AIA Overview: Prior User Rights Defense

By Kevin E. Noonan --

Section 5 of the AIA expands prior user rights:

35 U.S.C. 273 Defense to infringement based on earlier inventor.

(a)  IN GENERAL.–A person shall be entitled to a defense under section 282(b) with respect to subject matter consisting of a process, or consisting of a machine, manufacture, or composition of matter used in a manufacturing or other commercial process, that would otherwise infringe a claimed invention being asserted against the person if—

(1)  such person, acting in good faith, commercially used the subject matter in the United States, either in connection with an internal commercial use or an actual arm's length sale or other arm's length commercial transfer of a useful end result of such commercial use; and

(2)  such commercial use occurred at least 1 year before the earlier of either—

(A)  the effective filing date of the claimed invention; or

(B)  the date on which the claimed invention was disclosed to the public in a manner that qualified for the exception from prior art under section 102(b).

(b)  BURDEN OF PROOF.—A person asserting a defense under this section shall have the burden of establishing the defense by clear and convincing evidence.

(c)  ADDITIONAL COMMERCIAL USES.—

(1)  PREMARKETING REGULATORY REVIEW.—Subject matter for which commercial marketing or use is subject to a premarketing regulatory review period during which the safety or efficacy of the subject matter is established, including any period specified in section 156(g), shall be deemed to be commercially used for purposes of subsection (a)(1) during such regulatory review period.

(2)  NONPROFIT LABORATORY USE.—A use of subject matter by a nonprofit research laboratory or other nonprofit entity, such as a university or hospital, for which the public is the intended beneficiary, shall be deemed to be a commercial use for purposes of subsection (a)(1), except that a defense under this section may be asserted pursuant to this paragraph only for continued and noncommercial use by and in the laboratory or other nonprofit entity.

(d)  EXHAUSTION OF RIGHTS.—Notwithstanding subsection (e)(1), the sale or other disposition of a useful end result by a person entitled to assert a defense under this section in connection with a patent with respect to that useful end result shall exhaust the patent owner's rights under the patent to the extent that such rights would have been exhausted had such sale or other disposition been made by the patent owner

(e)  LIMITATIONS AND EXCEPTIONS.—

(1) PERSONAL DEFENSE.—

(A) IN GENERAL.—A defense under this section may be asserted only by the person who performed or directed the performance of the commercial use described in subsection (a), or by an entity that controls, is controlled by, or is under common control with such person.

(B) TRANSFER OF RIGHT.—Except for any transfer to the patent owner, the right to assert a defense under this section shall not be licensed or assigned or transferred to another person except as an ancillary and subordinate part of a good-faith assignment or transfer for other reasons of the entire enterprise or line of business to which the defense relates.

(C) RESTRICTION ON SITES.—A defense under this section, when acquired by a person as part of an assignment or transfer described in subparagraph (B), may only be asserted for uses at sites where the subject matter that would otherwise infringe a claimed invention is in use before the later of the effective filing date of the claimed invention or the date of the assignment or transfer of such enterprise or line of business.

(2) DERIVATION.—A person may not assert a defense under this section if the subject matter on which the defense is based was derived from the patentee or persons in privity with the patentee.

(3) NOT A GENERAL LICENSE.—The defense asserted by a person under this section is not a general license under all claims of the patent at issue, but extends only to the specific subject matter for which it has been established that a commercial use that qualifies under this section occurred, except that the defense shall also extend to variations in the quantity or volume of use of the claimed subject matter, and to improvements in the claimed subject matter that do not infringe additional specifically claimed subject matter of the patent.

(4) ABANDONMENT OF USE.—A person who has abandoned commercial use (that qualifies under this section) of subject matter may not rely on activities performed before the date of such abandonment in establishing a defense under this section with respect to actions taken on or after the date of such abandonment.

(5) UNIVERSITY EXCEPTION.—

(A) IN GENERAL.—A person commercially using subject matter to which subsection (a) applies may not assert a defense under this section if the claimed invention with respect to which the defense is asserted was, at the time the invention was made, owned or subject to an obligation of assignment to either an institution of higher education (as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a)), or a technology transfer organization whose primary purpose is to facilitate the commercialization of technologies developed by one or more such institutions of higher education.

(B) EXCEPTION.—Subparagraph (A) shall not apply if any of the activities required to reduce to practice the subject matter of the claimed invention could not have been undertaken using funds provided by the Federal Government.

(f) UNREASONABLE ASSERTION OF DEFENSE.—If the defense under this section is pleaded by a person who is found to infringe the patent and who subsequently fails to demonstrate a reasonable basis for asserting the defense, the court shall find the case exceptional for the purpose of awarding attorney fees under section 285.

(g) INVALIDITY.—A patent shall not be deemed to be invalid under section 102 or 103 solely because a defense is raised or established under this section.

These prior user rights provisions of the law as enacted have some significant differences and distinctions from the language of either the Senate or the House bills.  Significantly, the defense is expressly a personal defense that can be asserted against a charge of infringement that does not act generally to invalidate a claim on novelty or obviousness grounds (Section 5(g)).  The scope of the right was also expanded from Section 273 as enacted under the American Inventor Protection Act of 1999:  under the prior provisions, business method claims alone were subject to the prior user rights defense, whereas under the AIA, prior user rights can be asserted by an accused infringer for "a process . . ., a machine, manufacture or composition of matter used in a manufacturing or commercial process" (Section 5(a)).  While more limited than the full extent of Section 101 subject matter, this is a considerable expansion of the right, and as with many other provisions of the AIA, increases the uncertainty attendant upon patent claims and creates incentives to keep commercial methods secret and disincentives patenting.

The timing of the commercial use appears to be intended to preclude "Johnny-come-lately's" from hurrying into commercial use of a method disclosed by an inventor, since it must occur "at least a year before the effective filing date or first public disclosure by the inventor," whichever occurred earlier.  As with most defenses to patent infringement, the defense must be established upon clear and convincing evidence.

The AIA expands the category of qualifying commercial use to include periods of regulatory review, e.g. "any period specified in section 156(g)" (i.e., submission of an IND or NDA to the FDA for approval of a drug; Section 5(c)(1)), or use by nonprofit research laboratories (so long as the use is restricted to noncommercial use; Section 5(c)(2)).  These rights do not transfer upon the "sale or other disposition of a useful end result" to a third party, the defense being exhausted by the sale (Section 5(d)).  And the right is limited under Section 5(e), being personal to the person or entity that performs the "commercial use" (Section 5(e)(1)(A)) and cannot be transferred (Section 5(e)(1)(B)) except as a sale or transfer of
the entire enterprise or line of business" relating to the defense, as well as a limitation on the number of sites of the commercial use entitled to the defense (Section 5(e)(1)(C)).  Also excepted are instances of derivation (Section 5(e)(2)) or abandonment of the use (for "actions taken on or after the date of such abandonment; (Section 5(e)(4)), nor does the defense effect a "general license" of an entire patent, but just those claims relating to "specific subject matter for which [it is established] that a [qualifying] commercial use [occurs] (Section 5(e)(3)).  Of the exceptions, one that may have far-reaching implications is the exception for universities, wherein patents owned by universities are exempt from the assertion of the defense (Section 5(e)(5)).  This exemption has the potential for increasing licensing of patents owned by universities that can be adapted for commercial purposes, and even the potential for providing additional impetus for research universities (or their engineering departments) to become more involved in developing and protecting inventions related to processes that can be readily commercialized.  Even this exemption has an exception, however, wherein the exemption does not apply if "the subject matter of the claimed invention could not have been undertaken using funds provided by the Federal government."   Patents directed to human embryonic stem cell research during the Bush administration are examples of patents to which the exception to the exemption may apply.

Finally, perhaps to limit a proliferation of such claims, the statute provides for a sanction against defendants who assert the defense without a "reasonable" basis for doing so, whereby a court "shall" find the case to be exceptional under section 285 (Section 5(f)).  It should be remembered, however, that while the statute can compel a district court judge to find a case exceptional on the basis of an unreasonable assertion of the prior user rights defense, the extent of the sanction remains within the sound discretion of the court.

These provisions became effective against any patent "issued on or after the date of enactment":  September 16, 2011.

Comments

[Salton]

Thanks for the post. I am afraid that I do not understand (e)(5)(B) (the exception to the university exception). What does it mean, "could not have been undertaken using funds provided by the Federal Government"? Does that address subject matter that is banned from federal funding, like certain stem cell research? Or does it address a situation where the research leading to the patent was unequivocally not covered by federal funding at the time? Does anyone happen to know if there is any clarification anywhere?

[EG]

"Even this exemption has an exception, however, wherein the exemption does not apply if 'the subject matter of the claimed invention could not have been undertaken using funds provided by the Federal government.'"

Kevin,

I've pondered this exception to the university exception. I'm puzzled.What does it mean in "real terms"?

[Salton]

Another question raised by the language of the (e)(5)(B) exception--what if the research was funded in part by the federal government and in part by, say, a private company? Many labs receive funding from more than one source. Shouldn't the public be entitled to notice, for example, by the presence (or absence) of the paragraph that is supposed to be included in a patent application under 37 CFR 401.14(f)(4) where work is performed under a government contract?

[EG]

I'm glad I'm not the only one confused by (e)(5)(B), Salton. And nice astute point about the "partial funding" issue. The AIA is truly the Abominable Inane Act (how I hate the AIA!).

[Confused SCOTUS]

It seems to me that the exception for universities does not apply if the university reduced the invention to practice using Federal Government funds. Thus, so long as a university reduces a claimed invention to practice without federal funding, a person cannot assert the section 273 defense against the university when the university sues the person for patent infringement. But if the university does use federal funding in reducing the invention to practice, then a person can assert the section 273 defense against the university when the university sues the person for infringement.

[Confused SCOTUS]

The following sentence from above seems incorrect:

"These rights do not transfer upon the "sale or other disposition of a useful end result" to a third party, the defense being exhausted by the sale (Section 5(d))."

The defense is not exhausted by the sale, as the above states. Rather, the patent owner's right to assert infringement with respect to the "useful end result" is exhausted just as though the patent owner itself sold the "useful end result". In other words, even though a person other than the patent owner sold the "useful end result" (i.e. the person asserting the prior commercial use defense against the patent owner), the exhaustion doctrine still applies to the patent owner as though the patent owner itself sold the "useful end result".

It remains unclear what a "useful end result" (carried over from pre-AIA 273) means, although my guestimate is that it is the product made by the process or the output generated by the business method, etc.

[Kevin E. Noonan]

Dear Confused:

The provisions of the exception are:

(5)(A) A person commercially using subject matter to which subsection (a) applies may not assert a defense under this section if the claimed invention with respect to which the defense is asserted was, at the time the invention was made, owned or subject to an obligation of assignment to either an institution of higher education (as defined in section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a)), or a technology transfer organization whose primary purpose is to facilitate the commercialization of technologies developed by one or more such institutions of higher education.

(B) EXCEPTION.—Subparagraph (A) shall not apply if any of the activities required to reduce to practice the subject matter of the claimed invention could not have been undertaken using funds provided by the Federal Government.

So I think that a university benefits from the exemption whether Federal funds were used or not. The exception to the exemption comes into play only if Federal funds "could not have been used" to reduce the invention to practice; whether Federal funds were actually used does not seem to be a requirement.

Thanks for the comment.

[Kevin E. Noonan]

Dear Salton:

The question of joint invention/funding is a god one. I read the statute as saying that the presence of a university or tech transfer office as an assignee is enough; whether another entity is a co-assignee wouldn't vitiate the exception (because the statute doesn't say "sole assignee" or language to that effect).

Thanks for the comment.

[Kevin E. Noonan]

Dear Confused:

The exhaustion argument you make is no different than current law - the exhaustion in this statute relates to whether the defense can be asserted against the patentee, not whether a sale exhausts the patent owner's right to sue for infringement. But I agree this isn't a crystal-clear statute, and this is one example.

Thanks for the comment.

[Skeptical]

Dr. Noonan,

I noticed your log in to the Public Hearing on the Study of PRior User Rights at the USPTO this morning, and would love to see a write up of your view on this public hearing, as I unfortunately missed the first half hour or so.

Your write-ups are typically precise, exacting and even-handed, and I really am trying to understand the entire prior user rights (or as emphasized, Priot User Defense).

Thanks!

[Confused SCOTUS]

Kevin,

Thank you for your reply. I think you are right in saying that the exception to the University Exception is not based on whether Federal Government funds were actually used.

Here is my understanding of the exception to the University Exception.

If the patent's invention could have been reduced to practice using Federal Government funds, then the University Exception applies.

If the patent's invention could not have been reduced to practice using Federal Government funds, then the University Exception does not apply.

I think the reason this "Federal Government funds" language is used is because patent law is federal law and therefore federal requirements for funding should be the basis for determining whether a patent's invention qualified for funding for reduction to practice. Thus, even though a patent's invention may be owned by a university, and reduced to practice using state government funds (approval under state funding requirements), this does not necessarily mean the patent's invention could have been reduced to practice using Federal Government funds (approval under Federal Government funding requirements).

I suspect we will see a technical amendment to the exception to the University Exception, as the present language is unclear.

[Kevin E. Noonan]

Dear Confused:

It will be interesting to see what criteria are used to establish whether an invention "could not have been reduced to practice." The obvious one is a policy-based prohibition, such as stem cells. But can it be extended to inventions that the government does not support (e.g., does not have a funding agency that was empowered to give grants for study in the area)? Could it be year-to-year, as in "at the time the invention was made in technology X, the government was not giving/did not give any grants?" Worse, could it be that evidence that a funding proposal was denied would be enough to defeat the exception? No way to predict.

I hope your idea of a technical amendment is a good one.

Thanks for the comment.

[Anon]

Dr. Noonan,

Above you state "The exhaustion argument you make is no different than current law," but this is only true to the extent of the final outcome.

What is missing and what is very much different is the lack of ANY benefit accruing to the patentee from any such "exhaustion event" (i.e. sale). The patentee thus effectively has suffered a taking because someone else has benefited where previously a patent right had provided an exclusive nature to the item in question.

The third party that has not undergone ANY effort to join in the patent system enjoys Freerider effects from someone else's efforts, including the knocking out of other competitors. It is true that the defense does not provide a right to sue (and the downside concomittant cost), but the ability to sell free and clear - and the indemity afforded to those purchasing the item, materially can cut into the patentee's expected market.

Not only that, but there are additional negative effects to the patentee. The patentee simply will not know if anyone out there actually has the ability to support a prior user line of defense, thus materially increasing the risk that there may not be ANY market that can be gained by "exclusive" patent rights. There will now be this massive wildcard as to not only a direct infringer possibly having prior user rights, but the possibility now exists of a Huge Corporation having such hidden prior user rights and the umbrella of exhaustion protection shielding a target from an enforcement action.

A worst case scenario: No luck on the enforcement, no luck on the market protection, no luck on the exclusive nature of the patent (there goes licensing, if the Huge Corporation can undercut your license rate), very mixed luck against enforcing against other competitors outside the shield - as "lucky you" get to bear the costs and the competitor with prior user rights enjoys the fruits of your labors (perhaps a mandatory shared legal expense requirement can be made by technical amendment, but even this may be prone to abuse by deep pocket companies).

As this is the law, I am at a loss for a practical solution or even an approach to appraise my small start-up clients of this devaluation of patent worth (both intrinsic patent devaluation and business risk devaluation).

Thoughts...?

[Kevin E. Noonan]

Dear Anon:

I don't disagree. The expansion of prior user rights has the potential to effect the most pernicious effects on the patent system and innovation. But it was sold as a "fairness" issue.

I cannot see how even technical amendments can fix this portion of the new law. But we will all need to be creative to protect small clients under this law (and hope that vigorous discovery will keep infringers from asserting the defense improperly).

Thanks for the comment.