Part 6: Intellectual property

Central government: Results of the 2004-05 audits.

6.1
Intellectual property is a generic term for a range of property rights that protect creations of the mind. The term “intellectual property” is defined1 as including rights for:

  • literary, artistic, and scientific works;
  • performances of performing artists, sound recordings, and broadcasts;
  • inventions in all fields of human endeavour;
  • scientific discoveries;
  • industrial designs;
  • trademarks, service marks, and commercial names and designations;
  • protection against unfair competition; and
  • all other rights resulting from intellectual activity in the industrial, scientific, literary, and artistic fields.

6.2
Intellectual property rights provide creators and innovators with the exclusive right, for a limited time, to control what others may do with their work. This exclusive right is justified on the grounds that it gives creators and innovators an opportunity to make a return on their investment, and provides an incentive for creative or innovative activity that might not otherwise take place. The benefits of this additional creativity and innovation are generally considered to outweigh the costs imposed on society by intellectual property rights.

6.3
The importance of scientific endeavour and innovation to New Zealand’s prosperity was emphasised in the most recent Speech from the Throne, in which the Governor-General referred to the Government’s intention to accelerate the commercialisation of research generated from within the public sector.2

6.4
The protection of intellectual property is governed by national and international intellectual property regimes. These regimes employ a variety of means, including copyright, patents, trademarks, design rights, plant variety rights, and layout design rights.3

6.5
The Auditor-General has an interest in the manner in which public entities protect their resources, including intellectual property.4 In particular, we note that intellectual property can represent a significant asset for tertiary education institutions5 (TEIs) and Crown Research Institutes6 (CRIs).

6.6
During the 2003-04 annual audits,7 we noted that some TEIs and CRIs were developing practices to share the benefits of commercialising intellectual property with employees.

6.7
We decided to find out more about these practices to better understand the issues, to provide some reassurance that any sharing of the benefits of commercialisation was being done with due probity, and to ensure that public entities had adequate policies for identifying, managing, and commercialising intellectual property. For example, the procedures for awarding benefits to staff should ensure that conflicts of interest are avoided and that staff do not receive benefits that should rightfully be owned by the public entity.

6.8
We therefore asked our appointed auditors of all TEIs and CRIs, during the 2004-05 annual audits,8 to obtain copies of each TEI’s and CRI’s policies and procedures for identifying, managing, and commercialising intellectual property.

6.9
We also asked our auditors to identify up to 3 examples where employees or contractors shared in the benefits of commercialising intellectual property. For each example, we asked the auditor to outline how the commercialisation of the intellectual property took place, the value of the arrangement, and the nature of the benefits shared with the employee or contractor. We asked auditors to identify and report whether the transactions in each example complied with the entity’s intellectual property policies and procedures.

6.10
In this Part we provide some background, report our findings from the 2004-05 audit returns, and provide some commentary and recommendations on identifying, managing, and commercialising intellectual property.

Background

6.11
Each year shareholding Ministers produce an annual Operating Framework for Crown Research Institutes, which conveys their expectations for the CRI sector and for individual CRIs.

6.12
The 2005 Framework discusses intellectual property (IP) and contains a statement of obligations on directors, including –

The IP policy of the company should be kept under active review. For the avoidance of doubt, Ministers are comfortable with policy that allows an individual or group of employees to benefit materially from their intellectual contribution.

6.13
The Tertiary Advisory and Monitoring Unit of the Ministry of Education is preparing a set of best practice principles for TEIs to use as guidance when commercialising intellectual property. We understand that these principles are likely to outline the need for a TEI to have clear policies on who owns intellectual property generated by staff, and what kind of sharing with staff might be appropriate.

Findings – Crown Research Institutes

6.14
All 9 CRIs have policies for identifying and managing intellectual property, and for commercialising intellectual property. Each CRI also has supporting procedures for identifying, managing, and commercialising intellectual property.

6.15
Most policies and procedures define intellectual property and make it clear that such property arising from the duties of an employee belongs to the CRI. The documents typically remind employees of the need to exercise caution and to seek approval for articles, presentations, and other activities that might reveal confidential information or inadvertently assign ownership. The documents generally specify that staff need to obtain approval before they can seek to register intellectual property (for example, by applying for a patent).

6.16
A number of CRIs provide a clearly documented process that is used to commercialise ideas. This is typically a staged process (for example, conceptualisation, screening, selection, development, and investment) with a specified process for senior management, committee, and Board decision-making. The processes usually specify that legal and other advice must be obtained.

6.17
While these policies and procedures provide useful background on intellectual property generally, the focus of our study was on the sharing of benefits with employees. Our examination of the 9 CRI policies supplied shows that:

  • Two clearly state that intellectual property is not shared with staff.9
  • One is silent on the matter.
  • Three mention that intellectual property could be shared with staff, but the documents supplied gave no details of the policies or procedures for such sharing.10
  • Three contain details of sharing intellectual property with staff, as described in the next paragraph.

6.18
The 3 CRI policies with some detail had these features in common:

  • a definition of qualifying commercialisation (such as receiving royalties, setting up joint ventures or subsidiary companies, or selling a technology);
  • a definition of eligible staff, in terms of contribution (such as inventing scientist, product champion, or support team) and duration of eligibility (such as being dependent on remaining in employment);
  • a specified formula for sharing the benefits with staff (a set percentage or a sliding scale of percentage against total revenue) or a statement that it will be considered case by case; and
  • reference to a decision-making process for sharing benefits (such as a committee or senior management), often with a higher-level approval for larger amounts.

6.19
The policies are reasonably clear in defining the total reward that would be provided for a particular item of commercialisation. They are less clear in defining the process for deciding which staff would be entitled to a share of the total reward, what their individual share would be, and whose judgement would be involved.

6.20
We received 6 examples of payments made to staff, all from the 3 CRIs that have detailed policies for sharing the benefit of commercialisation with staff. All 6 examples are in accordance with the policies (albeit with one case being a retrospective application of the policy to an event that had occurred before the policy was adopted). None of the examples involved the staff member being given an equity shareholding in a subsidiary or other company, although some policies did provide for this option.

6.21
Five of the examples involve the ongoing payment of a share of royalties or licence fees received from a third party for the right to use a product commercially. Across all 5 examples, a total of fewer than 10 staff received individual benefits of between $1,000 and $3,000 each year, dependent on the level of sales. The other example was a one-off payment after an item of intellectual property was sold to a third party.

Findings – tertiary education institutions

6.22
We received returns relating to 8 universities, 3 colleges of education, 19 polytechnics, and 2 wānanga. At the date of the preparation of this report, we had not yet received information from the auditors of 2 TEIs.

6.23
We report the TEI findings in 2 groups because there is a marked difference in intellectual property practices between these groups. The 2 groups are:

  • the universities (8 entities).
  • the colleges of education, polytechnics, and wānanga (24 entities).

Universities

6.24
The 8 universities all have policies and procedures for identifying and managing intellectual property. Nearly all also have policies and procedures for commercialising intellectual property.

6.25
The policies define intellectual property and assert the university’s ownership, with some clearly defined exceptions. In general, staff are able to retain ownership of scholarly publications and teaching materials (with some conditions), in keeping with academic traditions and scholarly activities. Students are not employees and own the intellectual property they create, with provision generally being made, through a written agreement, for shared ownership of intellectual property arising from the work of post-graduate students and their supervisors.

6.26
Most universities have established a subsidiary company to take responsibility for managing all cases of commercialisation of intellectual property. Seven policies refer to sharing the benefits with staff and students, while one is silent. There is limited reference to specific shares or any formula, but reference is made to principles (such as fairness and recognising relative contributions) and the need to negotiate on a case-by-case basis.

6.27
There are 3 ways in which the benefits could be shared with staff – a share of royalties or licence fees, an equity shareholding in a subsidiary or other company, or a share in the proceeds of a sale.

6.28
We received 15 examples of sharing intellectual property with staff.12 Fourteen of these examples conform to the relevant entity’s policy. The remaining example is an equity shareholding benefit not detailed in the policy. The auditor assessed this benefit as being reasonable on the basis of the supporting documentation and agreements drawn up between the parties involved.

6.29
Ten of the examples involve intellectual property that is licensed by the university to a third party to use. This third party pays royalties (dependent on the level of sales) to the university, which shares the benefit with eligible staff. The percentage received by staff was negotiated and varies from example to example, but we note that one-third shares (the university as a whole, the department, and individual staff) are common. While data is incomplete for 2 of these examples, the other 8 involve a total of fewer than 20 staff receiving varying individual amounts, with an average payment of $2,500 each year.

6.30
The other 5 examples involve equity arrangements. The intellectual property was transferred into the ownership of a company (either existing or newly established) in exchange for a share of the equity in that company. The equity holding was then split between the university and the staff who had contributed to the development of the intellectual property. The value of these equity arrangements to individual staff is unknown as it depends on the commercial success of the company over time. This will be reflected in the future share price and any dividends paid. From the information available to us, we have formed the view that the financial benefit to individual staff in some of the university examples could be substantial.

Other tertiary institutions

6.31
The 24 non-university TEIs (colleges of education, polytechnics, and wānanga) reported significantly less established practices for identifying, managing, and commercialising intellectual property. In summary:

  • Seven have no policies or procedures for either identifying and managing intellectual property or commercialising it.
  • Two have some general policy, but have not prepared any procedures.
  • Five have policies and procedures for identifying and managing intellectual property, but do not have a policy or procedures for commercialising it.
  • Ten have policies and procedures for both identifying and managing intellectual property, and commercialising it.

6.32
We note that the policies vary considerably in their coverage and comprehensiveness. Some are rudimentary while some are comprehensive, including a number that appear to have been modelled on some of the university documents. Those that do refer to commercialising intellectual property generally say that the benefits will be shared between the creator(s) and the institution, without specifying any formula or details. A number of entities reported that they were working on their policy at the time of our audit.

6.33
None of the 24 entities have examples of staff receiving benefits from commercialising intellectual property. This was because most entities have not commercialised any intellectual property.

Commentary – CRIs and universities

6.34
In general, the CRIs and the universities have policies for commercialising intellectual property and, in some cases, for sharing the benefits with staff.

6.35
Whether individual institutions should share the benefits of commercialising intellectual property with staff is a policy decision for the institution to make, within the context of any government policy. Our interest is in ensuring that any such sharing arrangement is managed appropriately with due regard to the protection of public resources and assets, and to probity.

6.36
We are encouraged by the fact that all the examples (with one exception) have been in accordance with the relevant entity’s policy, and that all examples have been supported by appropriate documentation.

6.37
We are also encouraged by the general presence of a decision-making group or process for exercising judgements (such as the relative shares and exactly who is entitled to participate in a particular case of sharing). These matters are properly for the judgement of management or the Board or Council (guided by the policies), as opposed to being decided by those who could potentially personally benefit.

Commentary – other tertiary institutions

6.38
For the other TEIs (colleges of education, polytechnics, and wānanga), the situation is less clear. It is not clear how much intellectual property such institutions create.

6.39
However, it is clear that there is currently little commercialisation of intellectual property. This may be because there is little intellectual property in the first place or it may be because the institutions are not taking advantage of opportunities to commercialise the intellectual property they do possess. We note that about 40% of these institutions have policies for commercialising intellectual property and assume that they have done so because they envisage there being opportunities to commercialise now or in the future. On this basis we also assume that most of the other 60% have similar opportunities.

6.40
We recommend that each institution first consider what intellectual property it generates and then make an assessment of the possibility of commercialisation. If there is a reasonable prospect of commercialisation, the institution should prepare (or enhance) a policy to govern this commercialisation for the benefit of the institution. Whether such a policy provided for any sharing of the benefits with staff would be a decision for the institution’s governing Board.

Conclusions and recommendations

6.41
We chose to look at the management and commercialisation of intellectual property, and any sharing of benefits with staff, because we have an interest in how public entities protect their resources and whether they act with due regard to probity.

6.42
We expect that public entities with opportunities to commercialise intellectual property will have clear policies and procedures, including procedures to ensure that decisions on the sharing of benefits with staff are made with due regard to the protection of public resources and to probity.

6.43
We found that CRIs and universities have policies that provide clear decision-making processes. There were no probity concerns in the examples we examined. The situation with other TEIs (polytechnics, colleges of education, and wānanga) is less clear because of the varied state of their policies and procedures. We recommend that each institution first consider what intellectual property it generates and then make an assessment of the possibility of commercialisation.

6.44
As with any corporate policy, we recommend that the universities and the CRIs monitor the operation of their policies and periodically review their policies based on their experiences and on developments in good practice.

1: See Article 2(viii) of the Convention Establishing the World Intellectual Property Organisation 1967.

2: November 2005 Speech from the Throne.

3: A useful reference site on intellectual property is www.med.govt.nz.

4: The term “public entities” is defined in section 5 of the Public Audit Act 2001.

5: TEIs include the universities, polytechnics, colleges of education, and wānanga.

6: The CRIs are the 9 research-based companies established under the Crown Research Institutes Act 1992.

7: These audits cover the year ended 31 December 2003 for TEIs, and the year ended 30 June 2004 for CRIs.

8: The returns cover the year ended 31 December 2004 for TEIs, and the year ended 30 June 2005 for CRIs.

9: This means that there is no direct reward or sharing of the revenue from commercialising a particular identified piece of intellectual property. It does not preclude less direct recognition, for example in a performance assessment and annual salary review process.

10: One of these reported that a policy was being prepared.

11: We asked for up to 3 examples from each CRI but did not ask how many cases there were in total. It is therefore not possible to estimate how many cases there were.

12: As with the CRIs, it is not possible to estimate how many cases there were in total.

13: A number of agencies have an interest in good practices in managing intellectual property. We draw attention, for example, to reports published in 2005 by the New South Wales Auditor-General (Follow-up of Performance Audit: Management of Intellectual Property) and by the Victoria Auditor-General (Managing intellectual property in government agencies).

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