Protecting American Inventors

by Timothy E. Newholm & Mary E. Eberle

• balance the interests of inventors with those of the general public;
• harmonize U.S. practices with those of the rest of the world while preserving the United States' unique first-to-invent patent system;
• prevent disreputable invention promotion companies from bilking inventors while encouraging inventors to partake in the patent system; and
• improve the ability of the United States Patent and Trademark Office (USPTO) to deal with the needs of modern businesses while providing greater access to the patent procurement process by interested third parties.

The degree to which the Act met its goals is subject to much debate. However, there is no debate that the Act will have far-ranging impacts on the patent procurement and enforcement processes. The average company and its counsel need to be aware of these impacts to avoid the pitfalls associated with them. The following discussion addresses the Act's provisions in order of their effect on the average company.

Domestic Publication of Patent Applications Published Abroad

Many patent applications filed in the USPTO now will be published 18 months after they are filed, even if they have not yet matured into patents.² This early publication is a marked departure from prior practice, under which all patent applications remained secret until the patent was granted.³ Proponents of the old practice argued that secrecy promoted innovation by permitting inventors to attempt to retain trade secrets in an invention if they could not obtain protection of the desired scope. Opponents argued that secrecy permitted inventors to "sandbag" unsuspecting companies by letting the companies tool-up and establish sales records before the inventors permitted their patents to issue.

Small inventor lobbies attacked this legislation with a vengeance, contending that it was nothing more than an invitation for large, deep-pocketed corporations to use the published patent application as a blueprint to steal an invention before the patent issued. However, Congress was under strong pressure to enact it because of pressures to "harmonize" United States practice with the rest of the world's major industrialized countries, all of which have early publication.

In one of several major compromises in the legislation, Congress voted to require early publication, but left two outs for inventors who do not want their applications to be published. First, the inventor can simply abandon the application before the 18th month of its pendancy, in which case the application will not be published. Second, the inventor can certify that he or she has not filed and does not intend to file an application in another country with early publication. That certification can be rescinded at any time, in which case the inventor may file an application abroad, and the application will be published both abroad and in the United States.

This provision also creates provisional benefits of a reasonable royalty for the period of time between the date of publication and the date of patent grant.⁴ The provisional benefits are intended to preclude a free-ridership period during which a competitor could copy with impunity the invention claimed in a published but not yet granted application. The reasonable royalty may be assessed against any third party who makes, uses, sells, or imports the invention in the United States during the relevant time.

Three conditions must be met for the patent holder to obtain this reasonable royalty. First, the accused infringer must have actual notice of the published application before royalties may accrue. Second, the application must ultimately mature into a granted patent that claims an invention that is identical or substantially identical to that claimed in the published application. Third, the patentee must bring an action for the reasonable royalty no later than six years after the patent issues.

Critics argue that early publication secures no discernable benefit because only applications that also are filed in countries with early publication will be published in the United States. Hence, publication in the U.S. provides no additional early disclosure beyond that provided by the corresponding foreign application. They also argue that any marginal benefit of early publication is outweighed by the cost of publication. Pre-grant publication will cost the USPTO about $11 million in 2001.⁵ These costs will be passed along to inventors in the form of a $300 publication fee per published application that issues as a patent. Moreover, to facilitate pre-grant publication, the USPTO adopted a body of rules that places a range of new restrictions on the format and content of patent applications and on the procedure for amending pending applications.⁶ Conforming to these rules will drive up the costs of obtaining a patent.

"First Inventor" Defense

Until now, a company that commercialized a process may have been liable for infringement of another party's patent, even if it developed that process before the application for the other party's patent was filed with the USPTO, so long as the other party could prove that it developed the invention before the infringing company developed its process. The Act's "First Inventor Defense" provision is designed to provide limited protection for potential infringers under these circumstances. This provision's title is a misnomer because the provision does not require that the party asserting the defense must be the first inventor of the relevant subject matter. Instead, the party asserting the defense only need prove that it commercially practiced its process prior to the filing of the other party's patent application.

Early versions of the proposed legislation permitted the defense to be raised in every case of infringement. Congress subsequently limited the defense to methods of doing or conducting business that otherwise would infringe a method claim of a patent. Hence, this defense is applicable to only a relatively small percentage of patents.

Three conditions must be satisfied to assert the first inventor defense. First, the accused infringer must successfully practice the method (known as "reducing the method to practice") at least one year before the patent holder filed his or her patent application. Second, the accused infringer must commercially exploit the method before the patent application is filed. Third, the accused infringer cannot assert the defense if he or she abandoned its use before the application was filed in the USPTO.

The first inventor defense has several notable limitations in addition to applying to only a small range of potentially infringing activities. For instance, an accused infringer cannot assert this defense if it copied or "derived" the method from the inventor. In addition, if a patent claims both a method of doing business and other aspects of the invention not covered by this provision of the Act, such as a computer programmed to carry out the method steps, the defense applies only to the claims directed to a method of doing business. As a result, an accused infringer may succeed in asserting the defense but still be liable for patent infringement.

An accused infringer should exercise great caution when deciding whether to assert the first inventor defense. Like most other affirmative defenses to patent infringement, all elements of the defense must be established by the difficult-to-meet clear and convincing evidence standard. Worse, if the defense is unsuccessful and the court determines that the accused infringer has failed to demonstrate a "reasonable basis" for asserting the defense, the court must find the case exceptional for purposes of awarding attorneys fees.

Optional Inter Partes Reexamination Procedure

Reexamination is a procedure by which the validity of a patent can be challenged in the USPTO rather than in federal court. The USPTO will reexamine an issued patent if a reexamination requester demonstrates to the USPTO's satisfaction that there is a substantial new question of patentability based on printed publications that were available as prior art against the original application for the patent, but that were not considered by the USPTO while the original application for the patent was pending.⁷ Reexamination may be requested either by a patent holder who wants to bolster a suspect patent or a third party who wants to invalidate a patent.⁸ In either event, the substantive examination portion of the reexamination process is essentially the same, and terminates with the issuance of a reexamination certificate. The reexamination certificate may confirm the patentability of claims, cancel claims, or both.

Reexamination can be attractive to patent challengers because it is less expensive than patent litigation and because the presumption of validity, which imposes a substantial hurdle to invalidating a patent in federal court, does not apply to reexamination proceedings. However, patent challengers have been wary of reexamination before now because the requester's role in the reexamination process was limited. Once the request was granted, the third party requester was prohibited from further involvement in the reexamination process. Reexamination instead proceeded entirely ex parte, just as in examination of any other patent application. Hence, the requester had no opportunity to communicate with the USPTO examiner who was examining the application or to participate in any appeals. This lack of requester participation generated substantial concerns regarding the requester's ability to assure an equitable outcome of the reexamination process.

The American Inventors Protection Act includes a provision that attempts to address these concerns of third party requesters. Instead of eliminating the existing ex parte reexamination system, the new law supplements it with an optional inter partes reexamination system that is available to third parties who desire greater participation in the reexamination process.⁹ A third party requester now is entitled to submit one written response to each response filed by the patent holder during the reexamination process. Hence, for the first time, a third party requester can offer a counterpoint to each point raised by the patent holder during reexamination.

However, a third party requester's involvement in reexamination proceedings remains limited under the new law. The law provides for only written comments, not examiner interviews. Moreover, while a third party can participate in a patent owner's appeal to the Board of Patent Appeals and Interferences (the USPTO's internal appellate tribunal), it is not permitted to participate in the typical next level of appeal to the Court of Appeals for the Federal Circuit (CAFC).¹⁰ The third party requester therefore still is forced to fight with one hand behind its back, particularly during the later, critical stages of the reexamination process.

A third party requester who elects inter partes reexamination does so at substantial risks. Once an inter partes reexamination is declared (regardless of whether the third party participates in the proceedings or a final decision is rendered), the requester is estopped from asserting an invalidity defense in any civil action on any ground that was raised or could have been raised during the reexamination proceeding. The converse also is true. Once a final decision has been entered against a party in a civil action or another reexamination proceeding, that party is prohibited from raising any issues in a subsequent inter partes reexamination that it could have raised in the prior civil action or reexamination.¹¹

Inventor Protection

The Act includes a provision, known as the "Inventors Rights Act of 1999," that provides a policing mechanism for regulating the activities of sometimes-unscrupulous invention promoters. An "invention promoter" is defined as any entity (with several specific exceptions) that contracts with an inventor to develop or market the inventor's products or services. One of the most infamous invention promoters is American Inventors Corp., which has been indicted for mail fraud, money laundering, and tax evasion for allegedly bilking more than 34,000 inventors out of nearly $100 million.¹²

The new law requires that all invention promoters must provide written information about the company's practices and success rate before entering into a written contract with an inventor.¹³ For instance, it must inform the inventor of the total number of evaluations the invention promoter has provided in the past five years, broken down by positive and negative evaluations. It also must provide information on the number of inventors who contracted with the invention promoter, the number of inventors who received profits from their inventions in excess of the fees paid, and the number of inventors who entered into license agreements as a result of the invention promoter's services.

An inventor who believes that he or she is injured by an invention promoter's actions may file a civil action seeking either actual damages or statutory damages of no more than $5,000. Treble damages are available for intentional or willful behavior by the invention promoter.

Patent and Trademark Office Efficiency

This provision is intended to permit the USPTO to run itself in a more business-like manner than most government organizations.¹⁴ It recasts the USPTO as a performance-based organization and gives the USPTO substantial autonomy in managing its budget, personnel, procurement, and other administrative functions. It also provides for presidential appointment of a director who heads up the agency. The director is assisted by a deputy director, a commissioner of patents, and a commissioner of trademarks, all of whom are appointed by the secretary of commerce.

The new law also establishes separate public advisory committees or advisory panels for patents and trademarks, each with nine members appointed by the secretary of commerce for three-year terms.¹⁵ These committees, first formed on July 17, 2000, review and report on the policies, goals, performance, budget, and user fees of the USPTO. Each committee must include individuals with substantial background and achievement in finance, management, labor relations, science, technology, and office automation.

One important goal of USPTO reorganization has not been met. The USPTO is funded entirely by user fees paid by patent applicants upon the submission of new applications and several other documents. However, for the last several years, Congress has routinely appropriated a budget for the USPTO that is less than the accumulated fees collected by the USPTO and has diverted the remaining funds to other, unrelated government agencies. The USPTO, inventors' groups, and the intellectual property bar have complained bitterly that this practice constituted a hidden tax that increased filing costs with no benefit to patent applicants. The Act does not solve this problem. In fact, the House of Representatives has proposed to divert more than $250 million of collected funds to other agencies in 2001. The USPTO insists that it will be unable to perform effectively if these fund diversions continue.

Patent-term Guarantee

Under the old law that took effect in 1995, most patents had a term of 20 years from the application filing date for that patent.¹⁶ This term could be extended, but only up to five years and only for a few enumerated delays caused by specified USPTO procedures. Extensions were not available for routine delays that were not caused by any of the specified procedures.

To compensate for USPTO processing delays and for delays in prosecuting applications, the new law extends the term of any patents that remain pending more than three years. Diligent applicants, that is, those who respond promptly to all USPTO communications, are guaranteed a minimum 17-year patent term. However, any patent term extension obtained under this provision is reduced by one day for every day of delay caused by an applicant, including delays caused by routine requests for time extensions. Therefore, patent applicants should strive to respond to all USPTO actions promptly to avoid loss of patent term.

Conclusion

The degree to which the American Inventors Protection Act of 1999 succeeded in its goals is subject to much debate in the intellectual property law community. The early consensus is that the Act's success is mixed. The Act's supporters argue that it will curb the practice of unscrupulous invention promoters and help position the USPTO to meet the demands of today's rapidly changing business and political climates. However, the Act's detractors argue that many of its substantive provisions were watered down so much in an effort to build a consensus that they have little practical value.

Endnotes

1 Chapter 35 of the U.S. Code has been amended by the Act (full text of new legislation is available at http://www.uspto.gov/web/offices/dcom/olia/aipa/index.htm). The text of the Act is contained in Title IV of S. 1948, the Intellectual Property and Communications Omnibus Reform Act of 1999, as introduced in the 106th Congress on Nov. 17, 1999, and which was incorporated and enacted into law on Nov. 29, 1999, by § 1000(a)(9), Division B, of Public Law 106-113, 113 Stat. 1501 (1999).

2 35 U.S.C.A. § 122 (West Supp. 2000); see also Changes to Implement Eighteen-Month Publication of Patent Applications, 65 Fed. Reg. 17,946 (Apr. 5, 2000) (to be codified at 37 C.F.R., pts. 1, 5).

3 35 U.S.C. § 122 (1994).

4 35 U.S.C.A. § 154 (West Supp. 2000).

5 Transcript of Commissioner's February 10th Online Discussion (Feb. 24, 2000) (http://uspto.gov/web/offices/com/chats/chat0002.htm).

6 65 Fed. Reg. 54,604 (Sept. 8, 2000).

7 35 U.S.C.A. § 312(a) (West Supp. 2000); see also Rules to Implement Optional Inter Partes Reexamination Proceedings, 65 Fed. Reg. 18,154 (Apr. 6, 2000) (to be codified at 37 C.F.R., pt. 1).

8 35 U.S.C.A. § 311(a) (West Supp. 2000).

9 Id. at § 314(b)(3).

10 Id. at §§ 315, 134.

11 Id. at § 317(b).

12 George Graham and Doug Hanchett, "Dreams Turn into Nightmares," The Union News and Sunday Republican, Sept. 26, 1999.

13 35 U.S.C.A. § 297 (West Supp. 2000).

14 Id. at § 1; see also PTO Becomes Performance-Based Organization (March 29, 2000) (http://www.uspto.gov/web/offices/com/speeches/00-21.htm) (press release by PTO).

15 35 U.S.C.A. § 5 (West Supp. 2000); see also Notice and Request for Nominations to the Public Advisory Committees, 65 Fed. Reg. 16,564 (2000).

16 35 U.S.C. § 154(a)(2) (1994 & Supp. II).