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By Robert Pollock and Scott Popma, Finnegan, Henderson, Farabow, Garrett & Dunner
One of the advantages Congress has afforded small businesses is a 50-75 percent reduction in Patent and Trademark Office fees for qualified “small” or “micro” entities. These savings can be very important for companies with tight operating budgets.
Determining whether your business qualifies may not be easy—and an incorrect determination could lead to a charge of fraud on the patent office, with the potential loss of patent rights.
The upcoming implementation of the Crowdfund Act raises an additional question: If a small business qualifies for reduced patent office fees, can it lose this benefit—or even put its patent portfolio at risk—by raising capital through crowdfunding?
The Crowdfund Act was enacted as part of the Jumpstart Our Business Startups Act in April 2012. H.R. 3606, Pub. L. 112–106. The act includes provisions allowing crowdfunding, a method of raising capital from many small unaccredited investors through the sale of securities on authorized internet portals.
The crowdfunding provisions will take effect when the Securities and Exchange Commission issues regulations governing the sale of crowdfunded securities early next year. Under the new regulations, companies will be able to sell up to $1 million of securities per rolling 12-month period. This relatively modest level of funding is targeted for use by small businesses and startups.
For science and technology-based startups, intellectual property protection is likely a cornerstone of their business plan. Many of these companies may qualify for “small entity” status at the PTO.
If these startups are considering an equity-based crowdfund offering, they should evaluate whether crowdfunding may alter this status. The PTO should be notified if small entity status was claimed, but can no longer be maintained.
Patent applicants that claim small entity status receive a 50 percent reduction of most PTO fees, including the basic filing fee,1 and search, examination, issue, and maintenance fees. H.R. 1249, Pub. L. 112-29 (82 PTCJ 681, 9/23/11).2 Of special interest to startups eager to receive their first patent, small entity status applies to track one prioritized examination. For a fee of $2,400, the PTO will give a patent application priority status and will pledge to make a final disposition of patentability within twelve months of filing.
Businesses may claim small entity status when filing a patent application either by checking a box on a standardized application form or by paying the exact amount of a small entity basic filing fee.3 Alternatively, the benefit can be established at any time during prosecution by submitting a signed, written statement asserting the right to small entity status.4
Once claimed, an applicant need not reassert small entity status until filing a continuation application or until the PTO allows the patent and issue and maintenance fees are due.5 At each such juncture, applicants should reassess whether they are entitled to small entity status and must inform the patent office if they are no longer entitled to claim the benefit.
The determination of whether a business qualifies as a small entity turns largely on the number of employees at the business and its affiliates, if any, and whether the business has granted rights in the application or patent to a non-qualifying entity. In particular a small business can qualify as a small entity if:
(a) [its] number of employees, including affiliates, does not exceed 500 persons; and
(b) [it] has not assigned, granted, conveyed, or licensed (and is under no obligation to do so) any rights in the invention to any person who made it and could not be classified as an independent inventor, or to any concern which would not qualify as a non-profit organization or a small business concern under this section.6
Absent some unusual provisions in its offering, a company will not have “assigned, granted, conveyed, or licensed” rights to its inventions to crowdfunding investors. But crowdfunding applicants should recognize that determining the “number of employees including affiliates” is not always straightforward and may change over time.
When calculating the number of employees a company has, the PTO relies on the standards set by the Small Business Administration.7 The SBA broadly defines “affiliates” as entities having control, or the power to exert control, over the applicant.8 The SBA provides complex rules for determining affiliation, including guidelines for businesses that generate capital through equity investment.9
By their very nature, crowdfunded securities normally will be distributed to a large number of small investors, who may not even be accorded voting rights. Standing alone, this is unlikely to affect the right to claim small entity status.10
Nevertheless, selling crowdfunded securities could have downstream effects on affiliation status if shares are bundled or acquired by larger investors. Here are two illustrative examples of potential complexities:
• If a small business, Company A, sells voting stock during a crowdfund offering, and more than 50 percent of that stock ends up being controlled by Company B, Company A and Company B are affiliated for purposes of the SBA rules. If Company B is a majority owner of Companies C and D, then Companies A, B, C, and D are all affiliated under the rules.
• If Company A is widely owned by numerous individuals, each controlling less than 5 percent of voting stock, and Company B acquires 40 percent of voting stock, Company B may be considered to have a controlling interest, and Company A and Company B would be affiliates.
The SBA's website provides many more helpful examples.
Monitoring potential affiliates could be an expensive and timely process and could ultimately offset the cost saving gained by claiming small entity status. Indeed, the patent office's Manual of Patent Examining Procedure offers the following advice to applicants considering the benefits of reduced fees:
While small entity status is not difficult to obtain, it should be clearly understood that applicants need to do a complete and thorough investigation of all facts and circumstances before making a determination of actual entitlement to small entity status. Where entitlement to small entity status is uncertain, it should not be claimed.11
The patent office's caution reflects two major concerns: (1) “the costs incurred in appropriately conducting the initial and subsequent investigations may outweigh the benefit” of reduced fees,12 and (2) should a patent become the subject of an infringement suit, even an honest mistake in determining small entity status could lead to a charge of inequitable conduct, with potential loss of patent rights. Given the downside to errors in claiming eligibility status, and the complexities of determining affiliation, it is not surprising that the patent office expressly directs questions on this matter to the Small Business Administration.13
A soon-to-be- implemented provision of the American Invents Act creates an even smaller, “micro-entity” classification entitled to a 75 percent reduction in certain fees.14Micro-entities must:
(1) qualify as small entities;
(2) with certain exceptions, not be named on more than four previously filed patent applications;
(3) have a gross income in the previous calendar year not exceeding 3 times the median household income (or about $154,000); and
(4) not have assigned, granted, or conveyed, and not be under an obligation by contract or law to assign, grant, or convey, a license or other ownership interest in the application concerned to an entity that would not meet the above criteria.
Alternatively, micro-entity status may be achieved if a majority of the applicant's income is from employment at an institution of higher learning or the applicant has assigned, or is obliged to assign, an ownership interest to an institution of higher learning.15
Although authorized by the AIA, micro-entity status will not be available until sometime in 2013 when the PTO completes the rulemaking necessary to administer the program. Based on the current proposal, it is likely that the rules of practice for this program will be similar to those for small entity status.16
It is likely that the patent office will accept requests for micro-entity status only from actual inventors, but that it will not preclude those inventors from assigning rights to their invention to small companies meeting requirements (1) through (3), above.17 In fact, the patent office has invited public comment on whether the rules implementing the micro-entity provisions should refer to “inventor,” rather than the broader term, “applicant.”18
Either way, if an inventor or assignee takes advantage of reduced fees under this designation, they are advised to monitor that status carefully and promptly inform the patent office if they no longer qualify for the fee reduction.
Crowdfunding alone is unlikely to disqualify a company from reduced patent office fees under the small or micro-entity provisions. That said, given the complicated nature of the determination, the duty to inform the patent office of any changes in status, and the potentially grave consequences for improperly asserting small or micro-entity status, companies should weigh the benefit of reduced fees carefully.
At a minimum, companies should consult a patent attorney before seeking small or micro-entity status.
Robert Pollock and Scott Popma are partners at Finnegan, Henderson, Farabow, Garrett & Dunner, Washington, D.C. Pollock's practice focuses on district court litigation and pre-litigation counseling in biologic, biomedical, and pharmaceutical areas. Popma advises clients on a wide variety of intellectual property matters, including portfolio analysis, pre-litigation strategy, licensing, and due diligence.
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