It’s only a few days since the Patent Box came into force (1 April 2013) and I am still wondering whether, and how, this new tax regime will affect the generally conservative attitude of UK business towards protecting its intellectual property.
Statistics consistently appear to show that UK applicants file considerably fewer patent applications per capita than their counterparts in many other European countries such as Germany, Sweden, Denmark, France, and Austria, not to mention countries further afield, such as Japan and the USA. Does this prove that we, as a nation, are no longer innovative? I refuse to believe it. I suspect however that the statistics show that we in the UK are more suspicious of using the patent system than those in other major industrial countries. The UK government certainly thinks this is the case; part of the reason for introducing the Patent Box regime was to encourage UK companies to invest in protecting their innovations, and thereby help them to compete more effectively in the global market.
The Patent Box offers UK companies the opportunity to considerably lower their tax bill for profits derived from patented products or processes. Some other IP rights also qualify for Patent Box tax rates. Companies that have, up to now, routinely protected all of their innovations are understandably delighted, but what about the companies who have previously adopted a more cautious approach to patenting? My initial view is that it will take some time for these companies to change tack, and that the initial driving-force to seek patents will come from financial departments at these companies applying pressure to technical departments.
Why are some UK companies currently reluctant to seek patents for their technology? The number one reason may simply be the cost of the patenting process. Number two may be the time that scientists and engineers need to spend talking to patent attorneys rather than performing their usual day-to-day activities. Busy people constrained by tight budgets frequently, and understandably, see patenting as a bit of a luxury.
A further reason may be the perceived cost of litigation. I have often talked to managers of companies who have expressed the view that patents are pointless to them because they can’t afford to enforce them. These concerns were considered by the government a few years ago when they set up the Patents County Courts, but the objection still exists.
A yet further reason for reluctance to use the patent system (and no doubt there are many others) may be that the concept of what an invention is seems to be “bigger” in the UK than in other countries. What do I mean? I mean that scientists and engineers that I talk to in the UK often appear to be embarrassed to lay claim to anything they perceive as a minor technical step, rather than a “big” groundbreaking leap in understanding. In fact, many commercially important inventions are incremental steps based on earlier inventions and concepts, and failure to protect such increments may often leave UK companies at a disadvantage.
So what can the Patent Box achieve? The regime is a financial incentive, so it doesn’t take a crystal ball to suggest that financial directors will be engaging with technical directors and asking which of their company’s products are protected by patents. If the answer is “none”, the next question will be how can we protect our products with patents? As products at many companies will evolve with time, scientists and engineers will come under pressure to identify incremental improvements that may allow the company’s next generation of products to fall within the Patent Box. Thus, there will be an economic impetus forcing technical people to re-consider their perception of what an invention is. With a clear economic impetus, time and money for protecting IP will routinely be allocated as an essential part of the business.
With patent portfolios becoming an economic necessity, other more traditional benefits of the patent system may become more apparent, such as the ability to stop competitors from using the best technology.
One final thought in this non-evidence-based musing. I think that the Patent Box may encourage UK companies to challenge patents granted to their competitors for purely economic reasons, and possibly increase litigation. Traditionally, a company may seek to invalidate a patent where there is an actual or perceived risk to the company’s freedom to operate commercially. Invalidity challenges are often solved by an agreement to take a licence. There may now be other economic reasons to challenge patents as the Patent Box comes into effect.
Imagine two UK companies, company A and company B, who both manufacture similar products and operate in the same commercial environment. Company A has Patent Box qualification for all of its products, but company B does not. Irrespective of whether company B wishes to use the patented technology of company A, company B is at a commercial disadvantage. A large proportion of company A’s profits will fall into the Patent Box whereas none of company B’s profits will. While the economic impetus for company B to develop its own patent protection for new products is clear, there may also be a commercial driving force to prevent company A from benefiting from the new tax regime. With no licensing option in such circumstances, the frequency of litigation may increase.
This article is for general information only. Its content is not a statement of the law on any subject and does not constitute advice. Please contact Reddie & Grose LLP for advice before taking before any action in reliance on it.