By Kevin E. Noonan --
The U.S. Patent and Trademark Office on Friday released a "Report on the Prior User Rights Defense" provisions of the Leahy-Smith America Invents Act. This Report was prepared as part of a mandate by Congress in §§ 3(m) and 31 of the Act that the Office perform studies relating to the effects of the Prior User Rights Defense (PURD) of the Act including:
(1) comparison(s) between the patent laws of the U.S. and the laws of other industrialized countries;
(2) the effect of prior user rights on innovation rates;
(3) the correlation, if any, between prior user rights and start-up enterprises as well as the ability to attract venture capital to start new companies;
(4) the effect of prior user rights, if any, on small businesses, universities, and individual inventors;
(5) legal and constitutional issues with placing trade secret law in patent law; and
(6) whether or not the change to a first-to-file patent system creates any particular need for prior user rights.
The Report, attributed to Director David Kappos and Assistant Director Teresa Stanek Rea, addresses these questions, making a number of findings and recommendations.
1. The AIA strikes the right balance by limiting the prior user rights defense to those parties that can prove commercial use at least one year prior to the filing date of the patent application by clear and convincing evidence.
2. The scope of the prior user rights defense includes limitations on the type of continued activities, the transfer of the personal rights, and the enforcement of said right, such that the patentee's rights are not unjustly impinged and the university community may benefit, since the defense is not available in patent actions by universities.
3. There is not substantial evidence that prior user rights as established in the AIA will have a negative impact on innovation.
4. There is no substantial evidence showing that prior user rights as established in the AIA will have a disproportionately negative impact on venture-capital investments to small businesses and start-ups.
5. There is an insufficient basis to recommend a change to the scheme chosen by Congress with respect to the application of prior user rights to universities.
6. There is no substantial evidence that the limited prior user right defense as established by the AIA will have a negative impact on small businesses or independent inventors.
7. A prior use defense to patent infringement is both Constitutional and lawful and the defense is consistent with the Constitution and Supreme Court precedent recognizing that trade secret law and patent law can, and do, legally co-exist in the United States, and indeed have co-existed since our Constitution was created.
8. Trade secret protection is of considerable value to United States businesses and the United States economy, and as such, there are compelling economic and policy justifications for providing a prior user rights defense to patent infringement.
9. Providing limited prior user rights in a first-inventor-to-file system addresses the inherent inequity such a system creates between an earlier commercial user of the subject matter and a later patentee. A prior user rights defense is pro-manufacturing and pro-jobs, as it rewards businesses that put new technology promptly into commercial use, and provides protection for early commercial use when challenged by the later filing of patent applications by other entities.
10. Because the availability of a prior user rights defense to patent infringement is a fundamental aspect of many patent regimes throughout the industrialized world, there is a strong preference that United States businesses be afforded the same advantages in terms of prior use protections in the United States that their competitors enjoy abroad.
1. The prior user rights defense provisions set forth in the AIA are generally consistent with those of major trading partners and need not be altered at this time.
2. The prior user right defense under the AIA should be maintained with no change at the present time because there is no substantial evidence that it will have a negative impact on innovation, venture funding, small businesses, universities, or independent inventors.
3. The USPTO should reevaluate the economic impacts of prior user rights as part of its 2015 report to Congress on the implementation of the AIA, when better evidence as to these impacts might be available.
4. United States patent law should provide for a prior user rights defense as an appropriate balance between trade secret protection and patent law, which legally co-exist to provide competitive advantages for United States businesses.
5. United States patent law should provide for a prior user rights defense to patent infringement in order to address a systemic inequity inherent in a first-inventor-to-file system and to ensure United States businesses are (i) able to protect their investments in the event of a later issued patent, and (ii) placed on similar footing as competitors in other jurisdictions.
The Report, in Section III, contains a detailed comparison of the prior user rights defense in Japan, Canada, Australia, and countries in the European Union (Denmark, France, Germany, and the UK), as well as Korea, Brazil, Mexico, China, and Russia. The results are contained in an informative table comparing these rights across these different countries:
The Report was based on testimony at an October 25, 2011 hearing and written comments; testimony was provided by Gary Griswold (on his own behalf; Mr. Griswold is a long time supporter of these provisions, see, Gary L. Griswold & F. Andrew Ubel, Prior User Right—A Necessary Part of a First-to-File System, 26 J. MARSHALL L. REV. 567, 572 (1993)); Alan Kasper (from the American Intellectual Property Law Association); Thomas Kurkowski (on his own behalf); Dan Lang (Cisco) and MaCharri Vorndran-Jones (American Bar Association-IP Group). In addition, Intellectual Property Organizations (including the AIPLA, ABA-IP Group, Coalition for Patent Fairness, Computer and Communications Industry Association, Institute of Patent and Trade Mark Attorneys of Australia, International Federation of Intellectual Property Attorneys (FICPI), Japan Intellectual Property Association Innovation Alliance, Japan Patent Attorneys Association, and New Zealand Institute of Patent Attorneys), Academic and Research Institutions (including the Wisconsin Alumni Research Foundation, Berkeley Center for Law and Technology and Greentech Industries, Regents of University of California Board and Higher Education Associations); companies (including Belz Consulting, Cisco, Google and Verizon (Joint Comments), Hospira, Inc., Lex Machina, Microsoft Corp., Space Exploration Technologies Corp., and Telstra Corporation) and individuals (including Stephan Freischem, Asamichi Kato, Thomas E. Kelley, Thomas Kowalski, Paul Morgan, Tony Tether, and Neil Thomas) provided written comments. Conspicuously absent from this list are biotechnology or innovative pharmaceutical companies.
While comprehensive, some of the language of the Report seems to bear little logical relationship to the Findings and Recommendations. For example, regarding the impact on the PURD on "innovation, start-up enterprises, small businesses, individual inventors and universities," the Report notes that "[t]he extent of benefits and harm flowing from the availability in the U.S. of a prior user rights defense is, in the end, an empirical question best answered by comprehensive data on the true impacts revealed over time" and that "[u]nfortunately, formal statistical study of prior user rights has been extremely limited, largely because the full effect of this type of policy change is inherently difficult to measure." In view of these circumstances, and despite the admittedly limited experience with the assertion of the PURD both under 35 U.S.C. § 273 and in foreign jurisdictions, the Report finds (Finding 3) that "[t]here is no substantial evidence that prior user rights as established in the AIA will have a negative impact on innovation." Of course, there is just as clearly no substantial evidence that prior user rights as established in the AIA will not have a negative impact on innovation, making the nature of the finding a political, rather than a factual, statement.
Similarly, while acknowledging the mixed nature of the written comments and testimony ("the potential for secret uses in a market would make it more difficult for investors to estimate markets and value invention, thereby depressing the attractiveness of a later patenting start-up to venture-capital funding" versus "without the prior user rights defense, the company which lost the 'race to the USPTO' in a first-to-file environment would lose all investment returns for that project") and the lack of any empirical evidence ("[a] search of the existing economic literature yielded no empirical study of the impact of prior user rights within the U.S. venture-capital investment context"), the Report concludes that "[t]he best available evidence shows, however, that the U.S. venture-capital investment environment has grown and thrived in a context of uncertainty over property rights in innovation, especially as regards patents and trade secrets" and "if prior user rights are likely to be rarely exercised in the U.S. (as is suggested by the European experience), then it is reasonable to conclude that 'switching' from patent to trade secret protection as a result of the availability of this defense may be limited in nature." Thus, Finding 4 states that "[t]here is no substantial evidence that prior user rights as established in the AIA will have a disproportionately negative impact on venture-capital investments to small businesses and start-ups" and on equally absent evidence, Finding 5 states that "[t]here is an insufficient basis to recommend a change to the scheme chosen by Congress with respect to the application of prior user rights to universities," a finding that at least properly recognizes the "first make no recommendation for change" attitude adopted by the Office in the Report. Throughout the Report, the Office concedes that there is no evidence one way or the other on an issue (such as whether the PURD will harm innovation), or on the other hand postulates scenarios where patenting would not be important to an innovator (without much supporting evidence of the likelihood of such scenarios), and concludes that the absence of evidence supports the conclusion that no changes are necessary in the statutory scheme.
The question of constitutionality of the PURD provisions is answered almost entirely by citation of Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974), which held that the existence of patent and trade secret protection was not contradictory or incompatible with one another. (Interestingly, the Report notes that the Court's conclusion was based on the idea that "the ideas protected by trade secrets will likely be discovered by others in a similar time frame," wherein the Court stated that "[n]or does society face much risk that scientific or technological progress will be impeded by the rare inventor with a patentable invention who chooses trade secret protection over patent protection [because] if a particular person had not made a discovery others would have, and in probably a relatively short period of time." The basis for the Court's thinking is this regard is unexplained.)
The Report also states that the PURD existed between 1839 and 1952, citing (anomalously) Eldred v. Ashcroft, 537 U.S. 186, 199-205 (2002), in support of this proposition. Specifically, the Report cites Act of 1839, ch. 88, § 7, 5 Stat. 353, 354 (repealed 1952), "[t]hat every person or corporation who has, or shall have purchased or constructed any newly-invented machine, manufacture, or composition of matter, prior to the application by the inventor or discoverer of a patent, shall be held to possess the right to use and vend to others to be used, the specific machine, manufacture, or composition of matter, so made or purchased, without liability therefore to the inventor, or any other person interested in such invention; and no patent shall be held invalid by reason of such purchase, sale, or use prior to the application for a patent as aforesaid, except on proof of abandonment of such invention to the public, or that such purchase, sale, or prior use has been for more than two years prior to such application for a patent" and McClurg v. Kingsland, 42 U.S. 202, 208-09 (1843), wherein the Court held that "[t]he object of this provision is evidently twofold; first, to protect the person who has used the thing patented, by having purchased, constructed, or made the machine, etc., to which the invention is applied, from any liability to the patentee or his assignee. Second, to protect the rights, granted to the patentee, against any infringement by any other persons. . . . [I]t puts the person who has had such prior use on the same footing as if he had a special license from the inventor to use his invention; which, if given before the application for a patent, would justify the continued use after it issued without liability." Of course, each example is clearly directed to continued use of a "newly-invented machine, manufacture, or composition of matter" prior to the patenting thereof, and not the continued practice of methods, including methods for producing the patented machine, manufacture, or composition of matter. While patent law and trade secret law may be compatible, the citations do not support the contention that U.S. patent law ever contained a PURD of the type embodied in the AIA.
The "real" reason behind the PURD may be contained in one paragraph of the Report:
A related issue is the consequence that, by filing a patent application, the technology is disclosed to competitors in other countries where the innovator may not, for lack of resources, have sought patent protection, or where patents are difficult to enforce. Several comments pointed out that this can have drastic effects on American businesses and jobs. A representative from a small United States company commented that the company's use of trade secret protection enables it to provide services at a price level that its Chinese competitors admitted they cannot match. Several representatives of "green" technology companies based in the United States noted that disclosure of new technologies via a patent application would allow foreign competitors to copy the innovation, using cheaper labor and with the assistance of foreign government subsidies, to undercut their businesses, at the expense of "creating much-needed jobs for American workers."
While these sentiments are powerful incentives for establishing the PURD, and it is understandable that the Office would want to fulfill the statutory mandate, presumably Congress wanted something more than a rubberstamp. If in the exercise of its "special expertise" the Office was unable to find evidence supporting the PURD (or not), it seems that this is the conclusion: it is too early to tell, not that "all is well" in the absence of any evidence. While the Report's conclusions may reflect political realities, they serve Congressional purposes only facially and do not provide any basis for deciding whether the PURD will support or inhibit innovation. The public (and those members of the public whose representatives are not satisfied with the rhetoric of job creation that swept the bill through this Congress after several years of failure to enact "patent reform") are not well served by such facile conclusions. Perhaps we will all have to wait to assess whether the PURD has these predicted beneficial effects or inhibits innovation to our detriment. But it should not be too much to ask that policymakers face that fact and simply say so.