My fellow Australian patent attorney Andy Mukherji recently asked the question on this site: Are Australia’s listed IP firms doomed to fail? Doubtless the hyperbole was intentional, but Andy raises a fair point. The Australian IP professions – registered patent and trade marks attorneys (who, for the most part, would be recognized as patent agents rather than attorneys in the US) and IP lawyers – are currently engaged in what might well be regarded as a brave and daring experiment. Prior to 15 April 2013 the regulatory regime in Australia did not even permit patent attorneys to incorporate. Now, less than four years later, not only have many firms chosen to take up the option of incorporation, but Australia now has (to the best of my knowledge) the largest number of publicly-listed IP firms per capita in the world!
While these developments are certainly open to legitimate criticism, in my view they are a valid response to real challenges that the IP profession is presently facing in Australia. Indeed, I believe that these challenges are global. It is just that Australia, due to the relative small size of the domestic market, and our geographical distance from the world’s powerhouses of innovation in North America, Europe and Asia, is presently more acutely affected than other jurisdictions.
In publishing his article, Andy has firmly staked out where he stands in relation to the growing challenges faced by Australian patent attorneys. He, and presumably the firm in Brisbane, Queensland, for which he works, remain resolutely independent, continuing to offer clients the option of engaging attorneys who are free from the demands and expectations of shareholders, and from the potential ethical issues that may arise from acquisitions of competing firms by listed companies.
I, too, have responded to the changing work environment by declaring independence. In my case, I quit my job and will be exploring new and different opportunities and challenges that I hope may better suit my skills and interests. Given the options of working as a patent attorney for a publicly listed, or a privately held, firm, I choose neither! But my personal choice does not mean that these are not perfectly legitimate alternatives within a competitive market for IP services.
We should therefore try to look objectively at the issues raised in Andy’s article. Is delivering reasonable returns to shareholders at odds with providing high quality, and cost-effective, client service? Are concerns about real or perceived conflicts arising between firms held by a common publicly-listed entity legitimate? Will investor demands ultimately push up the cost of services? Are acquisitions by listed companies reducing competition and client choice? And, more fundamentally, why are so many Australian firms choosing to go down the path of public listing?
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The Australian Model of Public Ownership
So far, the model that the companies listing on the Australian Securities Exchange (ASX) have followed involves incorporating a holding company which acquires one or more incorporated, private limited, IP firms. The holding company then lists on the ASX, thereby raising capital for investment in the IP firms of which it is the sole shareholder, and for acquisition and development of further assets or other related enterprises.
As Andy explained in his article, this has resulted in the establishment of three publicly-listed companies, namely IPH Limited (ASX:IPH), Xenith IP Ltd (ASX:XIP) and QANTM IP Limited (ASX:QIP), which have collectively acquired nine of Australia’s pre-existing IP firms. These acquisitions, however, involved only one merger, between the firms of Fisher Adams Kelly and Callinans. Other than this, the acquired firms remain separate private companies, retaining their own branding, identities, employees, systems and clients.
Consolidation such as we are experiencing in the Australian market for IP services is not at all unusual. Indeed, as a 2002 article from the Harvard Business Review argues, it is an almost inevitable consequence of the maturing of an industry following establishment or deregulation. The objectives of consolidation generally include reducing costs and improving margins, for example by focusing on shared infrastructure and back office operations (such as accounting, marketing, and IT), achieving greater negotiating power with suppliers and customers, accessing new technology and practices, and expanding product/service lines.
A problem faced by patent attorney firms globally is the increasing commoditization of transactional services that were once the ‘bread and butter’ of the profession. Actions such as payment of renewal/maintenance fees, preparation of translations of patent specifications, and filing of national applications under the Patent Cooperation Treaty (PCT) or Paris Convention, have been increasingly computerized and centralized by specialist service providers. These companies have achieved economies of scale with which traditional patent attorney firms are unable to compete. Furthermore, because the services they provide are purely transactional, and do not involve the provision of substantive advice, no conflict arises in having competitors as clients.
Commoditization of patent prosecution is also a growing issue for Australian patent attorneys. According to IP Australia data, non-residents accounted for 92% of all standard patent applications filed in Australia in 2015. A majority of these applications are Australian equivalents, mostly filed as PCT national phase entries, of applications proceeding in one or more other jurisdictions. In many of these cases, the role of the Australian agent can be reduced to little more than following instructions of the applicant’s foreign or in-house attorney based upon the outcome of examination in the US or Europe. Not surprisingly, such clients are increasingly demanding advantageous fee arrangements, such as discounted rates and/or fixed-price prosecution, in exchange for their business.
Finally, as Andy noted in his article, the rate of growth of the market for IP services in Australia is modest, at only around four percent.
Smaller independent firms may find it increasingly challenging to survive, let alone prosper, in these circumstances.
In view of the factors discussed above, any IP firm looking for growth has limited options, all of which require significant investments. Competing profitably on transactional and basic prosecution services requires significant efficiency and productivity gains, including the deployment and use of extensive IT infrastructure. The limited growth in demand for traditional IP services can be addressed through acquisitions and /or diversification, e.g. into a range of new services or into other markets, such as south-east Asian countries.
An IP firm therefore has the same incentive for public listing as any other business, to raise capital for investment and expansion.
Conflicting Shareholder and Client Interests?
Under subsection 11(1) of the Code of Conduct for Patent and Trade Marks Attorneys 2013, the core obligations of a registered patent or trade marks attorney are, in order, to act:
- in accordance with the law; and
- in the best interests of the registered attorney’s client; and
- in the public interest; and
- in the interests of the registered attorney’s profession as a whole.
Notably, the interests of shareholders do not figure at all!
However, in a sense there is nothing new in this, other than that the shareholders are now members of the wider public. In a traditional firm structure, the shareholders are the partners or principals of the firm, whose professional obligations require them sometimes to act against their own short-term financial interests.
Accordingly, each of the three public companies identified this conflict of duties as a risk in its prospectus leading up to the initial public offering (IPO). While the exact wording differs slightly in each case, all list the above core obligations and declare the potential for companies in the group to be required to act in accordance with these duties contrary to other corporate responsibilities and against the interests of shareholders and short-term profitability.
Investors are therefore on-notice of these obligations and the associated risks. Of course, this does not mean that the market will not punish the companies if they underperform, even if that is due to acting in accordance with the Code of Conduct. On the other hand, I am a firm believer that acting ethically and in the best interests of clients is always to the long-term benefit of the company and its shareholders, and in this sense there is no conflict at all. The challenge for publicly-listed firms will be to ensure that they keep communicating this effectively to the market.
Conflict Between Clients of Different Firms
Under Section 19 of the Code of Conduct a registered attorney is obliged to maintain confidentiality of information received from clients, while Section 15 requires attorneys to avoid conflicts such as acting for one client against the interests of another. While an independent firm can endeavor to avoid conflicts on a continuing basis, by carefully vetting all prospective new clients, mergers and acquisitions potentially present a different kind of risk. For example, what happens when a client of one firm is a competitor to, or perhaps even already in direct dispute with, a client of another firm in a merged group?
As I have already noted, the Australian model of public ownership has so far resulted in only one merger. In all other cases, the firms acquired by the three public holding companies remain as completely separate operating entities. It is not a matter of having ‘Chinese walls’ in place. Rather, the firms within each group, and their employed attorneys, simply have no access to information, clients, or systems of the other firms in the group. For all practical, legal and ethical purposes,
therefore, nothing has changed in terms of the duties owed by each attorney, and each firm (themselves ‘corporate attorneys’ under the Australian regulations) to their respective clients.
Nonetheless, to the wider public this may be a subtle point. It is not enough that the firms within a publicly-held group be independent, they must also be seen to be independent. It is therefore pertinent that QANTM IP, as the only company to have acquired two IP firms (FPA and Davies Collison Cave) prior to its IPO, identified in its prospectus the risk associated with client perceptions. In particular, the prospectus notes that the common ownership structure may result in a loss of some clients’ business:
There is a risk that some clients may have a commercial concern as a result of DCC and FPA being jointly owned by QANTM. While the Firms will be operated as Separate Businesses, a client of DCC may, for example, take the commercial view that there is a conflict given FPA acts for one of its competitors. Similarly, a client might have engaged or wish to engage two Australian firms to provide it with some diversity in IP services and take the view that common ownership does not provide this diversity. Such perceived commercial conflicts may result in the Firms losing a client or failing to attract some new clients which would have a negative financial impact on the Company.
This is, again, more an issue of effective communication and education of the market than it one of any actual conflicts arising.
Costs, Competition and Choice
Further concerns about the consolidation and public listing of Australian IP firms include the potential for fees to rise to satisfy investor expectations, and for competition and choice to be lessened within the Australian marketplace. These are all possibilities, of course, but I see it as far from certain, or even likely, that there will be any adverse changes from a client perspective.
There are, presently, well in excess of 100 firms of patent and/or trade marks attorneys in Australia, operating across a broad range of price-points and service styles, from sole practitioners and small partnerships all the way up to teams housed within top-tier multinational law firms. That is an awful lot of competition, in a market out of which no firm can afford to price itself.
To succeed, the publicly-listed firms will need to leverage their access to capital to improve efficiency and productivity to increase profit margins, as well as to diversify into other services and foreign markets. Rather than decreasing client choice, this will create new service offerings and opportunities that have not previously been widely available in Australia.
Therefore, while I do not expect to see costs fall, I also do not expect to see any significant lessening of competition in IP services in Australia. Rather, I hope that access to new sources of capital via public listing will enable firms that may previously have been cash-strapped, and reliant on debt for investment, to provide clients with enhanced choice and levels of service delivery.
Conclusion – New Life for IP Services
The reality is that the IP services market has been stagnant in Australia for some time. Under the regulatory regime prior to 2013, when firms of patent and trade marks attorneys were prohibited from incorporating, most had limited access to funds for investment in service innovation, new technology, and growth. Reliance on debt and cash flow, in a market showing only modest growth, resulted in many attempts at expansion and diversification faltering.
That has now changed dramatically, with a number of firms consolidating into groupings with access to significant capital from the public market, greater negotiating and buying power, and new opportunities to achieve efficiency gains through application of innovative technology and sharing of back-end services.
While the ‘traditional’ career path to equity partnership may have been cut off under the new corporate ownership structures, public listing creates new opportunities to provide staff in all roles, i.e. not just attorneys, with financial incentives and a real interest in the success of the firm, such as through employee share schemes. Promotions, increases in responsibility, new challenges, and higher remuneration (including performance-based bonuses) are all possible within a corporate structure. Some adjustment may be required, but there will be no lack of career development for staff in these brave new organizations.
Any corporation or business can fail, e.g. due to poor management, unfavorable market conditions, or even plain old bad luck. But I see no reason why publicly-listed IP firms should be ‘doomed to fail’. On the contrary, my hope is that at least some of them will forge new and exciting paths that will save the IP profession from the risk of stagnation. Maybe they will not all succeed. Perhaps the future holds share buy-backs, demergers or further consolidation for some. But what that future will not be is dull!