Industry Committee on May 17th, 2012

[The Chair, Conservative, David Sweet]

Good morning, ladies and gentlemen. Bonjour à tous. Welcome to the thirty-second meeting of the Standing Committee on Industry, Science and Technology. We have a cavalcade of witnesses with us today.

From the University of Waterloo we have Scott Inwood, the university's director of commercialization. From the University of Manitoba we have David T. Barnard, president and vice-chancellor, and Digvir Jayas, vice-president, research and international. As an individual we have Catherine Beaudry, an associate professor in the department of mathematical and industrial engineering at the École Polytechnique de Montréal. By video conference we have Gay Yuyitung, the business development manager at the McMaster industry liaison office.

Welcome, ladies and gentlemen. We're very happy to have you here informing us for our study right now.

Why don't we go first to the person who is remote.

Madam Yuyitung, could you go ahead for seven minutes with your opening remarks, please?

[Gay Yuyitung, Business Development Manager, McMaster Industry Liaison Office, McMaster University]

Thank you very much for inviting McMaster University to participate in the standing committee's study on the effectiveness of the current intellectual property regime in Canada.

I will be speaking from the perspective of our office that supports and services the research administration area of the university. In this capacity our office offers a variety of functions related to the management of the university's intellectual property, including negotiating the rights to intellectual property generated at the university through research collaborations with industry; assessing inventions derived from university research, and filing for intellectual property protection; and developing and implementing commercialization strategies for such intellectual property with respect to licensing or startup potential.

The standing committee's examination of Canada's intellectual property regime and innovation support mechanisms is very much welcomed, as McMaster University, through its VP research office, is currently undergoing a review of its policies and procedures in these areas.

That being said, it should be noted that commercialization of technology created at the university is auxiliary to the university's core mission of teaching, research, and scholarly publications. As such, the resources to undertake the commercialization of university technologies are often quite modest and becoming more so with the overall budget pressures that all universities are facing.

University-created technologies are typically at a very early stage of development, where the technical market risks are high and uncertain, and the path to commercialization is long and arduous. In general, given the university's small patent budgets and the high cost of drafting and prosecuting patent applications, as well as the long time to issuance of such patents in the Canadian system, very few patents can be supported by the university on its own. However, most sources of government funding for further research and development at the university toward a commercialization end point requires some form of intellectual property protection, typically in the form of a patent.

The current practice of McMaster University is to initiate patent filings. But without a source of additional funding, be it an industrial partner, investor, or granting agency, many applications become abandoned before commercialization is realized. These issues are magnified in the biotech and health sciences sectors, which typically require not just a single patent but a family of well-protected patents for commercialization, which universities are ill-suited to build. This can result in stifling the development of truly innovative products, or causing many of these innovative ideas to be sold early to large multinationals, with limited benefit to the Canadian economy.

For other sectors, such as software, we typically do not file any patent applications due to the rapid change of technology advancements in this sector. The need to invest limited dollars in being first to market, versus using patents, is a form of gaining competitive advantage.

An additional consideration is the cost of filing for patent protection in Canada. For many inventions the market opportunity is much larger in the United States or other international markets. While McMaster currently supports prosecution of its patent applications in Canada, we are evaluating the value and benefit of this strategy. We know of other universities that do not file in Canada as a general rule.

Recent encouragement has been given to universities from government to extract additional value from their technology portfolios, but the value universities should be measured by needs to extend beyond simply generating revenue from university technology. It should include the impact we have on job creation, increased company productivity through research collaborations, and training of student entrepreneurs.

A university can build a culture of applied research commercialization through supporting faculty members' interests in innovation technology transfer. A university can also serve as a major component in the innovation ecosystem that encompasses elements internal to the university, as well as external parties that are supportive and knowledgeable about innovation.

We would encourage the Government of Canada to investigate ways to cluster the material resources, such as funding, equipment, and facilities; the human capital, such as faculty, staff, students, and industry researchers; and the institutional elements, such as university infrastructure, government-funded centres of excellence, funding agencies, and the co-location of industrial partners. Those are constituent elements of the innovation ecosystem needed by entrepreneurs and companies to support their endeavours.

Ontario currently has a number of successful innovation ecosystems centred around the MaRS Discovery District in Toronto, and Communitech at the University of Waterloo, but there's a need for more. The university can play a significant role in the innovation ecosystem through its support of basic and applied research, its performance in research contracts with industrial sponsors, its training of highly qualified personnel, and early-stage technology transfer. But further support would be welcomed to develop ecosystems that include more entrepreneurial education, larger pools of funds to support both research and patents, development of start-up service providers, and fostering executive mentorship programs.

The failure to leverage the value of the investments made by university research deprives both the university and society at large of benefits to which they are both entitled.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much.

Now we'll start from the top of our order.

Scott Inwood from the University of Waterloo, you have seven minutes.

[Scott Inwood, Director, Commercialization, University of Waterloo]

Good morning, honourable members. Thank you for inviting me to this standing committee meeting.

I've read over the years many reports on commercialization and intellectual property protection. It's actually refreshing to be invited to this kind of format to give you a perspective right from the coal face, from a practitioner's point of view. So again, thank you for the invitation this morning.

I'll make a few brief remarks about the University of Waterloo and set the context for my following remarks.

The University of Waterloo is a relatively new university, incorporated in 1957. It was incorporated with a couple of key principles. One was the co-op education program. It was designed to have a closer working relationship between industry and academe. With students going out into the workplace, learning practical skill sets, and bringing that back into the learning environment, professors would then get that continuous feedback mechanism—which is what's relevant and practical to industry—and that would then get introduced back into the classroom.

Along with that, the university focused on engineering and math in its earliest days. We were the first university to have a faculty of math. It was very much driven by a desire to work closely to solve industry problems. The university's pedigree was based on this closeness to industry, on industrial relevance, bringing that into a learning environment.

The third pillar on which the university was built was an intellectual property policy that granted ownership to the inventors. The principle behind that was that incentives drive commercialization activity. Incentives are is a motivator to actually take innovation, create it under their research programs, and move it out into the marketplace.

That inventor ownership policy has been responsible for attracting more entrepreneurial-oriented faculty members. It draws to the University of Waterloo certain types of faculty members, those who are interested in commercial activity. And actually, those kinds of faculty members play nice with industry, so there's a very interesting dynamic. It's a culture that's been cultivated at the university right from inception.

In the Canadian university IP landscape, I guess the relevant contrast is with the U.S., where intellectual property is owned by the institutions under the Bayh-Dole Act, whereas in Canada it is policy driven. Each individual university sets policy with respect to its intellectual property ownership practices. Approximately 40% of Canadian universities have a form of inventor-own or joint ownership policy. The rest, of course, would be institution-owned.

Waterloo's policy, as I mentioned earlier, is an inventor-own policy. The philosophy is that ownership attracts high-quality entrepreneurial researchers, and incentive is the best motivator to promote the transfer of technology. The result is that UW is widely acknowledged as one of the most entrepreneurial research environments in Canada.

One might wonder why there is a technology transfer office at Waterloo, then, if faculty members own it. Of course not every faculty member is entrepreneurial. There are many who would prefer to just stick to their academic pursuits. Our office is there as one of many options for our faculty inventors and creators to support commercialization activity.

So we are there, and we have to market our services to our faculty members. It forces us to be more customer-focused. It requires us to be proactive in finding the best researchers, and marketing our services to them, and actually offering them a value proposition.

If they work with us, the concept is that we share revenues: 75% to the creator-owners, 25% back to the University of Waterloo. As a consequence of both the ownership policy and the revenue-sharing model, it's one of the most attractive inventor commercialization environments in Canada from a faculty member's perspective.

You can't talk about intellectual property without talking about commercialization. IP, or patents in particular, is almost always a prerequisite for commercialization, with the exception of software, where you don't necessarily need patents. The Institute for Competitiveness and Prosperity has indicated that a solid measure of a region's innovative capacity is patenting. Compared to the U.S. peer jurisdiction, Ontario's patent per output is 55% lower, and intellectual property represents 45% to 75% of corporate value of the Fortune 500 largest companies. It's quite clear that in intellectual property, having patents or investment in patents is a necessary precursor to future commercial opportunities and the creation of wealth.

Universities often make very early and thus very risky investments in intellectual property. We see stuff that's very early. In fact, it's not uncommon for colleagues—Gay, me, and others—to see faculty members come into our offices two days before a conference, when they're about ready to disclose the technology, requesting patent protection to be filed to preserve an opportunity. Then of course you're forced to make decisions very quickly.

Fortunately, there are very affordable ways to file patent protection to preserve those opportunities, but we're in a very fast-moving environment sometimes, and we're forced to make decisions on value propositions on stuff that's very early and without a lot of feedback as to what the market opportunity might be.

Essentially, we're in a position where we are creating an asset. Our investments preserve an opportunity for future commercialization, commercialization beyond intellectual property. IP or patents are essentially an ante to play in the commercialization game. Universities most commonly operate in the pre-commercialization gap space. We spend a lot of time validating technology performance through prototyping and demonstration projects. There are a number of federal and provincial programs that support those activities, such as the NSERC idea to innovation program. We spend a lot of time trying to de-risk technology opportunities to attract commercial interests. De-risking is very important for both licensees who may want to take on the technology and for angel investors who may want to invest in actually creating a start-up company.

Commercialization is done by the private sector. It's either by investment or by licensing. Universities don't commercialize. Universities set the conditions that enable future commercialization. I think that's a key distinction. A lot of people talk about university and commercialization. It should be viewed more as setting the stage for commercialization.

In Waterloo in particular, we have a philosophy that it takes a village to raise a child when it comes to start-ups. Start-up companies require government support, financial support, industry support, and also community support. In Waterloo, we have a very entrepreneurial ecosystem. We have the Accelerator Centre in town, where technologies and young companies can be incubated with mentoring services, and a very active industry association, Communitech, which provides mentoring support and best practices and support for finding financing for these young companies.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much, Mr. Inwood.

Now we will go the University of Manitoba.

Are you going to split your time, Mr. Barnard, and Mr. Jayas? You have seven minutes.

[Dr. David Barnard, President and Vice-Chancellor, University of Manitoba]

We will, if that's all right.

[The Chair, Conservative, David Sweet]

Absolutely. Please, go ahead.

[Dr. David Barnard]

Thank you. We appreciate the opportunity to be here. We realize there's been a change in your schedule and a change in ours. As a result, though,

we do not have our notes in French today.

We apologize for that, but the time just wasn't available.

We're interested in increasing the impact of our research. We have a strategic planning framework that talks about building on strengths of the university, responding to the reality of being in Manitoba, because where we are shapes who we are, and having a broader impact. To advance this strategic agenda, we've had to revisit some aspects of the infrastructure of the university broadly considered, including policies and, specifically, policy around intellectual property. We're discussing a new approach. We're in the early stages, but we thought it would be potentially instructive to the committee. If I may, I'll ask my colleague, Digvir Jayas, the vice-president of research and international, to describe it to you.

[Dr. Digvir Jayas, Vice-President, Research and International, University of Manitoba]

Thank you very much for the opportunity to speak to the committee.

Currently, at the University of Manitoba, our policy is that the intellectual property is jointly owned between the university and the inventor. We look at the intellectual property as two separate items: one is intellectual property that can be commercialized; the other is the works themselves, which are original literary, dramatic, musical, or artistic works or performances protected under the Copyright Act.

We separate them and we deal with them differently at the University of Manitoba. Works are owned by the creator, whereas the other intellectual property is owned jointly. We do the commercializing of the other intellectual property through the university's technology-transfer office, either through licensing or through spinning off the companies.

When we develop collaborative projects with industry, industry would like to have the ownership or assignment or exclusive licence to that IP. A lot of time is spent in negotiating. The approach we are taking is that if industry is involved in a project we would allow them to have the exclusive right or assignment of that IP. In a sense, they would have full control of the IP.

We are looking at industry being responsible for deciding whether to protect the IP and manage it through its life cycle. If students are involved, naturally we would want the students to be able to graduate, to defend their thesis. At the same time, we would be willing to delay the public exposure of their research for up to six months, and in exceptional cases for up to a year, so the student's career would not be affected. Researchers would be allowed to publish their collaborative work with the industry, but the industry would have the right to review the material, decide whether it is protectable, and to protect it. Industry partners would allow the university to continue to use the IP for non-commercial, internal research. Because works are owned by the researchers, our researchers would agree to allow industry access to literary works for their internal use.

In return, we are asking our industry partners, who would have full control of the IP, to assess the value of that IP. We are getting feedback from them on the percentage of the royalty we would receive in return for their having full control of the IP. We are having consultations. Our consultations with our research community have shown that this is a model they would like to work within. Many of the industries with which we have consulted also like the model we are proposing.

The advantage of this approach is that the university would continue to receive royalty income, which we would share 50-50 with our inventors. So the inventor is still being recognized for his contribution and the university is receiving some return on its contribution. Industry partners are already the existing receptor of that IP. So by having the right to receptor capacity, issues are solved. They are interested in that IP: they want it to be sold so they can grow their technology.

There would be a significant saving in the costs of negotiating, because the percentage would already have been agreed upon. There seems to be quite a good reception on the part of industry, as they want to work within this model. The negotiation time would also be reduced quite significantly and this should foster a lot more industry-university collaboration.

The advantage we see for our students, in particular, is they would be working then on the problems that have real application and very short timeframes. In that situation they would be exposed to both the basic research required to solve an applied problem and a current problem of the issue. Certainly, there would be some perception that the university is helping industry in this particular case. But we are helping all industry that wants to work with the university, so we are not saying we would only work with such-and-such industry. We are willing to work with any industry in that kind of open model, so it is quite a flexible model in that sense. The reason researchers would want to work in this kind of model is that it is going to benefit their research program and their research program will grow with time. Overall, we think this approach would help us grow our collaborations with the industry and then utilization of that IP for economic growth in provinces and in Canada.

Thank you.

[The Chair, Conservative, David Sweet]

Thank you very much.

Now we'll go on to Madame Beaudry, associate professor, department of mathematical industrial engineering,

from the École Polytechnique de Montréal. Ms. Beaudry, you have seven minutes.

[Catherine Beaudry, Associate Professor, Department of Mathematical and Industrial Engineering, École Polytechnique de Montréal , As an Individual]

Good morning.

I trust you have received my text in French and then you have a translation in English. Yes.

So I am going to continue in French.

My position is slightly different from my colleagues'.

As a user of patent data for my research, I have two topics to speak to you about this morning. The first deals with the use by and impact of intellectual property on high technology, especially biotechnology, companies. My second subject, which may seem less relevant at first glance, concerns the intellectual property generated in full or in part by universities. I realize that this is exactly the same topic that my colleagues brought up earlier this morning.

On the first topic, since 2007, I have been able to work with the data from four Statistics Canada surveys on the use and development of biotechnology in Canada. These surveys, conducted in 1999, 2001, 2003 and 2005, were combined with Statistics Canada's Business Register to evaluate the growth and survival rates of those companies through to 2009.

The role of intellectual property was evaluated in those studies. In regard to the survival of small biotechnology companies in Canada, i.e. those with fewer than 50 employees, our results show that a high number of patents increases the likelihood of not surviving through to the next year by 0.72%. In other words, extra patents reduce the chance of surviving an extra year by 0.72%. While this figure is not huge, it nonetheless suggests that support mechanisms should be established to protect intellectual property, particularly for small businesses.

As regards growth measures, our results show that the number of patents does not appear to affect businesses' performances. Rather, we have found that patents have a non-linear effect on growth. In other words, patents have a positive effect on the growth of biotechnology companies until they number about 60. Above that threshold, further patents adversely affect the growth of small businesses in the short (two years) and medium (four years) term.

We have also studied the growth of so-called “gazelle” firms, or companies that have doubled in size within four years. In this case, the presence of small and medium-sized enterprises with strong growth have a clear and positive effect on the rapid growth of those businesses. The patents of those businesses are likely “good” patents in that they contribute to their rapid growth.

It is important to note that, in order to assess the quality of the intellectual property of those businesses, the Statistics Canada surveys would have to be combined with the register of patents for Canada, the United States, Europe, Japan, etc. This type of study is, for the moment, quite complicated.

In terms of the factors that contribute to innovation, measured in terms of number of patents or number of products, as I have but seven minutes for my presentation, I will be able to answer your questions to that effect later on.

The second subject I would like to share with you this morning, somewhat related to my colleagues' remarks, concerns the corporate university. I have studied the influence of patents on scientific production as well as the tendency of university researchers in biotechnology and nanotechnology to seek patents. Which factors affect these two measures? In the first case, our studies show, as does the literature, that patents have a way of reinforcing scientific publication. There is therefore no effect of substitution between patents and scientific publications. However this strengthening effect disappears after about 20 patents over a three-year period. The effect then becomes negative and hence reduces the scientific performance in terms of publication. It seems that researchers are somehow choosing to patent rather than to publish.

In terms of the quality of those publications, an inverted U curve is observed for the number of citations obtained by these publications. Once again, this comes down to the researchers' choice.

In regard to the tendency of university researchers to seek patents, our research shows that it is primarily the fact of cooperating with private enterprise, as measured by the amount of industrial contracts awarded to researchers, that influences the propensity to seek broader patents with a larger number of claims and to obtain more citations, two indicators of patent quality.

If we consider only patents of university inventors, our research shows that the contracts have a positive effect on the number of patents granted to researchers, but that that effect becomes negative in terms of the number of citations obtained by those patents. However, public funding has a positive effect on the number of patents up to about five; thereafter, the effect becomes negative.

In other words, private financing and, to a certain point, public financing, influences the number of patents, but only public financing influences patent quality, as measured by the number of citations.

Before concluding, I would like to mention a related topic that I will not have the time to speak to. This is the leaking of intellectual property out of Canada. These are patents in which Canadian inventors have participated that are owned by foreign interests.

In nanotechnology, a little over 40% of the intellectual property leaks across our borders. This is a marked improvement over the mid-1970s, when the figure was about 60% or 70% of the intellectual property. In addition, these are the patents that list the most claims. So, theoretically, they are those with the broadest scope.

Should we be concerned? It would be useful to consider the issue across all sectors, which is what I hope to do this summer.

I have covered a lot of ground; what can we conclude from all these studies?

In terms of biotechnology companies, the race to the patent house may in fact undermine small businesses and compromise their survival. Support mechanisms should therefore be established to support the protection of intellectual property for small businesses.

It is also necessary to allow and facilitate the combination of data on businesses, their performance and the characteristics of their intellectual property, as well as to construct longitudinal studies on businesses' performance in terms of growth and innovation. Without these indicators, we will never be able to say whether or not there is an impact and whether we want to change the intellectual property protection system.

But with these indicators, we will be able to optimize modifications to the system to ensure better performance by Canadian companies.

In terms of the corporate university, the importance of links to business is well established. However, we must still be careful not to neglect the discovery research usually financed by the public sector that feeds those applications, as the source could dry up. It will also be important to examine the impact of the leaking of intellectual property across our borders, because that generates no value for Canada.

Thank you for your attention. I will be happy to answer your questions in French or in English and to provide you with more details on my research.

Thank you very much.

[The Chair, Conservative, David Sweet]

Merci beaucoup, Madame Beaudry.

Now we'll move on to Mr. Braid for seven minutes.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Thank you very much, Mr. Chair, and thank you to all of the panellists for being here this morning and for your excellent presentations. We got a great cross-section of perspectives from universities across the country. So thank you.

Madam Yuyitung, I'll start with a question for you, if I could. You indicated in your opening remarks that one of the things you and your office do is to evaluate where or in what jurisdiction a patent should be filed—or you're currently undergoing that process of evaluation. Could you elaborate a little bit on that and explain what criteria go into that decision-making process in terms of where to file a patent and why?

[Gay Yuyitung]

We file a provisional patent application in the U.S., partly because, as Scott said, there are times when professors come into our office and say that they're going to be presenting this in the next day, and so we have to file something quickly. Plus, it's just a very cost-effective way.

So we file it originally in the U.S. as a provisional application, which isn't reviewed for 12 months, and then we have 12 months to file a regular filing. Usually we'll try to file that either as a PCT, which allows us to then declare in a country 18 months after that.

In terms of—

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

I'm sorry to interrupt. Could I ask then why you're deciding to file in the U.S. and not Canada in those instances? Could you clarify that?

[Gay Yuyitung]

We file the original U.S. provisional application because it's a simpler process. I think there's a Canadian [Inaudible--Editor], but we just have that as our standard process. That part isn't reviewed, so in some ways it doesn't matter where that part is filed.

When we enter the national phase, our evaluation of that depends on the market opportunity, where we think the potential licensees or market is going to be for that invention, and also just the cost of what that's going to be.

Typically we don't file in Europe and Asia because of the translation costs, unless we have someone who's going to be picking up those costs.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

What makes the U.S. process simpler?

[Gay Yuyitung]

You mean for the provisional stage?

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Yes.

[Gay Yuyitung]

It's partly because a registered patent agent is the director of our office, so she's familiar with that process. That's part of the reason we do it.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Great.

Mr. Inwood, what criteria go into evaluating where a patent is filed, and could you elaborate on what the statistics look like from your office of commercialization in terms of the patent filing jurisdictions?

[Scott Inwood]

I would echo some of the comments that Gay just made. The U.S. offers a very informal patent filing process. It's called a U.S. provisional patent. It's very cheap. You don't need to spend a lot of dollars with patent agents to formally structure the patent in the claims that might typically be associated with a patent.

You can literally take a manuscript, send in a fee of $150, and get a stamp. You get a date on which you claim your invention. After that date, you have one year to formalize your patent through any international patent jurisdiction. A PCT, patent cooperation treaty, is where we would go to the next step. So we have one year to file that application. We could file that in Canada as a PCT. A PCT then allows you to springboard into any other country in the world within 18 months of your first filing date.

So this is a strategy that almost any technology transfer office uses, I would say not just in Canada but probably in the world, because the U.S. offers this particular informal way of filing a patent quickly and affordably. That is recognized in all the other patent jurisdictions in the world. So this is what I call common practice.

So the real decisions have to be made within one year. You've got that 12-month cheap window to operate within. Within that year, we've got to figure out where the markets are, where the potential commercial partners are, if we're going to spend money. The big money starts at 12 months with that Canadian PCT filing, and after that you're into much heavier expenses in international jurisdictions with various translation costs, and we'll only continue investment patents to the extent we have commercial traction. Have we got somebody who's interested in the technology, somebody who wants to license it, someone who wants to pay these costs as we move forward?

So you should look at universities as a place holder. We try to create an asset and hold it for a period of time but we only have a limited bandwidth in which we can keep that investment. If we don't have commercial traction from Canadian partners or investment start-up companies, or international companies for that matter, then at some point we have to off-ramp. We can't afford to keep paying patent costs just to hold it for prospective opportunities.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Right. Moving on to another topic, you mentioned something in your opening remarks that I want to follow up on. You said that in some cases new software inventions don't necessarily need patents. Could you elaborate on that? Since this study began I have been getting some feedback from constituents on Twitter about this very topic.

[Scott Inwood]

The only jurisdiction in the world that allows pure software patents is the U.S., and they have fallen into disfavour. They're very expensive to prosecute as well.

Software is primarily protected through copyright. You keep your source code secret. You don't let people see how your algorithm is structured and how the software is working, and you can commercialize those products with safety behind the copyright protection, keeping your source code secret. It's almost like know-how.

The software world moves so fast. A patent can take up to five years to issue, in some cases. In that space, the IT and software world, five years is yesterday's news, so there's not much point in investing in those kinds of patent applications. They're not really a good time effort. You really want to get first-mover advantage with software. Get it out there, commercialized, get product traction, get eyeballs, hits on web pages, etc., and source code copyright protection is more than adequate to provide companies proprietary advantage with software.

[Peter Braid, Conservative, Kitchener—Waterloo, ON]

Mr. Inwood, one of the reasons we've embarked on this study is that we want to understand how government can facilitate and support the IP framework in Canada and facilitate the commercialization of inventions and technologies. Do you have any thoughts on the role of government and what we can continue to do?