Patent Law Reform: An Analysis of the American Inventors Protection Act of 1999 and Its Effect on Small, Entrepreneurial Firms

Congressional research reportFeb 29, 2000

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Patent Law Reform:

An Analysis of the

American Inventors Protection Act of 1999

and Its Effect on Small,

Entrepreneurial Firms

February 29, 2000

(name redacted)

Visiting Scholar in Economic Growth

and Entrepreneurship

Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

ABSTRACT

The American Inventors Protection Act of 1999 (P.L. 106-113) resulted in substantial reforms

to the U.S. patent system. This study assesses the potential impact of the American Inventors

Protection Act upon entrepreneurs and small, entrepreneurial firms. The report first explains

the significance of such businesses in high technology industries. It then introduces the patent

system and describes the role of patents in the process of technological change. This report

next provides a detailed review of the major provisions of the American Inventors Protection

Act of 1999. Finally, this report considers the effect of these reforms upon small high tech

enterprises, identifies issues that may deserve further consideration and highlights possibilities

for future reform. This report will be updated if events warrant.

Patent Law Reform: An Analysis of the American Inventors

Protection Act of 1999 and Its Effect on Small,

Entrepreneurial Firms

Summary

The American Inventors Protection Act of 1999, P.L. 106-113, worked

substantial reforms to the U.S. patent system. These reforms include provisions to

protect inventors from deceptive invention promotion services; reduce certain fees

associated with filing applications at the United States Patent and Trademark Office

(PTO); create an infringement defense to first inventors of business methods later

patented by another; ensure that processing delays at the PTO would not adversely

impact patent term; mandate the publication of certain pending patent applications;

establish provisional patent rights following the publication of patent applications;

provide for optional inter partes reexamination procedures; and establish the PTO as

an independent agency within the Department of Commerce.

The eight different titles of the American Inventors Protection Act were shaped

by diverse motivations. However, many of the Act’s provisions were influenced by

concern for entrepreneurs and small, entrepreneurial firms, actors that are generally

perceived as a principal source of innovative products and processes in the U.S.

economy.

This report assesses the potential impact of the American Inventors Protection

Act upon entrepreneurs and small, entrepreneurial firms. It concludes that it is not

possible to state the impact of the American Inventors Protection Act upon individual

inventors and small businesses with great precision. Within these limits of confidence,

however, there is evidence that most of the recent patent law reforms do not

significantly impact these companies any differently than larger, more well-established

enterprises. Whether a particular actor in the technological community will benefit

from the Act, or is negatively impacted by its provisions, depends upon traits that

likely arise without regard to the actor’s size. These traits include the propensity of

particular industrial sectors towards patent acquisition and enforcement, the

marketplace importance of that actor’s patent portfolio, and the innovative activity

of the actor’s competitors.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

The Significance of Entrepreneurs and Small,

Entrepreneurial Firms in High Technology Industries . . . . . . . . . . . . . . . . . 2

The Role of Patents in Small Business R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The American Inventors Protection Act of 1999 . . . . . . . . . . . . . . . . . . . . . . . . 7

Subtitle A – Inventors’ Rights Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Subtitle B – Patent and Trademark Fee Fairness Act . . . . . . . . . . . . . . . . . 8

Subtitle C – First Inventor Defense Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Subtitle D – Patent Term Guarantee Act . . . . . . . . . . . . . . . . . . . . . . . . . 10

Subtitle E – Domestic Publication of Foreign Filed

Patent Applications Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Subtitle F – Optional Inter Partes Reexamination Procedure Act . . . . . . . 13

Subtitle G – Patent and Trademark Office Efficiency Act . . . . . . . . . . . . . 14

Assessment of Effect of Patent Law Reform on

Entrepreneurial Firms in High Tech Industries . . . . . . . . . . . . . . . . . . . . . 15

Subtitle A – Inventors’ Rights Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Subtitle B – Patent and Trademark Fee Fairness Act . . . . . . . . . . . . . . . . 16

Subtitle C – First Inventor Defense Act . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Subtitle D – Patent Term Guarantee Act . . . . . . . . . . . . . . . . . . . . . . . . . 17

Subtitle E – Domestic Publication of Foreign Filed

Patent Applications Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Subtitle F – Optional Inter Partes Reexamination Procedure Act . . . . . . . 20

Subtitle G – Patent and Trademark Office Efficiency Act . . . . . . . . . . . . . 21

Issues and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Patent Law Reform: An Analysis of the

American Inventors Protection Act of 1999 and

Its Effect on Small, Entrepreneurial Firms

Introduction

As observers increasingly recognize the prominent role technological advances

play in driving the U.S. economy,1 interest in both entrepreneurial enterprises and the

patent system has expanded. Entrepreneurs and small, entrepreneurial firms are

generally perceived as a principal source of innovative products and processes.2 The

patent system too is understood to be a fundamental mechanism for encouraging the

pursuit of technological knowledge.3 The American Inventors Protection Act of 1999

(P.L. 106-113), which worked substantial reforms to the U.S. patent system,

evidences congressional concern for achieving a legal environment conducive to

technological progress.

Although diverse motivations shaped the eight different titles of the American

Inventors Protection Act, many of its patent law reforms were influenced by the views

of independent inventors and representatives of small companies.4 These entities,

along with larger entities and other members of the patent community, were offered

considerable opportunity to voice their concerns regarding changes to the U.S. patent

system. Participants in this discussion sometimes held sharply different perceptions

Tassey, Gregory. The Economics of R&D Policy (Connecticut: Quorum Books, 1997);

Edwin Mansfield, “Intellectual Property Rights, Technological Change, and Economic

Growth,” in Intellectual Property Rights and Capital Formation in then Next Decade, eds.

Charles E. Walker & Mark A. Bloomfield, New York: University Press of America, 1988,

p. 5.

Cordes , Joseph J. et al. A Survey of High Technology Firms, Small Business Admin.

Contract No. SBA-8141-OA94, February 1999.

Adelman, Martin J. et al. Patent Law: Cases and Materials. Minnesota: West Publishing

Co., 1998, p.1.

House Committee on Small Business, Subcommittee on Government Programs and

Oversight, The Importance of Patent Term and Patent Application Disclosure Issues to

Small Business: What Impact Will Proposed Changes in the Patent Laws Have on Small

Business?, 105th Cong., 1st sess., 24 April 1997, 2 (statement of the Hon. Roscoe Bartlett,

soliciting views on the “issues raised by the proposed changes to the patent system and

whether the implementation of those changes will have a beneficial or adverse impact upon

small business.”).

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as to the impact of various reform proposals.5 Given the role of entrepreneurs and

small, entrepreneurial firms in our nation’s technological progress, an analysis of the

potential impact of the American Inventors Protection Act on independent inventors

and small enterprises is worthwhile.

This report begins by explaining the significance of entrepreneurs and small,

entrepreneurial firms in high technology industries. This report then introduces the

patent system and describes the role of patents in the process of technological change.

It next provides a detailed review of the major provisions of the American Inventors

Protection Act of 1999. Finally, this report considers the effect of these reforms upon

small, high tech enterprises, identifies issues that may deserve further consideration

and highlights possibilities for future reform.

This report finds that it is not possible to state the impact of the American

Inventors Protection Act upon entrepreneurs and small, entrepreneurial firms with

great precision. Within these limits of confidence, however, there is evidence that

most of the recent patent law reforms do not significantly impact these companies any

differently than larger, more well-established enterprises. Although the reforms of the

American Inventors Protection Act are extensive, they appear in large part evenhanded with regard to smaller and larger enterprises.

Whether a particular actor in the technological community will stand to benefit

from the American Inventors Protection Act, or be negatively impacted by its

provisions, instead depends upon traits that likely arise without regard to the actor’s

size. These traits include the propensity of a particular industrial sector towards

patent acquisition and enforcement, the marketplace importance of that actor’s patent

portfolio, and the innovative activity of the actor’s competitors.

The Significance of Entrepreneurs and Small,

Entrepreneurial Firms in High Technology Industries

Technological advancement is a principal driving force in the growth of the U.S.

economy.6 Technical innovations often contribute to the creation of new goods and

services, new industries, new jobs and new capital. They can expand the range of

services offered and extend the geographic distribution of those services. Where

national problems are amenable to technological solutions, innovation can also

contribute to the resolution of these problems.

Entrepreneurs and small, entrepreneurial firms play a role in the technological

advancement and economic growth of the United States.7 Several studies

U.S. Library of Congress. Congressional Research Service, Omnibus Patent Reform: An

Overview of H.R. 400, by Dorothy Schrader, Report 97-336, 14 May 1997, p.12.

U.S. Library of Congress. Congressional Research Service. Patents and Innovation: Issues

in Patent Law Reform, by (name redacted), Report 97-599, 24 August 1999, p. 2-4.

U.S. Library of Congress. Congressional Research Service, Small, High Tech Companies

(continued...)

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commissioned by federal agencies have concluded that such enterprises are a

significant source of innovative products and services. For example, the National

Academy of Engineering concluded that “small high-tech companies play a critical and

diverse role in creating new products and services, in developing new industries, and

in driving technological change and growth in the U.S. economy.”8 This assessment

was founded on the ability of small firms to develop markets rapidly, generate new

goods and services, and offer diverse products. The study also concluded that small

businesses were less risk adverse than larger, established corporations and were often

better positioned to exploit market opportunities quickly.

Similarly, a 1982 study supported by the Small Business Administration (SBA)

determined that small firms are 2.4 times as innovative per employee as large

companies.9 More recent SBA studies claim that 55% of the country’s innovations

originated with entrepreneurs and small, entrepreneurial firms.10 A National Science

Foundation report found that entrepreneurs and small firms are six times as effective

as larger firms in utilizing research and development expenditures to generate new

products.11

High technology industries contain an especially large number of small

companies. According to SBA data, 94% of high technology companies have under

500 employees and 73% had less than 20 workers. These small firms accounted for

18% of the total receipts generated by high technology industries. In 1996, 37.9%

of workers in private sector, high technology businesses were employed by small

companies; 22.2% of all private sector, high technology workers worked in firms with

less than 100 employees. High technology employees comprised 3.1% of the total

number of workers in the small business community, compared to 4.6% for the

number of high technology employees in all companies regardless of size.

Although these studies and data suggest that entrepreneurs and small,

entrepreneurial firms play a critical role in the technological advancement of the

United States, other observers are less sanguine about their contribution. Much of

this skepticism follows from the teachings of the economist Joseph Schumpeter, who

contended that a rational market actor would only seek to innovate if it could

appropriate the returns on its research and development investment.12 Following this

reasoning, it would seem that technological change would be championed by large

(...continued)

and Their Role in the Economy: Issues in the Reauthorization of the Small Business

Innovation (SBIR) Program, by (name re dacted), Report RL30216, 28 May 1999, p. 1-6.

National Academy of Engineering. Risk & Innovation: The Role and Importance of Small

High-Tech Companies in the U.S. Economy. Washington: National Academy Press, 1995,

p. 37.

National Science Board, Science and Engineering Indicators, December 8, 1993, p. 185.

http://www.sba.gov/ADVO/stats/fact1.html.

Anderson, Anne. “Small Businesses Make it Big in the SBIR Program,” New Technology

Week, June 6, 1998, 2.

Schumpeter, Joseph. Capitalism, Socialism and Democracy, New York: Harper, 1984.

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enterprises with significant market share.13 Others have also maintained that no

conclusive evidence suggests that firm size affects the success of research and

development efforts.14 However, even the more skeptical observers have recognized

that large and small firms possess complementary strengths and weaknesses.

For example, the globalization of the economy increasingly requires firms to

access foreign markets in order to remain competitive. Large companies may be

better able to enter the international marketplace due to a number of comparative

advantages. As compared with smaller enterprises, larger firms may be better able to

tap external sources of finance and technical expertise, and maintain sophisticated

management teams. Larger businesses also benefit from scale and scope economies

due to size and diversification.15 As a result, smaller firms often enter into joint

ventures, or are absorbed into, larger enterprises for purposes of marketing and

manufacturing. The relationships small, entrepreneurial companies enjoy with larger

enterprises appears to be a crucial element influencing the ability of smaller firms to

achieve technological advance.16

Observers have also explained that small, high tech firms enjoy certain

advantages over larger enterprises. Small firms are perceived as enjoying

organizational flexibility, lack of bureaucracy and efficient internal communications

that depend upon informal channels. Such traits may allow smaller companies to

respond more quickly to changing market demands than larger competitors.17 In sum,

even technological observers who would assign entrepreneurs and small,

entrepreneurial firms a lesser role in technological advancement recognize that smaller

entities complement larger enterprises in the innovative process.

The Role of Patents in Small Business R&D

Whether innovating directly or forging partnerships with larger enterprises,

small, high tech companies have frequently turned to the regime of patents.18 The

patent system authorized by Article I, section 8, clause 8 of the U.S. Constitution

serves to encourage the advancement of the useful arts. A principal effect of patent

law in a market economy is to provide economic incentives to commit resources

Cordes, supra note 2, at 16.

Charles Brown et al., Employers Large and Small (Cambridge: Harvard University Press,

1990), 10.

Cordes, supra note 2, at 16.

Bennett Harrison, The Dark Side of Flexible Production, Technology Review, May/June

1994, at 40.

Cordes, supra note 2, at 16-17.

Congressional Research Service, Patents and Innovation: Issues in Patent Law Reform, by

(name redacted), CRS Report 97-599, 24 August 1999, 4-7.

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towards technological innovation. This effect is achieved by granting inventors

exclusive rights to practice the patented invention.19

Industrial response to the Plant Variety Protection Act of 1970 (PVPA) is often

cited in support of the rationale that patent rights can stimulate invention. In a field

in which proprietary rights were previously unavailable, the PVPA allowed plant

breeders the ability to obtain patent-like protection on novel varieties of plants grown

from seed.20 In the decade prior to the promulgation of the PVPA, industry

developed approximately 150 new plant varieties. But in the decade following the

enactment of the PVPA, over 3000 new varieties were created.21

The regime of patents purportedly serves other goals as well. The patent system

encourages the disclosure of products and processes, for each issued patent must

include a description sufficient to enable skilled artisans to practice the patented

invention.22 When the patent expires, ordinarily twenty years from the date the

application is filed,23 others are given the ability to practice the patented invention.

Although estimates vary, one report observed that 85-90% of the information

available in published patent instruments would not otherwise be publicly available.24

Issued patents may also encourage others to “invent around” the patentee’s

proprietary interest. A patentee may point the way to new products, markets,

economies of production and even entire industries. Others can build upon the

patentee’s disclosure to produce their own technologies that fall outside the exclusive

rights associated with the patent.25

The patent system has also been identified as a facilitator of markets. Absent

patent rights, an inventor may have scant tangible assets to sell or license, and even

less ability to police the conduct of a contracting party. By reducing a licensee’s

opportunistic possibilities, the patent system lowers transactions costs and makes

technology-based transactions more feasible.26

The extent to which the patent system practically achieves these goals is difficult

to assess. Various economic studies have suggested that different industries attach

Simone A. Rose, “Patent ‘Monopolyphobia’: A Means of Extinguishing the Fountainhead?,”

49 Case W. Res. L. Rev. 509 (1999).

7 U.S.C. § 2402(a).

Hon. Pauline Newman, “Legal and Economic Theory of Patent Law,” in Donald S. Chisum,

Principles of Patent Law: Cases and Materials 67, 70 (New York: Foundation Press, 1998).

35 U.S.C. § 112.

35 U.S.C. § 154.

Newman, supra note 21, at 72.

Rebecca S. Eisenberg, “Patents and the Progress of Science: Exclusive Rights and

Experimental Use,” 56 University of Chicago Law Review (1989), 1017.

Robert P. Merges, “Intellectual Property and the Costs of Commercial Exchange: A Review

Essay,” 93 Michigan Law Review (1995), 1570.

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widely varying values to patents. For example, one study of the aircraft and

semiconductor industries suggested that lead time and the strength of the learning

curve were superior to patents in capturing the value of investments.27 In contrast,

members of the drug and chemical industries attached a higher value to patents.

Differences in the perception of the patent system have been attributed to the extent

to which patents introduced significant duplication costs and times for competitors of

the patentee. Perhaps the best evidence available as to the perceived value patents is

that, in the United States, the number of filed patent applications and issued patents

continues to climb.28 These data suggests that members of the technological

community continue to view patents as valuable.

Studies have indicated that entrepreneurs and small, entrepreneurial firms rely

more heavily upon the patent system than larger enterprises. Larger companies often

possess a number of alternative means for achieving a proprietary or property-like

interest in a particular technology. For example, trade secrecy, ready access to

markets, trademark rights, speed of development, and consumer goodwill may to

some degree act as substitutes to the patent system. As Sally Wyatt and Gilles Bertin

reported in their survey of alternatives to patenting, a representative of one European

corporation opined that “multinational corporations could easily cease to use patents

and use other available methods to achieve the same aims.”29 However, individual

inventors and small firms often do not have these mechanisms at their disposal. As

a result, the patent system may enjoy heightened importance with respect to these

enterprises.30

The American Inventors Protection Act of 1999

Following several years of discussion, on November 19, 1999, Congress lent

final approval to a bill that made substantial changes to the patent law. This

legislation, the American Inventors Protection Act of 1999, P.L. 106-113, was part

of the Intellectual Property and Communications Omnibus Reform Act of 1999 (S.

1948), attached by reference to the Consolidated Appropriations Act for Fiscal Year

2000. President Clinton signed this bill on November 29, 1999.

The Commissioner of the United States Patent and Trademark Office (PTO) has

identified this legislation as working the most significant reforms to patent law since

Richard C. Levin et al., “Appropriating the Returns for Industrial Research and

Development,” Brookings Papers on Economic Activity, 1987, in The Economics of

Technical Change, eds. Edwin Mansfield and Elizabeth Mansfield (Vermont, Edward Elgar

Publishing Co., 1993), 243.

Robert Hunt, “Patent Reform: A Mixed Blessing for the U.S. Economy?,” Federal Reserve

Bank of Philadelphia Business Review, available at

http://www.phil.frb.org/files/br/brnd99rh.pdf.

Sally Wyatt & Gilles Y. Bertin, Multinationals and Industrial Property 139 (Harvester

1988).

J. Douglas Hawkins, “Importance and Access of International Patent Protection for the

Independent Inventor,” 3 University of Baltimore Intellectual Property Journal (1995), 145.

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Congress enacted the 1952 Patent Act.31 These reforms include provisions to protect

inventors from deceptive invention promotion services; reduce certain fees associated

with filing applications at the PTO; create an infringement defense to first inventors

of business methods later patented by another; ensure that processing delays at the

PTO would not adversely impact patent term; mandate the publication of certain

pending patent applications; establish provisional patent rights following the

publication of patent applications; provide for optional inter partes reexamination

procedures; and establish the PTO as an independent agency within the Department

of Commerce. A review of the most important provisions follows.

Subtitle A – Inventors’ Rights Act

Many commercial enterprises provide invention promotion services.

Independent inventors may employ invention promoters to assist in technology

evaluation, acquisition of patent rights and exploitation of the technology on the

marketplace. Invention promoters often provide valuable services, but some

commentators have observed that the industry has achieved notoriety for its predatory

practices.32 Observers also recount that inexperienced inventors have sometimes paid

considerable sums to invention promoters without receiving any real service in

return.33

The Inventors’ Rights Act mandates that invention promoters provide certain

information in writing to prospective customers. This information includes the

number of evaluated inventions; the percentage of inventions that obtain positive and

negative evaluations; and the number of customers known to have licensed or

obtained a net financial profit as a direct result of the invention promoter’s services.

The Act also exposes invention promoters to liability for any statement that was

material and either false or fraudulent. As well, the PTO is obliged to make publicly

available all complaints concerning invention promoters.

Subtitle B – Patent and Trademark Fee Fairness Act

This subtitle reduces certain patent fees associated with the filing of patent

applications and the maintenance of issued patents. This legislation marks the second

time in two years that patent-related fees have been reduced. Notable fee reductions

include the original filing and reissue fees, which were both reduced from $760 to

Steven R. Englund, “Recent IP Legislation Is Most Sweeping in Years,” 22 National L.J.

(31 Jan. 2000), at C18, col. 2.

Lynn A. Bristol, “Invention Disclosure Services: Needed Change for a Needed System,” 80

Journal of the Patent & Trademark Office Society (1998), 753; Paul S. Shemin, Idea

Promoter Control: The Time Has Come, 60 Journal of the Patent & Trademark Office

Society (1978), 261

See, e.g., Gary Klott, “New Rule Needed: Swindlers Targeting Inventors,” The San

Francisco Chronicle, Business (19 Sept. 1994); Teresa Riordan, “Patent Place,” The

Washington Post Magazine (13 Nov. 1994); Sharon Walsh, “Getting Stuck Over a Stick:

FTC Says Inventor Paid Thousands for Worthless Patent Services,” The Washington Post,

Financial (24 July 1996).

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$690, and the initial maintenance fee, which was reduced from $940 to $830. This

subtitle also requires the PTO to conduct a study of alternative fee structures to

encourage maximum participation of the U.S. inventive community in the patent

system.

Subtitle C – First Inventor Defense Act

This subtitle creates an infringement defense for an earlier inventor of a “method

of doing or conducting business” that was later patented by another. The defendant

must have reduced the infringing subject matter to practice one year before the

effective filing date of the patent and made commercial use of that subject matter in

the United States before the effective filing date.

The impetus for this provision lies in the rather complex relationship between the

law of trade secrets and the patent system. Trade secrecy protects individuals from

misappropriation of valuable information that is useful in commerce. One reason an

inventor might maintain the invention as a trade secret rather than seek patent

protection is that the subject matter of the invention may not be regarded as

patentable. Such inventions as customer lists or data compilations have traditionally

been regarded as amenable to trade secret protection but not to patenting.34 Inventors

might also maintain trade secret protection due to ignorance of the patent system or

because they believe they can keep their invention as a secret longer than the period

of exclusivity granted through the patent system.35

It is important to note from the outset that the patent system has not favored

trade secret holders. Well-established patent law provides that an inventor who

makes a secret, commercial use of an invention for more than one year prior to filing

a patent application at the PTO forfeits his own right to a patent.36 This policy is

principally based upon the desire to maintain the integrity of the statutory proscribed

patent term. The patent law grants patents a term of twenty years, commencing from

the date a patent application is filed.37 If the trade secret holder could make

commercial use of an invention for many years before choosing to file a patent

application, he could disrupt this regime by delaying the expiration date of his patent.

On the other hand, settled patent law principles established that prior secret uses

would not defeat the patents of later inventors.38 If an earlier inventor made secret

commercial use of an invention, and another person independently invented the same

technology later and obtained patent protection, then the trade secret holder could

Restatement of Unfair Competition § 39.

Friedman, David D. “Some Economics of Trade Secret Law,” 5 Journal of Economic

Perspectives (1991), 61, 64.

Metallizing Engineering Co. v. Kenyon Bearing & Auto Parts, 153 F.2d 516, cert. denied,

328 U.S. 840 (1946).

35 U.S.C. § 154.

W.L. Gore & Associates. v. Garlock, Inc., 721 F.2d 1540 (Fed. Cir. 1983), cert. denied,

469 U.S. 851 (1984).

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face liability for patent infringement. This policy was based upon the reasoning that

issued, published patent instruments fully inform the public about the invention, while

trade secrets do not. As between a subsequent inventor who patented the invention,

and thus had disclosed the invention to the public, and an earlier trade secret holder

who had not, the law favored the patent holder.

Recent legal developments concerning methods of doing business have focused

attention upon the relationship between patents and trade secrets. Inventors of

methods of doing business traditionally relied upon trade secret protection because

such inventions had long been regarded as unpatentable subject matter. As a result,

inventors of innovative business methods obtained legal advice not to file applications

at the PTO on their inventions. This advice was sound under the patent law as it then

stood.

The 1998 decision of the Court of Appeals for the Federal Circuit, State Street

Bank and Trust Co. v. Signature Financial Group,39 altered this traditional principle.

In the State Street Bank opinion, the Federal Circuit overturned the historical bar

denying patents on methods of doing business. As a consequence, inventors in fields

ranging from such sectors as finance, insurance and services have sought proprietary

interests in their inventions through the patent system.

This change in this background principle was perceived to have harmed

individuals that invented business methods prior to the issuance of the State Street

Bank opinion. Many of these inventors had maintained their innovative business

methods as trade secrets for many years. As a result, they were unable belatedly to

obtain patent protection on their business methods. As well, because trade secrets did

not constitute prior art against the patent applications of others, a subsequent inventor

would be able to obtain patent protection. Under these circumstances, a trade secret

holder could find himself an adjudicated infringer of a patented business method that

he actually invented first.40

The First Inventor Defense Act of 1999 reconciles these principles by providing

an infringement defense for an earlier inventor of a method of doing business that was

later patented by another. This infringement defense is subject to several

qualifications. First, the defendant must have reduced the infringing subject matter

to practice at least one year before the effective filing date of the application. Second,

the defendant must have commercially used the infringing subject matter prior to the

effective filing date of the patent. Finally, any reduction to practice or use must have

been made in good faith, without derivation from the patentee or persons in privity

with the patentee.

Subtitle D – Patent Term Guarantee Act

The Patent Term Guarantee Act of 1999 provides certain deadlines that, if not

met by the PTO, result in an automatic extension of the term of individual patents.

149 F.3d 1368 (Fed. Cir. 1998), cert. denied,119 S.Ct. 851 (1999).

Thomas, John R.. “The Post-Industrial Patent System,” 10 Fordham Intellectual Property,

Media & Entertainment Law Journal, (1999), 3, 32 n.156.

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Among these deadlines are fourteen months for a first office action, four months for

a subsequent office action, and four months between the payment of an issuance fee

and the grant of a patent. As well, the prosecution of an original patent application

must be completed within three years of the actual U.S. filing date, with exceptions

granted for continuing applications and appeals. The PTO Director is charged with

calculating any patent term extensions that might result from missed deadlines.

This statute appears to further the transition of the U.S. patent system from its

previous system of patent term, which was 17 years from the date the PTO issued the

patent.41 As of 1995, however, patent term was set to 20 years from the date the

corresponding patent application was filed.42 Absent provisional rights obtained

following publication of an application, however, the patentee obtains no legal rights

until the PTO allows the patent to issue. A consequence of the current system of term

calculation is that each day the application spends at the PTO amounts to a lost day

for purposes of the duration of a patent. By ensuring prompt PTO performance

through term extension, the Patent Term Guarantee Act of 1999 maintains the

integrity of the 20-year patent term.

Subtitle E – Domestic Publication of Foreign Filed Patent

Applications Act

The Domestic Publication of Foreign Filed Patent Applications Act of 1999

requires the PTO Director to publish pending patent applications 18 months from the

earliest filing date to which they are entitled. Significantly, not all applications will be

published. If an applicant certifies that the invention disclosed in the U.S. application

will not be the subject of a patent application in another country that requires

publication of applications 18 months after filing, then the PTO will not publish the

application. As the PTO previously maintained all patent applications in secrecy,

publishing them only when they had matured into formally approved patents, the Act

marks a significant change in PTO procedures.

Some background into international and comparative patent law will assist

understanding of this provision.43 First, there is no global patent system. Patent rights

must be applied for and secured in each jurisdiction. In a world where technology

knows no borders and international trade increasingly dominates, patent protection

in a single country is often insufficient to protect inventors.

Lemley, Mark A. “An Empirical Study of the Twenty-Year Patent Term,” 22 American

Intellectual Property Law Association Quarterly Journal, Summer/Fall 1994, p. 369.

Ibid.

Smith, Len S. “Promoting the Progress of Science and America’s Small Entity Inventors:

Inventing An Improved U.S. Patent Application Provision Out of the Prior Art,” 77

Washington University Law Quarterly (1999), 585; Christopher R. Balzan, Comment,

“Mandatory Publication of Patent Applications Prior to Issuance of Patents: A Desirable

Change in U.S. Policy?,” 18 Loyola Los Angeles International & Comparative Law Journal

1995, p. 143.

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In recognition of these realities, the United States has long been a signatory of

the Paris Convention for the Protection of Industrial Property.44 This treaty attempts

to ease the burdens of maintaining patent rights in many jurisdictions. Among the

chief provisions of the Paris Convention is the so-called priority right. The priority

right allows patent applicants to benefit from an earlier filing date in a foreign country.

So long as an inventor files abroad within one year of his first filing and complies with

certain formalities, his subsequent foreign filings will be treated as if they were made

as of the date of his initial filing.

A second important background principle is that foreign patent offices ordinarily

publish patent applications 18 months after their first effective filing date.45 As an

example, suppose that an inventor filed an application at the U.S. PTO on June 1,

1996. Suppose further that the inventor sought patent rights in Germany, which is

also a signatory to the Paris Convention. If the inventor files a German patent

application by June 1, 1997, his application will be treated as having been filed on the

U.S. filing date of June 1, 1996. The German Patent Office will publish the German

application on December 1, 1997, 18 months after the first effective filing date to

which the inventor is entitled.

In contrast to overseas regimes, the U.S. patent system traditionally maintained

applications in secrecy. This regime advantaged patent applicants because it allowed

them to understand exactly what the scope of any allowed claims might be prior to

disclosing an invention. Thus, if the applicant maintained the invention that was

subject to a patent application as a trade secret, then he could choose between

obtaining the allowed patent claims and trade secret status.46

However, this secrecy regime has been perceived as imposing costs as well.

Others might well engage in repetitive research efforts during the pendency of patent

applications, unaware that an earlier inventor had already staked a claim to that

technology. This arrangement also allows inventors to commence infringement

litigation on the very day a patent issues, without any degree of notice to other

members of the technological community.47

The Domestic Publication of Foreign Filed Patent Applications Act of 1999

attempts to strike a middle ground. U.S. patent applications will be published 18

months from the date of filing, except where the inventor represents that he will not

seek patent protection abroad. To discourage applicants from delaying their claims

of foreign priority under the Paris Convention, the Act allows the PTO Director to

Daus, Donald G., “Paris Convention Priority,” 77 Journal of the Patent and Trademark

Office Society , 1995, p. 138.

Todaro, John C., “Potential Upcoming Changes in U.S. Patent Laws: the Publication of

Patent Applications,” 36 IDEA: Journal of Law and Technology, 1996, p. 309.

Goller, Mimi C., “Is a Padlock Better than a Patent? Trade Secrets vs. Patents,” 71

Wisconsin Lawyer (May 1998), 20.

Thomas, John R., “On Preparatory Texts and Proprietary Technologies: The Place of

Prosecution Histories in Patent Claim Interpretation,” 47 UCLA Law Review (1998), 187.

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consider the failure of the applicant to file a timely claim for priority as a waiver of

such claim.

Sometimes inventors seek more robust patent protection in some countries than

in others. This step may be taken for business reasons or due to differences in the

patent or competition laws in varying jurisdictions. The Domestic Publication of

Foreign Filed Patent Applications Act therefore contains a provision allowing

applicants to “submit a redacted copy of the application filed in the Patent and

Trademark Office eliminating any part or description of the invention in such

application that is not also contained in any of the corresponding application filed in

a foreign country.” As a result, if an applicant seeks broader patent protection in the

United States than in other countries, only the more limited version of the application

will be published here.

This Act also creates so-called provisional rights that may attach to published

patent applications. Provisional rights are equivalent to a reasonable royalty, the

amount that the patentee would have charged an infringer had the two parties entered

into a licensing arrangement at the time the infringement began.48 Persons who

employ the invention as claimed in the published patent application are potentially

liable for this amount. Provisional rights are subject to several qualifications. They

are only effective at such time as the patent issues, apply only when the infringer had

actual notice of the published patent application and the claims of the published

application are “substantially identical” to those of the issued patent.

An example may clarify the workings of provisional rights. Suppose that an

inventor files a U.S. patent application on February 1, 2001. Assuming the inventor

does not file the appropriate certification, the PTO will publish the application 18

months later, on August 1, 2002. Suppose further that this application results in an

issued patent that the PTO formally grants on June 1, 2003. Under these facts, the

inventor may file a patent infringement suit on or after June 1, 2003. Assuming the

statutory requirements are fulfilled, the inventor may claim provisional rights

equivalent to a reasonable royalty from August 1, 2002, the date the application was

published, through June 1, 2003, the date the patent was granted. Infringing acts that

occur after June 1, 2003, will be subject to the full range of remedies under the Patent

Act of 1952, including an injunction and damages based upon the lost profits of the

patentee.49

Subtitle F – Optional Inter Partes Reexamination Procedure Act

The Optional Inter Partes Reexamination Procedure Act of 1999 provides

members of the public with a degree of participation in the PTO post-grant

proceeding known as reexamination. Under this legislation, individuals other than the

patentee may opt to submit written comments to accompany patentee responses to

the PTO. The requester may also appeal PTO determinations that a reexamined

Rodime PLC v. Seagate Technology, Inc., 174 F.3d 1294, 1308 (Fed. Cir. 1999), cert.

denied, 120 S.Ct. 933 (2000).

35 U.S.C. § 288.

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patent is not invalid to the PTO Board and the Court of Appeals for the Federal

Circuit.

A feature of U.S. law since 1981,50 the reexamination statute allows any

individual, including the patentee, a licensee, and even the PTO Director himself, to

cite a patent or printed publication to the PTO and request that a reexamination

occur. If the PTO determines that this reference raises “a substantial new question

of patentability,” then it will essentially reinitiate examination of the patent. A

principal goal of reexamination was to resolve validity disputes more quickly and less

expensively than litigation.51

As originally structured, the reexamination statute encountered criticism.

Reexamination was structured largely as a so-called “ex parte” proceeding. Much like

the process of obtaining a patent in the first instance, reexaminations are structured

as a dialogue between applicant and PTO examiner. The examiner does not assume

an adversarial posture towards the patentee, but instead assists the patentee in

ensuring that the patent fulfills the statutory requirements.52 The patent law

essentially limited the role of third parties to initiating the reexamination. Following

this first step, third parties could only play the role of passive observer.

Some commentators did not believe the reexamination system provided a viable

alternative to validity challenges in court.53 Judicial proceedings are conducted in a

so-called “inter partes” fashion, such that one litigant may contest the assertions of

the other. The reexamination requestor may well have much to gain if the patent is

struck down during reexamination, and so he would possess significant incentives to

counter the arguments of the patentee. Traditional reexamination procedures did not

provide that opportunity. As a result, the ability of reexamination to substitute for

litigation of patent validity was compromised. Data supported these observations, for

far fewer reexaminations were requested than had been originally anticipated.54

The Optional Inter Partes Reexamination Procedure Act of 1999 responds to

these concerns by providing third party requesters with an additional option. They

may employ the traditional reexamination system, which has been renamed an ex parte

reexamination. Or, they may opt for a minimal degree of participation in a newly

minted inter partes reexamination. Under the latter alternative, the third party

requester may submit written comments to the PTO during the course of the

Act to Amend the Patent and Trademark Laws, Pub. L. No. 96-517, ch. 30, 94 Stat. 3015

(1980).

Conger, William G. “Patent Reexamination Re-examined,” 1986 Detroit College of Law

Review (1986), 523, 534.

Russell E. Levine et al., “Ex Parte Patent Practice and the Rights of Third Parties,” 45

American University Law Review (1996), 1987, 1990.

Janis, Mark D. “Rethinking Reexamination: Toward a Viable Administrative Revocation

System for U.S. Patent Law,” 11 Harvard Journal of Law & Technology (1999),1.

Conger, supra note 51, at 562 (“The current level of reexamination requests is only ten

percent of that predicted and, as a result, the goals sought to be achieved through

reexamination have not been met.”).

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reexamination. The third party requester may also appeal a PTO decision upholding

the patent to the PTO Board or to the Court of Appeals for the Federal Circuit.

The statute includes one feature designed to discourage abuse of inter partes

reexamination proceedings. Under the Optional Inter Partes Reexamination Procedure

Act of 1999, issues that were raised, or could have been raised, during an inter partes

reexamination may not be asserted later before the PTO or during litigation. In other

words, an inter partes reexamination is essentially the final word on issues that were

or should have been part of the proceeding, at least with respect to that requester.

This provision does not prevent the requester from asserting invalidity based on prior

art unavailable at the time of the inter partes reexamination.

Subtitle G – Patent and Trademark Office Efficiency Act

The Patent and Trademark Office Efficiency Act defines the PTO as an agency

within the Department of Commerce and under the “policy direction” of the Secretary

of Commerce. Significantly, the Act gives the PTO authority to “retain and use all

of its revenues and receipts.” The Act provides for the appointment of an Under

Secretary of Commerce for Intellectual Property and Director of the PTO (Director),

appointed by the President and confirmed by the Senate, to provide policy direction

and management supervision for the PTO. In addition to the Director, a Deputy

Director, a Commissioner of Patents, and a Commissioner of Trademarks will be

appointed by the Secretary of Commerce. The Commissioners will serve five-year

terms and act as the chief operating officers for PTO patent and trademark operations.

Finally, the new law establishes Public Advisory Committees for Patents and

Trademarks, each with nine members appointed by the Secretary of Commerce for

three-year periods, to review and report on the policies, goals, performance, budget,

and user fees of the PTO. Not less than one-quarter of the membership of each

committee must consist of representatives of independent inventors and small,

entrepreneurial firms.

Assessment of the Effect of Patent Law Reform on

Entrepreneurial Firms in High Tech Industries

Entrepreneurs and small, entrepreneurial firms have a role to play in the process

of invention, innovation, and technological advance within the United States. The

patent system may be a more significant part of this process for smaller entities, as

compared with larger enterprises possessing more market power and material

resources.55 In that the American Inventors Protection Act of 1999 has worked

House Committee on Small Business, Subcommittee on Government Programs and

Oversight, The Importance of Patent Term and Patent Application Disclosure Issues to

Small Business: What Impact Will Proposed Changes in the Patent Laws Have on Small

Business?, 105th Cong., 1st sess., 24 April 1997, 44 (remarks of William D. Budinger, Rodel,

(continued...)

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significant changes to the patent law, it is appropriate to consider the potential impact

of patent law reform upon inventors and small companies in high tech industries.

Subtitle A – Inventors’ Rights Act

Of all of the provisions of the American Inventors Protection Act of 1999, the

Inventors’ Rights Act is most oriented towards the needs of entrepreneurs. Invention

promotion services are ordinarily marketed towards, and sought out by, individual

inventors who are independent of a larger enterprise. Three components of the

Inventors’ Rights Act are worthy of discussion here.

One portion of the Inventors’ Rights Act mandates that invention promoters

disclose certain facts concerning their own services and the success of their clients.

These disclosures could chill an invention promoter’s desire to exaggerate its claims

of success and thereby prove helpful to independent inventors. Experience with

similar requirements in other areas of commercial law suggests that the effects of this

reporting requirement may be modest, however. Disclosures of this sort are

sometimes not fully understood by consumers and may not even be read.56

Another component of the Inventors’ Rights Act creates a PTO-maintained log

of complaints concerning invention promoters. Registration of complaints regarding

invention promoters could be useful to the extent that inventors both report

complaints to the PTO and consult the registry. Whether entrepreneurs diligently

report complaints, or routinely contact the PTO prior to engaging the services of a

promotion service, will remain a matter for future observation.

The Inventors’ Rights Act also creates a cause of action for “any material false

or fraudulent representation, or any omission of material fact” by invention promoters.

Although potentially of use to the victim of a misrepresentation, this possibility is to

some extent duplicative of preexisting causes of action under state tort and contract

law.57 Entrepreneurs already possessed mechanisms for achieving remedies against

invention promoters who were fraudulent or otherwise misrepresented material facts

to customers. The success of this cause of action could also be judged by the extent

to which inventors employ it during litigation.

Subtitle B – Patent and Trademark Fee Fairness Act

It is well accepted that high costs present a significant barrier to patent

acquisition.58 These costs are keenly felt by entrepreneurs and small, entrepreneurial

(...continued)

Inc.).

Restatement of the Law, Second, of Contracts § 211 (acknowledging that standardized

agreements are often not read by consumers).

Ibid at § 162 (defining misrepresentation).

Meller, Michael N. “Costs Are Killing Patent Harmonization,” 79 Journal of the Patent &

(continued...)

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firms, which typically possess fewer financial resources than larger enterprises.59

Reductions in the fees associated with patent acquisition should be of particular

benefit to small companies. Two fundamental principles can be considered when

assessing the impact of these fee reductions.

First, PTO fees do not comprise a large percentage of the total cost of patent

acquisition. The bulk of these charges go towards the preparation and prosecution

of the patent application by a patent attorney or agent. Although these fees vary

markedly, depending upon locale, field of technology, amount of preparatory work

associated with the application, and other factors, a 1993 study revealed that most

inventors expend between $5,000 and $10,000 to acquire U.S. patent rights.60 Within

this financial setting, the reduction of the PTO filing fee by $70 may not be of great

moment for patent applicants.

Second, the PTO currently provides a 50% fee discount for individual inventors

and businesses with less than 500 employees.61 Because the PTO is wholly funded by

applicant fees, larger enterprises essentially subsidize small companies in their patent

acquisition efforts at the PTO. As a result, only the larger firms will receive the entire

discount. As entrepreneurs and small, entrepreneurial firms only bear 50% of the fees,

they will also receive only 50% of the discount.

Subtitle C – First Inventor Defense Act

The effect of the First Inventor Defense Act of 1999 upon small, high technology

enterprises is difficult to assess. Business method patents are a very recent

phenomenon and empirical evidence of its effects are still not clear. However, some

initial observations can be offered based upon past interactions between

entrepreneurial firms and the intellectual property regime.

To the extent that small companies make an earlier use of a business method that

is later patented by another, the First Inventor Defense Act could benefit them. As

sole proprietorships and smaller firms may lack the funding to obtain patents on every

(...continued)

Trademark Office Society (March 1997), 211.

Mogee, Mary Ellen. “Foreign Patenting Behavior of Small and Large Firms: Final Report”

(5 March 1996), 30 (observing that “high cost obviously affects the ability of small companies

to obtain and maintain foreign patents more than it does large companies.”).

Zisk, Matthew B., “Mediation and Settlement of Patent Disputes in the Shadow of the Public

Interest,”14 Ohio State Journal on Dispute Resolution (1999), 481, 509 n.52 (“In 1993, the

legal fees for drafting, filing, and arguing a normal high technology patent application through

all stages short of appeal with the PTO were estimated to run between five and ten thousand

dollars; when significant difficulty is encountered in the prosecution of a patent, the fees can

go well beyond these numbers. A patent holder also must pay maintenance and application

fees to the PTO that run into the thousands of dollars . . . .”).

Janis, Mark D. “Second Tier Patent Protection,” 40 Harvard International Law Journal

(1999),151, 180.

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aspect of their technology portfolio,62 they may well be the primary beneficiary of a

statute that considerably augments the value of trade secrecy.

On the other hand, observers could justly question whether the entities that are

best positioned to qualify as first inventors under the stringent provisions of the Act

will actually be entrepreneurs and small, entrepreneurial firms. In this regard, it is

important to note that the first inventor defense applies only when the putative first

inventor “actually reduced the subject matter to practice at least one year before the

effective filing date of such patent.” The term “actual reduction to practice” refers

to the construction of physical embodiment of a product invention or the actual

practicing of a process invention.63 An actual reduction to practice may be more

difficult for small businesses to achieve than larger firms. Larger firms presumably

have more resources available, and thus more able to put inventive ideas into

commercial practice. Therefore, some contend that it is reasonable to believe that

larger companies will find the first inventor defense more availing than independent

inventors and small enterprises.

Holders of patents on business methods may also discover that their patent

portfolios are of diminished value. A competitor’s previous use of the patented

invention may detract from the exclusive rights ordinarily enjoyed by patent

proprietors. To the extent that small firms rely more heavily upon patents than larger

enterprises, they may be more greatly impacted by the first inventor defense

Subtitle D – Patent Term Guarantee Act

The Patent Term Guarantee Act of 1999 appears to effect entrepreneurs, small

entrepreneurial firms, and larger enterprises equally. Any sort of patent applicant may

encounter PTO delays for any number of reasons, varying from simple personnel

shortages to mandatory suspension of the prosecution due to the prior art definition

within the patent law.64 As a result, small, high tech companies stand to benefit from

extended patent terms when PTO delays are encountered. However, they may also

be subject to the lengthened terms of patents held by their competitors.

A difficulty with the Patent Term Guarantee Act is that some patents may enjoy

terms that extend far beyond the usual duration of 20 years from the date the patent

application was filed. In particular, patents not issued within three years of the filing

date ordinarily will enjoy one day of additional term for each day of delay. As PTO

delays can sometimes be considerable,65 this provision might result in substantial term

extension for patents in biotechnology and other fields. To the extent that the recent

Cordes, supra note 2, at 58.

Scott v. Finney, 34 F.3d 1058 (Fed. Cir. 1994).

35 U.S.C. § 102(e).

Lemley, supra note 41, presents a study that includes data on prosecution delays at the PTO.

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adoption of a 20-year patent term was intended to encourage prompt patent

acquisition efforts, the Patent Term Guarantee Act may undermine these efforts.66

The Patent Term Guarantee Act also charges the PTO to calculate the

appropriate patent term and notify the applicant. This task may prove to be quite

difficult. In particular, the Act requires that any term adjustment “shall be reduced by

a period equal to the period of time during which the applicant failed to engage in

reasonable efforts to conclude prosecution of the application.” As a result, the Patent

Term Guarantee Act may lead to a situation where members of the public will no

longer be able to determine a patent’s term based upon information on the face of the

patent instrument. Instead, they must estimate the term based on information from

the patent’s prosecution history. Even then, the term may remain uncertain until a

court resolves whether the patentee made “reasonable efforts” to conclude

prosecution.67

Subtitle E – Domestic Publication of Foreign Filed Patent

Applications Act

Some of the concerns of entrepreneurs and small, entrepreneurial firms appear

to have been addressed during the drafting of legislation requiring the publication of

pending patent applications. Indeed, a predecessor version of the Domestic

Publication of Foreign Filed Patent Applications Act of 1999 expressly exempted

small entities from the publication requirement.68 As enacted, the Act allows

applicants to certify that they will confine their patent acquisition efforts to the United

States, and thereby avoid publication of their application prior to grant.

One explanation for this publication regime is that it ensures that U.S. inventors

will be able to see the technology that foreign competition is seeking to patent much

earlier than was possible before.69 Detractors have observed that the Domestic

Publication of Foreign Filed Patent Applications Act of 1999 essentially does nothing.

Because the legislation only makes available applications that were already published

by foreign patent offices, no more or less information is made available at particular

times than was before.70 One advantage of this legislation would lie in convenience.

Blount, Steve, “The Use of Delaying Tactics to Obtain Submarine Patents and Amend

Around a Patent that a Competitor Has Designed Around,” 81 Journal of the Patent &

Trademark Office Society (1999), 11.

Michael R. McGurk, et al., Report: The American Inventors Protection Act of

1999 (available at http://www.finnegan.com/fr_pubs.htm).

House Committee on the Judiciary, American Inventors Protection Act of 1999, 106th

Cong., 1st Sess., 1999, H.Rept. 106-287, p. 32.

Ibid at pp. 52-53.

House Committee on Small Business, Subcommittee on Government Programs and

Oversight, The Importance of Patent Term and Patent Application Disclosure Issues to

Small Business: What Impact Will Proposed Changes in the Patent Laws Have on Small

Business?, 105th Cong., 1st sess., 24 April 1997, 48 (remarks of William D. Budinger, Rodel,

(continued...)

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Inventors may find the U.S. PTO more accessible than foreign counterparts, and the

published applications would be available in the English language.71

Detractors also note that this legislation may antagonize our trading partners.

Inventors ordinarily file patent applications in their home jurisdictions first. Foreign

filings are taken up later. As a practical matter, then, the only applications that will

not be published under this statute are those filed by U.S. inventors. This domestic

preference may violate the principle of national treatment, a pledge the United States

made when it signed the Paris Convention to treat domestic and foreign inventors

equally.72

The impact of the Domestic Publication of Foreign Filed Patent Applications Act

of 1999 upon entrepreneurs and small, entrepreneurial firms appears uncertain. The

Act ensures that inventors who only file patent applications in the United States need

not disclose their technologies to the public until they are sure they know the scope

of the grant the PTO will allow. However, small businesses will remain uncertain

about the patent applications filed by others who have chosen not to file abroad.

Even if the PTO does publish an application, applicants may have opted to redact

portions of applications if they chose to seek more narrow patent rights overseas. As

a result, considerable uncertainty surrounds this partial publication regime. Small,

high tech firms may spend months engaging in wasteful and duplicative research

efforts, only to discover that the PTO issued a patent foreclosing their

commercialization of that technology.73

The Domestic Publication of Foreign Filed Patent Applications Act of 1999 may

also discourage entrepreneurs and small, entrepreneurial firms from seeking patent

protection abroad. Because this legislation attaches the penalty of publication to

foreign filings, inventors may opt to forego the possibility of foreign patent rights.

This incentive may impede small enterprises from receiving full compensation from

the use of their technologies abroad and actually benefit overseas industry.74

Legislative concerns over theft, particularly by foreign actors, was among the

motivations of the Domestic Publication of Foreign Filed Patent Applications Act of

(...continued)

Inc.).

Ibid at p. 49.

Thomas, John R. “Litigation Beyond the Technological Frontier: Comparative Approaches

to Multinational Patent Enforcement,” 27 Law & Policy in International Business, 1996, p.

277, 313 (discussing national treatment obligation).

House Committee on Small Business, Subcommittee on Government Programs and

Oversight, The Importance of Patent Term and Patent Application Disclosure Issues to

Small Business: What Impact Will Proposed Changes in the Patent Laws Have on Small

Business?, 105th Cong., 1st sess., 24 April 1997, 10 (testimony of Michael Kirk, American

Intellectual Property Law Association).

Hawkins, Douglas J. “Importance and Access of International Patent Protection for the

Independent Inventor,” 3 University of Baltimore Intellectual Property Journal (1995), 145.

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1999.75 For example, a representative of the Alliance for American Innovation

remarked that a universal pre-grant publication would expose “the small entity to

copying by both foreign and domestic imitators with only the illusory remedy of

provisional rights being in place.”76 One inventor and entrepreneur stated that the

publishing of patent applications before grant would “induce infringers to copy his

invention before he has patent protection and when he may in fact never be granted

a patent.”77

Other observers have noted that once the PTO has granted a patent, the

corresponding patent instrument is available for inspection on a global basis. U.S.

patents may be freely read by individuals located in foreign jurisdictions, even though

such patents offer exclusive rights only within the United States. If foreign patent

rights have not been obtained or are not yet in the pipeline, then concerns over theft

by foreigners may be besides the point.78

Subtitle F – Optional Inter Partes Reexamination Procedure Act

The Optional Inter Partes Reexamination Procedure Act could provide a more

effective mechanism for interested parties to challenge the validity of issued patents.

To the extent they wish to challenge the patents of others, entrepreneurs and small,

entrepreneurial firms stand to benefit from this legislation. Presumably these types of

companies possess less financial resources than other market entrants, so less costly

alternatives than patent litigation would seem highly beneficial.

However, small businesses may also bear additional costs as a result of the

Optional Inter Partes Reexamination Procedure Act. Prior to this legislative reform,

patentees that did not sue or threaten to sue their competitors could ensure that they

would not be subject to costly patent litigation. Following the Optional Inter Partes

Reexamination Procedure Act of 1999, patents held by entrepreneurs may be subject

to inter partes reexamination as well. Inter partes reexaminations will undoubtedly

prove more costly than traditional, ex parte reexaminations, particularly if PTO

findings of patent validity are appealed to the PTO Board or Court of Appeals for the

Federal Circuit. And to the extent that inter partes reexaminations are cheaper then

litigation, then industry actors will be more willing to launch them against

competitors, including entrepreneurs and small, entrepreneurial firms.79

Barta, Jr., James J. “Death of a Superior Intellectual Property Law System,” 17 St. Louis

University Public Law Review (1998), 383, 396.

House Committee on Small Business, Subcommittee on Government Programs and

Oversight, The Importance of Patent Term and Patent Application Disclosure Issues to

Small Business: What Impact Will Proposed Changes in the Patent Laws Have on Small

Business?, 105th Cong., 1st sess., 24 April 1997, 98 (remarks of Dr. B.N. “Biff” Kramer,

Alliance for American Innovation).

Ibid at 60 (remarks of Raymond Damadian, Fonar Corporation).

Ibid at 47 (remarks of William D. Budinger, Rodel, Inc.).

U.S. Library of Congress. Congressional Research Service, Omnibus Patent Reform: An

(continued...)

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Subtitle G – Patent and Trademark Office Efficiency Act

Entrepreneurs and small, entrepreneurial firms will likely gain two principal

benefits from the Patent and Trademark Office Efficiency Act. First, the Act allows

the PTO to “retain and use all of its revenues and receipts.” This legislation should

ensure that PTO revenues are not diverted to pay for other government functions.

The entire patent community could benefit from a PTO that can deploy its revenue to

retain qualified personnel, maintain an appropriate technical library and devote

appropriate amounts of time to the examination process.80

Second, the Public Advisory Committees for Patents could provide small, high

tech companies with a mechanism for dialogue with the PTO Director and

Commissioner of Patents. The Act mandates that one member of the Committee must

be an independent inventor. As well, not less than one-quarter of the nine-member

Committee must consist of representatives of small entities. Curiously, this formula

does not result in an integer, but it does ensure that delegates of entrepreneurs and

small, entrepreneurial firms will have the opportunity to address PTO management.

However, it should be noted that the members of the Public Advisory Committee will

be appointed by the Secretary of Commerce, and that the Committee possesses no

rule-making or other formal authority.

Issues and Options

Many of the provisions of the American Inventors Protection Act of 1999 were

drafted in view of concerns expressed by entrepreneurs and small, entrepreneurial

firms. However, the impact of most of the Act’s significant reforms will likely depend

not so much on the size of a specific entity, but upon other factors. Pertinent factors

include the marketplace importance of the actor’s patent portfolio; the innovative

activity of the actor’s competitors; and the general propensity of the actor’s industrial

sector towards patent acquisition and enforcement.

More specifically, both the Inventor’s Rights Act and the Patent and Trademark

Efficiency Act appear principally to benefit small, high tech businesses. Independent

inventors have long been the favored targets of invention promotion services, and the

creation of a Public Advisory Committee for Patents should promote communication

with PTO management. Yet the reforms achieved by this legislation appear modest

in view of more significant changes wrought by the other titles of the American

Inventors Protection Act. This group of statutory amendments appear to be of

neutral application to entrepreneurs; small, entrepreneurial firms; and larger entities.

(...continued)

Overview of H.R. 400, by Dorothy Schrader, Report 97-336, 14 May 1997, p.12.

For further discussion of the value of proper examination of applications by the PTO, see

Robert P. Merges, “As Many As Six Impossible Patents Before Breakfast: Property Rights

for Business Concepts and Patent System Reform,” 14 Berkeley Technology Law Journal

(1999), 577.

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For example, entrepreneurs and small, entrepreneurial firms stand to benefit from

the First Inventor Defense Act to the extent they have held methods of doing business

as trade secrets. Yet the first inventor defense also decreases the value of patents on

methods of doing business, whether or not the holder of such a patent is a small or

large entity. Similarly, the Optional Inter Partes Reexamination Procedure Act makes

it easier for anyone to challenge issued patents. While small companies may find it

easier to defeat the patents of others, to the extent that they are patentees they may

have to fend off more reexaminations themselves.

The Domestic Publication of Patent Applications Filed Abroad Act also appears

even-handed in application. Among its effects is to delay public access to patentrelated information until such time as the patent issues if the inventor seeks patent

protection only within the United States. The Domestic Publication of Patent

Applications Filed Abroad Act may well protect individual inventors and small

businesses from unscrupulous individuals who steal information from published patent

applications. But to the extent that these firms have competitors who seek patent

applications only in the United States, they may suffer from a lack of forewarning

over the proprietary interests of others. As the Domestic Public of Patent

Applications Filed Abroad Act seemingly discourages entrepreneurs and small,

entrepreneurial companies from seeking patent rights abroad, its directives also appear

inconsistent with the current trends in international trade.

The provisions of the Inventors Protection Act that decrease PTO fees and

extend patent terms also appear to impact small and large entities impartially. The

costs of obtaining patents will become marginally less expensive for both, perhaps

making it easier for them to obtain patents, but potentially increasing the number of

competitor patents for which concern must be had. Last, PTO delays in processing

applications occur independently of the size of the patent applicant. Some

entrepreneurs and small, entrepreneurial firms may reap the benefits associated with

longer patent terms, but others may have to deal with the delayed expiration dates of

patents owned by competitors.

Several provisions of the Inventors Protection Act may deserve further

congressional observation and consideration. Among them is the current articulation

of the first inventor defense. The First Inventor Defense Act of 1999 provides only

a brief explanation of the patented subject matter to which it applies. In contrast to

its extended definition of “commercially used,” the statute provides only that “the

term ‘method’ means a method of doing or conducting business.” This succinct

delineation may contain some ambiguity. As an example, consider an accused

infringer whose sole commercial practice is the manufacturing of a particular chemical

compound. Methods of manufacturing have traditionally been among the subject

matter of the patent system. Yet, should another patent that method, the accused

infringer may well argue that a chemical manufacturing technique is also a method of

doing business.

Given that the statute’s legislative history makes clear that the First Inventor

Defense Act of 1999 was inspired by the Federal Circuit opinion in State Street Bank,

this argument may at first appear untenable. The House Report to accompany H.R.

1907 expressly states, however, that this legislation is “not confined to the financial

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services industry.”81 Further, while the State Street Bank opinion undoubtedly

triggered a boom in filing patents on such inventions in such industries as finance and

insurance, a review of patents issued prior to that opinion suggests that numerous

previous patents had issued that could arguably be described as business methods.

For example, two such issued patents, one relating to managing a dry cleaning

establishment and the other relating to a plan for saving for anticipated college tuition

expenses, were the subject of recent opinions from the United States Supreme

Court.82 With no articulated definition of the term “method of doing or conducting

business” in the statute, no clear record of congressional intent, and no shared

meaning of this term prevalent within the patent community, judicial interpretation of

this term will be crucial.83

The statute also contains a limitation regarding the manner in which the patent

claim is drafted that may prove difficult to apply in practice. The First Inventor

Defense Act of 1999 provides that “[a] person may not assert the defense under this

section unless the invention for which the defense is asserted is for a method.”

However, the House Report to accompany H.R. 1907 provides:

An invention is considered to be a process or method if it is used in

connection with the production of a useful end-product or -service and is

or could have been claimed in the form of a business process or method in

a patent. A software-related invention, for example, that was claimed by

the patent draftsman as a programmed machine when the same invention

could have been protected with process or method patent claims is a

process or method for purposes of § 273.84

A difficulty with this language is that experienced patent practitioners know that

virtually any invention can be drafted in either product and method format.85 The

choice of one format or the other is most typically a matter of drafting style. That the

first inventor defense is supposedly limited to methods appears to have almost no

substantive legal effect whatsoever.

Looking forward, these issues may lead Congress to explore an expansion of the

First Inventor Defense Act of 1999. A simple adjustment to this statute could allow

House Committee on the Judiciary, American Inventors Protection Act of 1999, 106th

Cong., 1st sess., 1999, H.Rept. 106-287, 46.

Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, 527

U.S. 627 (1999); Markman v. Westview Instruments Inc., 517 U.S. 370 (1996).

“Signing of IP Reforms Amends Work-for-Hire, Leaves ‘First Inventor Defense’ Unclear,”

59 Patent, Trademark & Copyright Journal (2 Dec. 1999), 330, 331-32.

House Committee on the Judiciary, American Inventors Protection Act of 1999, 106th

Cong., 1st sess., 1999, H.Rept. 106-287, 46.

(name r edacted), “Of Text, Technique and the Tangible: Drafting Patent Claims Around

Patent Rules,” 17 John Marshall Journal of Computer and Information Law (1998), 219,

222.

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for a more expansive group of patentable subject matter.86 In this regard the first

inventor defense could prove quite similar to those prevailing in other countries.87

These statutes are commonly referred to as creating “prior user rights.” Unlike the

more limited regime created by the First Inventor Defense Act of 1999, prior user

rights abroad are not limited to methods of doing or conducting business. They

instead apply to any sort of invention. Experience with the First Inventor Defense Act

of 1999 might suggest whether the United States should consider a more full-fledged

prior user rights regime, or be maintained as a limited cure of a specific problem.

Finally, to whatever range of inventions it applies, a first inventor defense

appears to augment the value of trade secrets at the expense of the patent regime. In

a system where trade secret holders may face liability for patent infringement in the

future, inventors face significant incentives to file applications at the PTO. Even if

inventors never plan to enforce their patents against competitors, the patents

nonetheless possess defensive value should others come to the same invention later.

But where trade secret holders may employ a first inventor defense, the incentive to

obtain patent protection is diminished. A prior trade secret status will block liability

for patent infringement. This system may reduce the number of filed patents, and as

a consequence diminish the public trove of knowledge that appears only in issued

patent instruments.88

The manner in which the PTO implements the Domestic Publication of Patent

Applications Published Abroad Act of 1999 may also be of interest to Congress.

Inventors often amend their applications during the eighteen months following the

filing date, either unilaterally or in response to statements by the examiner. Whether

the application should be published as filed or with regard to later developments

appears to be an open question. As well, whether the PTO will publish the entire

application or merely a representative portion, and the precise medium of

presentation, appear unsettled.

The Act’s piecemeal publication regime might be considered as providing a first

step towards an ecumenical publication system. In August 1994, the United States

and Japan signed an agreement under which the Japanese Patent Office agreed, among

other things, to end its practice of allowing third-party, pre-issuance oppositions and

to allow the filing of patent applications in the English language. In return, the United

States in part agreed to introduce legislation requiring the publication of patent

application eighteen months after filing. The Japanese Patent Office has met its

commitments.89 Experience with the publication of a subset of pending U.S.

Jean Hubert, Pierre. “The Prior User Right of H.R. 400: A Careful Balancing of Competing

Interests,” 14 Santa Clara Computer & High Technology Law Journal (1998), 189.

The Advisory Commission on Patent Law Reform, A Report to the Secretary of Commerce

(1992), 48.

Rohrback, Robert L. “Prior User Rights: Roses or Thorns?,” 2 University of Baltimore

Intellectual Property Journal (1993), 1.

James E. Hudson, III, Comment, “The U.S.-Japan Agreement for Eighteen Month

Publication of U.S. Patent Applications: How Should it Be Implemented?”, 5 Journal of

(continued...)

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applications may lead Congress to revisit the wisdom of moving to a universal

publication regime as was promised nearly six years ago.

Finally, the PTO response to the new inter partes reexamination system may be

of interest to Congress. As the Patent and Trademark Office moves to a somewhat

unfamiliar regime of adversarial proceedings, examiners must bear increased

adjudicatory responsibilities.90 The Optional Inter Partes Reexamination Procedure

Act of 1999 calls for a PTO report progress following the passage of five years, and

the experience of the PTO should be well worth considering.

It should also be noted that some patent practitioners have doubted whether

industry will make significant use of the inter partes reexamination statute.91

Although many commentators have called for more robust third party participation

in reexaminations, the preclusive effect attached to inter partes reexamination

proceedings may have a chilling effect upon such proceedings. Potential requesters

may be reluctant to provoke reexaminations if they lack further opportunities to

challenge the reexamined patent based upon prior art that was, or should have been,

before the PTO during the reexamination. The fact that inter partes reexaminations

are more narrow in scope than judicial proceedings, and that many observers consider

the courts to be a more neutral forum than the PTO, may contribute to this prediction.

Whether the new inter partes reexamination will fulfill its expectations remains to be

seen.

A final observation is that the American Inventors Protection Act of 1999

highlights the dynamic between Congress, the PTO, and the courts in administering

the patent system. Until recently, patent policy was largely controlled by the PTO and

the Court of Appeals for the Federal Circuit, with little input from the legislature.

Certain problems are associated with judicial and administrative oversight, however.

Patent litigation is increasingly the subject of jury trials,92 which may not provide the

optimal mechanism for the advancement of sound patent policies. The assignment of

a significant policy role to the PTO, an agency which issues patents following ex parte

examination, may create an environment favoring proprietary rights holders without

a significant advocacy role for the larger public interest.

This environment has not gone unnoticed by the Supreme Court. The Court on

several occasions has proposed that Congress provide guidance on crucial issues

within the patent law, including the scope of patent coverage and the patentability of

(...continued)

International Law and Practice (Spring 1996), 87.

Teresa Riordan, “An overhaul of the rules is possible, but opposition to the plan remains

fierce,” New York Times, Jan. 5, 1998: D1 (quoting Jay R. Thomas, Associate Professor of

Law, George Washington University Law School).

Michael R. McGurk, et al., supra note 67 (concluding that “it is easy to see why most

people—at least those well-informed—are not likely to opt for inter partes reexamination.”).

Robert A. Armitage, “Corporate Counsel’s Role in Patent Litigation: Managing a Legal

Team to Meet Business Objectives,” 375 Practicing Law Institute: Patents (1993), 135, 148.

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computer software and life forms.93 To date, Congress has not accepted these

suggestions. The American Inventors Protection Act testifies to the growing

importance of intellectual property in the U.S. economy and suggests increased

legislative interest in the once obscure field of patents.

Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17, 28 (1997) (noting

congressional ability to mandate the appropriate scope accorded to individual patent

instruments); Diamond v. Chakrabarty, 447 U.S. 303, 317-18 (1980) (suggesting that

concerns over the patentability of living organisms be presented to Congress); Gottschalk v.

Benson, 409 U.S. 63, 73 (1972) (noting, with regard to computer software, that “[t]he

technological problems tendered in the many briefs before us indicate to us that considered

action by the Congress is needed.”).

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