Oregon State Bar Bulletin — OCTOBER 2011

Legal Practice Tips
Reinventing Patent Law:
The American Invents Act Changes the Rules
By Peter E. Heuser & Johnathan E. Mansfield

Since at least the turn of this century, almost anyone interested in innovation or technology could agree that something was rotten with the state of the U.S. patent system. Among the most common complaints were that there are too many patents, or not enough; that patents are too difficult to enforce, or too easy; that software or ways of doing business should not be patentable, or that all inventions are equal under the law; and that the U.S. should harmonize its patent laws with the rest of the world, or dance to its own tune. Unsurprisingly, several major patent reform bills have been floated in Congress over the last decade, where they sank more or less quickly in a sea of partisanship.

But on Sept. 16, 2011, President Obama signed the Leahy-Smith America Invents Act, Public Law 112-29, into law. The AIA is the most important legislative patent reform in over 50 years. The AIA will change how patents are granted, how patent litigation will proceed and what kinds of inventions are eligible for patents, among other things. Because the AIA will likely affect most Oregon businesses, Oregon lawyers should be familiar with the new law, whether or not their practices focus on intellectual property issues.

Below we introduce some of the major provisions in the AIA. Our discussion is general and nontechnical, and is not a complete analysis of the law or legal advice.

First-to-File Will Now Establish Priority of Invention
It is not uncommon that several inventors will conceive of the same invention at about the same time. For example, Alexander Graham Bell and Elisha Gray independently developed telephonic technology in the mid-1870s, and both filed patent documents within hours of each other on Valentine’s Day, 1876. But the fact that Bell may have filed a few hours earlier did not give him priority, because U.S. law gave priority to the first to invent, unlike the rest of the world where first-to-file is almost always the rule. The Patent Office did not rule that Bell had priority until after further proceedings determined that Bell had priority over Gray.

Perhaps the biggest change that the AIA will make is to convert the U.S. to a first-to-file system. When this provision takes effect on March 16, 2013, it will dramatically simplify the long and expensive disputes that arose when multiple applications were filed for similar inventions. The change will also lend more certainty to issued patents, which could previously be attacked by inventors claiming to have come up with the invention before the named inventor. Finally, it may lessen the burden on inventors to keep records on the timing of their inventive work, perhaps facilitating more productive activities such as improving inventions or conceiving new ones.

The first-to-file system will encourage early filings by large companies with the resources to do so, to the detriment of smaller companies who typically need to see if the invention really works before incurring the expense of a patent application. Given the one-year grace period under which inventors can market their inventions prior to filing, there will be an incentive to file an application early, and then perhaps file another application later if the invention is changed after design work and market testing are completed. This is likely to increase the number of applications filed, and increase the expense to both small and large technology-based companies.

Prior Commercial User Defense is Established
Many companies choose not to patent some inventions that are incorporated into their products, especially when the invention is not visible to the public. The new law establishes a “prior commercial user” defense for such inventors who commercially use certain inventions at least one year before another inventor files a patent on the same invention or discloses it publicly.

New Post-grant Proceedings for Patent Validity Challenges
An accused infringer can usually challenge the validity of a patent in court, although such proceedings are expensive and lengthy. Prior to the AIA, a party could also challenge a patent by asking the U.S. Patent and Trademark Office (PTO) to reexamine the patent, in either aninter partes or an ex parte proceeding. Reexaminations were less expensive than court challenges, but these reexaminations could still extend over several years before the PTO issued its decision.

The AIA provides new ways to challenge patents in expedited, cost-effective proceedings. Any entity will now be able to petition for post-grant review of the validity of a patent on essentially any ground for nine months after issue, provided the entity has not made a claim to challenge the patent’s validity in court and does not own the patent. In most cases, the entity requesting review will be barred from raising any claim that it made or could have made in the review, in any later court or administrative proceeding. A decision will generally issue within a year. After nine months from issue or after termination of post-grant review, a patent will still be open to challenge in an inter partes review, but on more limited grounds. These post-grant proceedings will eventually take the place of inter partes reexamination, although ex parte reexamination will still be available.

The PTO Will No Longer Grant ­Patents on Tax Strategy
The topic of business method patents that covered strategies to avoid tax liability was hotly debated leading up to passage of the new law. It was thought that the Supreme Court’s recent decision in Bilski v. Kappos, 130 S. Ct. 3218 (2010), would provide guidance, but it did little to clear the air. But under the AIA, applications for inventions comprising strategy for reducing, avoiding or deferring tax liability, which are pending on or filed after Sept. 16, 2011, will not be granted.

Special Transitional Review for Certain Patents Related to Financial Products and Services
The AIA directs the PTO to establish a special procedure for challenging the validity of some “covered business method patents,” defined as patents for performing data processing or other operations used in the practice, administration or management of a financial product or service, though not including patents for technological inventions. Under the AIA’s procedure, those accused of infringing these patents may bring a post-grant review proceeding without some of the restrictions generally applicable to such proceedings. The transitional review provision has an eight-year sunset provision. The AIA also provides that in an action for infringement of a covered business method patent, the location of an ATM machine shall not be deemed to be a regular and established place of business for venue purposes.

Most PTO Fees Will Increase by 15 Percent
There has been widespread frustration that the PTO takes three years on average to issue a patent, largely due to a shortage of funds. Although the PTO collects fees from patent applicants, some of this money is not available to the PTO but goes to other government programs. Many hoped that this would change under the AIA, but the new law makes no fundamental changes to address PTO fee diversion.

A 15 percent surcharge will apply to most PTO fees as of Sept. 26, 2011. As in the past, “small entities” can pay fees at 50 percent of the normal rate, but under the new law a category of “micro-entity” is established that will permit fees to be reduced by 75 percent. A micro-entity is currently defined as a university or an entity with gross income of less than $150,000 per year and who has not filed more than four patent applications or assigned the invention to a large entity.

Limited Prioritized Examination Will be Available
For an additional fee initially set at $4,800 (small entities at half that) it will be possible to have an application for an invention deemed important to the national economy or national competitiveness examined on an expedited basis. Until the PTO issues regulations, the AIA caps the number of such examinations at 10,000 per fiscal year.

New Rules Will Affect Litigation by Non-practicing Entities
It will no longer be possible to file a single patent infringement action against multiple defendants merely because they allegedly infringe the same patent, unless the defendants or the claimed acts of infringement are otherwise related according to the statute. This is a response to widespread concern about lawsuits filed by so-called nonpracticing entities (NPEs), which are often patent holding companies whose business model is to license patents or litigate, rather than to produce products embodying the patented technology.

The AIA requires the comptroller of the GAO to conduct a study and report to Congress on the consequences, good and bad, of NPEs. Although some have faulted the AIA for failing to address NPE litigation, the AIA contemplates further action by Congress in this area, since it requires that the comptroller’s report make recommendations on changes to laws to “minimize any negative impact” of NPE litigation.

False Patent Marking Claims are Curbed
Under current law, a patentee may give constructive notice that a product is patented by marking it with the applicable patent number. Another section of the patent law prohibits falsely marking a product with an inapplicable patent number, intending to deceive the public. Under pre-AIA law, any person could bring a false marking claim as a qui tam relator on behalf of the United States, regardless of whether the relator had suffered any injury of the sort traditionally required for standing to sue. A recent Federal Circuit case confirming this principle led to a cottage industry in such lawsuits, many brought by entities that had no business other than suing for false marking. See Stauffer v. Brooks Bros., Inc., 619 F.3d 1321 (Fed. Cir. 2010).

The pre-AIA penalties could be draconian, providing for fines of up to $500 for each falsely marked unit. In Pequignot v. Solo Cup Co., 608 F.3d 1356, 1359 n.1 (Fed. Cir. 2010), the court noted that defendant’s potential liability for claims that 21,757,893,672 paper cups were falsely marked was “approximately $5.4 trillion, (which) would be sufficient to pay back 42 percent of the country’s total national debt.”

The AIA changes virtually everything about false marking. Standing to bring false marking claims is now limited to the United States, or to an entity that has suffered a competitive injury caused by the false marking. Only the United States may seek the $500 per unit penalty. Other plaintiffs are limited to compensatory damages. The AIA also eliminates civil liability for marking a product with the number of a patent that has expired, so long as the patent covered the product. Within days of the signing of the AIA, district courts began dismissing patent marking suits sua sponte for lack of standing.

Other Provisions Will Make it More Difficult to Attack Patent Validity
Violation of the “best mode” requirement will not be a basis to invalidate a patent, although the patent statute still requires that a patent specification include the best mode contemplated by the inventor of carrying out the invention.

A patent owner can correct inventorship defects without alleging that prior identification of inventors was “without deceptive intent.”

Patent owners are permitted to submit prior art to the PTO in a “supplemental examination” to correct mistakes in prior disclosures made to the PTO, which will make it more difficult to assert that the patent owner committed inequitable conduct during the examination of the patent.

The America Invents Act will have significant effects on inventors, technology companies and other stakeholders in the patent system. Besides substantive changes, the AIA requires the PTO to prepare reports to Congress about patent litigation and other related topics. We have likely not heard the last word from Congress on patent reform.

Peter Heuser and Johnathan Mansfield are shareholders and intellectual property attorneys at Schwabe, Williamson & Wyatt.

© 2011 Peter E. Heuser & Johnathan E. Mansfield

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