Patents and the Crown

“Businesses in Canada planned to spend $15.6 billion on industrial research and development in 2011. That is five per cent higher than the $14.9 billion they had planned to spend in 2010, but still below the $16.8 billion they spent in 2007”

  • Canadian firms planned to spend more on R&D in 2011:  Spending relative to GDP declining, lags other OECD countries ; By CBC NewsPosted: Dec 9, 2011 11:24 AM ET, Last Updated: Dec 9, 2011 12:33 PM ET

 

Canada still has not recovered from Nortel. Nortel was a world leader in telecommunications and it put Canada on the map. So much so that Alcatel-Lucent, Cisco, Microsoft, RIM and Nokia are among the few companies that have bid for patents held by the former telecom giant. Around Nortel, other companies grew. Terry Matthews, became a billionaire by forming telecommunications companies Mitel and Newbridge Networks. He was quote, in cantechletter.com in their November 2011, as saying:

“‘The Nortel ecosystem is still there. There is still lots of research and development capability in Ottawa. But the ecosystem has a shelf life of seven years at most. This is a really good time to start a new company before the talent disappears.’

‘The company that once generated 20 per cent of Canadian research and development is gone’ said Matthews ‘Get over it.’”

The first time I realized the size of Nortel was when I was in Jamaica as a young lad. I turned over the phone my Grandmother had because it was similar to the one I had at home. It was a Northern Telecom phone.

This should not have been surprising because Nortel was big. Rivka Gewirtz Little – Senior News Writer for searchitchannel.techtarget.com in 2008 – wrote that “Nortel has a lot to live for: namely an installed base of 200 million equipped lines, great intellectual property and a loyal partner community.” Nortel serviced 150 countries. In February of that year, Nortel sill employed over 32,000 people worldwide. This included 6,800 people in Canada and 11,900 in the US. They still provided network infrastructure and communication services to customers across Asia including Mainland China, Hong Kong, Taiwan, South Korean, Japan, Singapore, Thailand, Malaysia, India, Pakistan, Australia, New Zealand and Turkey. Nortel was clearly a national technology champion and they spent more on Research and Development than any other firm in the country.  Yet, even when they were around, Canada did not spend as much per capita on Research and Development as most G8 countries.

A part of that comes from the fact that we do not spend a lot of money on defence spending. The US developed the Space Shuttle Programme and the Internet, in part, because they were looking for military solutions. Nuclear and Solar Energy Development can be traced back to military projects; so can most rocket, missile and other projectile projects.

Canada used to spend a lot of money on technological development. During the 1950’s, and 1960’s, governmental action was responsible for a lot of technological development. For example, the Shuttle Programme used Canadian Expertise. So did the F-14, F-15, F-16 and F-18 fighter jets. They are in fact related to one jet the AVRO Arrow. The Arrow actually was the basis for many Western jets. The Concorde – A British and French Co-Operative Venture – also used Canadian expertise. Cancelled by the Diefenbaker Government, the AVRO Arrow pushed aerospace knowledge, just as Nortel developed our telecommunication expertise.

Today, Canadian companies and governments are not doing the Research and Development required to maintain our society and level of wealth. The evidence of this assertion is clear. Canadian Economic Efficiency and Productivity is at historic lows. Since the mid 90’s, the Federal Government indicated that it would lower corporate taxes to increase Economic Efficiency. Yet, after cuts in the GST, individual and corporate taxes, we have not seen much of a movement in the numbers. In fact, on Jan.19, 2011, CTV News reported, in an article entitled “Strong loonie, low productivity restraining recovery “, that the Bank of Canada Governor Carney said, “We have not made the productivity gains that we would need in order to retain market share, let alone gain market share.”

While the Bank of Canada noted in a statement that “‘the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance are restraining this recovery in net exports and contributing to a widening of Canada’s current account deficit to a 20-year high’; the reality – as noted earlier – has been that Canada has had trouble with our productivity numbers for quite some time now.  With all of that being said, what are the policy consequences? What can a Liberal Government do with this knowledge? I would argue that we can turn knowledge into wisdom. Simply put, Canada has not been developing patents and useful Intellectual Property. So let us change this. Since, the market has failed in this respect, let us develop a solution. My suggestion is that the Crown develops Intellectual Property.

Like the Royal Canadian Mint (RCM), the Crown could create a corporation that creates valuable Intellectual Property. So, instead of coins, Intellectual Property would be created. Like the RCM, this crown entity could contract itself to Canadian Governments, Foreign Governments and Private Market Entities. For the purposes of this paper, this new entity will be called the Royal Canadian Intellectual Property Development Organization (RCIPDO). The RCIPDO would have two principles: to develop Canadian Economic Activity through research and to do so without any cost to the taxpayer.

While, any development costs would be fronted by the Federal Government, those same costs would be recovered through the provision of services: Through the creation of Intellectual Property. For example, RIM has several thousand patents. Those patents have a life time of between 5 to 50 years. These patents provide income because they can be “lent out” or “rented out” through licensing agreements. As we have seen through a variety of lawsuits, patents are precious and valuable.

For without patents, companies cannot make products. Samsung found that its products were removed, for a time, from Australia and Germany. This occurred when Apple sued them for copying their product line. Something, similar has happened to RIM, Microsoft and IBM. This is why a number of technology companies formed a consortium to buy Nortel’s last major asset: approximately 6,000 patents and patent applications encompassing technologies such as wireless, wireless 4G, data networking, optical, voice, Internet, and semiconductors. The patents were sold for $4.5 billion to a consortium including Apple,

EMC, Ericsson, Microsoft, Research In Motion, and Sony. So why not develop patents so that companies based in Canada, foreign or domestic, can have a leg up. If this is the case, our domestic economy will have a leg up.

So how would it work? As long as all companies have a chance to gain, most of our trade deals allow the Crown to create property. Companies with “substantial operations” in Canada – foreign or domestic –could be allowed to buy a license for cost or a minor profit. While, foreign companies that were not willing to set up shop here would be expected to pay the “full market cost” for licensing arrangements. As one can see, companies would make a decision based on a “cost benefit analysis”. In some cases, a company like Ericsson, Apple, Cisco or Airbus might set up operations in Canada to gain access to relevant Intellectual Property. While in other cases, firms based in Europe, Brazil, China, Russia and India might just pay to use Canadian Intellectual Property. They would pay for our scientists to do research. They would pay for our citizens to work in a great country.

This is important because, as a country, we need more economic infrastructure. This is the way that Canada can develop it. This is a way of improving our present economic system: a system that does not commit enough money to pure and applied research and technology. Universities are not designed to market, develop and build products or companies, while companies as noted earlier are not putting the necessary dollars into Research and Development. Canada – relative to the US – has fewer angel investors, venture capitalists and start fund dollars. So, it is not a surprise that our country has a lower economic efficiency rating; when compared to our G8 partners. Nor, is it a surprise that China is going to graduate more per capita engineers than any other country in the G8. As a country we need to do more.

Furthermore, this idea of a Crown Corporation, or a non-share legal entity, which develops intellectual property has other advantages. Firstly, unlike tax breaks or grants, the use of intellectual property is not short term in nature. Patents in the medical field, for example, have a minimum of a twenty year life span. Like a plant, those patents provide a chance for spinoff opportunities. If you want an example of this truth, just look at Magna Inc.’s development. Magna is a major player in Canada’s auto part manufacturing sector. It developed because successive governments – Progressive Conservative and Liberal Governments, federally and provincially – supported automobile companies in Southern Ontario and Southern Quebec. GM, Toyota, Ford and Chrysler are just some of the companies who have stayed and developed Canada. Or put differently, Magna’s development was enhanced by having three huge car manufacturers in its backyard. Long term incentives can develop industries.

If one wants to look at a short term solution, just look at the sale of Stelco to American Steel. In 2007, U.S. Steel paid $1.1 billion for some of the Stelco Corporation facilities. At the time, Stelco was going through the Bankruptcy process, so its assets were likely worth more than the selling price. Besides the value of the facilities, the deal was attractive because of the tax breaks and grants that were available. When the economic downturn happened in 2008, the economics of the deal changed. So, the deal became unprofitable. American Steel started laying off its employees: an act which ran contrary to the deal struck. In fact, the Federal Government had to go to Court to secure the return of the grants and tax breaks made available to American Steel. At the end of the day, the two parties settle out of court. US Steel promised to make a $50 million capital investment into two of its facilities and donate $3 million to local community and educational programs.

The difference between short and long term thinking is further emphasized by comparing the sale of American Steel to the purchase of Nortel’s patent portfolio. In American Steels’ case, after spending $1.1 billion dollars; a foreign company gained Canadian assets. Of a workforce of 3,105, they laid off 2,400 workers. This plant would likely be working at less than capacity in the short term and the hope is that this plant will be more profitable in the future.

While, Apple, EMC, Ericsson, Microsoft, Research in Motion and Sony were willing to spend $4.5 billion USD just to ensure access to patents of a long dead technology firm. They will have to hire people to build new devices. Would it not be better to have them hired in Canada? If the crown bidded for those rights, it might have encouraged the creation of Canadian jobs.

However, access also has another benefit. This Apple-RIM-Microsoft led consortium will be paid by other technology firms who want to use those existing patents. That is right; RIM will receive money for sitting on a strong patent portfolio.  Would it have been nice if the Nortel patents could have profited the Canadian economy? Therefore, investing in Patents can have a long term benefit because the Crown will be creating taxpayer owned assets that provide a return through licensing fees.

Therefore, offering cheap intellectual properly can offer a better return than tax breaks. The US has shown this with their military spending. For over fifty years, The US government has underwritten huge projects that have led to the development of software firms, aerospace firms and Silicon Valley. Why can we not learn from the lessons that they provided.

Additionally, the Crown Agency can be a cost effective tool. Canadians can make the development of Intellectual Property cheaper by having a single research institution to manage the cost of R&D. Just look at battery technology for Automobiles. Movement on the topic has been very slow even though there have been Experimental designs on the books since the 1970’s. Experimental companies have come and gone.

As a result, Research has been lost, sold or sat upon. Furthermore, stable companies have changed their opinion, several times, on experimental technologies. For example, GM introduced the EV-One in California in the 1990’s. It was the first mass marketed electric car in the world. Yet years later, the technology was scraped. If it was not for a bail out from the US and Canadian Governments, GM would not likely have ever pursued the technology again. With all of that beings aid, their new electric car – the Volt – was redeveloped without using the older technology GM started from scratch.

Imagine if the technology was public domain. Any car company could have gone to the Crown and asked for licensing rights. The new company would have paid back the Crown and might have established a new plant in Canada. Our scientists have work, our government will get paid and our economy flourishes. Our workers might have another job to go to and our economy can be turned into a knowledge based one. It is a virtuous circle. It is the way we should go.

Our major cities would attract world class companies and world class employees. All provinces would see more companies developing offices and institutions. Most studies have shown that from the 1990’s to now, Economic Efficiency has been marginal. This is even though taxes have been cut significantly. The Development, though, of an Intellectual Properly Base can have a direct effect on our economy by providing new ways of operating and new technologies. Why would the federal government not act in this manner? This is what I think a Liberal Government should do.

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