GUIDING PRINCIPLES FOR THE MANAGEMENT OF INTELLECTUAL PROPERTY ISSUES

Research and Data Collection
September 1997

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Intellectual Property Issues - Introduction
An IP Issues Evaluation Grid

• Sources of Research Needs and Research Solutions
  
• IP Core Issues
  
• Combining Issues, Mandates and Arrangements on the Grid
  

A Review of International Trends in Government Management of IP

• International IP Protection-Driven by the United States Agenda
• Economic Development through IP Creation
  • Competition Policy
  • Split Ownership of IP
  • Industrial Development Policy
  • Public Service IP Development Incentives
  • Industrial and Government Standards

IP Issues: The Canadian Experience

• Circumventing Complexity
• Pooling IP Experiences
• A Clear Motivation for IP Management
• The Push to Extract Value from IP
• Options for Revenue Generation
• Management Issues
• The Search for Solutions
• Summary of Management Issues

Guiding Principles for IP Management

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Intellectual Property Issues - Introduction

Intellectual property (IP) consistently commands the attention of government for two reasons:

• First, the existence of IP, in general, is an essential component of economic growth in knowledge-based economies. This has led many governments world-wide to use IP development strategies as an important component of their economic development efforts, and
• Second, governments are significant players in the creation of IP, either as a result of economic development efforts or through mandates to provide public goods and services. As developers of IP, governments seek the most effective methods of putting the IP to use through transfer of the technology to the private sector.

Recently, pressure on public budgets has led to a third attraction of IP for governments - revenue generation.

• Department and program managers are under pressure to partially or fully recover the costs of their operations, particularly when the public sector is providing services to businesses.

The interaction of these three motivating factors is not harmonious. Practices that maximize government revenue from the creation and ownership of IP may, for example, run counter to the mission of departments in fulfilling an obligation to the public (particularly in the areas of health and public safety). Moreover, fair and consistent IP management approaches are difficult to set up because of the diversity of departmental and agency mandates.

Federal Partners in Technology Transfer (FPTT) plays a role in developing fair and consistent IP practices. Its mandate is:

• "To promote best practices and provide leadership in technology transfer within the federal government; to improve on mechanisms to leverage technology development and transfer; and to enhance the public's understanding of the contributions of federal science-based departments and agencies to job and wealth creation and quality of life in Canada."

In accordance with its mandate, FPTT would like to outline some guiding principles for the management of IP within the federal government. One of the major concerns of the FPTT is that of balancing the need for consistency of management of IP throughout the government with that of having practices that respect individual departmental and agency mandates.

In co-operation with the various players involved directly and indirectly with FPTT, a grid was developed to relate the circumstances under which IP is developed and the issues that confront the Crown. The grid was developed through a review of Canadian and international experiences in IP management and by consultation with stakeholders with "hands-on" experience undertaken by Groupe SECOR. FPTT is grateful to Groupe SECOR for having worked with FPTT members to develop these guiding principles.

This document is accompanied by a summary of the principles entitled: "Guiding Principles for the Management of Intellectual Property Issues - A Summary Report".

Comments and suggestions on either of these documents can be forwarded to:

Morna Paterson
Director
FPTT Executive Office
Room 281B, Building M-55
1200 Montreal Road
Ottawa, Ontario, K1A 0R6
Phone: (613) 998-5285
Fax: (613) 998-8768
E-mail: morna.paterson@nrc-cnrc.gc.ca

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An IP Issues Evaluation Grid

IP management is complex. The first challenge in addressing IP management issues is to build an analytical framework to reduce the complexity. With the help of FPTT members, SECOR constructed a framework based on:

• Sources of research needs and research solutions that lead to IP development, and
• Core IP issues.

IP Issues Evaluation Grid
		Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector
Inside Public Sector	Outside Public Sector
Joint Need	Joint Solution
Outside Public Sector	Inside Public Sector
Outside Public Sector	Outside Public Sector
Outside Public Sector	Joint Solution

Sources of Research Needs and Research Solutions

Departments and agencies engage in activities that lead to the development of IP according to who has need of a certain innovation and who is capable of providing that innovation.

The public sector is both a buyer and supplier of IP. The same can be said of the private sector. From the government's perspective there are seven general arrangements that lead to IP creation:

• Public Sector Demand - Public Sector Solution: The need for the creation of IP is generated from government obligations and the solution to creating IP is found within the government.
  • This is typical of a department or agency that has a long-standing mandate to carry out research to provide a public good or service. To use the most efficient practices available the department may use internal resources (or those of another government agency) to develop innovations that constitute IP.

    - IP flows from in-house R&D capacity like the research facilities of Health Canada, the National Research Council (NRC), Environment Canada, etc.

• Public Sector Demand - Private Sector Solution: The need for the creation of IP is generated by government obligations and the solution to creating IP is found outside the government.
  • New, short term or one-off government mandates will often trigger these arrangements when departments or agencies do not have the internal capacity to fulfill an R&D need. For example, government procurement contracts often specify characteristics that must be developed through innovation outside the public sector.

    - Gives rise to contracting out of research. Procurement contracts specify the performance expected from innovations. Examples are: Canadian Space Agency (CSA) projects such as Radarsat II, some research at Agriculture and Agri-Food Canada, purchasing contracts of the Department of National Defense and of Public Works and Government Services Canada.

• Private and Public Sector Demand - Private and Public Sector Solution: The innovation or a research need is important to both private and public sectors so they share in its development through joint R&D funding and performance.
  • Gives rise to cooperative research and development agreements, such as collaborative research on pharmaceutical development between NRC and Biochem Pharma or environmental challenges in the mining industry at CANMET.
• Private Sector Demand - Public Sector Solution: The need for the creation of IP is found in the private sector and the solution is found within government.
  • These arrangements are useful when industry has precompetitive or non-competitive research needs, the benefits of which have public good characteristics in that the IP developed would be best used through broad dissemination among stakeholders. The NRC's Institute for Marine Biosciences research on cultivated mussels and a mesodinium rubrum infection serves as a good example. The information generated best served the industry and the public as a whole through broad publication. Other examples include R&D situations where public laboratories have unique facilities such as wind tunnels and test rigs that are not generally available to individual firms.

    - Gives rise to public research facilities that work on a contract basis for private sector clients. Examples include the NRC's Institute for Research in Construction, CRC, CANMET, etc.

• Private Sector Demand - Private Sector Solution: The private sector is seeking innovations using its own scientific research and development abilities but draws on government financial resources as a form of aid or risk mitigation.
  • Targeted funding agencies will typically use these arrangements to fulfill their mandates to aid business in developing a technology or even a new industry. CANARIE, Technology Partnerships Canada, the Canadian Space Agency are examples of agencies and programs that may participate in the creation of IP under these arrangements.

    - Gives rise to government-private sector and government-academic partnerships, loans to companies and grants to the private sector.

    - Granting agencies such as the Natural Sciences and Engineering Research Council (NSERC) and the Medical Research Council (MRC) fall into this category in as much as the university and hospital research that they fund fall outside the federal framework.

• Private Sector Demand - Private and Public Sector Solution: The need for the creation of IP is found in the private sector and the solution is found both within government and in the private sector.
  • Gives rise to cooperative research and development agreements. Examples include the NRC's Institute for Chemical Process and Environmental Engineering, NRC's Institute for Aerospace Research, CRC, CANMET and Canadian Forest Service.

IP Core Issues

In the previous section, we showed how IP issues can be simplified by considering the source of a research need and the source of the appropriate solution. The model can be extended by considering core issues that affect each one of the combinations described above. A review of the literature on the management of IP created with government resources indicates that throughout the world there are five core issues concerning the creation and transfer of public technologies. The validity of these issues was discussed and verified with FPTT members.

• Competition Policy: Will the transfer of Crown-owned or -created IP to the private sector lead to market distortions, such as the creation of a monopoly supplier of a good or service to government or the public?
• Split Ownership of IP: Will technology transfer lead to joint ownership arrangements between government and one or more private sector partners? If so how can the management burden of ownership be minimized? Moreover will technology transfer lead to split ownership of the background and foreground IP and can the split be managed efficiently?
• Industrial Development Policy: Will technology transfer lead to benefits from IP that fit into the government's industrial development plans on a national and regional basis?
• Public Service IP Development Incentives: Will civil servants receive rewards that encourage participation in IP discovery and management as well as technology transfer programs?
• Government versus Industry Standards: Are the standards demanded by government sufficiently harmonized with industry standards to allow innovations and IP developed under contract to the Crown to be applied to other markets?

Combining Issues, Mandates and Arrangements on the Grid

The complexity of the grid and the large number of issues and arrangements reflect a basic reality - IP management is complicated. Issues will vary to some extent for each of the basic mechanisms that are used to create IP.

IP Issues Evaluation Grid
		Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector
Inside Public Sector	Outside Public Sector
Joint Need	Joint Solution
Outside Public Sector	Inside Public Sector
Outside Public Sector	Outside Public Sector
Outside Public Sector	Joint Solution

Although complexity abounds, the tools for management of IP are flexible rather than rigid consisting of, for example:

• broad guidelines;
• contracts;
• licensing agreements; and
• terms for grants and loans.

Managers of IP will not have highly specific rules and regulations to guide them. The nature of their work makes them "deal-makers" rather than administrators of a detailed regulatory regime. Attempts have been made to codify the many possibilities for managing IP but the resulting documents tend to be unwieldy guides because of the level of detail that complexity demands.

The challenge for the manager of IP is to deal with a complex situation that has few detailed rules. However, the situation is better than would at first appear for the following reasons:

• most departments are active in only a few "cells" of the IP grid - managers do not need to know everything about IP;
• informal monitoring and information exchange systems are already in place so that sharing of expertise is possible;
• the flexible management tools allow "deals" to be struck that are consistent with departmental mandates.

The realization that building rules to deal with all situations would not provide a practical management tool provided FPTT with much of the motivation for this project which seeks to develop simple guidelines for the management of government IP.

In subsequent chapters, the grid is used as a framework for describing international approaches to resolving some of the more difficult IP issues. In addition, there is a description of some of the specific Canadian problems that weigh heavily on the minds of IP managers and some of the guiding principles that can be distilled from this experience.

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A Review of International Trends in Government Management of IP

As in Canada, governments throughout the world are involved directly in the management of IP through its creation, use and transfer and indirectly, through legislation and regulation of IP protection mechanisms. This has given rise to two major trends on the international IP scene.

• The first is the push by developed countries, particularly the United States, to expand the reach of their national IP protection mechanisms. This has led to a strong IP focus at the World Trade Organization (WTO) through the Trade Related Aspects Intellectual Property Rights (TRIP) agreement. TRIP is also high on the agendas of the Asia-Pacific Economic Co-operation (APEC) forum and the World Intellectual Property Organization (WIPO).
• The second trend is the emergence of IP as the new frontier of economic development for the first world. This trend is part of the growth of knowledge-based economies where production is as dependent on innovation and intellectual capital as it is on traditional inputs.

The first trend is, in part, setting the international institutional framework for commerce in IP. However, the second trend is of greatest interest to FPTT. This is because many of the means by which IP can be used by government as an economic development tool involve the use of best management practices and technology transfer mechanisms. Some lessons can be learned from the international scene.

International IP Protection-Driven by the United States

The push for IP protection across borders is long-standing, particularly where copyright and trademark of artistic products are concerned. Over the last twenty years, the push has intensified because of technological developments in software, sound and image reproduction. Mass manufacturing of recorded products is inexpensive relative to the cost of conceiving, producing and marketing the underlying art. The consequent incentive to make copies of the best selling programs, books, movies, and sounds has lead to more or less state-sanctioned piracy in many developing countries.

• United States State Department estimates placed US business losses to bootleg music compact discs in China alone at US $1 billion a year in 1994. However, more conservative estimates from the International Federation of the Phonographic Industry (IFPI) placed these losses at US $170 million. IFPI estimates further that 88% of the 50 million compact discs produced in China each year are pirated, and that 40% of the world's pirated compact discs are made in China.

The explosive growth of the software industry and the increasing importance of databases has exacerbated the problem. Physical distribution of data and software is no longer a hindrance to piracy as telecommunications transfer of data is commonplace.

• The Business Software Alliance (BSA), a US based international alliance, places piracy losses in just 14 Asian countries at a total of US $4.35 billion in 1994. BSA says the worldwide annual computer piracy figure is estimated at US $15.2 billion.

The magnitude of these estimated losses has had an impact on governments of countries with substantial investments in IP. To safeguard their nations' property, western governments have been pushing for an international convention on the protection of IP. The resulting systems and institutions of IP protection have set the ground-work for development of global free trade in IP.

With great pressure from the United States, IP became a main issue at the Uruguay round of the General Agreement on Trade and Tariffs. The resulting TRIP agreement was a compromise deal that gave the United States an international sanction to its efforts to protect American IP, while allowing foreign IP producers equal treatment under US patent law.

The WTO, established in 1995 as a result of the Uruguay round, will oversee TRIP compliance regulations. In brief TRIP requires:

• broad harmonization of IP protection laws among WTO nations so that in addition to copyrights and trademarks, any product or process in any area of technology is patentable, providing the subject matter is new, involves an inventive step, and is useful;
• that the legal treatment of foreign-origin IP be identical to domestic IP; and
• that developed WTO nations implement the TRIP rules in one year, less developed nations in five years, and underdeveloped nations in no more than ten years.

Ironically, the United States had to change its patent law so that foreign origin IP receive equal protection in the US as that of US origin. Before TRIP, the United States granted a patent on a "first to invent in the US" basis rather than the first to file an application. However, foreign inventions were deemed to have been made either when a patent was filed or the product was introduced to the US, instead of from the real invention date. This gave American inventors an advantage in their home market.

The loss of this head start for US inventors at home was compensated by the international sanction, via the WTO, of US efforts to protect its IP abroad. These efforts include the 'Special 301' IP violators watch list and more direct threats of retaliatory actions against the goods traded from countries that tacitly allow the theft of IP. The US is also pushing TRIP through other international forums like APEC.

Outside of the US, the introduction of the WTO and TRIP has been welcomed or spurned more or less in line with the IP wealth of nations.

• Canada, a country rich in IP development capabilities but with little power to influence the treatment of its IP through threats, has tended to welcome the US efforts. In addition, the TRIP measures reinforce the elements of NAFTA which pertain to IP.
  • The existence of TRIP has also increased the potential returns to technology transfer efforts of governments as benefits of Canadian technologies can be exploited in larger markets.
• Some less developed nations see aspects of TRIP as technological protectionism. They have begun to harmonize with TRIP measures but primarily to avoid potential goods-trade retaliation. China, under constant US pressure to crack down on piracy, is vying to join the WTO but will not sign TRIP unless it is allowed a five year compliance grace (the US will only allow it one).
• Other nations are keen to comply because they want to safeguard the potential of their IP capabilities and resources. Taiwan, Thailand and the Philippines, for example, have all begun programs to comply with WTO membership requirements as a step toward encouraging foreign direct investment in their knowledge-based industries. Indonesia has found that without IP protection much of the value of its biodiversity is being exploited by foreign biotechnology and pharmaceutical companies free of charge with little local impact.

The trend toward greater international protection of IP affects technology transfer from the public to the private sector in two ways. First the market in which Canadian businesses can exploit IP created from government resources is growing as it becomes easier to securely trade IP. Second, the need for government to properly protect public IP as it is being developed is underscored because IP is becoming more tradable and more valuable.

Economic Development through IP Creation

Governments themselves are involved in the creation of IP. Traditionally this involvement has been in support of the state's role in providing goods and services to the public, particularly in the areas of defense, health and public safety. This was either done internally or by the private sector under contract to government.

The potential value, commercial and other, of the inventory of public IP has led governments to question how it can be best managed to maximize the public's investment in its creation. The results of this line of inquiry have led to the use of public IP creation as an integral tool in economic development efforts.

As a result many countries, including Canada, have recently been exploring the issues presented on the IP Evaluation Grid. Issue by issue, the international experiences can be examined from a Canadian point of view.

Competition Policy

The link between competition policy and technology transfer policy comes from the government's desire to maximize the national benefits of public IP by transferring it to commercial use where acceptable. Maximum benefits will not be realized if the transfer of public technology leads to unfair competition in the economy.

		Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector
Inside Public Sector	Outside Public Sector
Joint Need	Joint Solution
Outside Public Sector	Inside Public Sector
Outside Public Sector	Outside Public Sector
Outside Public Sector	Joint Solution

The complexity of IP created to meet government needs has given rise to two issues that have implications for competition policy.

• First, in the creation of complex public sector IP, consortia of businesses from the same industry may be required. In many countries, including Canada, these types of associations are suspect or even illegal as they can lead to collusive behaviour among firms. Governments have had to re-examine their competition policies in order to weigh the benefits of IP development under consortia with the risks of anti-competitive behavior.
• Secondly, the transfer of public IP to the private sector may create problems if the government-funded IP can be used to create a monopoly.

The United States has taken action on both these issues. The Cooperative Research Act of 1984 eliminated antitrust concerns for companies wishing to pool research and development efforts for precompetitive projects. This reprieve applies to both private sector and public sector IP development projects.

Having eliminated anti-trust concerns at the development stage of the IP, the US has since taken moves to tighten controls on the transfer of technologies once developed. In 1995, the Antitrust Division of the Department of Justice and the Federal Trade Commission released Antitrust Guidelines for the Licensing of Intellectual Property. The Guidelines are designed to reduce the incidence of anti-competitive markets arising from transfers of IP.

In essence the government will investigate and possibly prohibit technology transfers that result in one business capturing more than 20% of an identifiable market. Though there is room for case-by-case interpretation, the US policy intent is clear — transfer technology but maintain competitive forces since IP is most valuable when it enhances competition.

In the European Union, a sweeping antitrust law (Article 85(1) of the Treaty of Rome) prohibits any agreement that prevents, restricts or distorts competition among businesses from EU member nations. Activities such as the transfer of IP that may fall under Article 85(1) are given "Block Exemptions". The Technology Transfer Block Exemption allows the IP transfers to occur but only under conditions that prohibit the establishment of monopolies.

Following the EU trend, the government White Paper on Technology and Science in the United Kingdom stipulates that government departments should seek to vest as much Crown IP with the private sector as possible. One of the exceptions to the policy occurs when there is a danger of a contractor achieving a monopoly position with regard to future government procurement or service contracts.

The general international trend with respect to competition policy is to transfer IP to the private sector but to ensure that such transfers do not allow a firm to dominate a specific market.

Split Ownership of Intellectual Property

Joint ownership of IP can arise for many reasons. In many circumstances a project developed for government is itself so complex that many players, both private and public sector, are involved. Each contributes to the final IP and, therefore, may exert a claim of partial ownership.

		Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector
Inside Public Sector	Outside Public Sector
Joint Need	Joint Solution
Outside Public Sector	Inside Public Sector
Outside Public Sector	Outside Public Sector
Outside Public Sector	Joint Solution

In other circumstances, IP may be developed by a party to improve or modify existing technologies, which themselves have IP components developed by another party. The final technology package will therefore have joint owners, one of which may be government.

Furthermore, governments, for public policy reasons (often mandated), may wish to keep a hand in the ownership IP that has been developed with public resources. This often occurs when there are public safety and health issues at stake or when defense considerations need to be discussed. Also, as discussed above, governments may wish to keep some control over publicly developed IP to ensure the existence of competitive markets.

Most governments see joint ownership as somewhat problematic, particularly from an economic development point of view. This is because the commercial use of IP can be diminished if the administrative costs of employing new ideas and technologies are prohibitive.

Recognizing the potential for administrative costs to choke IP use, the United States began in 1980 to simplify the hurdles for private sector and academic use of federal technologies. One of the bottle-necks was the requirement that headquarters of science-based departments and agencies had to review all licensing arrangements. In a series of legislative acts (beginning with the Baye-Dole Act of 1980), the federal government placed the decision to grant licenses (even exclusive licenses) and to waive the State's claim of ownership with the managers of government-owned labs.

When IP ownership is turned over to contractors or other private sector players, the government interest in the IP does not end. For example, the National Aeronautics and Space Agency (NASA) vests title to all inventions made by its contractors with the private sector. Even inventions made by NASA employees are marketed commercially through the offer of licenses to companies qualified to exploit the technology. However to protect the public interest, NASA maintains "march-in-rights" allowing it to influence how the IP is used by the private sector. In addition, it maintains a license for government use of the technology after it has been transferred.

Split ownership of IP is problematic. The trend internationally is toward rapid deployment of IP in the private sector. Governments maintain the right to "march-in" if the exploitation of public IP is unsatisfactory and also to retain licenses to use IP for internal research and development projects.

Industrial Development Policy

Knowledge and technologies developed with government resources can be used as economic development tools in two ways:

• Governments can add economic development considerations to the criteria for choosing partners with which to develop new IP or to which to transfer appropriate existing IP.
• Governments can design specific programs that defer the business risk of developing technologies in key sectors of the economy.

IP Issues Evaluation Grid
		Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector
Inside Public Sector	Outside Public Sector
Joint Need	Joint Solution
Outside Public Sector	Inside Public Sector
Outside Public Sector	Outside Public Sector
Outside Public Sector	Joint Solution

According to the National Institute of Environmental Health Sciences, a research group of the National Institutes of Health in the United States, the primary reason that business was reluctant up to the 1980s to participate in technology transfers from federal research facilities was that federal research was made available to everybody. At face value, this seemed appropriate for state-sponsored research but it dampened the ability of companies to recuperate investments made in joint projects with the federal government. As a result, the United States was foregoing its ability to use IP as an economic development lever. The Consiglio Nazionale delle Ricerche of Italy, has faced the same problem. It has published unprotected technical and scientific information thereby diminishing the Italian and European impacts of Italy's public investment.

Maximizing the public benefit of government-owned and -created IP is not equivalent to transferring technologies to companies and individuals who will profit the most from holding the IP. Governments use IP as part of their economic development portfolio and may introduce non-market considerations into their technology transfer methods. One obvious example is that governments worldwide will tend to select IP partners who will keep the ownership and exploitation of IP within their national boarders.

Governments attempt to promote economic development through encouraging the creation of IP in a specific sector or region. This can be done by physically locating facilities in targeted regions to conduct research and development that may lead to the creation of IP in industrial sectors of local interest. Some of the research institutes of the NRC and of Agriculture and Agri-Food Canada serve as examples. Alternatively, governments can encourage private sector IP development by investing in businesses conducting research and development in certain fields. CANARIE and the CSA encourage IP development through this type of risk mitigation program.

Economic development programs based on IP creation have their pitfalls. In Taiwan between 1986 and 1996 the government ran the Scientific and Technological R&D (STRD) Project to upgrade private sector research and development capabilities by creating key government R&D facilities. The program eventually accounted for 55% of all of Taiwan's R&D activities. However its success as an economic development tool was hampered by two information gaps in the technology transfer chain between the public research and the private sector.

The first gap was technological: it was found that many of the firms who sought to benefit from government-created IP did not have the technical abilities to understand or use technologies transferred to them.

The second gap was market-related. The market information being fed back to research institutes for further technology planning was inadequate or not understood by the scientist in the research facilities.

The creation of IP is being used to foster industrial development in geographical regions and targeted sectors. This is being achieved through regional distribution of government-funded research and, for sector development, through focused investment programs.

Public Service IP Development Incentives

Governments, such as Canada's, have the potential to create IP through the use of their own science-based departments and agencies. In general, IP created by civil servants rests with the government. This treatment seems to be uniform throughout the world. Yet there are differences country by country in the way civil servants are rewarded for their role in the creation of and transfer of IP. Rewards can come in two forms :

• Allowing the civil servants to participate in the financial gains of the successful commercialization of government IP.
• Making technology transfer efforts a key component of performance recognition and career advancement.

IP Issues Evaluation Grid
		Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector
Inside Public Sector	Outside Public Sector
Joint Need	Joint Solution
Outside Public Sector	Inside Public Sector
Outside Public Sector	Outside Public Sector
Outside Public Sector	Joint Solution

Evidence from outside Canada suggests that the second driver is by far the most important for governments seeking to capitalize on the public's investment in IP.

According to research by Consiglio Nazionale delle Ricerche (CNR) of Italy's Office for Innovation, Transfer, Patents, Technical Standards and Regulations, one of the primary reasons for rampant public dissemination of IP before it has been protected is due to a deep-rooted conviction of scientists at the CNR in the publish or perish philosophy. Through publication they receive peer recognition, prestige and promotion. In the United States, NASA has attempted to de-institutionalize this mentality by making technology transfer efforts part of employee evaluation criteria and by using the potential for technology transfer as a key component in selecting projects for resource allocation.

The following is a part of NASA science and engineering job descriptions :

"Identifies, develops and facilitates the transfers of federally-owned or originated technology resulting from research, development, design or other technological advancement resulting from the accomplishment of assigned duties and responsibilities within the Federal statutes governing the transfer of technology to domestic and foreign entities."

Like Canada, many countries will financially reward civil servants who develop technologies that are successfully commercialized. The Federal Technology Transfer Act of 1986 in the US stipulates that inventors on the public payroll are entitled to a minimum of 15% share of royalties generated through federal IP. In Japan, the Agency of Industrial Science and Technology which employs over 2,500 research scientists and engineers has implemented a policy of vesting 50% of the agency's IP with the inventor. However, the researchers themselves are tasked with the financial burden of filing and maintaining any related patents. Should this burden become excessive, researchers are allowed to sell their interest to private industry for commercialization.

Most countries have some form of financial rewards for civil servants who develop IP. However, the most effective incentive tool is to incorporate IP creation and transfer goals in employee job descriptions and evaluations.

Industrial and Government Standards

Governments use procurement contracts and partnerships with the private sector to meet their mandated obligations to the public. Under these arrangements IP is often created. The public can benefit from this IP in two ways:

• The application of the technology as it was designed to meet the specific needs of government.
• The commercial adaptation of the technology.

IP Issues Evaluation Grid
		Ip Issues
Source of the Research Need	Source of the Research Solution	Competition Policy	Split Ownership	Industrial Development	Internal Incentives	Industrial Standards
Inside Public Sector	Inside Public Sector
Inside Public Sector	Outside Public Sector
Joint Need	Joint Solution
Outside Public Sector	Inside Public Sector
Outside Public Sector	Outside Public Sector
Outside Public Sector	Joint Solution

The ability of the private sector and government to find commercial uses for government developed technologies rests on the similarity of the standards employed in public and private sectors. For example, many products developed for the military are necessarily over-built. Adapting those products for appropriate civilian use involves cutting costs out of production processes. The further government standards are from those accepted by industry, the harder this exercise becomes.

The United States has been pushing government departments to conform to industry standards wherever possible. The problem has been addressed by two key pieces of legislation. The first is the Federal Acquisitions Streamline Act of 1995. It allows government agencies and departments to adjust their practices in order to use existing private-sector standards.

Second, in March 1996 the National Technology Transfer and Advancement Act was passed. This law compels departments to:

"compare standards used in scientific investigations, engineering, manufacturing, commerce, industry and educational institutions with the standards adopted or recognized by the Federal Government and to coordinate the use by Federal agencies of private sector standards, emphasizing where possible the use of standards developed by private, consensus organizations."

Moreover the Act stipulates that where consensus standards are not used for defense or public safety reasons, the government department, not industry, must show justification for the exemption.

The international trend is for governments to conform to industry standards wherever possible. This has its greatest impact on contracting-out of government technology needs.

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IP Issues: The Canadian Experience

The columns of the IP issues evaluation grid are as applicable in Canada as they are in any other developed country. The positive aspect of this similarity is that Canadian policy-makers can learn from the lessons provided in other jurisdictions. However, on the down-side, the similarity of the Canadian experience means that IP issues management in Canada will be no less complex than it has been in the rest of the world.

Interviews with key stakeholders, a review of applicable legislation, FPTT documentation, and stated IP policies showed that several key policy instruments and decisions are already in place:

• The April 1992 DSS-MAS 9601 Standard Acquisition Clauses and Conditions section 24 states that, under most conditions, IP that is developed under contract with the government will be vested with the contractor.
• The Civil Servants Invention Act provides for incentives for the internal creation of IP.
• There is broad agreement that where appropriate the government should seek to transfer the technologies that it currently holds in its IP inventory to the private sector for commercialization.

Taken as a whole, the government has plethora of experiences and capabilities for dealing with the complexity. By agreeing on guiding principles for IP management, science-based departments and agencies can use their collective experiences to further leverage the public's investment in IP.

Circumventing Complexity

In departments and agencies, IP issues are viewed according to the department's or agency's mandate and the type of arrangements under which it might be involved in the creation of IP. Essentially, each department or agency is more or less a specialist in one or two of the rows of the IP issues evaluation grid.

A funding agency that is involved in private sector demand - private sector solution arrangements on the grid would be rich in knowledge of the split ownership issues that arise through royalty and equity arrangements. However, it may have little experience with the issues surrounding civil service technology transfer incentives. Conversely, departments that fulfill their mandates through in-house research may know all about providing performance incentives but be lacking in the technology transfer skills needed to spin-off relevant aspects of their research.

Pooling IP Experiences

The view of the IP issues grid from the point of view of any one of the agencies may often be narrow. These incomplete views can lead to missed opportunities on the part of individual departments and agencies. Collectively, however, there are few, if any, gaps in the Government of Canada's IP management experience.

A Clear Motivation for IP Management

The government can approach the management of IP from one of two broad motivations. The first is to harvest the creative potential of the civil service, particularly in science-based departments and agencies, in order to maximize Crown revenue accruing from the creation of government-sponsored IP. On the other hand, government can use IP development and transfer as a tool to maximize the benefits to Canadians and the economy as a whole from public investments in IP.

There is consensus among FPTT members that revenue generation is not an appropriate primary motivation for the management of government IP. As will be discussed, the perception that the federal government has a "gold mine" in the IP it owns or has license to is not well founded. In universities and government the cost of protecting "invented here" IP with patents usually exceeds the revenue generated from corresponding licenses. Accordingly, the taxation system is a more efficient and economically neutral way for the government to fund its operations.

The other motivation, maximizing public benefits, may be more appropriate for the government but it is somewhat more complex. The complexity follows the many ways in which the government delivers public benefit. The government may be involved in the creation of IP because of obligations to:

• Support legislation and regulation;
• Provide goods or services directly to the public;
• Protect the value of Crown assets;
• Purchase goods and services from the private sector;
• Encourage and aid in industry development.

Each of these activities supports the government's goal of creating benefits for Canadians. They also are motivating factors for creating IP. The Canadian Space Agency, for example, will often assist companies in the aerospace industry in developing innovations applicable to the space program but also as a means of fulfilling its economic and regional development role. Familiarity with IP management and technology transfer will be very different according to the type of motivations a department or agency has in developing IP. For example, the experiences with IP and technology transfer issues of a research funding organization (like NSERC) will be very different from those of a department fulfilling a mandate to protect the health and safety of Canadians (Health Canada or Environment Canada).

The Push to Extract Value from IP

As departments and agencies are being down-sized, many managers are beginning to view IP as a potential revenue source that will augment diminishing funds. This tendency is being expressed through increased pressure on scientists and IP managers to "deliver the goods".

Most managers of IP view this as a dangerous trend because of its potential to deflect departments and agencies from their proper R&D mandates.

In Agriculture and Agri-Food Canada, for example, research on the production of new plant varieties is viewed as a public good when the targeted plants produce seeds that can be used by farmers for the next year of planting. This is because no commercial seed producers could easily extract a decent rent by breeding such plants even though they are of value to the farmer. The department therefore compensates for a market inefficiency by providing a public good.

In Health Canada, R&D aims to help protect public health and safety. Research at the department's Laboratory Centre for Disease Control does produce valuable IP but as a spin-off from its health and safety role. To push such an institution towards a commercialization goal would risk deflecting it from its primary purpose.

The pressure on departmental revenue streams and the view that the exploitation of IP might provide partial solutions, leads also to false expectations about the value of IP. One naive perspective is that many laboratories have gold mines of IP that could be converted to hard cash if only one knew where to look and how best to manage the mining operations. On the whole, expectations about the worth of IP portfolios tend to be too high.

Although major gold mines are unlikely to be discovered, the management of IP can often be improved and a number of departments are establishing or scaling-up IP operations. This brings new and sometimes inexperienced people into IP management. For these newcomers, IP management issues seem to be rather daunting because of their complexity. However, a strong and informal mentoring process seems to be emerging in which IP managers across departments are pooling their expertise supported by the FPTT which serves as a very important catalyst and clearing-house of new ideas and approaches.

Mentoring is extremely important because IP management involves "deal-making" for which rules cannot be readily codified. The inexperienced IP manager needs to acquire tacit skills - a rule book will not suffice.

Thus, the push to extract value from IP requires very careful management:

• deflecting R&D resources from their primary mandates becomes a risk if the pressure to extract revenues from IP becomes too intense;
• expectations about the worth of IP tend to be too high;
• inexperienced personnel are being introduced into IP management and need mentoring and guidance; experienced IP managers and the FPTT have important roles to play in skills upgrading.

Options for Revenue Generation

Revenue generation from IP is not an important goal for most government departments and agencies:

• fulfilling the primary mandate of the agency or department is the most important target; and
• maximizing socioeconomic benefits from government-sponsored IP is an important secondary goal.

Notwithstanding, government will acquire IP of commercial importance and will need to extract an appropriate return for the Crown from its use.

The experiences of government departments and universities around the would suggest that the revenue stream is strongly dependent upon the mechanism used to transfer the technology.

Licensing of patents produces the worst returns. Most often the revenues generated do not cover the legal and maintenance costs of filing patents.

Collaborative research between departments and firms to generate IP produces a much more important revenue stream than licensing. The acceptability of these kinds of projects will be very strongly dependent on the mandate of the participating department. For example, Health Canada which is responsible for the regulation of pharmaceutical products would find it difficult to undertake collaborative research with a single firm on new drug discovery. On the other hand, the NRC which has an industrial development mandate should be actively involved in this kind of work.

In instances where a laboratory supports a public good mandate, R&D can be performed in collaboration with industrial consortia which share the knowledge and then use it to develop differentiated products. For example, the NRC's Plant Biotechnology Institute in Saskatoon has produced a large number of strains of Canola in collaboration with an industrial consortium. The firms in the consortium are then able to cross-breed the plants to develop new products.

Equity participation in a company in return for the transfer of IP unquestionably produces the greatest returns. However, this is a very difficult area for government since departments and agencies are generally expressly forbidden to hold equity in private-sector firms. One option that is being considered by departments and agencies with an industrial development mandate is to license their technology to an agency of the Crown such as the Business Development Bank which can act in the private sector. For example, the bank could relicense the technology to a firm in return for equity participation.

This is a highly experimental area where guidelines are now being developed. The situation becomes even more complex when the firm receiving the technology has been founded by a government employee who is participating in the formation of a "spin-off". Balancing the legitimate goals of departments and agencies with industrial development mandates to encourage spin-offs and to benefit from the rewards against issues of probity and due diligence is a challenging area of IP management that is now being explored. One or two test models are likely to emerge over the next year.

In summary, the potential for revenue generation from IP is strongest in the case of equity participation, solid for collaborative research and weakest when the IP is licensed. Interestingly, the extent to which guidelines are available for the management of IP follows the reverse trend. Guidelines are well-established for licensing but are essentially non-existent for equity participation.

Management Issues

Interviewees identified a number of management issues that impact upon their capacity to maximize benefits from government IP. Two were discussed above. They are:

• lack of clarity in objectives - are departments and agencies to maximize benefits for the economy or for the Crown?
• false expectations about the value of IP portfolios.

Although these two issues cause some difficulties, others are far more important and relate to the management of the research itself.

In any well organized R&D effort, the protection of intellectual property forms part of the research strategy. The design of experiments is often dictated by IP goals as is the timing of investment in a promising research program.

A holistic approach to R&D that includes IP management in the development of projects is generally not found in government laboratories. Scientists develop IP in isolation and then submit their inventions for patent protection. The IP manager is isolated from the research effort and is unable to guide it so as to ensure proper protection.

Divorcing the IP manager from the R&D greatly weakens possibilities for commercialization. The IP manager does not have a full appreciation of the IP and the scientist is insufficiently aware of market potential. Government IP is promoted through advertising, the Internet, etc. The search for firms capable of exploiting the IP becomes ad-hoc and serendipitous. Serious marketing efforts to find the most competent collaborators are seldom undertaken.

The separation between R&D and IP management is compounded by a "publish or perish" approach amongst government scientists. This is exacerbated by performance evaluation criteria that encourage publication but seldom reward contributions to the development of intellectual property.

The weak links between R&D and IP cause researchers to be insensitive to IP needs. Undisciplined and careless disclosures occur at conferences and seminars thus weakening the IP position.

Finally, a great deal of government IP rests in the tacit skills of the researchers themselves embedded in "know-how" and "trade-secrets". The separation between the R&D and IP functions has led to a situation where this knowledge is completely undervalued and is not properly exploited for the benefit of the Crown or the economy.

Improvements can be made in the management of government IP:

• The IP manager must be an active participant in the development and management of R&D projects.
• The management of IP and R&D must be firmly integrated.
• IP management must feature as part of the research plan and must contribute to investment and timing decisions.

  IP managers need to be able to market R&D portfolios rather than promoting them. Choosing the right commercialization partners is a critical factor for success.

• Scientists and their managers need to be educated and trained in optimum approaches for organizing IP and for preventing careless and untimely disclosure.
• Contributions to IP and its management need to be incorporated into the performance evaluation criteria of government scientists.

The Search for Solutions

Despite the complexity of IP issues, managers have dealt well with the many problems that have arisen. Few interviewees report technical difficulties or impediments to their work that are associated with rules and regulations. The ability to write contracts and to construct licenses provide managers with the flexible tools that they need to fulfill their mandates.

An informal mentoring system has emerged that is strongly encouraged and facilitated by the FPTT.

Most IP managers recognize that codified rules and regulations cannot cover the myriad situations that arise. Tacit skills, hands-on experience, case studies, mentoring and broad guidelines are deemed to be as useful if not the preferred learning tools.

Since the IP manager is a "deal-maker" departments will have to accept the norms that apply in the private sector - some deals will be highly successful, some will be duds and from time-to-time errors will be made. These will be features of portfolio management.

Summary of Management Issues

Few management problems were reported that relate to rules and regulations that govern the management of IP.

Serious issues arise from the isolation of the IP manager from the research effort and from the general lack of discipline amongst scientists with respect to protecting the Crown's intellectual property.

Principles for the management of IP are often unclear according to interviewees and should be expressed in a series of simple guidelines.

Expectations about the value of IP are often too high and need to be scaled-down.

IP involves "deal-making". The management of IP and training of participants will involve the transfer of tacit skills and "know-how" which are deemed to be as important if not more important than codified rules.

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Guiding Principles for IP Management

The following principles for IP management were derived from the interviews, literature review and data collection conducted in this study. They are described in greater detail in an accompanying report entitled "Guiding Principles For The Management of Intellectual Property Issues - Summary Report".

1. Intellectual property (IP) must be managed as a tool to help departments fulfill their mandates. This is its primary function. No other consideration can equal or surpass the obligation to support the departmental mandate.
2. When government transfers IP to the private sector for commercialization, the objective is to maximize socioeconomic benefits for Canadians.
3. When split ownership of IP occurs, contractual arrangements must be managed so as to maximize possibilities for commercial exploitation. This will generally translate into efforts to focus control of the IP into the hands of a single player for a given application of the IP.
4. To facilitate technology and IP transfer to the private sector, government will use generally accepted industrial standards and norms whenever possible.
5. IP developed in a collaborative research and development with industry generally stands the best chance of being effectively transferred to the private sector and commercialized. This mode of technology transfer should be favored in the management of the IP. In instances where government research and development laboratories do not have a mandate to collaborate directly with firms, licensing of IP should be the favoured option.
6. For departments and agencies that have an industrial development or support mandate, project selection should involve careful consideration of the market potential and value of the IP being targeted. Managers of IP should be involved in this assessment.
7. IP may be embodied in various forms, including patents, copyrights, "know-how" and trade secrets. All forms of IP must be properly managed and respected.
8. IP management is an integral part of the research and development process. It helps define the optimum research strategy. Managers of IP should be part of R&D teams during the entire course of project development.
9. Human resources training is an essential component of IP management. It leads to improved R&D strategy and reduces the risk of premature disclosure. Departments must provide such training for scientists and their managers.
10. The importance of contributions to the creation, management and exploitation of IP must be properly reflected in job descriptions and performance evaluations of employees.
11. Government-created or -sponsored IP is an asset of the Crown. As such it must be treated with the same care and respect due to physical Crown assets. In particular, care must be taken to recognize the value of IP at the early stages of its development.
12. To maintain employment equity, rewards to inventors and innovators in government employment must be made according to uniform principles established by the Treasury Board. Appropriate rewards should be given to the employees directly responsible for the development of an IP and to members of the support team that contributed to the work even if they were only indirectly involved in the discovery.
13. The management of IP involves flexible business skills such as deal-making that are not readily translated into rules and guidelines. Given the complexity and diversity of IP issues, sharing of knowledge and experience across departments through mentoring and information exchange is considered to be an essential means for training and for management improvement.
14. When it awards an exclusive license thereby providing a monopoly to a firm, government should reserve the right to continue to use the invention in question for its own non-commercial purposes.
15. The continuance of licenses should be conditional upon the licensee achieving predetermined performance milestones so that government can recover its property if the licensee fails to properly develop and exploit the IP.
16. Licensees should be prohibited from assigning licenses to third parties without the consent of government since such an action may conflict with the obligation to maximize the use of the IP for the socioeconomic well-being of Canadians.