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2011 America Invents Act:  How will the patent reforms impact startups?

Insight October 19, 2011

After several sporadic decisions issued by the Supreme Court impacting the US patent system and years of debate about how the system should be improved, Congress recently passed the Leahy-Smith America Invents Act (HR 1249).  President Obama signed the Act into law on September 16, 2011.  The text of the Act can be found here.

The provisions of the new law have a variety of effective dates.  Some of the changes take effect immediately.  Fee increases will be instituted on September 26, 2011.  Other changes will not be implemented until 2012 and 2013.

Many have argued that the patent reforms contained in the Act will hurt small businesses and individual inventors.   While some of those concerns may be justified, the overall impact of the Act will likely depend on a number of variables such as how an individual business operates, its relevant technology area and the way that the law is implemented and interpreted over time.

The Act includes a variety of patent reforms that may significantly impact start-ups.  The list below is a sampling of some of the Act’s major changes.

(1)             “First to File” replaces “First to Invent”

The Act changes the US from a “first to invent” to a “first to file” system  (Section 3), thereby harmonizing the US with most other countries effective March 16, 2013.  

Under the “first to invent” system, the first inventor who invents an invention has priority over another inventor who files a patent application for the same invention at an earlier time.  

The new law gives priority to the “first to file” the patent application (unless the first filer derived the invention from another).

This reform is believed to motivate a  “race to the patent office”, which many think will favor large companies with the resources to file an application quickly.  In some cases, this will most likely be true.

Who is slow-moving and has more “red tape”?

Consider the dynamics of large companies with layers of bureaucracy.  Often, the process involves several steps: (i) the invention is conceived by a researcher or engineer, (ii) the idea is submitted to an invention disclosure database, (iii) an IP committee might meet monthly or quarterly to decide which inventions to protect, which applications to maintain, etc.,  (iv) if approved by committee, the invention disclosure is sent to an outside attorney or assigned to an in-house attorney for evaluation and drafting, and so on.  

That’s not the case with all large companies and many will likely streamline their invention pipeline processes in view of the new reforms, but startups and small business can be much more nimble.   Startups can get applications on file quickly and more cost-effectively by leveraging the knowledge and skills of the in-house inventors in the application process (e.g., see Have an Idea? What about a Patent? for some cost-effective tips). 

Which companies are more equipped for $50-600K+ mini-trial proceedings?

Under the current “first to invent” system, disputes before the Patent Office are resolved by a patent interference which is an administrative trial proceeding by which it is determined which party was the first to invent.

An interference proceeding usually includes the presentation of motions with supporting testimony and documentary evidence, cross-examination depositions of fact and expert witnesses, and an oral hearing before a panel of three Administrative Patent Judges.  An American Intellectual Property Law Association Survey reported that the mean cost of an interference through the completion of the preliminary motions phase was over $400,000, while the mean total cost of the entire interference was over $650,000.

In addition to the cash outlay for an interference, the ability to prove “first to invent” (e.g., “reasonable diligence”) often requires devoting resources to producing documentation (e.g., signed notebooks, etc.) not always well maintained by independent inventors or small businesses.

Accordingly, the current interference system was not favorable to small business or individual inventors in view of the large costs involved.  

However, interference proceedings under the pre-Act patent system were rare.   And more often than not, the first to file prevailed in the interference proceeding  - so in practice the new system may not change the outcomes of these disputes.

“First to File” a Mixed Blessing

Moreover, under “first to file” more prior art would become available as it narrows the applicability of the one-year grace period available under the pre-Act patent system.  Under Section 5 of the Act, the patent statute is amended so only certain categories of art that are published or publicized during the one-year grace period prior to the patent application filing date would not be deemed a bar to patentability.   Under the Act, a prior art disclosure made within the one-year grace period that was (1) derived from the inventor or (2) made public after the inventor publicized his invention will not create bars to patentability.   It will be no longer be possible to “swear behind” all “prior art” effective March 16, 2013 and this will likely cause some inventions to be “made public” to create a grace period for the published invention.

Generally, “first to file” could favor nimble small businesses and individual inventors.  As always, it will require cash and human resources, whether or not an applicant is rushing to the Patent Office, to file a patent application.   Large companies have more resources, but small entities often have an edge on moving faster and more efficiently and will no longer face expensive interference proceedings.

(2)              “Best Mode” disclosure requirement

Effective September 16, 2011, the Act eliminates "failure to disclose best mode" as an invalidity defense in infringement cases and a means to invalidate a granted patent in post-grant proceedings (Section 15).  This provision does away with a costly issue in many litigation disputes and reduces some of the difficult tensions between trade secret laws and patent protection

(3)            Expanded Prior User Rights

Effective September 16, 2011, the Act also expands "prior user rights" (Section 5) which not only provides a defense against patent infringement, but also makes trade secret protection a more viable option than patent protection in some cases.  

Without “prior user rights” a trade secret user/owner faces the risk of being sued even by a subsequent patentee.  For example, you may decide to keep your innovative process a secret, but someone else may later independently “invent” the same process and secure a patent.  As “unfair” as it may seem, this subsequent patentee – under the old patent system – has grounds for suit.

With the Act’s implementation of  “prior user rights”, it is now a defense to infringement if an accused infringer can show prior commercial use by clear and convincing evidence for at least 1 year before the effective filing date of the patent or before the date of public disclosure under Section 102(b).

The Act likely fosters an environment that favors trade secret protection (if an invention can be maintained as a trade secret and is not easily “reverse engineered”) since the prior user rights will provide a defense against infringement accusations by subsequent patentees.  Moreover, trade secret protection lasts for as long as the invention is maintained as a secret, while patents expire (generally 20 years from the date the application was filed).

In the end, protecting innovations using trade secret law is less expensive compared to patent protection and thus levels the playing field between large and small companies in those industries where trade secret protection is an option.

(4)             Post Grant Reviews, Inter-Partes Proceedings and other proceedings for challenging patents

The Act creates new procedures for challenging or amending a patent after issuance. In addition to traditional reissue and Ex Parte Reexamination proceedings, the Act provides for three new post-issuance procedures: (i) Post Grant Review, (ii) Inter Partes Review and (iii) Supplemental Examination. The new review procedures will be available starting in September 16, 2012.

One way of looking at this group of reforms is as a means for resolving issues or correcting mistakes as an alternative to litigation.  For example, the post grant review forces the patent challenger to elect between using these administrative proceedings or taking a chance in a Federal district court.   Any reforms that result in less court litigation generally helps startups since litigation costs are invariably high.

Conclusion

The 2011 Act is the most sweeping reform of the U.S. patent system since the last patent statute was enacted in 1952.   This article only discusses a few of the many changes to U.S. patent law and other changes may have an impact on companies depending on their individual circumstances.  The Act generally simplifies the patent process by removing issues often litigated and providing alternatives to District Court litigation.  How the 2011 Act impacts an individual startup will depend on the startup’s internal resources, processes and technology focus.

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-Michael Fedalen contributed to this post