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Prior User Rights and the Incentive to Keep Innovations Secret

Written by Nicholas Mattingly
Mattingly and Malur, PC
Posted: March 1, 2012 @ 7:10 am
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The statement of Senator Patrick Leahy in the Congressional Record sums it all up nicely: “After dozens of congressional hearings, markup sessions, and briefings, and countless hours of Member and staff meetings, through two Presidential administrations, and three Congresses, patent reform is finally a reality.”

On September 16, 2011 President Barack Obama signed into law the America Invents Act, which constituted the most significant overhaul to the U.S. patent system since the Patent Act of 1952.  Some of the most pronounced amendments to Title 35 of the United States Code include replacing interference proceedings with derivative proceedings, initiation of inter partes review, eliminating failure to disclose the best mode as a challenge to a claim, the addition of post grant review process and various changes to the fee setting authority by the USPTO.  But that was just the beginning.

The most significant reform to the U.S. patents system approved by the 112th Congress is the transformation from a first-inventor-to-invent to a first-inventor-to-file system for granting patents.  To say the transformation of the patent system is controversial is an understatement.  However, notwithstanding future constitutional challenges to the America Invents Act and the affect of future reports to Congress concerning the implementation of the bill, the America Invents Act is here to stay and as interpretations of the bill filter through the court system, we will be tuned in acutely.

When Sen. Patrick Leahy introduced S. 23 to the Senate on January 25, 2011, he identified three important goals of the legislation: improve the application process by transitioning to a first-inventor-to-file system; improve the quality of patents issued by the USPTO by introducing several quality-enhancement measures; and provide more certainty in litigation. Whether these goals are achieved remains to be seen; however, there were compelling reasons expressed supporting and opposing each section of the bill.  As the bill progressed out of the Senate and into House of Representatives, representatives of big companies as well as individuals weighed in with their concerns.

The previously mentioned provisions each received healthy scrutiny, but there was one change that was quite literally slipped in at the last minute and received little Congressional consideration in public.  Section 5 of the America Invents Act, which includes amendments to 35 U.SC. § 273, is titled “Defense to infringement based on prior commercial use.” In short, the defense allows a prior user to assert a defense to infringement if certain requirements are met. The debate over prior user rights is part of the controversy of the America Invents Act and although a majority of published articles seem to favor prior user rights, no overwhelming consensus has emerged among patent scholars.

In particular, § 273 permits a defendant to rely on a prior user right which is limited to subject matter consisting of a process, or consisting of a machine, manufacture, or composition of matter used in manufacturing, or other commercial process that would otherwise infringe a claimed invention being asserted against the person. Although the defense is limited to the aforementioned subject matter, Congress contemplated further expansion of the right. See H.R. Rep. No. 112-98, pt. 1, at 44 (2011) (“The Act responds to this point by revising US law as follows: First, the prior-use defense may be asserted against any patent (not just method patents)…”); See 157 Cong. Rec. 4,482 (2011) (“Section 5 expands the prior-user rights defense from its present narrow scope to broadly apply to all patents with minimal exceptions…”) (statement of  Rep. Baldwin).

 

The Conception of Today’s § 273

Following the Federal Circuit’s decision in State Street Bank & Trust Co. v. Signature Financial Group, which overturned the ninety year “business method exception to patentability,” Congress implemented 35 U.S.C. § 273 in 1999, which provided a defense to patent infringement regarding “method[s] of doing or conducting business.” Prior to the State Street decision, business method patents were not patent eligible subject matter and as a result this subject matter was kept as a trade secret.  Not surprisingly, after the State Street decision the USPTO received a sharp increase in business method patent applications. This increase sparked Congress to pass the 1999 version of § 273 in order to protect those inventors who kept their business methods as trade secrets from being liable to a subsequent patent holder of the same subject matter.

However, it’s important to point out that the defense to infringement, as now stated in § 273, does not flow from this same rationale.  Today’s defense is premised upon the rationale that prior user rights are necessary in a first-inventor-to-file patent system.  On September 8, 2011 on the eve of voting, Sen. Leahy stated the “Senate bill included only a very limited expansion of this defense.” While it was indicated that the defense would be a slight expansion of the former 1999 version, that is not entirely correct.

Generally, advocates of prior user rights in a first-inventor-to-file system propound that a defense is necessary because a user who has been commercially using an invention should not be stopped from using that invention simply because a subsequent, independent inventor obtains a patent covering their invention.

Congress indicated that their intent of including prior user rights is to prevent manufacturing jobs from moving overseas to foreign countries where prior user rights have played a role in attracting “[a]merican manufacturing jobs and facilities to these countries.”  Further, some believe the defense will correct the imbalance and provide an incentive to keep jobs in America. Additionally, advocates in Congress proffer that § 273 will help manufacturers, small business and other innovative industries strengthen our economy by helping businesses grow and allow innovation to flourish.

 

Today’s § 273

In particular, § 273 says, “[a] person shall be entitled to a defense … if 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 … of a useful end result of such commercial use” if the use occurred “at least one year before … the effective filing date of the claimed invention; or 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).”

A quick analysis of § 273 reveals the issues surrounding § 273 become prominent when a person commercially uses the subject matter in secret.  If the prior user did not use the invention in secret, it would be prior art under § 102(b) to a subsequent, independent patent application.  If a prior user keeps his invention secret, thereby not creating prior art, he runs the risk that a subsequent, independent inventor will obtain a patent covering the secret subject matter.

Section 273 includes a subsection titled “University Exception” which states (in pertinent part): “a person … using subject matter … may not assert a defense under this section if the claimed invention with respect to which the defense is asserted, was … owned or subject to an obligation of assignment to … a technology transfer organization whose primary purpose is to facilitate the commercialization of technologies developed by one or more such institutions of higher education.”

While there is confusion about what the terms mean, Congress has provided some guidance in the legislative history.  According to Sen. Patrick Leahy, “internally used methods and materials qualify for the defense of prior user rights” and “[t]he phrase ‘commercially used the subject matter’ is intended to apply broadly, and to cover a person’s commercial use of any form of subject matter, whether embodied in a process or embodied in a machine, manufacture, or composition of matter that is used in a manufacturing or other commercial process.”

Additionally, Mr. Leahy stated the term “primary purpose” was intended to be consistent with and have a similar scope as the ‘‘primary functions’’ language in the Bayh-Dole Act.

 

Prior User Rights Create an Incentive for Secrecy

Article I, Section 8, Clause 8, of the U.S. Constitution provides Congress with the authority to enact patent laws based on the foundation that the progress of science and useful arts should be promoted. The constitutional basis for U.S. patent law is the granting of an exclusive right to inventors for a limited period of time in exchange for a disclosure of their invention to the public. 35 U.S.C. 154 (2002); Universal Oil Prod. Co. v. Globe Oil & Refining, 322 U.S. 471, 484 (1944) (“As a reward for inventions and to encourage their disclosure, the United States offers a seventeen-year monopoly to an inventor who refrains from keeping his invention a trade secret.”) As explained by a unanimous Supreme Court, the patent system “embodies a carefully crafted bargain for encouraging the creation and disclosure of new, useful, and non-obvious advances in technology and design in return for the exclusive right to practice the invention for a period of years.” Bonito Boats v. Thunder Craft Boats, 489 U.S. 141, 150-51 (1989).

Section § 273 realigns this constitutional foundation to one favoring secrecy.  Prior user rights create an incentive for prior users to keep their technology secret by eliminating any liability on behalf of themselves to a subsequent patentee.  As the Supreme Court in Graham v. John Deere stated: “[i]nnovation, advancement, and things which add to the sum of useful knowledge are inherent requisites in a patent system which by constitutional command must promote the Progress of …. useful Arts” Graham v. John Deere, 383 U.S. 1, 6 (1966).

Congressman Jim Sensenbrenner continually voiced this concern during hearings and debates: “[a]n expansion of prior user rights would discourage inventors from sharing their knowledge and reward those who don’t contribute to the progress of science[.]”

As another scholar stated, one of the basic purposes of the

[p]atent system is to encourage use of the system to provide a disclosure of technology for the subsequent benefit of the public, as contrasted with encouraging secret uses that (a) prevent dissemination of technological information; (b) avoid the possibility of development of design around and/or improvement technology by others; and, (c) eliminate competition for an indeterminate period while the secret remains undiscovered, thus depriving the public of the beneficial effects of competition.

See Robert L. Rohrback, Prior User Rights: Roses or Thorns, 2 U. Balt. Intell. Prop. L.J. 1, 10 (1993).

In a speech at the 3rd Annual Georgetown Law & Stanford Law Conference on November 4, 2011, Director Kappos commented on the importance of disclosure as well albeit during a conference in which he strongly advocates for prior user rights.  He stated:

protecting those technologies with clear, consistent and dependable patent rights is fundamental to disseminating scientific advances. And ultimately, that dissemination affords society the opportunity to build upon and leap-frog from one breakthrough to the next.

However, if prior users are keeping their technology secret while being protected, that leap-frogging from one breakthrough to the next be impeded.  Disclosure is the backbone of the progression of the sciences for this reason.  “[T]he ultimate goal of the patent system is to bring new designs and technologies into the public domain through disclosure.” Bonito Boats v. Thunder Craft Boats, 489 U.S. 141, 151 (1989).  Sharing ideas allows others to improve upon the state of the art and as a result, better products such as medicine and consumer electronics are brought to market thereby driving our economy and benefiting the welfare of the U.S. as a whole.  Prior user rights, on the other hand, will inhibit this progression.

Further, “[t]he patent system is one in which uniform federal standards are carefully used to promote invention while at the same time preserving free competition.” Sears, Roebuck & Co. v. Stiffel Co., 376 U.S. 225, 230-31 (1964). Undeniably, Director Kappos understands the relationship between a strong patent system and the economy.  In the aforementioned Georgetown speech he stated:

[w]ithout the incentives offered by patent protection, there would be little motivation for anyone to share their new idea for the laser or the microprocessor, with the rest of the world. And arguably, plenty of incentives not to share.

While Director Kappos is commenting on the America Invents Act as a whole and the necessity for a clear patent system, I think he is understating or failing to consider the attenuated effects of incentivizing secrecy.  Congressman Sensenbrenner voiced this concern while responding to the position that proponents take, annunciated by Congressman Lamar Smith: § 273 “will help manufacturers, small business and other innovative industries strengthen our economy [and] will help our businesses grow and allow innovation to flourish.” Congressman Sensenbrenner replied:

I think we are all for manufacturing, [b]ut what this does is it helps old manufacturing, which we need to help, but it also puts new manufacturing in the deep freeze because they use the disclosures that are required as a part of a patent application.

Additionally, The Supreme Court has made it’s view on the importance of disclosure in the patent system for almost two centuries.  In 1829, the Court stated, “it would be reasonable for Congress to require that the public be put in possession of secret information in exchange for the granting of an exclusive right.” Pennock v. Dialogue, 27 U.S. 1, 2 (1829). Further, in 1858, the Court explained:

[t]he true policy and ends of the patent laws enacted under this Government are disclosed in that article of the Constitution, the source of all these laws, viz: ‘to promote the progress of science and the useful arts,’ contemplating and necessarily implying their extension, and increasing adaptation to the uses of society. By correct induction from these truths, it follows, that the inventor who designedly, and with the view of applying it indefinitely and exclusively for his own profit, withholds his invention from the public, comes not within the policy or objects of the Constitution or acts of Congress. He does not promote, and, if aided in his design, would impede, the progress of science and the useful arts.

Kendall v. Winsor, 62 U.S. 322, 328 (1858) (emphasis added); see also Mason v. Hepburn, 13 App. D.C. 86 (D.C. Cir. 1898).

Accordingly, encouraging secrecy in the patent system by including § 273 ultimately impedes innovation which detriments our economy and welfare.  While the Court and other members of Congress have expressed their concern with prior user rights, it seems they’re deflected or counted as trivial.

 

About the Author

Nick Mattingly is a registered patent agent with Mattingly and Malur, PC and soon to be US patent attorney with a focus on prosecuting patent applications in the electrical art units. He will graduate from the University of Baltimore School of law in May 2012 and plans to sit for the Virginia bar. In addition to prosecuting patent applications, Nick advises clients on the upcoming changes in patent law and corresponding rules due to the America Invents Act.

11 comments
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  1. Is this not putting the cart before the horse? I would like more data from countries that currently have this in place. My main issue with discussions of the Prior Use defense is how often it would even come up? If a company has a trade secret and uses this commercially, and another company obtains a patent covering the secret, (1) how will the second company even know about the first company’s alleged infringement beyond a trade secret misappropriation, and (2) besides certain methods, how much value will a trade secret even be for a manufacturing company? I agree that, hypothetically, this seems like a big issue. I really have a hard time believing that it will actually be used, at least appropriately. I would say good luck trying to prove that you have been using the patented invention in secrecy for over a year before the filing date or public use of the invention.

  2. Luke,

    I would like more data from countries that currently have this in place.

    Other countries do not have our law (the constitution) and thus it is not relevant to look at other countries. In fact, other countries do not have our version of first to file either, so relevancy even under the new law (AIA) is questionable.

    My main issue with discussions of the Prior Use defense is how often it would even come up

    How often it comes up has no bearing on the legality of its use – none. You rmain issue, then is not a legal issue.

    I would say good luck trying to prove that you have been using the patented invention

    Companies may still keep the “invention” paperwork trial, as the payoff is huge for letting someone else do all the heacy lifting of first procuring the patent, and second clearing the field through enforcement of the patent. Needless to say, however, such proving – possible or not – also bears little on the legal issue involved.

    Nicholas,

    I commend your article.

  3. While agreeing with above comments that this prior commercial use defense itself is very unlikely to be used in court, as evidenced by the similar prior statute for secret business methods never having been successfully used in patent litigation, and also noting that this debate is now too late, with the AIA already enacted, the author does makes some good public policy arguments. In fact there are two other contributory aspects of the AIA that may add to favoring and encouraging trade secrecy over patenting in some cases: (1) the AIA elimimination of any practical way to enforce “best mode” disclosures in patents, and (2) an interpretation argued for the AIA definition of what is prior art that would only consider public disclosures of inventions to be a patentability bar and thus allow patenting long after, in addition to, a long period of trade secret commercialization by the same entity.

  4. As Anon alludes to pretty specifically, which frankly has me a lttle nervous, is the potential for PUR’s to be abused in the future. This New US patent law, that is noticably much different than European patent law, might have some pretty dramatic negative consequences. Just the fact that the Trade Secret holder can possibly trump the *new* inventor twice seems to be pretty unfair to me. Advance the arts, and all like that.

    It seems as if this might be an area of the AIA legislation that seems to need some serious rewording of the current legislative language, to avoid some perhaps unintended or downright damaging results. A technical amendment to the language of the AIA seems to be indicated for more reasons than this, and I certainly hope that the Office might be able to find the time somewhere to try to address issues like this and several others. For instance, what in the world does the term “or otherwise available to the public” actually mean in a legal sense? Not clear and or convincing at all to me right about now. A real technical amendment suggestion for the language might very well take quite a few months, and I certainly wouldn’t like to have to write it!

  5. To play the devil’s advocate for but a moment (I am running up quite the tab for the devil), I must ask Stan if it is really “abuse” to maximize the functioning of a corporation under the provisions of law?

    The adage of “be careful of what you ask for” play our perfectly here, as the “must have” of PUR to accompany FITF necessarily includes the “fairness” of protecting (and thus promoting) instances of secrecy rather than sharing of knowledge. By expressly taking away the stick of consequences of not sharing, we have chosen to promote secrecy.

    This is not to say that there is an absence of a truly monumental constitutional issue with this facet of the AIA.

    It is rather a bit of red herring to even note that the law allows the coexistence of secrecy and patents, because the constitutional clause does not speak to the existence of such coexistence, but only to the promotion for the public’s benefit. Benefits for Private Concerns through the protection of secrecy, while making a nice sound plug on today’s political stage, simply are not found in the constitutional mandate of patent law. Sure, that constitutional mandate does not preclude the existence of secrecy – but that’s a far cry from saying a foundation exists in the Patent Clause.

    Stan, how is the recipe for Red Herring Hops coming along? I am aiming for a higher alcohol content in that brew.

  6. BD writes in small part-

    “To play the devil’s advocate for but a moment (I am running up quite the tab for the devil), I must ask Stan if it is really “abuse” to maximize the functioning of a corporation under the provisions of law?”

    Yes I believe it is, as it amounts to the taking of a fair amount of my property rights, as it seems possible for Corporation A to keep it as a Trade Secret, of course not saying anything when they see a patent issued that would make them infringers. If the patentee discovered it, the PUR would grant the Prior User immunity from infringement, which I am OK with in a first to invent mind set. Either they maintain their Trade Secret, or they lose it forever to public disclosure.

    On the other hand though, both Corporations A and B might just keep silent about it, and then start figuring out how to invent or design their way around a valid granted patent at their leisure and just start using it at the patentee’s expense by *borrowing* their technology to make their products superior, or much more inexpensively.

    Add to this that Corporation B might have the option of challenging the validity of the patent, as they are not constrained by the single challenge factor of PUR’s (Personal defense.) and they probably have everything well documented for several years.

    The way it used to be, you either chose to go with a Trade Secret approach which is basically free, or decided to try to *buy* some patent rights for like $20,000 or so, and then lately having to wait about 3 or 4 years to get a decision on your application.

    Meanwhile, Corporations A and B might well have held up the progress for several years, just because their chosen path was personally more profitable for a few years before somebody had invented their way around their trade secrets. Unless they fix the PUR’s language quite a bit, I would bet you dimes to donuts that they get a pretty substantial challenge to the Constitutionality of it as it is currently written. It seems to be a taking of the property rights of American citizens by the Federal government.

    On a lighter note though, the Red Herring Hops brand is coming along very nicely, but I can say no more than that here publically right now. Kewl Aide West is in Trade Secret lockdown mode right about now, for obvious reasons.

    Cheers-

    “Stan, how is the recipe for Red Herring Hops coming along? I am aiming for a higher alcohol content in that brew.”

  7. BTW though-
    I can’t seem to find any red herrings here on the Left coast, but the Red Snappers seem to be almost leaping right into the boats these days!
    S~

  8. I highly disagree with the shift to a “first to patent” focus. Many things have been seen as examples or ideas created by small businesses, inventors, science fiction writers, etc… that are now being seized upon by big business. Big business does not innovate but copies someone else’s idea and is the first to patent because they have the big bucks to do so. Big business strips the rightful rights away from the true innovater in a first to patent system. The new focus has created a patent race with the most wealthy companies benefiting.

    Part of this new race by large wealthy companies is to patent everything possible no matter if it is obvious, has prior art, is overly broad, or just non innovative. For example, the biggest one in the news has been Apple’s “slide to unlock” patent. What is more obvious than using a graphical representation of what has been done on electronic devices for years with physical switches. It is the first thing any developer thinks of when trying to transition from physical to software or screen based models. It is inherently obvious. Yet, Apple and others have been bombarding the patent office with such patents – more of a race on who has the money to patent every obvious idea possible than true development or innovation.

    Hopefuly the downfall of the patent system created by this move to a “first to patent” system will be quickly changed before it destroys competition, small business, and independent inventors.

  9. […] objection to prior user rights (see my previous articles on the subject here and here) is that Section 273 uses language that is untested in the court system.  Clarity with […]

  10. Smells fishy that something like this could be added in at the last moment. Has there been any talk of changing this?

  11. Jodi-
    Fortunately there is some serious consideration of possible damaging consequences to small businesses and inventors by Congress if this provision is allowed to stand. They asked the USPTO to make a study of repercussions, and as I seem to recall they seem to be suggesting PUR’s are a pretty bad idea. I believe it was jammed in at the last minute by Senator Leahy and others at the behest of some of his corporate pals who are probably their best resource for funding their re-election campaigns I would presume. To me, it seems to be contrary to the whole spirit of US patent law.

    Stan E. Delo