Patent Law Reform Is Almost Here

Article by John Richards¹

BACKGROUND

Patent Law reform legislation (in the form of the "America Invents Act") has at last passed both houses of the United States Congress. The Senate passed Bill S. 23 by a vote of 95-5 on March 8, 2011. The House of Representatives passed Bill HR 1249 by a vote of 304 - 117 on June 23, 2011. The two bills as passed are very similar and so reconciliation of their texts is not expected to be a problem. President Obama has indicated that he will sign the legislation when it is presented to him. When he does so it will effect the most significant single legislative change in U.S. patent law in over a hundred years.

Attempts at Patent Law reform have failed in the three previous Congresses and prior to the present Congress there was some concerns as to whether it would ever be passed. Following criticisms of the patent system by the Federal Trade Commission (FTC) and the National Academy of Sciences, bipartisan attempts at patent law reform were introduced into Congress in 2005, 2007 and 2009. Although the 2007 legislation passed the House, and the 2009 legislation passed the Senate, in the end neither of these initiatives resulted in a change in the law. The main reason for failure of the earlier attempts was the lack of agreement between various parts of industry as to how damages for patent infringement should be calculated. Industries where typically each product on the market was covered by only one or two patents had a different view as to what was appropriate from those where each product might involve many inventions and so many patents.

After the failure of the 2007 and 2009 proposals, various industry groups worked on a compromise that switched the emphasis away from an attempt to define the calculation to the methodology to be used and to increase the power of the judge to act as a gate keeper to avoid the risk that juries might be presented with inappropriate theories and facts. The 2011 bills simply omit this issue, apparently at least in part in the light of recent judicial decisions that seem to make the need for change on this topic less urgent.

THE MAIN FEATURES OF THE CURRENT BILLS, WHICH WILL TAKE EFFECT ONE YEAR AFTER ENACTMENT OF THE ACT UNLESS OTHERWISE SPECIFIED, ARE AS FOLLOWS:

1. Change in Novelty/Statutory Bar provisions (Section 2 of S. 23; Section 3 of HR 1249)

Although these changes have been hailed as adopting a first-to-file standard, the reality is not that simple. Both the Senate and the House bills make the same sweeping changes to 35 USC 102 to provide:

1. Prior patenting, printed publication, public use, placing on sale or "otherwise" making available to the public anywhere in the world more than one year before the effective filing date will be a bar. The "effective filing date" is the date of filing of an application containing a claim to the invention or a priority date afforded under any of sections 119 (therefore including priority claims made under the Paris Convention), 120, 121, 365(a), (b) or (c).
2. Any of the above acts within one year prior to the effective filing date will also be a bar unless the act was by or an inventor, joint inventor or others obtaining the disclosed subject matter directly or indirectly from the inventor or joint inventor or was by a third party but followed such a disclosure by or deriving from the inventor or joint inventor.
3. Furthermore the contents of any earlier-filed but later-published application (apparently including a PCT application designating the US irrespective of the language of publication) or patent will also be a bar as of its priority date unless any of the exceptions in (B) apply or the prior application was commonly owned or subject to an obligation to assign to common ownership no later than the effective filing date. ("Common ownership" includes being subject to a joint research agreement similar to the current provisions of CREATE.)

As a consequence of these changes, the provisions currently requiring proof of invention within the United States to establish an effective date of invention and the possibility of registering an invention under the statutory invention scheme are repealed.

Both bills replace the current interference proceedings in 35 USC 135 by "derivation proceedings" before the Patent Trial and Appeal Board (which will replace the current Board of Patent Appeals and Interferences) to enable a determination to be made as to whether a prior applicant had derived the subject matter in question from the patent applicant. Such proceedings will have to be commenced within one year of the publication of a claim setting out the allegedly derived invention. It will be permissible for contesting parties to settle issues of derivation by agreement or submit them to arbitration. Agreements shall be accepted by the Board unless inconsistent with the evidence of record and at the request of "a party" to the proceeding they will be kept "business confidential" and disclosed only to government agencies or others on a showing of good cause. Arbitration awards will be dispositive between the parties but unenforceable until notice is given to the USPTO. Civil actions with respect to determinations of the Board in derivation proceedings are possible in the same manner as at present in interference proceedings.

Both bills also provide for amendment of 35 USC 291 to replace the current provision relating to interfering patents with one that provides that the owner of a patent may bring an action against the owner of an allegedly derived patent under similar conditions.

A proposed amendment in the House of Representatives to make all of these changes conditional on patenting authorities in other major countries adopting a grace period "substantially similar" to that of the US failed by a vote of 316 to 105.

This section will take effect 18 months after enactment.

Additional Comments:

1. The addition of otherwise" making available to the public" to the grounds on which novelty may be destroyed on its face adopts a European standard. It remains to be seen how this will be applied in practice. Earlier bills attempted to define this in terms of reasonable accessibility etc. No such attempt is made in either of the present bills.
2. The ability to establish a publication date prior to a third party independent disclosure and then file within one year of one's own publication raises interesting issues. This feature has been referred to by some as creating a "first to publish as long as you file within a year" system rather than a true first to file system. It does, however raise possible problems if what is published by someone else after one's own first publication is similar to but different from the contents of one's own prior publication.
3. Prior proposals for amendment dropped the "on sale" bar. The present bills make the bar a world-wide one.
4. The changes with respect to the effective date of earlier-filed but later-published applications as prior art to make them effective not only from a U.S. filing date but also from a foreign priority date will finally end the Hilmer doctrine.

2. Assignee Filing, Oaths and Declarations (Section 3 of S. 23, Section 4 of HR 1249)

Both bills amend 35 USC 118 to provide for filing in the name of an assignee or one to whom the inventor is under an obligation to assign the invention. Additionally, a person who otherwise shows sufficient proprietary interest in the matter" may make an application "on behalf of and as agent for the inventor", but only "where appropriate to preserve the rights of the parties". Where this is done, the patent will issue to the real party in interest.

Both bills also simplify oath and declaration requirements of 35 USC 115 and permit statements currently required in the oath or declaration to be incorporated into a "substitute statement" or an assignment document filed at the USPTO instead, as long as the statements are accompanied by an acknowledgment of the penalties accompanying any false statement set out in 18 USC 1001 (specifically a fine or imprisonment for up to five years or both). Required statements are that the application was made or authorized by the affiant or declarant and that he or she believes him or herself to be the inventor or a joint inventor of the invention claimed. The Director of the USPTO is given the power to provide for additional required statements. The amendments also specifically provide that additional documents do not normally have to be filed in continuing applications.

Additional Comment:

3. Increased Damages (Section 4(c) of S. 23, Section 17 of HR 1249)

Both bills prevent the plaintiff from relying on absence of counsel's opinion as evidence of willfulness.

4. False marking (S. 23 Section 2(k), HR 1249 Section16(b))

Both bills amend the current law to provide that only the United States may sue for a penalty under the current false marking provisions but add a new provision whereby a person who has suffered competitive injury as a result of false marking of a product as being patented my sue for damages adequate to compensate for the injury caused.

This section will take effect upon the date of enactment and will apply to any case pending or commenced on or after enactment.

5. Prior Inventor Defense/Prior Commercial User Rights (Section 4(a) of S. 23, Section 5(a) of HR 1249)

35 USC 273 currently provides "first inventor" defense to an action for infringement of a business method patent.

The Senate bill would make a minor change to this to extend the protection afforded to a party being sued if it had itself been a prior user of the invention so that it will now cover "the person who performed the acts or caused the performance of the acts necessary to establish the defense as well as any other entity that controls, is controlled by, or is under common control with such a person". Such rights are, however, not licensable or transferable other than with the enterprise or line of business to which they relate.

The House provision goes much further and would create a more general prior user right for those who used the "subject matter" on which they are being sued for infringement commercially more than one year prior to the earlier of the effective filing date of the application giving rise to the patent under which they are being sued or the date of first disclosure "in a manner that qualified for" an exception from being treated as prior art as noted above. Commercial use is deemed to include the period during which an application for marketing approval is pending before a regulatory body for products that are subject to such premarketing review. The defense may be transferred only with the business or part of the business to which it pertains and if such transfer occurs, it is limited in application to sites where the subject matter was in use before the later of the effective filing date of the claimed invention and the date of the transfer.

The defense may not be asserted if, at the time the invention was made, it was owned or subject to an obligation to assign it to either an institution of higher education or "a technology transfer organization whose primary purpose is to facilitate the commercialization of technologies developed by one or more such institutions of higher education". This exception only applies, however, if the activities required to reduce the invention to practice are such that they could have been undertaken using funds provided by the federal government.

The Senate bill also calls for a study of how prior user rights work in other countries (S. 23 Section 2(n)).

6. Virtual Marking (Section 4(b) of S. 23 and Section 16(a) of HR 1249)

Both bills permit the marking requirements of 35 USC 287 to be met by placing information on the patented article that uses the word "patent" or "pat" and directs the public to a free internet site that associates the patented article with the number of the patent.

This section will take effect upon the date of enactment and will apply to any case pending, or commenced on or after enactment.

7. Citation of Prior Art (Sections 5(g) and 7 of S. 23, Sections 6(g) and 8 of HR 1249)

Both bills provide that prior to grant, the ability of third parties to submit prior art under 35 USC 122 is amended to permit such submissions up to the earlier of at least six months after publication or the date of allowance.

Both the Senate and House bills amend 35 USC 301 to expand upon the information that may be placed on record in the USPTO for any patent to include written statements made by the patent owner in federal court or USPTO proceedings as to the position taken by the patent owner as to the meaning of one or more claims. Statements made in this way will be able to be used only for purposes of claim interpretation in re-examination, inter partes review or post grant review proceedings.

8. Post Grant Administrative Proceedings

Both bills effect substantial changes in the ways in which a patent may be reviewed in administrative proceedings after grant. Ex parte re-examination remains unchanged except that the USPTO Director can institute reexamination on his own initiative on the basis of prior art cited during another reexamination proceeding. Inter partes re-examination is replaced by inter partes review in which, among other changes the threshold question is changed from "does the request raise a substantial new question of patentability" to "does the request show that there is a reasonable likelihood that the requester would prevail with respect to" at least one claim. Additionally a new proceeding called "post grant review" is introduced to allow more broadly based challenges to a patent, but only during the period of nine months after grant or reissue. New provisions are added that may be used by the patent owner to effect amendment by way of Supplemental Examination, following which, if the director believes a substantial new question of patentability is raised, re-examination may be ordered. Finally, a special form of post grant review is to be instituted for business method patents if the challenger has been sued for or charged with infringement of the patent.

8A. Inter Partes Review (S. 23 Section 5(a), HR 1249 Section 6(a))

Inter partes review replaces the current inter partes re-examination provisions of 35 USC 311-319

As with the current inter partes reexamination, issues that can be considered are limited to novelty and obviousness over prior patents and publications. Additionally there will still be a threshold issue to be addressed before review will be ordered. However, instead of having to show a substantial new question of patentability as required under the present law, the new threshold question will be whether the petitioner has shown a that there is a reasonable likelihood that the petitioner will prevail on at least one claim. There is to be no change from the present law that a party that has failed to prove that a claim should not have been granted will be estopped from asserting that the claim that has been challenged in review proceeding is invalid on any ground that the petitioner raised or reasonably could have raised during the inter partes review.

There are, however, differences from the current inter partes reexamination in addition to a change of name and threshold question.

Under both bills, in order to avoid conflict with the new post grant review proceedings, inter partes review will only be able to be requested more than nine months after the grant or reissue of the patent being challenged or if post grant review has been requested after termination of such post grant review. Additionally, inter partes reviews will be carried out by the Patent Trial and Appeal Board.

Inter partes review will be able to be instituted by anyone other than the patent owner, although the real party in interest will have to be identified. The patent owner will have the right to respond to any such petitions. Inter partes review may then be authorized only if the Director determines that there is a reasonable likelihood that the petitioner would succeed on at least one of the challenged claims. For the most part the details of the procedure to be followed will be left to regulations. The bills do, however, provide that unless otherwise necessary in the interest of justice, discovery will be limited to depositions of witnesses who have submitted affidavits or declarations and that the patent owner will have one opportunity to file an amendment to cancel challenged patent claims and replace them with a reasonable number of substitute claims. It is further required that the challenger be provided with at least one opportunity with at least one opportunity to file written comments and that each party has the right to an oral hearing. The challenger will bear the burden of proving unpatentability of challenged claims by a preponderance of the evidence.

Inter partes review proceedings can be settled by agreement between the parties up to the time at which a decision has been made by the board. If this is done, the agreement will have to be in writing and a copy filed with the USPTO. At the request of "a party" to the proceeding such agreements will be kept "business confidential" and disclosed only to government agencies or others on a showing of good cause.

Appeals lie only to the Court of Appeals for the Federal Circuit. The bill also includes provisions governing the relation of such proceedings with other proceedings or actions including a bar on instituting or maintaining inter partes review if petitioner or real party in interest has filed a civil action challenging the validity of a claim of the patent.

Both bills provide for the possible "graduated implementation" of this provision.

Additional Comment:

8B. Post Grant Review (S. 23 Section 5(d), HR 1249 Section 6(d))

These sections will add new sections 321-329 to 35 USC. The main features are as follows:

1. Proceedings may be instituted only within a period of nine months from the grant of a patent or its re-issue. Challenges to claims of reissued patents that were present in or narrower than the original claims are only permitted within the time period for challenging the original patent.
2. Post grant review may be sought on any ground of invalidity that can be raised as a defense in an infringement action.
3. Both bills make it explicit that the challenger bears the burden of proving its case by a preponderance of the evidence.
4. Both bills provide that if a court in a civil action finds that the claims in question were not invalid, post grant review actions cannot be brought or continued against such a claim on any ground that the party or its privies raised or could have raised in the civil action.
5. Both bills provide that petitions for post grant review will be subject to an initial review by the Director to determine whether "the information presented ... if not rebutted would demonstrate that it is more likely than not that at least one of the claims challenged in the petition is unpatentable". Review may also proceed if the initial determination shows that the petition raises a novel or unsettled legal question that is important to other patents or patent applications. Both bills provide that there is to be no review of determinations made on this issue.
6. Discovery is to be permitted, subject to rules made by the Director of the USPTO, but limited to "evidence directly related to factual assertions advanced by either party".
7. Amendments will be permitted during post grant review proceedings only to cancel a challenged claim, replace a challenged claim or to amend other parts of the patent. .
8. Final decisions of the Patent Trial and Appeal Board are to be made within one year of the date of institution of the proceeding, subject to a possible six months extension "for good cause".
9. At any time before the board's decision, the parties may settle. However, they must file full details of the settlement which will be available to "government agencies on written request or any person showing good cause" but otherwise can be kept from public view.
10. Decisions of the Board are to be appealable to the Federal Circuit by either party.
11. Decisions in favor of the patent owner have an estoppel effect in other proceedings for "any ground that the petitioner raised or reasonably could have raised during the" post grant review. However, settlement agreements will have no estoppel effect.

8C. Supplemental Examination (S. 23 Section 10, HR 1249 Section 10)

Under this provision, a patent owner will be able to request supplemental examination of its patent "to consider, reconsider, or correct information believed to be relevant to the patent". The purpose is to give patent owners some means for dealing with situations in which a patent might otherwise be unenforceable as a result of mis-steps during prosecution. The bills provide that, subject to certain exceptions where steps have already been taken in or preparatory to litigation, "a patent shall not be held unenforceable under section 282 on the basis of conduct relating to information that had not been considered, was inadequately considered or was incorrect in a prior examination of the patent if the information was considered, reconsidered or corrected during a supplemental examination of the patent". Based on the request, the Director may order re-examination of the patent using a slightly modified procedure from that normally used in ex parte re-examination. In the case of re-examination following supplemental examination, the issues that may be considered are not limited to novelty or obviousness over patents or publications as is the case of other reexaminations.

It is specifically provided that this change does not change the power of court to impose sanctions based on criminal or antitrust laws or the authority of the Director to investigate and sanction attorney misconduct.

Additional Comment:

8D. Special Post Grant Review for Business Method Patents (S. 23 Section 18, HR 1249 Section 18)

Both the Senate and House bills provide for a special but temporary provisions for reviewing business method patents. Under the Senate bill, the provisions will lapse after four years. The House bill provides for sunset after eight years.

Both bills provide that the special procedure applies to business method patents that claim "a method or corresponding apparatus for performing data processing or other operations used in the practice, administration or management of a financial product or service" except for patents for technological inventions. The Director is charged with issuing regulations to define a "technological invention". In general the same provisions apply as to post grant review as described above, except that there is no limitation on the period following grant within which review can be sought. It is, however, a requirement that the party challenging the patent or his real party in interest has "been sued for infringement of the patent or been charged with infringement under that patent".

9. USPTO Fee-Setting Authority (S. 23 Section 9, HR 1249 Section 10)

The Senate and House bills are the same. Contrary to proposals in previous reform bills, the proposed changes in USPTO rule-making are confined to fee-determining issues. However, the change is a significant one. The House bill would give the Director the power to set all fees for patent and trademark matters so that in aggregate the patent fees cover the costs of the patent operations and the trademark fees cover the costs of the trademark operations. At present, much of this power lies with Congress, with fees being specified in 35 USC 41.or 35 USC 376.

Both bills (S. 23 Section 12, HR 1249 Section 11(g)) provide for the creation of a new category of patent applicant, a "micro-entity". A "micro entity" is a small entity that has not been named on 4 (House bill) or 5 (Senate bill) or more previous U.S. non-provisional applications, did not in the previous year have a gross income more than three times the most recently reported median household income and has not assigned etc. rights to an entity having a greater income. Micro entities will be entitled to a 75% reduction in fees.

The amendments also provide that when a fee-based prioritization of examination becomes possible, small entities will be entitled to a 50% reduction in fees.

The House bill (section 11) but not the Senate bill sets out new fees as the starting point for the new system.

This section will take effect upon the date of enactment.

10. Best Mode Requirement (Section 15 of S. 23, Section 15 of HR 1249)

Both bills remove failure to disclose the best mode from the list of possible invalidity defenses to an infringement action by providing that this is "not a basis on which any claim of a patent may be canceled or held invalid or otherwise unenforceable".

This section will take effect upon the date of enactment.

11. Exclusions from Patent Protection

Both bills declare that for purposes of novelty and obviousness "any strategy for reducing, avoiding or deferring tax liability, whether known or unknown at the time of the invention or application for patent shall be deemed insufficient to differentiate a claimed invention from the prior art. Both bills also contain a "rule of construction" to the effect that "Nothing in this section shall be construed to imply that other business methods are patentable or that other business method patents are valid." (S. 23 Section 14, HR 1249 Section 14.) The House, but not the Senate, bill provides that this provision does not apply to inventions relating to tax preparation etc. or to inventions relating to financial management to the extent that they are severable from any tax strategy.

This provision would take effect upon the date of enactment and have retroactive effect on any applications pending on that date.

The House bill (HR 1249 Section 33) prohibits the grant of patent claims "directed to or encompassing" a human organism.

This provision would take effect upon the date of enactment and have retroactive effect on any applications pending on that date.

12. Satellite Offices (S. 23 Sections 21 and 24, HR1249 Sections 23 and 23)

"Subject to available resources" the USPTO is called upon to open three or more satellite offices within three years of enactment of the new law. The criteria for selecting the locations of these satellite offices are set out.

Both bills name the satellite office currently being in the process of starting operations in Detroit as the Elijah J. McCoy United States Patent and Trademark Office".

13. Priority Examination for Important Technologies (S. 23 Section 23, HR 1249 Section 25)

Both bills provide that applicants for applications for products, processes or technologies "that are important to the national economy or national competitiveness" shall be able to request prioritization of their applications "subject to any conditions prescribed by the Director".

14. Miscellaneous

Both bills (S. 23 Section 8 and HR 1249 Section 9) amend both 35 USC and the Trademark Act to provide that certain actions against the Patent and Trademark Office which hitherto had to be brought in the district court of the District of Columbia must now be brought in the district court for the Eastern District of Virginia, where the Patent and Trademark Office is now located. This section will take effect upon the date of enactment.

Both bills (S. 23 Section 22, HR 1249 Section 28) provide for a Patent Ombudsman to assist small business concerns.

Both bills (S. 23 Section 6 and HR 1249 Section 7) provide for the replacement of the present Board of Patent Appeals and Interferences by a Patent Trial and Appeal Board that will have jurisdiction over appeals during examination and re-examination, and conduct derivation proceedings and inter parties and post grant review proceedings. The board is required to sit in panels of at least three members.

Both bills (S. 23 Section 13, HR 1249 Section 13) change the percentage of royalty income that must be paid to the government under 35 USC 202 from 75% to 15% when the royalty earned by a government owned contractor operated facility exceeds 5%. This section will take effect upon the date of enactment.

Both bills (S. 23 Sections 16(a) and 16(f) and HR 1249 Sections 20(a) and 20(f) amend 35 USC 116 and 35 USC 256 relating to correction of the names of inventors in patent applications and granted patents by removing the requirement that in order for correction to be permitted, the error must have occurred without deceptive intent. Similar changes are made with respect to the provisions of 35 USC 184 and 185 relating to foreign filing licenses. (S. 23 Sections 16 (b) and (c) and HR1249 Section 20 (b) and (c).)

Both bills (S. 23 Section 20 and HR 1249 Section 22) contain provisions relating to funding of the USPTO. Both bills provide that any fees earned by the USPTO in a given year that are in excess of its expenses in that year are to be deposited in a special fund in the US Treasury which is designated for subsequent use by the USPTO. The bills differ in that the senate bill gives the director unfettered use of these funds whereas the house bill makes their use subject to annual appropriations acts.

The Senate bill (S. 23 Section 11) would amend the residency requirement for judges so that judges of the Federal Circuit Court of Appeals no longer need to be resident in the DC-area. There is no equivalent provision in HR 1249. This section will take effect upon the date of enactment.

The House bill (HR 1240 Section 37) provides that the 60 day term from the FDA's grant of marketing approval within which an application for patent term extension must be filed commences on the next business day if the FDA issues its approval after 4:30 pm.

The House bill retains requirements for studies on a variety of issues including implementation of the act, genetic testing, diversity of applicants, international patent protection for small businesses and patent litigation.

Issues that have not been covered in the present bills but which were present in earlier reform bills include:

Footnote

1. John Richards is a partner in the New York Office of Ladas & Parry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.