For Canadian hardware tech company Ranovus, intellectual property (IP) is no afterthought. The Ottawa-based business, which invents and commercializes advanced photonic interconnects for data centres and communication networks, holds approximately 50 patents to its name in North America, Europe, and Asia.
According to Ranovus’ president, CEO, and chairman Hamid Arabzadeh, the company has spent years fine-tuning its IP strategy to ensure it has the ability to freely commercialize its technology. That strategy involves sequentially building up its patent portfolio, monitoring competitor activities, securing patents in multiple jurisdictions, and sometimes filing “decoy patents” to ensure it can stay ahead of the game.
“It’s in the hundreds of thousands of dollars, typically about a half a million dollars per year that we spend on patents,” Arabzadeh told BetaKit. “It’s a major ticket item, and it’s foundational to our business.”
For many tech startups, possessing legal ownership of their ideas and inventions is now table stakes. One study from research firm Business Valuation Resources identified a correlation between intangible assets like IP and higher business valuations, and another from the European Union (EU) Intellectual Property Office suggests that patent-owning companies pay higher wages and are more likely to achieve growth compared to other firms.
“I would say that we’re middle of the road, if not a little bit off on the side road.”
While companies like Ranovus demonstrate how Canadian tech companies can scale through the development of IP, many stakeholders from the IP sector believe that most Canadian startups are not deriving value from their IP, which has put Canada behind its peers in the global race for IP rights.
In 2019, Canada was ranked the fourteenth country globally by number of IP rights filed, and according to a Canadian Intellectual Property Office (CIPO) survey from the same year, only two percent of Canadian SMEs said they owned a patent. What’s more, the trove of IP that is created in Canada often gets scooped up by foreign giants with deep pockets.
“I would say that we’re middle of the road, if not a little bit off on the side road,” said Dana O’Born, vice-president of strategy and advocacy at the Council of Canadian Innovators. “Canada hasn’t produced the kind of patent activity or IP activity that certainly our neighbours to the south have.”
The Canadian government has ramped up efforts in recent years to ensure IP funded and developed in Canada is retained in the country. Approximately four years ago, the government launched the nation’s first IP strategy, and has since made several other IP-related commitments, including in its most recent budget.
In Budget 2022, the federal government earmarked $96.6 million over five years to “build a world-class intellectual property regime.” The budget included commitments to existing programs like ExploreIP and the CanExport program, an upcoming review of the SR&ED program to better incorporate IP, and a consideration of new measures to incentivize IP creation, such as a patent box regime.
BetaKit spoke to IP experts and industry stakeholders from across Canada who weighed in on how effective some of Budget 2022’s measures could be, and what more the federal government can do to boost Canada’s IP ecosystem.
Education until “we’re blue in the face”
The federal government’s IP strategy, first unveiled in 2018, was one of a series of measures aimed to shore up Canadian entrepreneurs’ capacity to commercialize, protect, and scale their ideas and inventions.
In Budget 2022, the government highlighted two initiatives it had launched from that strategy, aimed to “improve Canada’s IP performance:” ElevateIP and the IP Assist program (both announced in Budget 2021). ElevateIP was created to provide funding to accelerators and incubators to help startups increase their IP awareness, as well as develop and implement their own IP strategies. The IP Assist program gives businesses that qualify for the National Research Council of Canada’s Industrial Research Assistance Program (NRC IRAP) access to advisory support in building out an IP strategy.
Louis-Pierre Gravelle, president and chair of the Intellectual Property Institute of Canada (IPIC), said while helping startups craft an IP strategy is “certainly a first step, it’s not necessarily going to translate into more filings.”
“We’re still riding the coattails of raising awareness, raising education, and promoting the importance of IP.”
Gravelle sees a broader problem at play with the government’s approach to promoting the growth of IP in Canada. Namely, the federal government is forking out on education and awareness initiatives, but is not adequately incentivizing companies to secure IP rights. “If the government really believes that IP is an important pillar of developing the economy of tomorrow, then we need to start changing behaviours,” Gravelle said.
Budget 2022 appeared to include more commitments related to IP awareness and education initiatives. One new commitment included $800,000 to the IP Legal Clinics Program, which offers funding to Canadian law schools to provide advisory services and increase “the exposure of university students to IP issues.”
Also included under the latest budget’s IP measures was $10.6 million to launch a survey to “assess the government’s previous investments in science and research, and how knowledge created at post-secondary institutions generates commercial outcomes.” With Budget 2022 piling more money onto awareness, Gravelle said the government is still not putting money toward changing behaviour.
“We’re still riding the coattails of raising awareness, raising education, and promoting the importance of IP,” Gravelle said. “We can do that until we’re blue in the face; it’s not necessarily going to start changing behaviours.”
Some federal programs missing the mark
The Canadian government doles out billions per year in funding to businesses generating IP through programs like SR&ED and NRC IRAP. Mike McLean, CEO of the Innovation Asset Collective, claimed that while many federal programs fund activities like research and development, some will not fund IP assets, a decision he believes is “short-sighted,” given how expensive it can be for companies to build an IP position.
“The professionals that advise on those deals are expensive, the fees for governments and other registration entities are expensive, and those costs add up,” McLean said. “Small businesses typically are going to deploy their capital on building products or selling that product. They don’t have extra capital sitting around to help develop strategies to file trademarks or patents.”
The Innovation Asset Collective plays a role in the government’s IP strategy as it runs a four-year, federally funded patent collective program. Through this program, the Collective provides various forms of support to Canadian cleantech startups, including funding and patents, which the group acquires and licenses out to cleantech startups to minimize their risk of third-party threats.
While there was no explicit mention of directly funding IP assets in Budget 2022, the federal government did commit an additional $35 million over five years for the CanExport program. That program provides companies with up to $50,000 to assist with international market development activities, including applications for IP protection.
While CanExport funding also covers many activities unrelated to IP, it follows a similar format to Québec’s “first patent system.” Québec’s first patent system launched in 2015, offering a refund of up to 50 percent to a maximum of $25,000 per project for IP-related expenses incurred by companies filing their first patent.
In 2018, the Québec government ended the first patent program when it launched its broader Innovation Program, which funds other activities like product development. Patent lawyer Natalie Raffoul noted Québec’s first patent initiative was popular among small to medium-sized enterprises during its run.
Stakeholders like Raffoul said the federal government should take the learnings from Québec’s first patent model and integrate it with a program like IP Assist, to ensure the government is directly supporting companies procuring IP rights.
In Budget 2022, the federal government also committed to exploring opportunities to modernize and simplify the Scientific Research and Experimental Development (SR&ED) program, a move that was welcomed by some members of Canada’s business community and bemoaned by others.
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SR&ED is the largest single source of federal funding for industrial R&D, but several IP advocates who spoke to BetaKit criticized the program for its lack of consideration for IP. Organizations like IPIC have previously remarked that the tax incentive program “does little to encourage firms to maintain their IP in Canada or to commercialize their IP here once developed.”
“The SR&ED program in Canada costs something like $3 billion a year, and there’s not a single mention of intellectual property,” Gravelle added.
O’Born said she believes IP-related costs should be among the tax credit’s eligible expenses, and Gravelle said paying attention to one’s IP should be part of the performance criteria for SR&ED recipients.
Canada’s Global Innovation Clusters (formerly the Innovation Superclusters Initiative) also touches upon IP. Budget 2022 proposed an additional $750 million over six years for the clusters, and the federal government refers to IP as a “key program consideration” for the clusters. In its budget, the government claimed the initiative has generated more than 850 “new IP rights” to date. Still, critics have said those numbers may not tell the full story.
When engaging groups for various projects, the innovation clusters often bring in large, foreign multinationals, which Raffoul said creates an uneven bargaining dynamic. “You’re essentially bringing the fox into the henhouse,” she said, adding that the federal government should provide more in-depth data on how much IP is retained by Canadian businesses.
Even with IP noted as part of the cluster strategy, Gravelle said that with more federal funding committed to the clusters in the latest budget, he’s disappointed that IP is not a bigger part of the program. “We think it’s a missed opportunity,” he added.
Building a moat around innovation
For many startups, IP protects assets that can be vital to the long-term viability of a business. The current challenge for Canadian firms is determining how to protect the value of their IP against shrewd and well-resourced foreign companies, which have, as one report suggests, increased incentives for Canadian startups “to sell rather than to scale up.”
“We need to create that moat around our Canadian companies,” O’Born said. “If we don’t create the right digital infrastructure here in Canada to ensure that ideas that are produced and commercialized by Canadians, we’re going to have a very bleak future in terms of our overall global competition.”
According to a 2019 study, the number of Canadian patents sold or transferred to foreign firms on the date of issue increased from 18 percent to 45 percent over two decades. Of the 1,565 patent families owned by 400 venture-back Canadian firms, nearly three-quarters went to foreign buyers from 2018 to 2021, according to research from the Innovation Economy Council (IEC).
IP is often also a matter of national security. In Budget 2022, the government acknowledged that Canadian IP can also “be an attractive target for foreign intelligence agencies looking to advance their own economic, military, or strategic interests.” Lobbying groups like IPIC have pushed the government to implement measures to incentivize firms to file and keep their IP in Canada, such as a patent box regime.
Patent box systems tax business income earned from IP, such as royalties or licensing revenue, at a rate below the standard corporate income tax rate. Several countries in the EU have implemented patent box regimes, including the United Kingdom, France, and Spain. In Budget 2022, the Canadian government said it would consider “the suitability of adopting a patent box regime,” but did not commit to implementing such an incentive.
However, the patent box policy is not without scrutiny. Bodies like Organisation for Economic Co-operation and Development have previously criticized the patent box system for creating a “race to the bottom” by pushing countries to lower their tax rates so they can attract large corporations. Raffoul, who is admittedly less bullish on the idea of a patent box, indicated this sort of regime could end up backfiring.
“We don’t just want to set up a program like that will benefit foreign multinationals when it’s doing nothing for our own companies,” she added.
Reaping returns on Canada’s tech potential
While IP advocates who spoke to BetaKit agreed on the importance of IP for Canada’s tech community, there are many other stakeholders and groups like the IEC who believe IP is only a small part of Canada’s larger innovation challenge, and that foreign M&A deals should not be viewed as a scourge for startups.
The IEC has also noted that patents are “just one piece of a complex innovation landscape” and may not be as crucial for software companies. Raffoul said that although IP activity is not the only benchmark of innovation success, it is still an important measure.
“If we’re innovating in this country and our taxpayers are funding this kind of activity, we owe it to them to make sure that there are net benefits flowing back to Canadians,” Raffoul said.
Image source Unsplash. Photo by Tom Carnegie.