"The patent system adds the fuel of interest to the fire of genius, in the discovery and production of new and useful things."

Abraham Lincoln

Abstract

Notwithstanding public statements by many individuals, obtaining intellectual property (IP) rights is not the objective that will allow Canadian industry to thrive in the future. The objective for each company should be identifying and delivering relevant innovations that will appeal to consumers and which will also survive in the high-pressure environment of world competition. Surviving in business in the future will increasingly become more of a challenge due to the increasing competence of foreign competitors.

Establishing IP rights is a bonus that can make a few companies richer than they would otherwise have been. But most winners will succeed because of their focus on a consumer-based target objective - delivering customer-satisfying products at prices that will displace competitive alternatives - and not because of IP. Obtaining IP rights should not displace the focus from providing value to customers. To survive, that value should be sufficiently innovative so as to place companies ahead of competitors. Businesses will have to continue to innovate in order to stay ahead of competitors. If some businesses can acquire the comfort of meaningful IP protection, that will be a plus. However, a business has to have good fundamentals to survive and to thrive.

Introduction

During the last 70 years, Canada and the United States have had robust economies that have made them prominent in world trade. But this advantageous situation is coming to an end. We now live in a global marketplace where suppliers worldwide are competing for consumer purchases in every market.

Canadian businesses must realize that there are now competitors in other countries that are adept at delivering product for purchase by Canadian consumers. The competition has perfected the art of new-product refinement and innovation. They understand the need to present customers with a product that will receive votes in the form of purchases. As they become more sophisticated, more and more of them will avoid slipping into the trap of “cheapening the product.”

Imports from abroad have replaced many nationally produced products across broad market sectors, including apparel, consumer electronics, and the notorious example of automobiles. These changes are often said to have arisen because such goods are coming from low-wage countries. But a further explanation cited by commentators is a failure to innovate on the part of Canadian companies. Anne Golden, President and CEO of The Conference Board of Canada, recently stated that: "It is widely understood that in a high-wage economy like Canada’s, the only route to higher productivity and competitiveness in our global economy is innovation… Canada’s productivity gap is rooted mainly in a failure to innovate and, in particular, our failure to commercialize our research, our development, our inventions… We all need to internalize the reality that Canada is becoming less competitive in our global economy."

To address these challenges and promote innovation, some suggest that we must convert to a knowledge-based society and that patenting should be used as a key metric for success. But these formulas, which focus on IP, cannot support the Canadian economy as a whole and ensure commercial success across its full spectrum.

An important reality on the issue of patents in Canada is acknowledged in a posting on innovation in Canada by Mount Allison University, which concludes: "Patents are considered one indicator of creativity, and reflect a country's capacity for invention. Each patent represents a potential innovation. As a source of new technology, however, Canada is relatively insignificant. We create only 0.3% of the world's patented inventions. Residents of other countries, mainly the United States, file over 90% of the patent applications in Canada. Conversely, Canadians take out relatively few patents abroad."

It is important to appreciate that Canada is therefore not going to be the only source of patented inventions. The bulk of Canadian patents, 90% in fact, are issued to such foreigners. Canadian businesses must therefore operate in an environment where 90% of advances addressed by Canadian patents are available to foreign competitors and cannot be adopted by Canadians, or can only be implemented with the approval of foreign patent owners.

But what accounts for this imbalance? Canadians are not particularly less inventive than most other countries. However, it is a combination of inventiveness and patent consciousness that counts, plus the weight of numbers. Foreign domination of our patent system simply by reason of population size is inevitable. Even if Canadians were twice as inventive and twice as active in filing patents, we would always be minor participants in the patenting process in our home country. Further, foreign domination of the patent system is going to increasingly coincide with the growth of competition originating from abroad. We may now have reached a tipping point, and increased patenting efforts by Canadians will not make this reality go away.

The counterpart to these statistics is that Canadians who do make inventions are entitled to patent them around the world. But will that make a difference? The best that can be expected is that some smart and lucky few who obtain meaningful IP protection will turn out to be big winners. Meanwhile, the rest of Canadian industry will have to compete on the basis of the merits of the products and services that they deliver to the marketplace, products and services that are free of IP claims held by others.

Is R&D the Answer?

We hear a lot of talk today about the need for R&D, and how Canadian industry is behind in investing in this activity. This is often associated with references to "Science and Technology." Both are touted as the panacea for the Canadian industrial sector in the future. But is R&D enough?

In the 1970s, Senator Lamontagne of the Canadian Senate chaired a committee on the future of science and technology and its relevance to Canadian industry. One of the less popular recommendations of the Lamontagne Report was that science and technology in Canada should be directed towards improving the performance of the Canadian industrial sector. Researchers at universities and institutes objected that this would undermine "blue sky" research and the benefits that follow from undirected scientific investigation. But there was also a recognition that Canadian industry needed to be supported by science and should be encouraged to apply and exploit the latest developments as part of their role of supplying goods and services within Canada and in world markets. The benefits of R&D can be realized if it drives innovation.

In a highly competitive marketplace, innovation can provide a temporary refuge from the pressures of competition. There are advantages to getting there first, but these advantages may not last. The nature of a free marketplace is that others will also proceed towards innovation and arrive more promptly than the market pioneer may wish to see happen. If an innovation is able to support patent protection, then it may provide an extended period of relief from the pressures of competition: 20 years from the filing date of a patent application. But 20 years is not forever and a single successful innovation coupled with effective patenting may not be enough.

Patents and Intellectual Property

Governments encourage the patenting of new technology so that Canadian industry can innovate, at least for a period of time, in an environment that is sheltered from competition. That is the fundamental premise of the patent system. An inventor will disclose his new concepts and the government will issue a certificate, which the inventor can then use to establish a new business. For a period of 20 years from the filing date of the patent application, no competitor is allowed to enter the market using the same invention. This is to allow a new industry to develop based on the original, novel, inventive concept.

Patents are a principal member of the group of rights called "Intellectual Property." This group includes a number of exclusive rights over intangibles associated with the marketing of goods and services. Other members of the IP class include registered design rights (for the look or shape of products), trademarks, and distinguishing guises (e.g. the distinctive shape of the Coke bottle), rights in trade secrets and confidential information, and copyright.

For patenting purposes, novelty has to be present in order for a specific feature of structure or more efficient procedure to receive protection. Sadly, good ideas often turn out to have been proposed previously. This is what is known as "prior art," which is everything that has been known previously. Patent protection may not be available for features that do not meet the novelty requirement. Even a perfectly valid patent can be of little real value if there are close alternatives already available in the marketplace. Thus the existence of viable alternatives in the prior art will greatly limit the scope of patent protection that can be obtained. Patents must never interfere with the prior art.

Among patents that have been issued, we hear of occasions when a patent generates enormous returns. The example of the $600 million settlement paid by Research in Motion to NTP Inc. in an American patent suit immediately springs to mind. Previously, Polaroid won a $1 billion judgment against Kodak Corporation and forced Kodak to withdraw from the instant camera market. These certainly represent successes for the owners of successful patent rights, but they are the exception.

As a general rule, most patents provide no return to their owners. The greater part of patented concepts is never embodied in products or services that are delivered to the marketplace. But even amongst commercially exploited patented technology, the level of payoff for the patent-owning manufacturer is only occasionally spectacular.

Patents Alone are Not Sufficient

Cases can arise where a valuable advance has been made, an innovation with a "have to have it" quality in terms of consumer appeal. In such cases, companies may be missing an opportunity to greatly enhance their profits. Patents can be pursued on a cost-conscious basis if care is taken to understand the value of the innovation in the context of the marketplace and the scope of exclusive rights that can be obtained. Typically, companies cannot expect their outside patent professional to make these critical judgments. Someone within the organization has to be "IP aware," and preferably, "patent smart."

However, merely obtaining patent rights is not enough to support success in the marketplace. To succeed, first there must be an innovation that is relevant to consumers. Then that innovation must be technically feasible and commercially practical in terms of the cost of its incorporation into a product. Additionally, the innovation must be able to compete against existing alternatives, and preferably future alternatives as they may arise. These are not characteristics that relate to patenting.

A patent is not a badge indicating that a product is good. It is merely an indication that the patent office concedes, conditionally, that a feature included in the product is new and inventive. It is up to the manufacturer of a patented product to ensure that the product, and the feature it contains, has sufficient appeal to consumers so that it will command a share of the market. Nobody buys a book because it is copyrighted. It is a misconception to believe that a product is superior because it is patented.

Patents and copyright cannot create success. But if a success occurs, they can make such a success more profitable. The challenge is to think of something appealing that can be protected so that no competitor will be able to come close for the balance of the term of protection. That is the goal if you wish to have the bonus benefits of enjoying exclusive rights. But exclusive rights are not essential. It is the customer appeal that counts. That is where individual companies can win when playing on the field of global competition. It is not likely that all Canadian companies can operate on this basis and be a winner all the time throughout the global marketplace. But there can be individual winners who choose to do it right.

The key is to provide the customer with a product that meets the customer's needs and has a commensurate level of quality and price to ensure the supplying company’s survival. In a competitive market environment, balancing the competing interests of price versus quality is always a challenge. The temptation is to compete on price, and this is the strategy that is pursued by many of the offshore competitors who are supplying product to Canada from low-wage home bases. But succeeding in competitive environments is not just about producing at a low price. You have to innovate and deliver true value to your customers.

Transition to a New Era

There was a time when North Americans thought they could continue to enjoy unending prosperity and unlimited advances in their quality of life. Unfortunately, there are limits to growth, and while there may not be limits to expectations, reality has an uncomfortable way of determining the future. This is not a prediction of the imminent arrival of a Dark Age in North America, but it is a recognition that survival will depend upon staying ahead of competitors in the world market environment.

Science and technology have a role to play, as do innovation and IP. But the best foundation for establishing and sustaining industries that will last is to adopt the following goal for being in business: caring for the interests of the customer and endlessly seeking new and better ways to address and meet customer needs before competitors from other jurisdictions achieve this goal first.

Canada may not, as a nation, be able to act as a major player in world markets for much longer. But if the adopted attitude is to continually seek improvement, then at least those companies that embrace such a policy will survive, and sometimes thrive.

Conclusion

The cry for Canadian businesses to generate more IP will not lead to a robust Canadian economy. Businesses that focus on delivering value to their customers efficiently, at prices that customers are willing to pay and that competitors cannot meet in selling equivalent product, will be the long-term survivors. The challenge is for industry to conceive of new and creative ways of generating products and services that incorporate such value.

IP is an embellishment on an underlying marketable product or service. It can enhance profits but will not, on its own, make companies succeed. The winners will succeed because of their focus on a consumer-based target objective and not because of the ownership of IP rights.

Obtaining IP rights should not displace the focus from providing value to customers. But once this objective is clearly in hand, every business should take care to identify IP rights that do have prospective value and every company should take reasonable steps to preserve those rights. If some can acquire the comfort of meaningful IP protection, that will be a plus. However, above all, a business has to have good fundamentals to survive and to thrive.