosure of the invention, which means it is more difficult for third parties to reverse engineer or otherwise learn about the invention. And as outlined in our trade secret series at Part 1, trade secrets can be used for a wide variety of intangible assets, much more so than patents.

The problems with using patent filings as a proxy for R&D activity

The above raises the question: if trade secrets are a better protection mechanism for some types of inventions, could this explain the sluggish patent filing data?

If an entity does not believe, either wrongly or rightly, that a patent will afford suitable protection for an invention when taking commercial considerations into account, then they are less likely to file a provisional patent application. But this doesn’t mean the entity hasn’t performed R&D, nor that the invention they have arrived at is any less valuable than a patented invention. The formulation for WD-40 is protected as a trade secret, yet it took significant R&D to arrive at the formulation for WD-40*. It would be difficult to argue that the R&D value of WD-40 is less because it isn’t patented.

The issue of measuring innovation is not new. A journal article by Paul Jensen and Elizabeth Webster in Australian Economic Papers^ concluded that:

  • Proxies for innovation based on registered IP have problems since certain types of registered IP tend to be used more intensively in some industries than in others.
  • Patents are infrequently used by firms working in technical fields that are not well covered by patent laws (e.g. services), where inventions can easily be protected by other methods, and where inventions are otherwise hard to imitate.
  • There is some evidence that the use of patents for process innovations is low.

The problem in trying to prove that falling patent filing rates is being offset by increased use in trade secrets is that there is no public information about the rate of trade secret usage. And given how trade secrets work, it is unlikely that there will be any information about this any time soon, if at all.

As technology and innovation generally move more from the physical world (traditional engineering) to the intangible world (software and ITC), the use of patent filing data as a proxy for R&D becomes less informative and useful. This isn’t to say that falling patent filing trends is not an issue – it very much is as there is a lot of technology that should be protected using patents – but perhaps it is not as big an issue as we once thought. To get a more complete picture of the level of innovation, we need to start to look beyond patent filing data.

*Fun fact: WD-40 got its name because it took 40 attempts to develop a water displacing formulation, hence Water Displacing formulation 40 aka WD-40.
^Another Look At The Relationship Between Innovation Proxies, Volume 48, Issue 3, September 2009, Pages 252-269.