20.3.1 The Existing EU IP Framework

The first reason for EU harmonisation is linked to parts of the EU’s secondary law.Footnote ⁴³ Various legal acts refer to UMs in their scope of application. Given the heterogeneous nature of UM protection within the EU Member States, it is unclear under which conditions a legally protected subject matter is considered a UM and therewith falls in their scope.Footnote ⁴⁴ For example, Regulation 608/2013 on customs enforcement of IP rights (Customs Regulation, IPCR) defines UMs as an IP right (Art. 2 (1) (k)). The Regulation sets out the conditions and procedures for action by the customs authorities regarding goods suspected of IP infringement. However, the Regulation does not define what a UM is or what conditions qualify a protected subject matter as such. As discussed earlier, the conditions for UM protection clearly varies within the EU Member States that afford protection to UMs.

The situation is similar for Directive 2004/48/EC (Enforcement Directive, IPED). The IPED does not mention UMs explicitly, but it does apply to any infringement of IP rights as provided for by EU law and/or by the national laws of the Member States (Art. 2 IPED) without defining what an IP right or UM is.Footnote ⁴⁵ It is therefore unclear which kind of national sub-patent rights the Member States must protect with the full spectrum of measures, procedures and remedies enshrined in the IPED. Even an early draft of the EC’s proposal for a regulation on standard essential patents included UMs within its scope.Footnote ⁴⁶ It would have raised a similar uncertainty, though subsequent versions of the proposal removed UMs from its scope.

The lack of a common concept of UM creates not only issues for the application of the EU’s secondary law but also for its interpretation. The aforementioned Customs Regulation and Enforcement Directive set certain standards for the enforcement of IP law. In the last decades, awareness has been growing that a one-size-fits-all approach is detrimental to an efficient IP framework. A more holistic approach is required taking into account the nature of the IP right, the context of the infringement and the proportionality of a remedy.Footnote ⁴⁷ If the ECJ were to decide on the requirements to issue a preliminary injunction based on a UM under Art. 9(1)(a) of the IPED, it would be impossible to strike the right balance without having a common understanding of the protected subject matter the law intends to enforce. A holistic approach would need to differentiate based on the conditions for UM protection in the Member States. This distinction is crucial because the right balance significantly varies whether the subject matter is a trivial advancement, possibly even obvious to a person skilled in the art,Footnote ⁴⁸ or if the national UM is essentially a full-fledged patent with just a shorter duration and no prior substantive examination before the grant.Footnote ⁴⁹ One might argue that patentability requirements are neither harmonised by the EU, so these uncertainties are not specific to the UM rights but to the protection of inventions on a more general level within the EU. A significant distinction to patents is, however, that the conditions for patent protection are harmonised either through or as a consequence of the Strasbourg and the Munich conventions.Footnote ⁵⁰ Moreover, a general framework can be found in Article 27 ff. of the TRIPS Agreement that brings the national patent systems within the EU closer together than the UM systems.

One might think that an ECJ interpretation of the term “UM” or “IP” after a referral by a national court could have at least a similar effect. With its preliminary ruling in “Cofemel”, for example, the Court set the requirements for copyright-protectable work due to the absence of a definition in the various legal acts of the EU.Footnote ⁵¹ However, the situation in copyright law is hardly comparable to UM law as various legal acts by the EU design a copyright framework with exploitation rights, limitations and exceptions, etc.Footnote ⁵² These legal acts as well as the respective decisionsFootnote ⁵³ give at least a certain guidance on a general understanding of copyright law as well as some key features of the copyright framework which hints towards an EU concept of “work”. There is no secondary law of the EU addressing UM protection. Moreover, UMs are registration rights where legal clarity provided by a Directive or Regulation is more important than in the field of unregistered rights such as copyrights.Footnote ⁵⁴

20.3.2 The Single Market

The second reason for the introduction of an EU UM law refers to the concept of the EU single market and is based on the EU’s primary law. The discussions which took place in the 1990s and the proposals of the EC have already featured these aspects.Footnote ⁵⁵ The recitals of the two proposed directives outline the porous nature of the protection of UMs across the EU and the differences in the existing UM protection systems, which have the potential to obstruct the free movement of goods and distort competition within the internal market. The explanatory memorandum mentioned explicitly Art. 2,Footnote ⁵⁶ Art. 3(c),Footnote ⁵⁷ Art. 3(g)Footnote ⁵⁸ and Art. 7aFootnote ⁵⁹ of the old EC Treaty in this regard. According to the Commission, the fragmentation of protection forces right holders to avoid markets in which they cannot obtain an equivalent protection for their invention.Footnote ⁶⁰ Moreover, the significant variations between national systems make it even more difficult to obtain cross-border protection as an invention which qualifies for protection in one Member State may not qualify, at least not on the same terms, in another, according to the EC.Footnote ⁶¹ These aspects trigger a need for legal expert advice creating administrative difficulties and a major cost factor. The Commission pointed out that such a situation restricts innovative activity and distorts competition.Footnote ⁶² In 2008, Gómez Segade advanced that these risks are even stronger today than they were in the 1990s due to the subsequent EU enlargement increasing the degree of fragmentation and heterogeneity.Footnote ⁶³

In its reasoning more than 25 years ago, the Commission focused largely on the interests of potential right holders – an approach that stems from the IP zeitgeist of that period. However, not all the points the EC advanced are entirely convincing. There are doubts as to whether businesses would avoid the EU or specific Member States for the sole reason that their inventions would not be eligible for UM protection in these jurisdictions. Third parties can copy and sell their products in these countries regardless of whether the originator is present. Offering goods also in these national markets can be attractive for the originator if he can recoup his R&D costs through his business in a Member State that protects his technology as a UM anyways. A recent study even suggests that marginal disharmony in the field of UMs works reasonably well for those right holders who can effectively navigate such environments.Footnote ⁶⁴ They are able to optimise the differential appropriability of these rights to achieve protection efficiencies and accommodate national differences, according to Cahoy and Oswald.Footnote ⁶⁵

A modern analysis of the effects of the status quo needs to integrate the perspective of the right holders’ competitors. Today, this appears to be the major reason for UM harmonisation from a “single market perspective”. The lack of harmonisation and therewith the lack of transparency creates disincentives to commercialise products also on the side of enterprises who do not hold any rights, or which hold rights in another Member State. A firm willing to offer goods within the internal market is at risk of running into UM infringement in one part of the single market while selling products legally in another part. This risk, along with the lack of transparency, currently poses the most significant potential threat to hinder the free movement of goods and to distort competition as companies might refrain from offering their goods and services in Member States where they are not entirely aware of the peculiarities of the national law on UMs.

20.4.1 Cheaper

UM systems are intended to lower the cost barriers for the IP protection of technical inventions,Footnote ⁶⁷ and come in the form of “registration rights”.Footnote ⁶⁸ UMs do not have to pass a full-blown substantive examination before protection is granted.Footnote ⁶⁹ This is different than the majority of patent systems in the EU and the European Patent Convention (EPC) where an office investigates substantive patentability requirements before registering the right. Hence, IP offices can offer UM protection for less than patent protection. As mentioned in the beginning, UM protection is therefore supposed to be particularly attractive for SMEs which have a relatively small budget for IP protection in comparison to larger enterprises.Footnote ⁷⁰

The potential savings for an SME to obtain UM protection instead of patent protection might be less than expected. The office fees for UM protection are indeed lower than the fees for patent protection in many countries. However, some SMEs, in particular micro entities, can achieve patent protection with discounts in various jurisdictions.Footnote ⁷¹ Furthermore, the overall costs for UM protection are primarily driven by patent attorney fees for drafting claims and specifications, which are comparable to those within the patent system.Footnote ⁷² Finally, it is more likely that the UM will be challenged than a patent for the same invention during its lifetime as the office does not perform a full-blown substantive examination of UM applications. Therefore, the enforcement costs of UMs can be even higher than the enforcement costs within a patent system.Footnote ⁷³ Taking this into account, UMs may not provide SMEs access to effective IP protection that is substantially cheaper.

20.4.2 Faster

As there is no requirement for a substantive examination, a UM system offers protection faster than a patent system.Footnote ⁷⁴ Patents are generally granted years after the application, whereas UMs will be registered within months or even weeks. In Germany, one of the countries prominent for its UM system,Footnote ⁷⁵ the registration procedure to obtain UM protection is completed after 4.2 months on average while the patent granting procedure takes usually 2.5–3 years.Footnote ⁷⁶

Given the speed of registration, UMs are sometimes used as measures to protect an invention that is subject to a patent application while the application is still pending. A patent application does not provide a right to an injunction in many jurisdictionsFootnote ⁷⁷ while a UM does.Footnote ⁷⁸ Therefore, companies may “branch-off” UMs from prior patent applications as permitted in some Member States. An applicant is allowed to claim the filing and, if applicable, priority date of a previously submitted patent application for a subsequent UM application provided the latter application concerns the same invention.Footnote ⁷⁹

However, fast IP protection is in numerous cases not very attractive. UMs are published upon registration as a quid pro quo for protection. Therewith, the invention leaves the sphere of secrecy more rapidly than it would under the 18-month publication delay for patent applications. Thereafter, competitors can use the information as a springboard for subsequent developments, which might not make UM protection very attractive for applicants. We can observe similar reluctance to opt for fast protection with patents. Patent applicants requiring faster search or examination can ask the European Patent Office (EPO) to have their applications processed under the programme for accelerated prosecution of European patent applications (PACE).Footnote ⁸⁰ However, data indicate that very few applicants are interested in such fast-track proceedings,Footnote ⁸¹ allegedly due to the secrecy inherent in a slower examination.Footnote ⁸²

Even if access to speedy IP protection is necessary while a patent application is prosecuted, patent internal measures might be just as feasible as a separate UM registration and allow for a more coherent policy approach.Footnote ⁸³ Art. 67 (2) of the EPC, for example, requires the Contracting States to ensure at least that the applicant can claim compensation reasonable in the circumstances from any person who has used the invention after the date of publication of the application. However, the Contracting States are free in granting earlier or stronger protection,Footnote ⁸⁴ for example enshrining a UM-style right to an injunction in their national laws.Footnote ⁸⁵

20.4.3 Lower

Traditionally, UM systems offer protection for incremental innovation while the patent system is supposed to protect more substantial improvements over the state of the art. In many jurisdictions, the requirements for UM protection are lower than the prerequisites for patent protection, in particular the level of required inventiveness.Footnote ⁸⁶ At the same time, UM protection is weaker and shorterFootnote ⁸⁷ than patent protection as the idea is to provide a moderate IP right for the corresponding level of innovation.

However, it is often unclear precisely how to distinguish between low and high standards of inventiveness. In its groundbreaking decision “Demonstrationsschrank”, the German Federal Court of Justice pointed out that this is hardly possible in practice.Footnote ⁸⁸ Moreover, granting UM protection below the non-obviousness standard of patent law offers IP protection for subject matter that is theoretically obvious to the person skilled in the art. This result amounts to a break in the general understanding of IP law and cannot be justified against the background of the constitutionally protected freedom of action of third parties, according to the German Federal Court of Justice.Footnote ⁸⁹ The Court therefore held that the required threshold for inventiveness in UM law can only be the same as in patent law. Other countries followed suit.Footnote ⁹⁰ These judicial concerns cast doubt on the viability of the lower standard of inventiveness in UM law from a legal perspective.

From public policy perspective, it is debatable whether monopoly rights should be granted for trivial achievements, particularly in times of IP thickets. The German Federal Court of Justice addressed this point from a purely legal perspective when referring to the third-party freedoms protected by fundamental rights. But one can also raise this argument from an economic perspective, as it has been done in the scholarship on UM protection.Footnote ⁹¹ Enterprises already have problems to identify the relevant patent rights during a freedom-to-operate (FTO) analysis when they seek to avoid IP infringement and hold-up. The efforts of firms must be substantially stronger when grain-sized innovation receives protection since trivial achievements are harder to trace. Moreover, in the case of UMs, the rights were not examined by the patent offices. Hence, the competitors are forced to investigate the validity of the claims.Footnote ⁹² This is particularly problematic for SMEs, the alleged core user of the UM system. Many authors have therefore unmasked the notion of UMs as small patents for small inventors as a myth.Footnote ⁹³ There is a particular concern that large firms flood a promising area of technology with an array of UMs,Footnote ⁹⁴ particularly since major international enterprises appear to be the core users of many national UM systems.Footnote ⁹⁵

The overall economic impact of sub-patent protection within the EU appears therefore unclear and potentially negligible. Economic scholarship has found that UMs favour growth in developing countries when the capacity to conduct innovation research does not exist.Footnote ⁹⁶ A minor innovation can be a learning device and thus a stepping stone for developing patentable inventions later.Footnote ⁹⁷ UMs are considered particularly useful in times of “catching up”Footnote ⁹⁸ but there is no conclusive evidence regarding their positive impact in developed and highly developed countries or economic unions. As discussed at length in Chapter 10, the impact of UMs in a highly developed country has been studied deeply and at different points in time in Australia where a UM-like system was established in 2001. However, after a short span of protection lasting about 20 years, the Australian government began the process of phasing the system out as it did not achieve its intended objectives. It is therefore very unclear whether there is a need to incentivise incremental innovation with the prospect of an inclusive right such as a UM.

20.5.1 The Instruments

In general, the EU has several different options for becoming more proactive in the field of EU IP law. The binding legal acts available to unify UM protection or to approximate the respective national laws are regulations and directives.Footnote ¹⁰¹ A regulation is binding in its entirety and directly applicable in all Member States (Art. 288(2) of the Treaty on the Functioning of the European Union (TFEU)). A directive is binding as well but only as to the result to be achieved. Hence, national authorities have the discretion to choose the form and methods (Art. 288(3) TFEU) and, as a general rule,Footnote ¹⁰² direct effect does not apply. In sum, it is for the Member States to adjust their laws and to give effect to the directive.

We must distinguish between maximum or full harmonisation on one hand and minimum harmonisation on the other when referring to the level of approximation the EU intends to achieve with a directive.Footnote ¹⁰³ A directive can regulate a particular area exhaustively and preclude Member States from deviating from defined standards (maximum or full harmonisation). In the case of minimum harmonisation, the EU sets minimum standards and allows Member States to maintain or provide for more stringent national laws.

20.5.2 The Competences

The EU has no competences by right as they are all voluntarily conferred on it by its Member States (principle of conferral, Art. 5(1) of the Treaty on European Union (TEU)). It can only act within these competences defined by the Member States in the Treaties (Art. 5(2) TEU). Competences not conferred upon the EU in the Treaties remain with the Member States (Art. 4 (1), 5 (2) TEU).

We need to distinguish between the competencies to establish an EU IP right and the competencies to harmonise national laws on IP. Art. 118 TFEU empowers the EU to introduce an EU UM system,Footnote ¹⁰⁴ and allows measures to be established for the creation of European IP rights to provide uniform protection throughout the EU and for the setting up of centralised EU-wide authorisation, coordination and supervision arrangements.Footnote ¹⁰⁵ Art. 118 TFEU does not constitute “competition rules” for the purpose of Art. 3(1)(b) TFEU but it does fall within the “internal market” area in which the EU has shared competences under Art. 4(2)(a) TFEU.Footnote ¹⁰⁶ Accordingly, pursuant to Art. 5(3) TEU, the principle of subsidiarity applies where EU legislature makes use of Art. 118 TFEU.Footnote ¹⁰⁷ In practice, however, the importance of this principle is limited since it will be difficult for Member States to achieve the creation of IP rights, including an EU UM right, which benefits from EU-wide protection without EU intervention.Footnote ¹⁰⁸ Hence, Art. 118 TFEU would serve as a basis to create an EU UM system by a Regulation.

An EU directive which does not establish uniform IP protection by the EU but merely intends to approximate national IP laws cannot be based on Art. 118 TFEU.Footnote ¹⁰⁹ However, Art. 114 TFEU does provide a general competence for harmonisation measures “which have as their object the establishment and functioning of the internal market”. To limit the danger of an unduly wide interpretation that would lead to an open-ended form of EU power, the European Court of Justice (ECJ) requires for the substantive conditions to be fulfilled that the measures have the genuine objective of improving the conditions for the establishment and functioning of an internal market. They should address disparities between the legal systems of the Member States that significantly obstruct fundamental freedoms and thus have a direct effect on the functioning of the internal market.Footnote ¹¹⁰ The current situation has the potential to obstruct the free movement of goods and distort competition within the internal market, as discussed above. This gives the EU the competence to harmonise national UM regimes based on Art. 114 TFEU. The principle of subsidiarity also appliesFootnote ¹¹¹ in the framework of Art. 114 TFEU but its importance is again limited in practice. If the substantive condition in the interpretation of ECJ is fulfilled, Member States will regularly struggle to prevent any negative impact on the international market without the action of the EU.Footnote ¹¹²

20.5.3 UM Regulation

20.5.4 UM Directive

The other policy options would address national laws with a directive and would be based on Art. 114 TFEU. The directive could be combined with the first option (EU UM right) described above, similar to the situation in EU trademark or design law. Also, the following options could be combined.

20.5.5 Recommendations

None of the policy options described above are entirely satisfying. All options except for the opt-in harmonisation would require a final stance by the EU on whether UM protection is positive or negative for the Member States. It is recommended that the Union refrains from such a decision as the general foundation of UM protection is ambiguous. There is no convincing argument for the introduction of a UM protection system in well-developed countries but there is also no conclusive argument that Member States should refrain from such protection. Moreover, designing a universal UM framework means filling gaps in the conspicuously heterogeneous national patent systems. Logically, before harmonising the UM framework, one would need to harmonise the patent system, but such an endeavour is not realistic at the moment.

If at all, harmonisation should address the different national laws by an opt-in harmonisation. This would leave the more general decision as to whether a national system requires a sub-patent protection system to the respective Member State. An opt-in solution would clarify the concept of UM for the application and interpretation of the other EU’s secondary law on IP, for example the Enforcement Directive. However, this option will not entirely resolve the existing problems of businesses working across boarders within the single market. These entities would still be required to inquire whether a certain invention is protected by a national UM in all Member States relevant for their business to avoid the risk of hold-ups. It will, however, implement one single standard for the UM framework of the national laws.

The overall analysis suggests that the EU is not well advised in implementing any of the outlined policy options. At the same time, the status quo is unsatisfactory and calls for an EU harmonisation, as pointed out in Section 20.3. Hence, further research is required to formulate compelling solutions.

20.6.1 Two Assumptions for Further Research

Further research on the harmonisation of UMs within the EU should be based on two assumptions. Firstly, future efforts at harmonisation should embrace an outside-the-box thinking and consider a new understanding of the concept of UMs. As discussed above, one of the main reasons why UM protection within the EU is diverse is the lack of international harmonisation. At the same time, this vacuum offers a tremendous policy space to reflect on the understanding of UMs when defining a suitable UM policy for the EU.

Secondly, further research should not only aim at optimal policy options but also consider second-best solutions. The analysis above suggests that perfect results are not in sight as certain optimal conditions are incompatible. For example, not taking any stance on the design of UM laws and overcoming the heterogeneous forms of protection within the EU appears impossible.

20.6.2 UMs as Remuneration Rights and Opt-In Harmonisation

Given the unsatisfying policy options available, a valuable starting point for new research on the EU harmonisation of UM law might be a critical reflection on the basic concept of UMs. Legal entitlements can be protected with a liability rule instead of a property rule, as recognised by Guido Calabresi and Melamed in their seminal contribution on the methods of protection.Footnote ¹²⁷ A liability rule does not prevent the use of an entitlement by a third party, but the right holder can ask for a remuneration as a compensation.Footnote ¹²⁸ Such mechanisms are particularly recognised in EU copyright law.Footnote ¹²⁹

In the following, we will touch upon the idea of a system that enshrines a liability rule and understands UMs as remuneration rights. “Take-and-pay” approaches for UM law have not been discussed to a noticeable extent in Europe.Footnote ¹³⁰ This lack of research does not come as a surprise as the existing UM protection systems of the Member States work with property rules. The US scholarship, however, has examined the protection of UMs by a remuneration right.Footnote ¹³¹ The primary intention of these scholars is the reduction of barriers to marketsFootnote ¹³² – an idea that works particularly well also in the EU where a single market is subject to heterogenous forms of UM protection with the respective negative effects on competition.

We will include this new conceptional starting point in the framework of the most promising policy options outlined above: an opt-in harmonisation. The decision on the protection of UMs will still be left for the Member States. Nevertheless, if a Member State protects sub-patentable inventions, it would have to implement a liability rule. Hence, the EU is not required to decide on whether Member States can or must protect UMs but, as a second-best solution, the directive will decide on the “how”. Therefore, the act would leave no national leeway when defining the effects of UMs (full harmonisation) while other features of the UM system could be subject to a mere minimum harmonisation.

20.6.3 Addressing the Two Reasons for EU Harmonisation

Above, we pointed out two reasons for the need for EU harmonisation of UM law. One of them related to the existing IP framework in EU law and the lack of a common understanding of a UM right when interpreting and applying this law (see Section 20.3.1). An opt-in harmonisation of UM protection would solve this issue as it would give a clear definition of the concept of an UM.Footnote ¹³³

The second reason for EU harmonisation concerned the adverse impact of the diverse UM frameworks on the single market (see Section 20.3.2). Businesses are at risk to infringe national UMs if they aim to operate in multiple countries of the EU without conducting a proper and expensive FTO in each and every relevant Member State. Their concern to be caught in a hold-up has a detrimental effect on the free movement of goods and bears the potential to obstruct competition in the internal market. The opt-in options discussed above (Policy Options 5 and 6) were able to address this issue only to a limited extend.

Obviously, the proposed concept of a remuneration right does not solve the existing problem for the single market entirely either. It does not overcome the fragmentation or porous UM protection within the EU. However, a liability approach will mitigate its effects as the extent of the negative effects are directly linked to the concept of UMs as exclusive rights. Remuneration in case an entity infringes an overlooked national UM in one part of the internal market creates fewer negative effects than a full-fledged exclusive right entitling preliminary and permanent injunctions and the risk of hold-up.Footnote ¹³⁴ An understanding of UMs as remuneration rights has the potential to accommodate the interests of businesses better than a property rule regime. This is particularly true for SMEs which do not have the financial means to conduct EU-wide FTOs.

20.6.4 Accounting for the Conceptional Differences with Patents

Although the EU would be able to refrain from a general decision of UM protection, this proposal requires the Union to be convinced about the advantages of a liability rule over a property regime in UM law. A decision on the form of protection is less far-reaching than imposing a decision on the general existence of a UM protection system, particularly when choosing with liability rules an “intermediate form” of protection. Nevertheless, it is the potential trouble spot of this approach. Further research will need to examine the actual effects of such a concept for the European systems. At least to some extent, this research will be able to rely on the existing US literature.Footnote ¹³⁵

Already now, it appears to be clear, that a liability rule will account better for the conceptional differences of patents and UMs. The prevailing consensus is that UMs are less robust than patents, with a lower threshold for protection, with a mere registration requirement, and with a pure gap-filling function to perform. It is therefore striking that UM holders are entitled to the same remedies as patent holders in the existing national laws and the EU framework.Footnote ¹³⁶

UM protection systems appear to be one of the most appropriate systems of industrial property protection to work with a liability rule. In general, property rules have one main advantage over liability regimes: It is the form of entitlement which gives rise to the least amount of state intervention after the grant of a right.Footnote ¹³⁷ It is for the parties to agree on a price for the usage of the protected subject matter while liability rules require some organ of the state to determine a value.Footnote ¹³⁸ Hence, one could fear that shifting the existing property rule approach to a liability regime would increase the involvement of the judiciary in UM disputes. However, unlike most patent systems worldwide, the existing sub-patent protection systems work without pre-grant examination. These protection mechanisms are already court-intense in their design. The validity of the entitlement has not been examined by an IP office. The structure of the system leaves it for the post-registration phase and therewith for the courts to assess the protectability of the subject matter if a dispute arises.

20.6.5 Fulfilling the Auxiliary Function and Curing the Patent System

One concern of the Member States might be whether UMs as mere remuneration rights will still be able to fulfil their intended auxiliary function. UM protection systems are devised to cure gaps in the patent protection (“cheaper”, “faster”, “lower”). However, as briefly discussed above in Sections 20.4.1 and 20.4.2, the Member States have sufficient leeway to improve their national patent system if needed to provide for cheaper and faster protection. For example, if a Member State wants to offer cheaper access to IP protection to accommodate the needs of SMEs, it can offer fee discounts for such patent applicants. Moreover, if a Member State wants to offer faster protection for technical inventions by a property rule, e.g. already during patent prosecution, it could offer patent applicants access to interim injunctions if a preliminary assessment of the court deems the subject-matter patentable. Hence, Member States will need to internalise some of the auxiliary functions (“cheaper”, “faster” protection) performed by their existing national UM systems in their patent systems if they think that a property rule is required.

As a core result of such a directive, the Member States will not be able to offer a full exclusive right for inventions which do not fulfil the requirements of patent protection (“lower” protection). The national systems will need to accept the imposed remuneration approach if they opt for a UM protection system. It is unclear whether this could be a major concern for Member States. It is difficult to imagine cases in which compensation as protection is not sufficient to protect sub-patentable inventions that do not fulfil the requirements of patentability. This idea aligns with the broader consensus that stronger rights come with more stringent requirements. It is well-recognised in copyright law where neighbouring rights tend to protect less original subject matter with a more limited set of rights.

20.6.6 The Structure for Remuneration

There are two ways in which the proposed directive could implement a structure for remuneration. The directive might foresee the establishment of a collection society. Such bodies relieve the burden on individuals to enforce their own rights within the realm of copyright law.Footnote ¹³⁹ UMs are registered rights which facilitate the collective management of royalties. However, setting up and running such organisations entail high administrative costs.

As an alternative, the directive could enshrine a compensation claim of the right holder against the user of a UM. The burden of enforcement of such an individual claim would lie on the right holder. Therefore, we recommend that the directive works with incentives that users inform the right holder about their exploitation of the UM (“notify-and-use”). This could be achieved by an obligation of the user to inform the right holder prior to the use or shortly thereafter. If not informed, the right holder will be entitled to claim double compensation.

21.1.1 Height of Legal Requirements Governing the Rights

There are several subcomponents of the height of the legal requirements for utility models. The first is novelty. The strictest novelty threshold is absolute novelty, the next most restrictive threshold is relative novelty, and the least stringent threshold is local novelty. When novelty standards for utility models and conventional patents differ within economies, they are sometimes lower for utility models but still exist or, in some cases, are completely nonexistent in law.Footnote ¹³

The next subcomponent is the legal requirements for inventive step. Inventive step for conventional patents is usually thought of as the “nonobviousness” of an invention to a person skilled in the relevant prior art, but exact definitions for utility models differ among economies.Footnote ¹⁴ Moreover, some economies’ utility model systems have no inventive step requirements, while others have inventive step requirements but they are lower than for conventional patents, and some economies have the same inventive step requirements for both utility models and conventional patents.Footnote ¹⁵

Yet other requirements can fit underneath the height umbrella. These include, for example, standards for sufficiency of disclosure and establishing industrial applicability of the invention. These may vary somewhat among economies.Footnote ¹⁶

21.1.2 Strictness of Requirements’ Administration

There are several subcomponents of the strictness of how requirements for utility models are administered. The first is the examination process. Generally, there are two types of utility model patent examinations: a Preliminary Examination and Substantive Examination. Preliminary Examinations often only check formalities, for example, the clarity and completeness of claims and descriptions in the utility model application. However, in some cases, they may include a limited assessment of some substantive aspects of the application. In contrast, Substantive Examinations are more in-depth, assessing the extent to which the utility model application satisfies the legal requirements for novelty, inventive step, industrial applicability, patentable subject matter, among other standards (e.g., sufficiency of disclosure). In some economies, a Search Report – an assessment of the prior art most directly related to a patent application – is used in addition to a Preliminary Examination or as part of a Substantive Examination. This report can be mandatory and considered as a basis to not grant the utility model, mandatory but not considered as a basis for not granting the right, or simply available upon request to the applicant and/or other interested parties and kept only for their own purposes. Although some economies only require Preliminary Examinations for utility models while requiring Substantive Examinations for conventional patents, others require Substantive Examinations for both types of rights.Footnote ¹⁷

The second subcomponent is observations and related mechanisms. Economies have widely varying mechanisms to challenge the granting and validity of utility models. These can include an opposition mechanism, under which, during a certain period of time, third parties submit evidence to support the decision not to grant the utility model in the first place (pre-grant) or invalidate the right (post-grant). Although not always opposition mechanisms stricto sensu, various related mechanisms exist in different economies. Some economies have third party observation mechanisms under which third parties can submit information related to the patentability of a utility model, typically after publication but before grant; and this information may be “considered” to varying degrees, including not at all, by the patent office as a basis for not granting the utility model. Some economies have reexamination mechanisms, which can be ex parte or inter partes. Some economies have administrative revocation and invalidation mechanisms, which may or may not have time limits on when invalidation cases can be brought. Some economies have a combination of several of these mechanisms. Such mechanisms are similarly structured for utility models and conventional patents in some economies, although sometimes they are different for utility models, or do not exist at all.Footnote ¹⁸

21.1.3 Direct Fees

The official government fees associated with satisfying the aforementioned requirements and obtaining and maintaining a valid utility model are another important aspect of the accessibility of utility model regimes. Utility models around the world usually have substantially lower costs to obtain and maintain than conventional patents owing to their lower and less strict legal requirements.Footnote ¹⁹

21.3.1 Height of Legal Requirements Governing the Rights

Among the economies studied, only Germany has relative novelty for utility models, whereas the other economies currently have an absolute novelty standard for utility models.Footnote ²⁸ While Germany has maintained its novelty standard for some time now, the absolute novelty standard is inferably viewed by the other economies as useful to ensure utility model quality in an increasingly interconnected world.Footnote ²⁹

Some economies have the same inventive step requirement for utility models as for conventional patents. Evidence is mixed, however, as to if this is optimal for balancing utility model quality with incentives to seek utility models in the first place. The experience of Germany offers a natural experiment highlighting this trade-off. A 2006 decision from the German Supreme Court changed the prior way of interpreting inventive step for utility models as lower than for conventional patents to require that the inventive step requirement be the same for both rights.Footnote ³⁰ While perhaps encouraging higher-quality utility models according to some scholar’s conceptualization of the term, this decision was criticized by a range of experts based on legal grounds.Footnote ³¹ Also, the decision has been scrutinized on economic grounds given it appears to have discouraged filing of utility models by German entities at a time when filing for such rights could be helpful to improve their competitiveness.Footnote ³²

The other economies studied have varying approaches to inventive step requirements for utility models relative to conventional patents. France has consistently maintained the same inventive step requirement for utility certificates and conventional patents.Footnote ³³ In 2006, the Austrian Supreme Court ruled that the inventive step threshold for utility models, conversely to what the German court ruled the same year, should continue to be lower for utility models than conventional patents; however, in practice, the inventive step for the two rights is assessed similarly.Footnote ³⁴ China,Footnote ³⁵ Finland,Footnote ³⁶ and ItalyFootnote ³⁷ have lower inventive step thresholds in statute for utility models than conventional patents. The Czech Republic has lower inventive step thresholds in statute for utility models than conventional patents, although in practice the inventive step requirement is basically the same.Footnote ³⁸

Different economies use varying methods to determine inventiveness of utility models. China is unique among the economies studied as it has written examination guidelines recommending narrowing prior art to one or two pieces, as well as narrowing the number of technical fields considered, when assessing the inventive step of utility models in “normal” cases.Footnote ³⁹ However, in practice, the patent offices in the Czech RepublicFootnote ⁴⁰ and FinlandFootnote ⁴¹ also usually use no more than one or two pieces of prior art to determine the validity of a utility model – although there are no written rules requiring this and, like in China, there is flexibility to use more pieces of prior art as necessary. Austria, Germany, and Italy have no such restrictions in practice or otherwise. Inventiveness of utility models in Italy and utility certificates in France is determined by the courts through a proceeding removed from the purview of the patent office in which external technical experts can be involved.Footnote ⁴²

21.3.2 Strictness of Requirements’ Administration

Requiring a Search Report prior to granting a utility model, even if not considered as a basis for not granting the application but simply presented alongside it, can be a useful method for ensuring the quality of utility models. This approach is mandatory in Austria.Footnote ⁴³ The costs of such a procedure to patent examiners or externally contracted agents can be included in the fees for filing the utility model. Some offices studied offer Search Reports or a type of report listing prior art relevant to utility model applications prior to publication of the application upon the applicants’ request and for a fee. They also offer such reports to any entity at any time after a utility model is granted for a fee, and such reports are available to the public. This appears to provide the requestor improved certainty regarding the quality of the utility model.

All economies studied consider several formalities in their Preliminary Examinations of utility models. These include the clarity and completeness of claims and descriptions. In some economies, Preliminary Examinations also examine more substantive elements. Finland requires an assessment of industrial applicability of utility models in the Preliminary Examination stage.Footnote ⁴⁴ ChinaFootnote ⁴⁵ and the Czech RepublicFootnote ⁴⁶ require assessing if utility models “obviously” lack industrial applicability. Preliminary Examinations of utility model applications in Austria,Footnote ⁴⁷ the Czech Republic,Footnote ⁴⁸ China,Footnote ⁴⁹ Finland,Footnote ⁵⁰ France,Footnote ⁵¹ and ItalyFootnote ⁵² assess the patentability of subject matter therein in some form, in terms of obvious nonconformity or otherwise. Meanwhile, the only substantive element examined in the Preliminary Examination of a utility model in Germany is if the invention in the application has a technical background.Footnote ⁵³

China is unique among the economies studied as the country’s National Intellectual Property Administration (CNIPA)’s Preliminary Examination for utility models assesses if the invention in the application “obviously” lacks noveltyFootnote ⁵⁴ and, as of very recently, inventiveness.Footnote ⁵⁵ These requirements appear useful to ensure the quality of utility models.Footnote ⁵⁶

None of the economies studied require a full Substantive Examination for utility models. The lack of this requirement is said to enable utility models to be granted much quicker and cheaper than conventional patents which undergo such an examination. (This being said, multiple economies around the world do require substantive examinations for utility models.Footnote ⁵⁷) Moreover, in the cases of the Netherlands and Belgium, lack of a substantive examination – or at least examination of novelty via a Search Report – appears to have created significant uncertainty in the equivalent of utility model regimes there by incentivizing the filing of low-quality rights. In fact, partially because of this, these economies ultimately abolished their utility models regimes in 2008 and 2009, respectively.Footnote ⁵⁸

The economies studied adopt different approaches to third party observation mechanisms. A third-party observation mechanism is used for utility certificates in France.Footnote ⁵⁹ Third parties in Italy can submit petitions on utility models during the examination procedure, although they are not considered part of a formal third party mechanism nor do they serve as a basis for the Italian patent office to not grant a utility model.Footnote ⁶⁰ In Austria, while there is no formal mechanism to collect third party observations, if third parties provide the Austrian Patent Office with their observations they will be considered prior to the publication of the Search Report.Footnote ⁶¹ These mechanisms can help ensure quality utility models are granted.

The economies studied institute different utility model invalidation procedures. Some invalidation cases go directly to courts without involvement of patent offices, as in France and Italy. In the other economies studied, their patent offices serve as at least a first instance reviewer in a procedure that can then be appealed to the courts. As it is not straightforward to determine from available evidence, it is beyond the scope of this article to assess which of these two approaches are better for utility model quality.

21.3.3 Direct Fees

Relatively low official fees are another classic component of the utility model regime, at least costs lower than those associated with conventional patents. This differential reflects the often less-substantive nature of the examination process for utility models when compared to conventional patents. Also, the lower costs are meant to be one mechanism to enable small-scale inventors, who typically have limited money to protect their inventions, to obtain IP protection. Among the economies studied in this chapter, the nonsubsidized/otherwise preferentially reduced official costs associated with utility models are the lowest in the Czech Republic. This is one main reason cited by the Czech IP Office for the attractiveness of the utility model system to inventors in that economy.Footnote ⁶²

Some economies offer special reductions and subsidization of official filing fees and other expenses associated with utility models. This does not necessarily create problems for utility model quality. For example, available evidence shows that subsidies for intellectual property rights in Italy – which, when distributed by provincial and local level entities, can go to utility models – do not appear to significantly hurt patent quality; however, they also do not appear to do much to improve patent quality.Footnote ⁶³ However, in the case of China, some provincial/municipal and local subsidies and state-provided financial awards for utility models appear to have led to a surge in low-quality utility models.Footnote ⁶⁴ In reaction to this, China’s CNIPA has continued to work with IP bureaus and other departments across the country to modify and restrict such incentive schemes.Footnote ⁶⁵ The more significant size and widespread use of state-provided monetary patent incentives in China vs. in European economies, amongst other factors, likely explains the especially negative utility model quality in China.Footnote ⁶⁶

In summary, utility model regimes need not be homogeneously accessible. However, sometimes, regimes that are too accessible need to be reformed to safeguard against significant utility model quality problems. This is illustrated by China’s experiences with significant state financial incentives for utility model fees alongside low and not strictly administered requirements for obtaining utility models, which stimulated low-quality utility models. The importance of carefully calibrating utility model regimes to safeguard the quality of corresponding rights is also illustrated by the low and not strictly administered requirements for obtaining the equivalent of utility models in Belgium and the Netherlands, which contributed to the abolishment of the regimes governing those rights altogether. In short, utility model regimes may be made less accessible over time to limit quality problems with the rights, although the exact parameters of these reforms need to be decided on an economy-by-economy basis.

22.1.1 Cumulative and Incremental Innovation: Lower Thresholds and Policy Limits

Innovation as a concept lies on a spectrum ranging from Arrow’s sweeping conception (innovation is the production of information) to Schumpeter’s broad definition.Footnote ⁸ Irrespective of the development and technological stage of the country or the company concerned – a lot of “innovation” is incremental and cumulative. This is equally true of both industrial and cultural innovation.Footnote ⁹ One of the key implications of that is the creation of new works requires access to and use of pre-existing data and works. So, lowering thresholds within patent (and even design) laws would be a useful policy if it extends to reward cumulative or minor innovation in ways that do not impose high transaction costs on follow-on innovations.

But such low thresholds, whilst benefitting the innovators of today, may hinder the innovation of tomorrow. Good policy dictates that all innovations cannot be categorized as legally patentable inventions. Moreover, if patent protection is structured in such a manner as to unduly require the sacrifice of scarce resources, any societal benefits and economic rent accruing from patent law would be dissipated. These arguments also explain (i) the high levels of novelty and inventiveness (theoretically) required, (ii) the range of limitations and exclusions in national IP laws to ensure that commonplace, obvious or mere workshop inventions and works are not protected,Footnote ¹⁰ and (iii) the lack of global consensus as to the eligibility of patentable subject matter such as computer programs, methods, genetic materials or inventions contrary to “morality and ordre public”?Footnote ¹¹

Instead of lowering eligibility thresholds, the other historical solution is to either introduce a liability-rule-based system such as a statute-based tort or misappropriation law, or a hybrid property rights system. We will consider these next.

22.1.2 Revised Rationale for UMs

As I suggested above, the “IPRs promote innovation” mantra is not new and runs throughout the IP literature; and one can detect its influence when the discourse shifts to justifying new hybrid IPR systems in different contexts including fashion, design and plant variety rights.Footnote ¹² And indeed, historically, local Procrustean solutions were the ideal means to overcome patent law defects. The solutions could accommodate “forbidden” subject matter, bypass inconvenient policy rules and remove procedural thresholds such as examination or even registration. Existing laws can be re-purposed and extended; or new sui generis rights can be created which emulate existing rights and rationales. Or liability-rule-based systems can be employed to introduce new tort actions.Footnote ¹³ These systems could operate in place of patents or copyright, or could alternatively operate in parallel, so that patents and copyright could then be used only for those inventions and creative works displaying a demonstrably high inventive step or level of creativity. In this manner, all sorts of new subject matter can be accommodated within any national IPR framework as ostensibly new sui generis regimes (or liability rule systems) can subsist.

The policy criticisms against such hybrid rights are varied. But they can be reduced to a single contention: by constructing a loose hybrid misappropriation or property regime, the traditional IPR system is in danger of being captured by the wrong parties and of being ignored by the “chosen” stakeholders. In the case of UMs, the targeted party usually includes local SMEs or the sole, indigenous innovator. On the other hand, hybrid rights may well be the best way to do so due to the inherent flexibilities in such systems; note such flexibilities within IP law in relation to non-creative databases, test data exclusivity, plant variety and plant patent rights, AI-derived and computer-generated works, and geographical indications.Footnote ¹⁴

So perhaps a better rationale for hybrid rights is that property rights may be a necessary allocation to underwrite/support risk-laden, investment-driven knowledge activities and results. This chapter employs this revised rationale to explain why UMs can play a role in a country’s local innovative system. As Cahoy and Oswald argue, UMs are “purely economic rights and are offered in countries at very different levels of development”.Footnote ¹⁵

22.1.3 UMs as Development Tools

A final consideration is in relation to the many studies which have emphasized the role of UMs as a catch-up and developmental tool in different contexts.Footnote ¹⁶ Thus, Maskus and McDaniel report that technology diffusion through UM applications had had a positive impact on Japan’s post-war productivity growth. Importantly, UM applications had an indirect impact on patent applications. They opine that this perhaps reflects a more fundamental industrial invention, through their stimulation of follow-on utility model applications, which were quickly diffused into commercial use.Footnote ¹⁷

A more recent empirical study by Kim et al. affirms this general conclusion in a more concise manner. According to them, UM protection allows developing economies to build up their “indigenous innovative capacities”.Footnote ¹⁸ Moreover, within such developing economies, the study found that UMs contributed specifically to technologically lagging firms.

This finding appears to lend credence to one of the rationales of UM in that it can enhance the capacity of SMEs/sole innovators to produce (future) patentable inventions – this is discussed further in Section 22.2.2.

Kim et al. conclude that developing countries need to construct the sort of IPR framework which is appropriate for their economic and development level; and that UM protection “can be an important factor affecting the production of patentable innovations only in middle-to-low income countries”. (emphasis added).Footnote ²⁰ A more recent 2020 study for the Asian Development Bank confirms this – at least from the Korean perspective. Depending on the development stage of a firm (or country), the innovation policy should shift between the different forms of IPRs: early stages of development were associated with UMs while catch-up stages required trademark and design, and the globalization stage required patents.Footnote ²¹ Other studies have also alluded to the holistic IPR framework by noting that technologically strong and developed economies distrust an “easy” system and switch to the more rigorous patent regime, as their concerns shift to market-based competitiveness, the need to attract foreign direct investment, and the use of the utility model system by foreign companies (as in Australia and JapanFootnote ²²).

The lesson for developing countries is to seriously consider introducing UMs into their IPR framework. But a lot of initial discourses must be had. And such countries should be realistic and view IPRs as mere tools for economic advancement that contribute to the enrichment of society. If it does not do this, then dump the policy.

What of developed nations? The reasoning appears to be linked again to the economic and innovative environment of the country in question. The 2013 Australian economic review confirmed that the economic effect of UMs decreases with the rise of technological capacity in industries (see Chapter 9 on the Australian system); however, the report also concluded that the continued use of UMs in Japan, Germany, France and Italy (see Chapters 11, 6, 5 and 7, respectively) suggests that these instruments may have a role in innovation and economic growth even in developed economies.Footnote ²³

22.2.1 Narrow, Short and Non-registered?Footnote ³²

The next step would be to consider the undesirable consequences of introducing a UM right which is too broad in terms of eligible subject matter, duration and scope of protection. Such concerns can include: excessive protection of innovations leading to an increase in wasteful claims and litigation; increased rent-seeking behaviour re-directing funding away from innovation or marketing to obtaining more rights via UM; over-utilization by foreign companies accompanied by under-utilization by local firms, leading to an increased outward flow of royalties and licensing fees; using UM system to cordon off research areas.

I would suggest, however, that the most fundamental questions to determine are:

• Subject matter: Developing countries, in particular, should be cautious in broadening protection to cover all types of innovations – irrespective of whether they are minor and low-cost innovations, or whether they involve complex and cutting edge technologies such as biological and pharmaceutical products.Footnote ³³ Previous experiences show that a generous UM regime will attract larger market players who use the UM regime as a means of circumventing the more stringent criteria under the patent system, and overuse the system in ways that make it hard for SMEs to compete.Footnote ³⁴ Conversely, some of the UM laws are confined to protecting three-dimensional functional or technical designs and innovations, the term of protection is to a short 3–5 year duration, a local novelty threshold is adopted, and the scope of protection is limited to five or fewer claims.

• Patent-type registration: Another consideration is whether developing countries should adopt a registration-based system? Especially one which emulates existing patent regimes, and its accompanying procedural formalities and costs? For example, the Australian Government’s report noted that one of the illusory benefits of the “innovation patent” regime was that the upfront and maintenance costs for innovation and standard patents were similar.Footnote ³⁵ From the German perspective, it is apparent that imposing identical application structures on both standard patents and UMs (i.e. claims, description and drawings) results in incurring the same costs in the form of the trained patent agent. “The idea that a utility model application needs less care and competence than a patent application can have fatal consequences especially for sole inventors”.Footnote ³⁶ And surely a quick, automatic right would solve the needs of SMEs to obtain quick injunctive relief again copying?

• Hybrid design/UK right: An alternative way to protect cumulative or minor innovation would be to introduce a hybrid IPR fashioned on both industrial design and UM principle – such as the United Kingdom-type unregistered design right which extends to protecting functional shapes.Footnote ³⁷ Historically, this is rather similar to first second-tier patent systems in the world. Both the British and German laws incorporated elements that would ordinarily constitute functional or utilitarian designs or objectives with spatial forms.Footnote ³⁸

22.2.2 For Whom? Local Industries and SMEs

Who are the ultimate beneficiaries of UM laws? It may be that this will be dependent on the innovative capacity of each country, which in turn will depend on the industrial sector in focus. As this author and others have previously highlighted, a key argument for UMs is the ability of such second-tier laws to prevent free-riding and imitative copying. This is more so in relation to certain types of product sectors which are concerned, not so much with revolutionary technological breakthroughs, but more so with incremental or improvement innovation. And that it is quite likely that individuals or SMEs have a large presence in such industries where minor innovation is the norm, and unfair copying is rife.

Prud’homme, for example, notes several studies showing how UMs have had a significant effect on the labour productivity in China, with some benefit accruing directly to individual inventors and SMEs.Footnote ³⁹ Similar reasons were also offered by the European Commission when it initially proposed the (unsuccessful) draft UM directive. In addition to highlighting certain local European industries in need of further protection, the Commission had highlighted the failure of patent law to protect minor innovations from SMEs.Footnote ⁴⁰ The contrary narrative stems from Australia where a 2015 report noted that it was “unable to obtain adequate empirical evidence as to whether the system does or does not stimulate innovation” in Australian SMEs; a year later, the Australian Government’s Productivity report concluded that the UM system had failed to be a strategic tool to help SMEs.Footnote ⁴¹ More recent surveys note that it is the larger firms with more resources and IPR know-how who have utilized UMs as complementary instruments.Footnote ⁴²

There are grumbles even under the much-lauded German UM system, with one commentator going as far as to suggest – as I do above – why not just change patent law and thus render UMs redundant?

22.3.1 Registrations Reflect Local Context

A recurring challenge is to resolve the conflicting picture that emerges from various empirical studies: some countries respond to the existence of a UM system, whilst others barely use it. The discourse in Section 22.2 reflects particularly pertinent considerations when we look at the global statistics issued by WIPO from 2019 to 2023.

With the major exceptions of China, Germany, Japan, Korea, Russia and Ukraine, UMs have not been well exploited in many of these countries. The standard patent protection system has been used more extensively and – apart from China – only a handful of UMs have been filed in those countries offering UM protection.Footnote ⁴⁶ Heikkilä’s work shows that for each of the 40 years preceding 2020, UM filings at the patent offices of China, Japan, the Republic of Korea and Germany accounted for about 90 per cent or more of all global utility model filings.Footnote ⁴⁷ If we focus solely at the global filings in 2023, we get an impressive figure of 3 million plus filings for UMs as opposed to 3.5 million for patents, and 1.5 million for industrial designs.Footnote ⁴⁸ But 2.95 million filings originated in a single country – China. The second top country in terms of filing is Germany recording a very modest filing number at 9469.Footnote ⁴⁹

If we turn to look at other regions, the registration figures remain low. For example, the 2022 ASEAN region statistics show the following approximations:Footnote ⁵⁰

It is also difficult to reconcile the development ethos with the low registration rate in some African states which come under the Harare Protocol.Footnote ⁵¹ On the one hand, the UM system is treated as being a success in Kenya since (i) there has been a continuous increase in the UM application rate annually, and (ii) more than 90 per cent of UM applications were made by local entities. However, the actual numbers remain low: prior to 2015 when substantive examination was carried out on UMs, the success rate was as follows: out of 450 UM applications, 85 were registered (18.8 per cent success rate).Footnote ⁵²

However, what do these statistics reveal other than registration is not a preferred mode by sole or small entitles? Do the registration figures for China indicate high innovative capacity or is it due to China’s distinctive national innovation policy which embraces, inter alia, innovation parks, IPRs pledge loans, compulsory licences and talent plans?Footnote ⁵³ And to what extent do registration statistics indicate the local innovative environment or show that UM systems encourage domestic innovation?

22.3.2 Determining “Local Innovation”

Many economists, by focussing on Schumpeter’s narrow usage of innovation, see innovation as something which introduces new technology to the market.Footnote ⁵⁴ This tends to view innovation as something inextricably linked to patent systems, and usually as extractive and capitalist commodities – discussed further in Section 22.3.3.

However, as Scherer points out, innovation does occur in cultural spheres such as music performance and composition, film making and book writing.Footnote ⁵⁵ Innovation must be understood in the broader Schumpeterian sense: the usage of information in the creation of scientific and cultural goods. A correlated view is that most innovations, as opposed to groundbreaking and dramatic inventions, are routine and primarily devoted to product improvement or enhanced user-friendliness or searches for new uses for those products.Footnote ⁵⁶

In sum, innovation is a complex process intertwined with factors such as the strength of the knowledge base, institutional arrangements, qualifications of the labour force, openness of the economy and an overall ability to take on board improvements achieved in other countries or sectors.Footnote ⁵⁷

It may be more helpful to treat IP systems holistically and also as public policy regulatory institutions. Institutions that evolve over time and operate in diverse ways according to the local innovation and economic contexts. Therefore, the same UM system may be appropriate and functional in one context (e.g. under China’s national innovation policy) but inappropriate and dysfunctional in another (e.g. the Australian example). It can be difficult to predict how well such an institution transplanted to a completely different cultural, political or economic milieu will work in practice. And history offers some clear and important indicators. Take the case of Germany where UMs were introduced when the changing economic and industrial policies and landscape generated a perfect incubator for the newly coherent and unified industrial property policy, in the German free trade area in the late nineteenth century. And with Germany industrialising rapidly, the anti-monopoly and anti-patent movements were collapsing.

22.3.3 Observing and Valuing “Real Innovation”: Diverse Economies: An Inventory of Local Entrepreneurship

Part of the problem with any UM study is, I believe, the approach which accepts the categorization of UMs as “industrial property” under the Paris Convention. This leads to the logical extension of perceiving UMs as a subaltern second-tier regime, as an off-shoot of the “parent first-tier” patent regime, and as being a registered right. This is curious when one argument for UMs is the “flexibility” inherent in international IP and the flexibility that most nations presume when designing bespoke utility model laws.Footnote ⁵⁸ It is arguable that the true test of the flexibility of UM systems would be to escape the strict IP typology and if UMs can be re-fashioned so as to protect “local innovation” in a broader and more meaningful fashion. The optimal way forward would be to (i) identify with precision the innovation culture within the country, thus optimizing the entire IPR framework needed, (ii) identify which cottage or fledgling industries are to be encouraged, thus tailoring the subject matter of protection to such industries, and (iii) map the different stages of development within that country for those specific industries.

I suggest that this sort of analysis, which will differ according to different economic and technological contexts, may be undertaken within the diverse economies framework. This theoretical framework has been labelled as a Marxist approach though a more gentle description may be that the diverse economies framework invites us to consider the heterogeneity of economic practices which produce knowledge and endeavours (including innovation).Footnote ⁵⁹

Developing countries should cast a wide net to inventorize, capture and valorize all sorts of innovative activities, which are not necessarily produced as surplus, through locally grounded enterprises including cooperative, ecological, communal, non-profit and tribal enterprises. Such a diverse economies inventory may work to identify why, despite local innovative practices, there is so little interest in registration systems. Examples of diverse enterprises include:

If we focus on IPRs and local innovation, a good example is the Sri Lankan cosmetics industry which incorporates traditional knowledge. According to findings, such industries are hesitant to use the patent system due to fear of (i) disclosure of valuable information to competitors, (ii) delays in the registration process which affects the short product life-cycle, (iii) lack of novelty and inventive step. And thus the authors suggest that UMs may be very appropriate for Sri Lanka at this stage.Footnote ⁶³

More engagingly for our purposes, the diverse economies outlook asks policy makers to re-think and re-frame the “type” of sole innovators/SMEs that work and live in specific contexts. Are we expecting them to be the capitalist entrepreneur at the heart of the economic process: the heroic, charismatic, special people, with high levels of vigour, persistence and self-esteem, rational Western white males? Or can we expand our vision to include, say, SME owners who have limited cash flows and an unsympathetic bank manager?

In this reality, SME owners may have very limited time, cash, energy and resources, it is odd, therefore, to believe that a registered system, with complex forms calling for legal services, would be the pathway to economic success in developing countries. Moreover, a truly local and small business is usually embedded within the local communities – staying through good times and bad, having a reputation to maintain, and using their surplus profits to support local services, groups, pubs and cafes, etc.Footnote ⁶⁵

And yet, I have not found any UM law which emphasizes the “IPRs for local businesses” link or threshold.Footnote ⁶⁶ Or else, one finds this link within national innovation policies such as the Chinese policy – which has led to more enthusiastic local participation. This re-assessment of “local innovation” can also vary widely despite the category of “developing countries”. The starting assumption is that the latter term refers to a country with comparatively low economic output, the World Bank uses “developing countries” as a convenient nomenclature for “low and middle income countries”, and bases its categorization on the gross national income (GNI). The UNDP Human Development Index looks at several factors in order to classify countries according to its “level of human development”, whilst the UN itself uses “developed regions, and developing regions, and Least Developed Countries” and the IMF employs “advanced economies, emerging and developing economies”. Therefore, Malawi and Mexico are developing countries but their respective GNIs are disparate: US$250 v US$9,860. This, in turn, does not explain other “developing” considerations, for example a developed country may still be an IP net importer nation.

22.3.4 Linking Innovation and UMs to SDGs

A final suggestion is that developing countries seriously consider tying UM legislation with SDGs, expressly in the statute or with a national innovation policy paper. “Innovation is not an end in and of itself: innovation is an instrumental good”.Footnote ⁶⁷ Or as the WIPO policy paper on the SDGs states:

The value scheme under SDG9 can be linked, in a similar manner as advocated under the diverse economies theory, to the types of innovative and entrepreneurial activities which are of importance in the Global South (but not necessarily in the US or EU): build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation.

We leave the final note to Noto La Diega, Cifrodelli and Dermawan who advocate this perspective in the new technological field of AI-generated inventions. The question is whether developing countries should adopt the US/EU perspective of what constitutes patentable innovation, or do such countries adopt SDG9 values since they “constitute an incentive for the promotion of sustainable industrialisation and the upgrade of technological capabilities”.Footnote ⁶⁹ Thus,