Prior User Rights: The Uncertainty Will Cost You

The U.S. economy is dependent on patents and other IP assets for stability and growth. According to the President’s 2008 Economic Report [1] intellectual property accounts for 33 percent of the value of U.S. corporations, with patents representing one third of this value. In total, U.S. intellectual property is worth an estimated $5 trillion, which represents more than a third of U.S. gross domestic product (GDP). Just recently the United States Patent and Trademark Office also released the study titled Intellectual Property and the U.S. Economy: Industries in Focus, which found that intellectual property intensive industries support at least 40 million jobs in the United States and contributes more than $5 trillion dollars to U.S. gross domestic product (GDP). These facts augment the necessity of a stable, clear and predictable patent system.

Another 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 respect to statutory construction is especially important to those who wish to take advantage of a prior use but will only later find out when tested during litigation that their use does not qualify under the statute.  As argued by Sen. Roy Blunt, “assurances are all the more important for U.S. companies in the biotechnology field with extraordinarily long lead times for commercialization of its products.” [2]  Therefore the scope of protection and reliance upon the defense is concerning to those who might enjoy this defense which may lead to a detrimental reliance on the part of those would be prior users.

Uncertainty also adds to patent litigation costs, which are already particularly expensive, mainly due to discovery. [3]  When § 273 is utilized, the person establishing the defense must prove the defense by clear and convincing evidence. [4]  In order to rebut this defense, the patentee will likely undergo an expensive discovery phase based on material produced by their opponent.  Additionally, whether the defendant established a prior commercial use is a question of fact. [5]

Further, given the cost associated with uncertainty, larger companies will be better equipped to handle the expense of litigation and therefore a smaller company or individual would be disadvantaged in refuting or establishing the defense.

Although some language of § 273 was addressed by Congress in an attempt to explain a clear definition of the meaning of terms, they have yet to be tested in the court system. Are patentees going to realistically bet the farm and rely on untested terms? Further, will litigation attorneys suggest to their clients that relying on the defense is a safe option thereby admitting infringement and placing the success of their case into unexplored territory?

Additionally, the language of § 273 fails to clarify the scope of the defense with respect to geographic location.  The only language limiting the geographic scope of a prior user to qualify for the defense is § 273(a) requires that such person “commercially used the subject matter in the United States…”  I draw attention to this point because some members in Congress strongly supported prior user rights based on the assumption that the prior commercial use defense “creates a powerful incentive for manufactures to build their factories and plants in the United States.” [6]  Additionally, proponents urged support from their fellow Congressman by boasting that § 273 will “keep high paying jobs in this country by giving U.S. companies a realistic option of keeping internally used technologies as trade secrets.” [7]

Section 273 may prevent foreign manufacturers from utilizing the disclosures in patents relating to manufacturing processes; however, § 273 does not resolve the issue of incentivizing “manufacturers to build their factories and plants in the United States.”  The language of § 273 does not prevent a U.S. manufacturer from building a majority of their factories in Mexico, for example, where manufacturing is cheaper while simultaneously keeping one or few factories in the United States for the purpose of satisfying the requirement of § 273(a) that the prior user “commercially used the subject matter in the United States.”

If my interpretation is incorrect, however, and use of the subject matter outside of the United States bars a prior user from asserting the defense, then this would effectively limit the growth of such a manufacturer to only the United States.  This geographic limitation on a manufacturer taking advantage of the prior user right provided § 273 is inconsistent with the supporting premise that switching to a first-inventor-to-file will harmonize the U.S. patent system with the rest of the world thereby fostering global expansion of technology. [8]

Prior User Rights and Startup Companies

Proponents in Congress continually expressed the importance of including prior user rights in the America Invents Act for the purpose of creating jobs and keeping jobs in America. [9]  Startup companies play a major role, if not leading role, in job creation and economic recovery. [10]  However, prior user rights threaten a startup company’s ability to gain marketplace value and acquire capital, which is vital for the growth of a startup. [11] Often, investors rely on strong patents obtained by the startup as a gauge for market growth and potential. [12]  Further, startups and small companies frequently license their inventions to build capital. [13]  However, the strength of their patent is undermined because investors are without certainty as to whether they would be the only company in the market able to the utilize the embodied technology.  Congressman Baldwin explains the point:

investors would have no way of determining whether anyone had previously developed and used the process or product that they were seeking to patent. In such a scenario, a patent might be valuable or relatively worthless; and the inventor and potential investors would have no means of determining which was true. [14]

Congresswoman Baldwin also adapted the concern by using an example of a company named Stratatech, which developed a human living skin substitute that is hopeful to save the lives of American troops who have suffered burns while serving in Iraq and Afghanistan. [15] She explained:

I wonder if Stratatech would have been able to drive this phenomenal innovation and life-saving technology as far as they have with a patent that provides only conditional exclusivity. Would investors have felt as secure advancing this technology in a system shrouded in secrecy? What if Stratatech’s patent was subject to the claims of an unlimited number of people? [16]

Supporters in Congress overlook this concern by placing the importance of prior user rights on bigger companies “who hold many of the keys to U.S. economic competitiveness” [17] to ensure they “are provided sufficient prior user right protections to put them on an even competitive field internationally.”[ 18]  But, this concern does not address the stifling effect prior user rights will have on startup companies which in turn inhibits job growth.  Reassuringly, Congressmen Sensenbrenner and Baldwin sent a letter to Director Kappos reiterating the impact prior user rights will have on startup companies in an effort to make sure these concerns do not go overlooked. [19]

University and Technology Transfer Organization Concerns

University spending on research and development in science and engineering increased 5.8% between 2008 and 2009 to $54.9 billion. [20]  The nation “benefits substantially when technology transfer processes facilitate the movement of fundamental discoveries from university research into the commercial sector for development into useful products and processes.” [21]  Further, “according to the Association of University Technology Managers’ most recent licensing survey, 3,417 U.S. patents were issued to U.S. universities during 2009 alone, while 596 new companies were formed and 658 new products were introduced based upon university inventions.” [22]

The U.S. patent system plays a critical role in enabling universities to promote innovation through technology transfer. [23]  Universities use the patent system to license their inventions to a wide range of private sector companies. [24]  In order for the university technology transfer system to work, we need a level of patent certainty that will allow our licensees to develop these discoveries in confidence. [25]  Mr. Vaughn (Executive Vice President, Association of American Universities) explained universities believe that expanding prior user rights is an unwise expansion of immunity from the assertion of patent rights. [26]  Such expansion would reduce patent certainty, and that reduction in patent certainty would impair university technology transfer into the private sector for development. [27]  Congressman Sensenbrenner also warned that prior user rights will destroy “the meld of academia and invention that has worked so well for the last 30 or 40 years.” [28]

In an attempt to relieve the above noted concerns, § 273 was amended to include a “university exception”, which states the defense under § 273(a) may not be asserted “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 or a technology transfer organization.”  Mr. Vaughn acknowledged that although there was a legislative carve out in § 273 addressing university and technology transfer organizations, his concerns still exist.  He explained,

[m]any companies to which universities license their patents inter- mingle university patents with their own in developing new products. The commercial prospects for those products would be at risk with the expansion of prior user rights since it would increase the vulnerability of nonexempt patents to a prior use defense by a competitor.

Sen. Blunt also voiced his concern with respect to the agriculture sector.  His remarks indicated U.S. farmers adopt high technology that is provided from multiple sources including research at land grant universities. [29]

Conclusion

The inclusion of § 273 in the America Invents Act was met with strong arguments from those in favor and those opposing.  Those favoring point to the necessity of including prior user rights in a first-inventor-to-file patent system and supplemented their position by demonstrating that the inclusion would effectively create jobs – a hot button issue in the recent years.  I, however, warn that the inclusion of § 273 is unnecessary and the unintended consequences associated with prior user rights outweighs and even undermines the benefits in some situations.

One goal of this article is to provide an idea of what Congress considered when deciding whether to include the defense to infringement based on prior commercial use.  It seems an opportunity for reconsideration is in the near future and I hope the report Director Kappos provides to the Committee on the Judiciary January 16, 2012 adequately equips Congress with the information necessary when re-evaluating the issue.