- Australian stock valuations are probably depressed by low patent activity.
- Australian companies hold no defensive patent portfolios to assert in defence against corporate behemoths moving into Australia.
- Australian company boards may be liable for patent infringement risk management.
As recently noted by Minister for Foreign Affairs Julie Bishop, Australia is headed down a path where by 2050, it will no longer be in the G20. The Australian Financial Review (AFR) reported that:
Ms Bishop said she found it “confronting” to read a recent PwC report that warned Australia – currently ranked the 13th largest economy – would be lucky to remain in the top 30 countries by 2050.
“We are living in an era of profound change, arguably more profound than in earlier phases of the Industrial Revolution.” she said.1
Most would agree that Australia’s economy is in a post-industrial phase in which the mining and manufacturing in Australia is declining.
A post-industrial economy refers to a period of growth within an industrialized economy or nation in which the relative importance of manufacturing reduces and that of services, information, and research grows.2
In this post-industrial economy, the pace of technological advancements and their disruptive effects is increasing.
Dr Francis Gurry, the Australian Director General of the World Intellectual Property Organization, in a recent speech in Melbourne, Australia, confirmed that the pace of technology advancements and its disruptive effects is increasing. He argued that three things have changed in this post-industrial economy — being scale, speed and continuity of disruption. He said:
… with scale, of course, this is the feature that’s commonly described as the knowledge economy. We see that knowledge as a component of production and distribution is much more predominant than it ever used to be and that all of you are familiar with the transition from physical capital … to intellectual capital being increasingly the source of wealth generation.
The second thing, I think, besides scale which is a difference from previously, is speed. … A British intellectual, the late Tony Jud, said that we are losing our social memories. Because things happen so quickly that we do not have the time to absorb the change. In the case of the industrial revolution we had 150 or 160 years to absorb what it meant. And now things happen so quickly we can’t remember what was the former technology.
And then I think the third thing, the last thing I would mention is described variously, you know one popular term is the fourth industrial revolution, but what we are seeing at the moment is the continuity of change and disruption caused by the first two factors, the scale of the importance of knowledge in the economy on the one hand and the speed of change. And so we see that with robotics, artificial intelligence, advance manufacturing, we see it in the life sciences, in the digital revolution, and all over the place we have significant disruption.3
Speaking on the same point, the president of the Federal Reserve Bank of San Francisco, John C Williams, in a recent speech at the University of Technology Sydney, noted that in the earlier phases of the Industrial Revolution, inventions such as electricity and the combustion engine brought society strong productivity gains. He noted that in this later phase of the Industrial Revolution, the post-industrial phase, the innovation of artificial intelligence might rival the influence of electricity and the combustion engine on humans’ output capacity. He said, “potentially, that could be revolutionary in terms of our productivity … Artificial intelligence could be the most revolutionary force affecting productivity in the United States economy”.4
The prevalence of technology in today’s world is also evident in the fact that the world’s five biggest corporations by market capital are US tech corporations: Apple, Alphabet (Google), Microsoft, Amazon and Facebook.5 Stock market players who hedge bets on the future have a strong appetite for technology. For example, in an AFR recent stock market pick opinion piece by Sally Patten, she argued that growth is in the US large cap technology stocks, not Australian large caps. She compared the top five US large caps to the top four Australian large caps in a chart sourced by Financial Review, Bloomberg below:
|US companies||Sector||Market cap|
|AU companies||Sector||Market cap|
She noted that Apple, Alphabet (Google), Microsoft, Amazon and Facebook are growth stocks while Australian bank stocks provide little or no growth because they are a mature sector and are only trying to defend their positions against each other. Patten also noted there are a few Australian stocks worth considering and acknowledged that:
Australia is home to world-class companies, many of which are essentially technology companies and some of which are a decent size. Credit Suisse points to healthcare companies CSL and Cochlear and gaming machine maker Aristocrat as (relatively) large companies that are heavy users and developers of technology.6
As reported recently in the AFR, Evans & Partners chairman David Evans discussed his firm’s conversion to tech stocks. Raymond Tong, a top stock picker for Evans & Partners new global disruption fund, says that high-priced US technology stocks are a far better bet than comparable Australian businesses. Tong expects that despite the multi-year run in the big five US tech stocks, the fundamentals looked good and the growth outlook remained strong. Tong also said that “there is no doubt things like retail, banking, heath and insurance are all going to be disrupted”.7 That is, Evans & Partners will be investing in US bank stocks but not in Australian bank stocks.
Stock market valuations can be directly correlated to companies’ patent positions. The Ocean Tomo 300® Patent Index (OT300) is an index based on the value of intellectual property, and represents a diversified portfo- lio of 300 US companies that own the most valuable patents relative to their book value. From its inception 9 years ago through 3 November 2015, OT300 has outperformed the S&P® 500 by 1620 basis points. “The sectors with the greatest weight in the index as of the recompilation date is Information Technology, Healthcare, and Financials with 33%, 15% and 14% respectively.”8
An index like OT300 would not be relevant with respect to the Australian Securities Exchange (ASX) because Australian companies have a very low patenting rate. Other knowledge-based post-industrial economies, however, have high patenting rates. The US, the EU and Chinese companies are participating in the worldwide knowledge-based economy trade IP rights veraciously – buying, selling and licensing large patent portfolios.9 Notably, in 2015, 2.9 million patent applications were filed worldwide and the growth rate was 8% for patent applications over the previous Oddly though, Australia’s patenting rate has not changed in 20 years. Australia’s patenting rate is stagnant while worldwide patenting rates are soaring.10 In fact, foreign entities account for over 90% of Australian patent filings at IP Australia.11 The result is that 90% of all Australian patents are owned by foreign entities, 5% are owned by Australian universities and public entities, and a mere 5% are owned by Australian business.12 For many years, foreign corporations have been using the Australian patent system to shore up their offensive patent portfolios in Australia, arguably to use against Australian companies.13
Again referring to Ms Patten’s acknowledgment that tech-heavy Australian stocks such as Cochlear and Aristocrat are growth stocks, and that the OT300 shows that patent valuations are a key indicator to US stock market valuation, it is relevant that both Cochlear and Aristocrat have strong patent activity. Notably, the United States Patent and Trademark Office publishes a list of the top 1000 patent assignees (grantees) yearly, and Cochlear and Aristocrat are on this list. Even though Australia’s patenting rate is extremely low compared to other post-industrial economies such as the US and Europe, actually, four Australian entities are routinely on the list: Aristocrat, Cochlear, ResMed and Commonwealth Scientific and Industrial Research Organisation (CSIRO).14 These Australian entities occupy the following slots in the list of companies who obtained the most US patent grants in 2016:
- Ranked at 618, Aristocrat Technologies obtained 59 patents.
- Ranked at 688, Cochlear obtained 53 patents.
- Ranked at 779, ResMed obtained 47 patents.
- Ranked at 853, CSIRO obtained 42 patents.
Therefore, Ms Patten’s acknowledgment that these particular Australian tech companies are growth companies aligns with the theory of the OT300 that tech companies who own valuable patents relative to their book value perform the best. Given that, it is concerning that she is critical of Australian banking stocks while in the meantime Evans & Partners is investing heavily in US banking and financial services company stocks. Notably, Australian banks hold virtually no patent portfolios.15
Not surprisingly, American banks and financial services companies are investing heavily in technologies such as blockchain and are patenting those technologies at a very high rate. For example, The Economist recently published an article entitled “A rush to patent blockchain is a sign of the technology’s promise”. It said that:
Heated fights over intellectual property are nothing new in promising technology markets. But given that the blockchain is expected to shake up everything from the way precious diamonds are safeguarded to the way shares are traded, the legal fights could be especially fierce.
Financial firms are among the most assiduous filers: MasterCard, for instance, is seeking four payment-related patents; Goldman Sachs has put in for one outlining a distributed ledger that can process foreign-exchange transactions.16
On the same point, Bloomberg Technology published the article “Big banks are stocking up on blockchain patents”. It recently reported that some of the biggest names in business, from Goldman Sachs to Bank of America and Mastercard, have quietly patented some of the most promising blockchain technologies for themselves. Through mid-November 2016, the number of patents that companies have obtained or said they’ve applied for has roughly doubled since the start of the year. In finance alone, blockchain’s adoption could create a multibillion-dollar market in the coming decade from just tens of millions today, according to Gil Luria, an analyst at Wedbush Securities.17 Yet another publication, Law360, reported on the rush to patent blockchain applications. It identified that some of the:
… most well-known companies appear in the patent filings, such as Amazon.com Inc., Apple Inc., Bank of America Corp., Facebook Inc., Dell Inc., Goldman Sachs Group Inc., IBM Corp., MasterCard Inc., Visa Inc., Wells Fargo, and many more.18
Apparently, Australian entities are also developing blockchain technologies. According to Treasurer Scott Morrison, as reported by the AFR, Australia is a leader in developing blockchain technology. Morrison stated that “the benefits of this technology could be profound — delivering productivity, security and efficiency gains. We should all be interested in blockchain developments and its potential application, right across our economy”.19 However, as noted above, Australia’s patenting rate is stagnant. Arguably, without patent activity, the gains in technology will not be reflected in stock prices and therefore, the effects on the Australian economy by its blockchain advancements will be stunted. Accordingly, Australian banks and financial services using blockchain will still not be considered growth stocks.
Not only are American banks and other financial services companies stocking up on blockchain patents, they are patenting other fintech applications at high rates as was reported by The Wall Street Journal. It reported that “since 2013 large financial institutions have applied for at least 2,700 patents in hot areas such as blockchain, analytics and cybersecurity, a surge of 83% from the prior three years”.20 In another article by the Corporate Counsel, it was reported that an analysis:
… from London law firm EMW shows a drastic spike in global patent filings related to fintech in 2016 compared to 2015. Last year, the number of fintech filings totaled 9,545–500 more applications than the year prior.
The number of fintech patent filings was up by 49 percent from five years earlier in 2011, when there were 6,399 filings, according to EMW’s research sourced from the World Intellectual Property Organization.21
Not only do Australian banks hold no patent portfolios,22 which as noted arguably diminishes their prospects for valuation growth, they are also in a precarious position as global corporate behemoths set their sights on Australia, as it is well known that Amazon already has. Not only will valuation growth of Australian banks remain stagnant without substantially increased patent activity, but they will not be able to utilise technologies covered in 90% of Australian patents owned by the likes of Amazon, Apple, Bank of America, Facebook, Dell, Goldman Sachs Group, IBM, Mastercard, Visa, Wells Fargo and many more. Most concerning is that Australian boards, including bank boards, have ignored patent trends which could be a dereliction of their fiduciary duties.
In what may be an example of Apple threatening to sue Westpac for patent infringement, Westpac just announced that it cannot use a keypad feature on its Apple payment app that would make its banking app more appealing to millennials, but it would not provide the reason.23 Most likely, the reason is that the technology is proprietary to Apple and therefore litigious Apple may have threatened to sue for patent infringement. Westpac holds one granted Australian patent.24 Without at least a defensive patent portfolio, Australian companies assaulted by these global corporate behemoths with new stakes in Australia have nothing to bargain with.
It is well known that as Amazon moves into Australia, retailers are playing technology catch-up to avoid losing market share. However, as a global behemoth, not only is Amazon’s strength in its technology, Amazon is also one of the world’s most prolific patentees, owning well over 10,000 worldwide.25 Therefore, there is a substantial risk that as Australian retailers innovate to keep up with Amazon, they may also be installing new technologies which infringe Amazon’s substantial Australian patent portfolio.26 When Amazon arrives in Australia, it will have standing to sue for patent infringement. Australia’s largest retailers such as Coles, Woolworths, JB Hi-Fi and Harvey Norman which own virtually no patent portfolios will have nothing to bargain with defensively.27
Any other industry that relies on technology, for example businesses in the Internet of Things (IoT) of which there are a large number in Australia,28 should not be ignoring patent trends in their sectors. Notably, patenting in IoT is also extremely high, and the value of IoT patents is evident in that such patents are in high demand in the secondary patent market.29 In ignoring worldwide patenting trends, Australian company boards may find themselves facing shareholder lawsuits for mismanaging the risk of patent infringement if and when the foreign entities who own 90% of Australian patents assert them against Australian companies. Since intellectual property is important in the US, there have been successful shareholder cases brought against US company boards for mismanagement of IP.30 Australian company boards should take note of these facts.
As discussed above, the president of the Federal Reserve Bank of San Francisco, John C Williams, predicts that artificial intelligence will revolutionise our society in the way electricity and the combustion engine did in the early stages of the industrial revolution. This notion has not been lost on IBM. Again, referring to the top 1000 US patentees list for 2016, IBM has been at the top of the list year after year. In 2016, it received 8088 patents where more than 2700 of them stem from artificial intelligence and cognitive computing work.31 Its IP licensing business in 2016 generated $2 billion.32 The importance of knowledge in the economy and the speed of change, as above noted by Dr Gurry, is driving spectacular increases in worldwide patenting activity.33 Emerging technologies such as blockchain, artificial intelligence, IoT and fintech are at the forefront of the patent activity increase.34 However, since Australia’s patent activity is stagnant, its economy cannot benefit from the capture of innovations as transferrable intangible assets — in particular, patents — in the way other post-industrial economies are doing. In Australia, high growth companies ResMed, Cochlear and Aristocrat are the exceptions. Regardless of Scott Morrison’s prediction about Australian blockchain innovations, without a simultaneous quest to drive patent activity, Australian innovations in blockchain or any other emerging technologies will have little effect on the Australian economy. In fact, utilisation of these technologies in Australia may backfire if patent landscape analyses are not performed prior to implementation. Australian companies may be hindered from implementing their technological advancements, as Westpac most likely has been because of the proprietary position of litigious Apple and Westpac’s lack of a defensive patent portfolio. Without a major shift in the Australian cultural attitude toward the acquisition of IP wealth so that it can accumulate patents and therefore participate in the worldwide knowledge-based economy, there is a strong chance that the worries of Minister Bishop of losing Australia’s international economic standing will come to fruition, at least in part by Australia’s failure to capture its innovations in patents.
- A Tillett “Embrace change to stay in G20, warns Julie Bishop” The Australian Financial Review 19 June 2017 www.afr.com/news/embrace-change-to-stay-in-g20-warns-julie-bishop-20170619-gwtszx.
- Post-industrial economy, available at https://en.wikipedia.org/wiki/Post-industrial_economy.
- F Gurry, “Knowledge, Property and Power” speech delivered at the Australian Institute of International Affairs (AIIA) Victoria Melbourne, Australia (17 November 2016) www.wipo.int/about-wipo/en/dgo/speeches/.
- J Sier “Artificial intelligence could be the answer for productivity woes” The Sydney Morning Herald 26 June 2017 www.afr.com/news/economy/artificial-intelligence-could-be-the-answer-for-productivity-woes-20170626-gwykol.
- Above n 3.
- S Patten “Growth investors should take a long, hard look at the US market” The Australian Financial Review 6 June 2017 www.afr.com/personal-finance/shares/growth-investors-should-take-a-long-hard-look-at-the-us-market-20170602-gwj6rrl.
- J Frost “Tech boom has a long way to run: Evans & Partners” The Australian Financial Review 26 June 2017 www.afr.com/business/banking-and-finance/financial-services/tech-boom-has-a-long-way-to-run-evans–partners-20170622-gwwf9i.
- Ocean Tomo 300® Patent Index, available at www.oceantomo.com/ocean-tomo-300/.
- P Chavez “Post-industrial economies invest in intangibles to protect competitive advantage” (2017) 30(5) IPLB
- Above n 9.
- Above n 9.
- Above n 9.
- AusPat, available at http://pericles.ipaustralia.gov.au/ols/auspat/do.
- IFI Claims Patent Services, Top 1000 US Assignees for 2016, 9 January 2017, www.ificlaims.com/rankings-top-US-assignees.htm.
- Espacenet Patent search, available at https://worldwide.espacenet.com.
- “A rush to patent blockchain is a sign of the technology’s promise” The Economist 12 January 2017 www.economist.com/news/business/21714395-financial-firms-and-assorted-startups-are-rushing-patent-technology-underlies.
- O Kharif “Big banks are stocking up on blockchain patents” Bloomberg Technology 21 December 2016 www.bloomberg.com/news/articles/2016-12-21/who-owns-blockchain-goldman-bofa-amass-patents-for-coming-wars.
- N Rosario, The Emerging Blockchain Patent Landscape, 10 March 2017, www.law360.com/articles/899815/the-emerging-blockchain-patent-landscape.
- R Johnston, CSIRO Says Australia Needs To Lead The Way In Blockchain Technology, 9 June 2017, www.gizmodo.com.au/2017/06/csiro-says-australia-needs-to-lead-the-way-in-blockchain- technology/.
- K Nash “Big banks stake fintech claims with patent application surge” The Wall Street Journal 10 May 2016 https://blogs.wsj.com/cio/2016/05/10/big-banks-stake-fintech-claims-with-patent-application-surge.
- S Forshee “Global patent filings spike in fintech” Corporate Counsel 19 April 2017 www.corpcounsel.com/id=1202784052214/Global-Patent-Filings-Spike-in-Fintech.
- Above n 15.
- P Smith “Westpac shock as Apple bans its messaging payments app after three months” The Australian Financial Review 26 June 2017 www.afr.com/technology/apps/westpac-shock-as-apple-bans-its-messaging-payments-app-after-three-months-20170622-gww8lf.
- IP Australia, available at www.ipaustralia.gov.au.
- Above n 14 — Amazon was 14th on the list of Top 1000 US Patent Assignees with 1662 grants in 2016; Above n 15.
- Above n 24.
- Above n 24.
- Seizing the IoT opportunity for Australia, available at www.iot.org.au/.
- What are the hottest patents? IoT , available at www.blueironip.com/iot-patents-hot/.
- I Donner “Fiduciary duties of directors when managing intellectual property” (2016) 14(2) Northwestern Journal of Technology and Intellectual Property 203 http://scholarly commons.law.northwestern.edu/cgi/viewcontent.cgi?article=1254&context=njtip.
- S Shankland, Artificial Intelligence Keeps IBM Atop 2016 Patent List, 9 January 2017, www.cnet.com/news/ibm-top-2016-us-patent-list-artificial-intelligence-intel-amazon/.
- The company reported income of more than $500 million in the fourth quarter from IP, which includes licensing deals and royalty collections. That was up from $193 million a year earlier. IP income in 2017 should remain about the same levels as 2016 — J Cao “IBM margins narrow while it struggles to end sales slide” Bloomberg Technology 20 January 2017 www.bloomberg.com/news/articles/2017-01-19/ibm-fourth-quarter-earnings-2017-outlook-beats-estimates.
- A total of 2.9 million patent applications were filed worldwide and the growth rate was 8% for patent applications over the previous year — Intellectual Property Statistics, available at www.wipo.int/ipstats/en/.
- While Australian banks are seen by Ms Patten as a mature sector with no growth prospects.