35 U.S.C. - Written Description

When small entities aren't small according to the law

While reading the potential effects of first-to-invent reforms on small entities, I thought that I’d start my blog with what a small entity is according to the patent law. Small entity status gives the entity a fifty percent reduction in many patent fees. 35 U.S.C. §41(h)(1).

A small entity under the patent law is any small business concern, independent inventor or non-profit organization as defined by the regulations. 35 U.S.C. 41(h)(1). With one important exception regarding licensing, the small entities mean exactly what they mean.

An individual inventor is an individual person who invents or his or her assignee. 37 C.F.R. §1.27(a)(1).

The patent regulations rely upon the Small Business Administration for the definition of a small business. The SBA states that a small business, for these purposes, is a business with no more than 500 employees. 13 C.F.R. § 121.802. Of course then the question is how to count employees. The SBA counts employees by a fairly straight-forward calculation: average number of employees for each pay period over the last twelve months. 13 C.F.R. § 151.802. Employees include both full-time and part-time employees and they are counted equally. Also note that the employees of any affiliate or parent company are counted as well.

Finally, a tax-exempt 501(c)(3) non-profit, a university, a non-profit scientific or educational organization, and any foreign non-profit organization are small entities. Noticeably absent from this definition is a government agency.

Indeed, the government is not treated as a small entity under the patent law. This is of particular interest for the “big” exception.

The "big" license exception

The “big” exception to claiming small entity status under the patent happens when a small entity licenses its patent to a not small entity, including the government. Almost every definition includes a statement similar to:

[So long as the entity] has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention to any person, concern, or organization which would not qualify as a person, small business concern, or a nonprofit organization.

Under this provision, a small entity may lose its status where it has transferred “any rights in the invention” to an entity, which is not, itself, a small entity. Applying this provision requires an examination of “rights”, the transfer of those rights, and to whom those rights were transferred.

Rights in the invention mean any United States patent rights. The Manual of Patent Examination and Procedure (M.P.E.P.) defines “rights in the invention” as “the rights in the United States” including “the rights to exclude others from making, using, offering for sale, or selling the invention.” M.P.E.P. §509.02 Note V. Since the regulation states “any rights”, a transfer of a single right is sufficient to preclude small entity status.

This regulation covers transfer of rights by any number of mechanisms. The regulation explicitly covers rights transferred by “assignment, grant or license” or by contract to “assign, grant, convey or license.” In particular, the term “license” includes non-exclusive, exclusive, royalty-free and royalty-bearing licenses. Id. The Federal Circuit has held a licensor is not a small entity where it non-exclusively licensed its patent to non-small entity. Ulead Systems, Inc. v. Lex Computer & Management Corp., 351 F.3d 1139, 1142 (Fed. Cir. 2003). The only general exception noted in the regulation is for an implied license. A license, for example, to manufacture or sell a patented product, on behalf of the patentee, is not a license for purposes of determining small entity status.

In addition, a large entity retaining any interest in a patent by a small entity will preclude small entity status. As an example, the M.P.E.P. notes, “status as a small entity is lost by an inventor who has… an obligation to transfer a shop right to an employer who could not qualify as a small entity.” Id. A shop-right grants an employer a right to practice an employee’s invention royalty free. Since a shop-right effectively grants the large entity employer a license, the employee cannot claim small entity status.

Significantly, the regulations do not sum the total employees of all licensees. That is, having 500 non-exclusive license agreements would probably involve licensees whose total employees when summed together would be more than 500. Rather, the regulations look at individual licensees separately.

As noted above, the government is not ordinarily a small entity. However, a license to the government under Bayh-Dole is not a license for purposes of small entity status. Where an inventor elects title, Bayh-Dole requires a “non-exclusive, non-transferable, paid-up license to practice or have practiced of behalf of the United States any subject invention.” 35 U.S.C. §202(c)(4). The regulations point out specifically that such a license “resulting from a funding agreement with that agency pursuant to 35 USC 202(c)(4) does not constitute a license for” the purposes of claiming small entity status. 37 C.F.R § 1.27(a)(4)(ii). The M.P.E.P. reasons, “when taken together”, both the Bayh-Dole provision and the prohibition on transfer would “frustrate the intent” of Bayh-Dole.

Small entity status and inequitable conduct

Finally, improperly claiming small entity status may constitute misconduct before the PTO. In DH Technology, Inc. v. Synergystex International, Inc., the patentee paid small entity fees during a time it was undisputed that its total number of employees exceeded 500. 145 F.3d 1333 (Fed. Cir. 1998). The Federal Circuit explained that the “regulations permit correction of honest mistakes, but prevent attempts to fraudulently pay the small entity issue fee while maintaining an enforceable patent.” Id. at 1343. The court emphasized the reasoning of the district court that “where there is the slightest doubt about an applicant’s entitlement to claim small entity status, the applicant would be foolish not to pay the full issue fee.” Id. This alone seemed to raise doubt regarding the defendant’s intent; an issue the lower court did not address. Id. The court remanded the case back to the district court to “assess whether [the patentee] acted in “good faith,” i.e. whether [the patentee] fraudulently established status as a small entity or fraudulently paid the small entity issue fee.” Id.

In Turbocare Corp. v. General Electric Company, the court distinguished the facts from DH Technologies. 45 F.Supp. 110 (1999). The court held that even if there was, as alleged, “some implied license”, the facts of DH Technologies were “far more egregious.” Id. at 112. The court, holding for the defendant, stated the “plain truth is that an informed applicant in [defendant]’s shoes, operating in good faith, would have paid the $525.00 fee.” Id.

In a recent case, Ulead Systems, Inc. v. Lex Computer & Management Corp., the Federal Circuit held an erroneous payment of small entity fees might be excused as long as the patentee is not guilty of inequitable conduct. 351 F.3d 1139 (Fed. Cir. 2003). The court explained, “inequitable conduct” would render a patent unenforceable “when there is ‘evidence of affirmative misrepresentations of a material fact, failure to disclose material information, or submission of false material information, coupled with an intent to deceive.’” Id. (quoting Dayco Prods., Inc. v. Total Containment, Inc., 329 F.3d 1358, 1362 (Fed. Cir. 2003)).

Showing inequitable conduct requires a “determination of both materiality and intent and a balancing of the two.” Id. Materiality is probably not a difficult hurdle. In the case of payment of small entity fees, the false declaration of small entity status “was material to the PTO’s acceptance of reduced maintenance fees, and thus, survival of the patent.” Id. Showing intent to deceive is more difficult.

Intent to deceive requires a showing “the involved conduct, viewed in light of all the evidence” indicates “sufficient culpability.” Id. First, the court held “gross negligence” alone is not enough to show an intent to deceive. Id. Second, the court recognized “direct evidence of deceptive intent is not required; rather it is usually inferred from the patentee’s overall conduct.” Id. (quoting Kingsdown Medical Consultants, Ltd. V. Hollister, Inc., 863 F.2d 867, 876 (Fed. Cir. 1988)).

A licensee's representation of status

Small entity licensing its patents to another company obviously creates potential hazards. Imagine a small entity, claiming small entity status, who licenses its technologies to a company that represents itself as another small entity. To what extent may the patent owner rely on that representation?

Absent something more, an entity may be able to rely on the statements of its licensee regarding their status as a small entity. As stated above, the courts are reluctant to hold a patent unenforceable for unintentional and “good faith”, but improper, claims to small entity status. So long as the entity's reliance is in good faith, it may rely on the representations of its licensees.

In the context of fraud on the PTO, a showing of bad faith carries a heavy burden. In characterizing the issue in Ulead, the court rephrased the question as “whether Lex committed inequitable conduct by knowingly misrepresenting that it was entitled to have the error excused.” Id. (emphasis added). Under the court’s analysis, “negligence” and even “ignorance” are not sufficient for inequitable conduct. Even where the institution, as a whole, presumably “knew” enough, the court did not grant the motion for summary judgment, and, instead, remanded the case on the issue of intent. Furthermore, any finding of inequitable conduct requires “clear and convincing evidence.” Under this analysis, absent something more, reliance on a licensee’s declaration of small entity status is probably sufficient.

However, the existence of “something more” might support a finding of inequitable conduct. For example, claiming small entity status despite knowledge that a licensee was, in fact, not a small entity regardless of its representation. In that case, there may be evidence of “knowingly misrepresenting” status. All of the cases above arose on motions for summary judgment. In each case, the courts did not reach a conclusion on “intent”. As such, there is no clear authority on intent to deceive in the case of improper claims to small entity status. Furthermore, the costs associated with litigation and an unenforceability finding weigh heavily against claiming small entity status where there is any dispute.

It is important to note, as the courts have in the past, that it is foolish to claim small entity status when there's any possibility that licensing may be aimed at a large entity. An informed patentee would simply pay the full rate.

posted by Mike @ 6:14 AM