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U.S. Patent System Nearing Long-Awaited Overhaul

Thursday, August 11, 2011

Naresh Sritharan | Bloomberg Law After several failed attempts, the U.S. Patent Act1 is on the brink of its most significant reform in nearly 60 years.2 Similar versions of the "America Invents" Act have now passed both the U.S. Senate and the House of Representatives.3 The Senate and House proposals, sponsored respectively by Senate Judiciary Chairman Patrick Leahy, a Democrat from Vermont, and Judiciary Committee Chairman Lamar Smith, a Republican from Texas, differ in some aspects and must be reconciled before being signed into law by President Obama. The Senate, however, recently agreed to vote directly on the House version of the Act without first attempting to reconcile the bill. This article is the first in a series exploring some of the important changes proposed by the Act.

Brief History of Patent Reform

Following the significant changes brought on by the Patent Act of 1952, the U.S. patent system has remained largely stagnant over the past several decades.4 Recent sessions of Congress, however, have attempted to address concerns regarding our patent system. Fot instance, the Patent Reform Act of 2005,5 which incorporated recommendations by the Federal Trade Commission and the National Academy of Science, promised comprehensive change, but never progressed beyond the House Committee on the Judiciary. Then, in 2007, the House voted 220-175 to pass the latest attempt at reform,6 but the proposal ultimately stalled in the Senate. In 2009, the House and Senate introduced parallel patent reform bills,7 but again the proposals failed to proceed beyond the committee stage. Unlike its predecessors, the 2011 attempts to reform the patent system have likely succeeded due to strong bipartisan support and a greater awareness that an effective patent system may stimulate innovation and drive job growth.8

Important Provisions of the America Invents Act

— First-Inventor-to-File

The most significant, and perhaps the most controversial, proposal within the America Invents Act is the adoption of a first-inventor-to-file patent system, in which priority in an invention is awarded to the first person or entity to file a patent application. This change is a marked shift from our current system which grants priority to the first party to establish the earliest date of invention, regardless of filing date. In a first-to-file system, a patent would receive an "effective filing date" that would be the earlier of the actual filing date of the application or the filing date of the earliest application or patent to which the subject application claims priority. Supporters of the proposal note that the move to a first-to-file system would harmonize our patent system with most other nations, which have long operated under a first to file system and create "a bright line . . . bringing certainty to the [patent] process."9 Furthermore, the adoption of a first-to-file system would largely eliminate interference proceedings, which are lengthy and costly priority contests between "senior" and "junior" parties to an invention. Instead, the Act proposes new "derivation" proceedings wherein the invention of an earlier filed application is alleged to have been derived from a later filed application. Patentability would also be measured with respect to the "effective filing date." For novelty purposes, potentially invalidating prior art would have to be known or used prior to the effective filing date of an invention, rather than the current system that only recognizes prior art available prior to the date of invention.10 Therefore, a greater scope of prior art could potentially be used against an applicant that delayed in filing for patent protection following their invention. Additionally, unlike our current system, an inventor would no longer be able to "swear behind" prior art by demonstrating earlier conception of the invention together with diligence in reduction to practice.11 The proposed Act also limits the existing one-year grace period for pre-filing disclosures. Currently, an inventor may obtain a patent even if the subject invention was in public use or offered for sale by anyone up to one year prior to the filing date.12 Under the Act, the grace period now only applies to pre-filing disclosures by the inventor or derived from the inventor. Under the proposed Act, obviousness will also be measured from the effective filing date, rather than the date of invention. Similar to novelty, a wider range of prior art may now be available for use in the obviousness analysis. However, as one commentator has noted, this modified obviousness analysis would run contrary to the intended goal of harmonizing the U.S. patent system with the rest of the world.13 For instance, under the new system, an earlier-filed, but unpublished, patent application could render a later filed application obvious in the United States, but that same unpublished application would be unavailable for obviousness purposes in the rest of the world.14 Most critics of the proposed first-to-file system argue that it unfairly favors large organizations and disadvantages small businesses and independent inventors. They claim that the new system creates a race to the Patent Office, which will always be won by large entities with sufficient legal resources to routinely file patent applications covering any new discovery. Small businesses, on the other hand, must carefully weigh the economic consequences before beginning the costly patent application process. In a 2010 letter to the small business community, David Kappos, the director of the U.S. Patent and Trademark Office, disagreed, noting that "we already essentially have a first inventor to file system"15 and that the impact of the proposed system will largely be limited to interference proceedings, which occurred in roughly 0.01 percent of patents in 2007. Director Kappos believes that a first to file system will actually benefit small businesses because of the reduction of costs in obtaining global patent rights in a harmonized patent system. Some, including U.S. Representative Don Mazullo, a Republican from Illinois, remain unconvinced. Rep. Mazullo warns that a first to file system would "devastate small inventors by effectively eliminating the one-year 'grace period' . . . to develop their invention, seek investors, and raise funds to begin the expensive patent application process."16

— Patent Office Funding

The most contentions difference between the Senate and House versions of the proposed Act appears to involve the funding of the Patent Office. Currently, the Office is funded by user fees with excess fees being diverted to the U.S. Treasury's general fund, where they are often appropriated by Congress to pay for non-patent related measures. Meanwhile, the Office currently has a backlog of nearly 700,000 applications and an average pendency rate of three years before issuance of a patent.17 The Patent Office has argued that allowing it to keep its user fees would clear this backlog, fund new satellite offices, and provide for increased hiring of patent examiners. Both the Senate and House versions of the Act allow the Patent Office to set its own fees. The bills, however, differ in the allocation of those fees. The Senate bill allows the Office to keep all the fees it collects, but the House bill allows the Office to keep only a portion of the fees and transfers the remaining fees to an escrow-like account controlled by the Appropriations Committee. The Patent Office would be required to submit a spending plan to Congress to access the money in this account. Politicians like Senator Tom Coburn, a Republican from Oklahoma, have strongly argued for an end to fee diversion. In a June 2011 statement, Senator Coburn remarked that "[i]t is outrageous for Congress to take fees paid by Americans for a specific service and spend those dollars on other programs."18 Moreover, Senator Coburn expressed skepticism concerning the escrow account created by the House Bill, noting that the "Appropriations Committee has a poor record of managing such accounts responsibly and honestly in this area and others."19 On the other hand, Representatives Harold Rogers of Kentucky and Paul Ryan of Wisconsin, both Republicans, have raised their voices in support of the House version of the bill, "strongly oppos[ing] th[e] proposed shift of billions in discretionary funding and fee collections to mandatory spending."20 Representatives Rogers and Ryan argue that the absence of an escrow account would be "irresponsible and unwise"21 and deprive Congress of the ability to oversee the operations of the Patent Office. Given the tenor of these arguments, the Senate and House may be challenged to resolve the Patent Office funding issues, but a compromise will hopefully be reached.

— Third Party Patent Challenges

Currently, third parties can submit prior art to the Patent Office within two months following publication of a patent application, but parties are prohibited from explaining the significance of the prior art or submitting any other information.22 The America Invents Act proposes to potentially increase participation by third parties in the patent process and perhaps reduce the incidence of patent litigation. Three new scenarios are available for a third party to challenge a patent before the Patent Office.

Pre-Issuance Submissions

During the pendency of a patent application, third parties can submit any patent, published patent application, or other printed publication for consideration by the examiner reviewing the patentability of the application. The submission is also accompanied by a description of the relevance of each document to the patentability of the application.

Post-Grant Review

Following issuance of a patent, a third party could still challenge the validity of a patent claim on any basis. The process is similar to current reexamination proceedings with the important difference being that this review must be requested within nine months of patent issuance.

Inter Partes Review Proceeding

After the nine month period for post-grant review has lapsed, a third party may request inter partes review of one or more claims of a patent. These proceedings, however, are limited to the submission of prior patent or printed publications for novelty and obviousness issues.

— Supplemental Examination

Currently, patentees do not have the ability to correct patents post issuance to clear the road of any potential inequitable conduct charges. The Act further proposes a supplemental examination period that allows patentees to potentially eliminate allegations of inequitable conduct by petitioning the Patent Office to consider, reconsider, or correct information believed to be relevant to the patent. If a substantial new question of patentability is found, the Office orders reexamination of the patent. Importantly, any information found to have not been considered, inadequately considered, or incorrect during the original examination could not be used as the basis for an inequitable conduct defense during litigation. Moreover, the request of a supplemental examination, or the absence thereof, will not factor into any inequitable conduct analysis. Finally, to preclude an inequitable conduct defense, supplemental examination and any resulting reexamination must be concluded prior to the filing of an infringement lawsuit.

— Review of Business Method Patents

The America Invents Act also sets forth a pilot program allowing a party sued for infringement of a business method patent to challenge the validity of that patent based on lack of novelty or obviousness. The provision, introduced by Senator Charles Schumer, a Democrat from New York, is intended to vacate allegedly "low-quality" business method patents and appears to primarily benefit financial institutions, which have been routinely sued for infringement of patents involving check scanning and other related technology.

— Removal of Best Mode as Basis for Invalidation

Under the Act, failure to disclose the best mode of practicing a patented invention can no longer be a basis for cancellation or invalidity of any patent claim can be canceled. However, best mode still remains as a prerequisite to patentability and the Patent Office may still reject patent applications due to the inventor's failure to set forth the best mode.

— Reduction of False Marking Claims

Given the concern over the sharp rise in patent false marking suits, the Act eliminates the majority of those suits, except for those brought by the United States or a party who has suffered a competitive injury.

Conclusion

The America Invents Act promised sweeping change and has largely delivered on that promise. Regardless of the final form of the Act, the changes are significant and litigants will likely rely on the courts to aid in the interpretation of the new law. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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