SC Lawyer, September 2012, #3. Patent Reform 101.

• Author: By Ammon Lesher and Tom Vanderbloemen

South Carolina BAR Journal

2012.

SC Lawyer, September 2012, #3.

Patent Reform 101

South Carolina LawyerSeptember 2012Patent Reform 101What Every South Carolina Lawyer Should KnowBy Ammon Lesher and Tom VanderbloemenOn September 16, 2011, President Obama signed into law the Leahy-Smith America Invents Act (AlA), which many are calling the most significant overhaul to U.S. patent law in more than half a century. The AIA is a complex piece of legislation that will change how patents are granted, how patent litigation will proceed and what types of inventions are eligible for patents, among other things. ln particular, the AlA represents an overall recognition of the increasing economic value of patents, a trend that will certainly continue in today's knowledge based economy. Just recently, the U.S. Commerce Department released a comprehensive report showing that lP-intensive industries support at least 40 million jobs and contribute more than $5 trillion dollars to the United States' GDP. See Econ. Statistics Admin., U.S. Patent Trademark Offices, Intellectual Property the U.S. Economy (March 2012), www.uspto.gov/news/publications/ lP_Report_March_2012.pdf.

While many people have criticized specific provisions of the AlA, almost everyone agrees something needed to be done to alleviate the problems associated with an overburdened patent office and exploding litigation costs. Through passage of the AlA, Congress most notably sought to accomplish the following: 1) harmonize the U.S. patent system with the majority of foreign jurisdictions; 2) increase the quality of issued patents; and 3) reduce the increasing costs of patent litigation by providing an alternative forum for challenging the validity of a patent.

As South Carolina continues to focus its future economic growth on innovation and entrepreneurship, the state's business community will need to familiarize itself with the AlA. Therefore, South Carolina's lawyers should have a working knowledge of the new law, whether or not their practice regularly involves intellectual property issues. What follows is an introduction on some of the major provisions in the AlA and the potential effects it may have on individual inventors, small businesses and large corporations.

First to file

At the heart of the AlA is the change to who can seek patent protection. The system in place in the U.S. has granted a patent to the inventor who first conceives the claimed invention, even if that inventor was not the first to file an application at the U.S. Patent Trademark Office (USPTO). Under this "first-to-invent" system disputes frequently arose about who was the first inventor, whether an invention had been abandoned and other related issues. Under the new system, which is effective March 16, 2013, an inventor who is the first to file a patent application will be entitled to a patent, assuming all other patentability requirements are met. This change places the U.S. system into alignment with a majority of foreign jurisdictions, including those of the European Union.

Shifting to a first-to-file system will almost certainly simplify the protracted and costly disputes that arose when multiple applications were filed for similar inventions. These disputes could span years and were typically decided on suspect notes and research records that may have been kept at the time an invention was conceived. For example, a recent opinion issued by the U.S. Court of Appeals for the Federal Circuit, the court that hears appeals from patent cases in the district courts, affirmed a finding of infringement of a patent for a prosthetic vascular graft. Bard Peripheral Vascular, Inc. v. W.L. Gore Assocs., Inc., 670 F.3d 1171, 1193 (Fed. Cir. 2012). The application that became the patent at issue in Bard was filed on October 24, 1974, was subsequently issued as U.S. Patent No. 6,436,135 on August 20, 2002, and included an 18-year battle over inventorship rights! Considering the pace of technology today, any system that allows a patent application to remain pending for 28 years appears outdated and unsustainable.

Under the new system an inventor who is not the first to file an application will no longer be able to challenge the validity of a patent on the basis that he was the first to invent. This will not only prevent lengthy disputes, as discussed above in Bard, but will also lend more certainty to the enforceability of most patents by removing one potential basis for invalidity.

A common misconception, especially among individual inventors with little knowledge of patent law, is that under the new law a third party will be able to "steal" an invention and obtain a patent by being the first to file an application with the USPTO. However, in keeping with the U.S. Constitution, only a true inventor may apply for a patent, thereby disqualifying those who obtain an invention from another.

One legitimate concern resulting from the shift to a first-to-file system is that it may encourage a race to the patent office, favoring large corporations that have ample resources and established procedures to ensure early filings for new inventions. While the new system does include a one-year grace period for certain types of disclosures by the inventor, the language used to define that grace period is ambiguous and will only increase the motivation to file applications early and often.

The Act has also substantially expanded the definition of "prior art" that may be used against a patent application under 35 U.S.C. 102. Under the old system, many activities, such as public disclosure and offers for sale, were only considered "prior art" if they occurred in this country. However, under the new system a patent will be unavailable if the invention was "in public use, on sale, or otherwise available to the public before the effective filing date of the application." There is no longer a distinction between activities conducted "in this country," and any public disclosure will preclude the ability to obtain a patent. Further, the "otherwise available to the public" catchall is entirely new, and it will likely be years before this limitation is expressly defined by the USPTO or the courts.

The new system will also require applicants to make quick decisions on whether an invention is ready for patenting, which in turn will likely lead to an increase in the number of applications filed and increased expenses on the front end. Many cite this change as a disadvantage to smaller businesses, which typically have limited financial resources and are not able to file multiple applications in order to ensure that each and every aspect of a new invention is protected as it evolves into a marketable product.

America's current first-to-invent system has been considered by many as supportive of independent inventors and entrepreneurs. Most notably, it provided these groups with the necessary time to finalize an invention before seeking patent protection and incurring the substantial costs that come with it. At first glance, the new first-to-file system appears to favor those willing and able to file applications early and often. Some fear this could lead to large, entrenched market incumbents that are able to make it more difficult for disruptive technologies to enter the marketplace to the detriment of the entrepreneurial business community.

Improving patent quality

Another notable goal of the AlA is to improve the quality of issued patents by incentivizing public involvement in the patenting process and allowing patent owners to cure potential problems with an issued patent before they are raised in litigation. Two new procedures, pre-issuance submission and supplemental examination, should improve both the quality and reliability of issued patents and reduce some of the uncertainty and expense typically associated with patent litigation.

Pre-issuance submissions

Under the current rule, 37 C.F.R. 1.99 (2012), at certain limited times during the pendency of a patent application, a third party may submit existing patents or printed publications to the USPTO for consideration. This may be a useful way for a competitor or other person in the field to challenge whether a patent should issue. However, the current procedure is rarely used because existing law precluded the person submitting such information from offering any explanation as to its relevancy to the pending application. Under the new Act, third parties are able to submit a broad range of documents, including patents, published patent applications and other printed publications. Further, and most importantly, a third-party will also be allowed to set forth a concise description of the significance of each submitted document.

The new procedure is also cost-effective, as there is no charge for the first three documents submitted and only a $180 charge for every 10 documents thereafter. This is in stark contrast to the filing fees associated with other types of patentability challenges in the USPTO, which start at $27,200.

Supplemental examination

Another procedure that may increase patent quality is supplemental examination. While every patent is afforded a presumption of validity when challenged in court, patents are often invalidated in litigation where it is shown they were improperly issued. It is very common that a defendant in a patent infringement case will attempt to invalidate the asserted patent due to inequitable conduct, either on the part of the patentee or the patent attorney that prosecuted the application. In order to find inequitable conduct, a court must determine that the patentee intentionally withheld material information from the USPTO during the examination of a patent, thereby rendering the patent invalid. This defense can account for a significant portion of the costs incurred during discovery, which of course increases the overall cost of litigation.

Currently, the law does not have an effective mechanism in place for patent owners to cure or correct patents after issuance as a way to prevent an inequitable conduct defense when the patent is asserted in court. Supplemental examination is an entirely new proceeding that provides a patent owner with the opportunity to have the USPTO consider, reconsider or correct information relating to patentability, and to remove that information as a potential basis for an inequitable conduct defense in court. Patentees will now have the ability to cure false statements or misrepresentations made during the original prosecution of the patent and may even be able to strengthen the patent in the process. Under the new statutory scheme, a patent may not be held unenforceable based on information previously considered during a supplemental examination proceeding, provided that the supplemental examination request was made before any allegations of misconduct were pleaded in court proceedings.

These two new procedures, while aimed at improving patent quality and reducing uncertainty in litigation, will also be valuable commercial tools. Any company operating in an IP-intensive market would be wise to monitor pending patent applications belonging to their competitors and submit relevant prior art where it may prevent the competition from obtaining a patent on a valuable product or process. Further, if a client's competition has filed for supplemental examination of an issued patent, this may indicate the patent's value to the owner and signal the patentee's intent to assert the patent in litigation sometime in the near future.

Reducing patent litigation costs

Another goal of the new Act is to reduce both the amount of patent litigation in the United States and the considerable costs associated with it. Over the past two decades, the costs of litigating a patent dispute have skyrocketed. According to the American Intellectual Property Law Association's 2011 Economic Survey, the median cost of litigating a patent infringement suit through trial can range from $650,000 to $5 million. In an attempt to address this problem, the Act has created new administrative proceedings for challenging the validity of a patent at the USPTO and has expanded the "prior commercial use" defense.

Post-grant review

An accused infringer can always challenge the validity of a patent in court, but the proceedings are lengthy, expensive and unpredictable. Prior to the AlA, a party could also challenge a patent by asking the USPTO to reexamine the patent. Reexaminations were less expensive than court challenges, but these reexaminations could still last several years before the PTO issued its decision and also had several drawbacks. Moreover, litigants often used reexaminations in tandem with a pending court case, further driving up costs and delays.

The AlA provides new ways to challenge patents in an expedited and potentially more cost-effective proceeding. Anyone (person or corporate entity) will now be able to petition for review of the validity of a patent on essentially any ground for nine months after the date of issuance, provided the challenger has not made a claim to dispute the patent's validity in court and does not own the patent. The "post-grant" review will be conducted and decided by the Patent Trial and Appeal Board, an administrative tribunal that will accept written submissions and permits oral argument. The entire review procedure must, according to statute, be concluded within one year, and any party that is dissatisfied with the board's decision may appeal to the U.S. Court of Appeals for the Federal Circuit, which is the same court that hears all patent infringement appeals from the district courts.

One advantage of the post-grant review process for those seeking to invalidate a patent is that a prepon-derance-of-evidence burden of proof applies, as opposed to the "clear and convincing" standard used in litigation because district courts must presume patents are valid. The absence of any presumption of validity and lower burden of proof in the administrative proceeding means that the burden of proving unpatentability may be easier, making the post-grant review process potentially more appealing. Further, the scope of discovery at the USPTO is much narrower, thereby significantly reducing costs in comparison with a federal court case.

The post-grant review process does include some drawbacks, most notably the estoppel provisions of 35 U.S.C. 325(e). Under this statute, the person requesting review in most cases will be barred from raising any claim that it made or could have made in the review in any later court or administrative proceeding. Therefore, careful evaluation of whether your challenge is better suited to a judge or jury in federal court or a panel of patent experts at the USPTO is recommended any time a post-grant challenge is considered. There are different reasons one forum may be better than another, but you usually only get one bite at the apple.

After nine months from issuance 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. The new post-grant proceedings will eventually take the place of inter partes reexamination and will also be conducted before the Patent Trial and Appeal Board, as opposed to a single patent examiner under the old system.

The new post-grant review provisions will become an important part of the patent landscape in the years to come. In particular, the availability of a more efficient and cost-effective proceeding for challenging patents will be attractive to a patentee's competitors and potential infringers. The lowered burden of proof associated with the post-grant review process will only increase the appeal.

Prior commercial use

Many companies will choose not to patent some inventions that are incorporated into their products, especially when the invention is not visible to the public. Rather than obtaining patent protection and disclosing an otherwise confidential process, a business may decide to keep the method secret and, if challenged in court, rely on what is called the "prior commercial use" defense to avoid liability. The new Act expands the availability of this defense beyond business methods to include any process, machine or composition of matter used in a manufacturing process.

Under the defense an alleged infringer cannot be liable if it can show continued commercial use of the patented subject matter at least one year before the filing or public disclosure of a claimed invention. Therefore, any company that elects to keep such inventions secret should be sure to properly document the conception and implementation of the invention to ensure the defense is properly supported.

Conclusion

Only time will tell whether the AlA will be successful in actually reducing costs and improving patent quality, as the broad language included in some of the Act's most important provisions will require further clarification from the courts and the USPTO. However, it is clear that companies who are able implement a successful strategy early on and take advantage of the new features introduced by the AlA will be able obtain a commercial advantage in the marketplace. Therefore, any lawyer who advises new or existing businesses should inform clients about these changes and advise them to be proactive in addressing any issues that may arise.