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October 30, 2013

The emergence of sovereign patents funds

Growing recognition of the strategic importance of intellectual property for domestic innovation raises the question of what the Canadian government can and should do to enhance Canadian competitiveness in this area. In particular, a strong focus has emerged related to the need to halt the exodus of valuable intellectual property from Canada.  A 2012 report  released by the Canadian International Council highlighted Canada’s intellectual property and technology deficit. Though understandably more taciturn, a recent report produced by the Standing Committee on Industry, Science and Technology also pointed to keep intellectual property in Canada.

Recently, my DEEP Centre colleague Dan Herman  (and others) have wondered whether Canada should follow the lead of a small number of other OECD countries by establishing a sovereign patent fund (SPF).  Patent funds, whether public or private, are intermediary entities that purchase or licence patents which they subsequently licence, sell, or utilize in litigation. Unlike similar private entities, the operations of sovereign patent funds  are motivated not only by revenue generation, but also by a strategic mandate to promote national competitiveness or protect domestic firms.

Though the model is relatively new and untested, SPFs appear to boast some significant benefits. Funds can serve as market makers by acting as intermediaries between producers and consumers. On the supply side, such funds provide an avenue for entrepreneurs, particularly those in start-ups or small to medium size enterprises, to more quickly monetize their patents. In doing so, they can help provide much needed financing to small entrepreneurs who may not have the capacity to pursue patent valorization on their own. Additionally, SPFs can help to increase patent utilization by purchasing, aggregating and licencing dormant patents. Given the public nature of much of Canada’s research and development funding, facilitating the use of dormant or under-utilized patents can be argued to provide a long-run economic benefit.

For buyers, these funds can help reduce transaction costs associated with locating sellers and assist in the navigation of increasingly complex patent thickets. SPFs can also broaden access to intellectual property resources on the part of domestic firms through non-exclusive licencing or the provision of preferential agreements. Such arrangements could be particularly advantageous to small and medium size enterprises.  Finally, SPFs can also play an important role in deterring or responding to aggressive litigation against domestic companies by foreign companies or patent trolls.

SPFs, however, are not a panacea. As yet, state sponsored entities have not conclusively demonstrated their advantages over similarly constituted private firms. Private firms such as RPX and Allied Security Trust, for example, already provide defensive services intended to deter and defend their members against patent assertion entities. In addition, some have raised concerns about the ability of SPFs to accurately assess the value of the patents they acquire. Evaluating a proposal for the creation of a pan-European patent fund put forward by the French Caisse des Dépôts, the EU expert group on patent valorization warned that such a fund could potentially “end up with a large number of valueless patents aggregated at high cost.” Resulting financial pressures could push SPFs away from a focus on supporting innovation and protecting domestic firms towards a more offensive strategy based on aggressive litigation.

Unlike their private counterparts, SPFs also raise geopolitical risks. Indeed some commentators, particularly within the United States, have already derisively labelled these entities as state-sponsored patent trolls. One US congressman described the rise of SPFs as a new form of protectionism.  Other commentators have argued that they are anti-competitive. The US government, for its part, has not adopted an official position on SPFs. The branding of these funds as patent trolls, however, could prove particularly damaging. Given that the Obama administration has recently heaped scorn on domestic patent assertion entities, the US does not seem likely to be favourably disposed to SPFs.

The position of SPFs within the international legal regime remains murky. Still, the existence and operations of these entities need not be illegal under international law for their actions to generate attendant costs. It remains to be seen, for example, how the US or other governments will respond to litigation undertaken by foreign SPFs against domestic firms, such as that recently undertaken by France Brevets.

For Canadian policy makers, this suggests a need to tread carefully. The creation of a Canadian SPF could potentially help stem the exodus of intellectual property from Canada and provide a competitive edge to Canadian firms. Properly conceived, a SPF could also provide a supplement for the venture capital funding that is often lacking in the Canadian context. These benefits could be erased, however, if the creation of a SPF drew the ire of our largest trading partner. As always then, Canada’s strategic national interest must be pursued with a careful eye to the reaction of the United States, however, this shouldn’t blind us to the changes afoot in the global economy and the race for innovation.

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