Congress Passes Historic Patent Reform Legislation

Congress Passes Historic Patent Reform Legislation America Invents Act Transitions U.S. Patent System from a First-to-Invent to First-Inventor-to-File System, Overhauls Post-Issue Review Proceedings and Provides Other Significant Reforms; Expected to Become Law by End of September BACKGROUND On, the U.S. Senate approved, by a vote of 89 to 9, a landmark bill to reform the nation s patent system, entitled the Leahy-Smith America Invents Act, which was previously passed by the U.S. House of Representatives on June 23, 2011. President Obama is expected to sign the bill into law very soon. This memorandum provides a brief summary of what we believe are the most significant aspects of this sweeping legislation. KEY PROVISIONS OF THE AMERICA INVENTS ACT When signed into law, the America Invents Act will represent the single greatest legislative change to the U.S. patent system in over 50 years. This legislation will change the U.S. patent system in several fundamental ways, including: A groundbreaking transition from a first-to-invent to a first-inventor-to-file system, which will abolish interference proceedings; A sweeping overhaul of the Patent and Trademark Office ( PTO ) s post-issue review and examination regime, including new provisions allowing third parties to challenge the validity of already-issued patents based on any ground of invalidity in an administrative proceeding before the PTO, as well as an entirely new form of reexamination proceeding that patentees can use to cure inequitable conduct; and Substantial modifications to the procedural and substantive provisions governing litigants involved in patent infringement proceedings, including elimination of the best mode defense as well as new restrictions on joining together multiple defendants. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com

A more detailed account of these and other key features of the patent reform act is set forth below. First-Inventor-to-File System One of the most significant aspects of the patent reform act is that it converts the United States patent system from a first-to-invent to a first-inventor-to-file system, thereby bringing the United States patent system closer in line with patent regimes in much of the rest of the world. In the legislation, the current rule giving priority to the applicant with the first invention date (defined as the applicant who was the first to conceive of and reduce the invention to practice with reasonable diligence) is replaced by the much simpler rule that priority is awarded to the first inventor who files a patent application on the claimed invention. This new test for priority is significantly easier to administer and is expected to eliminate entire categories of issues that are routinely the subject of extensive litigation under current laws. The following is a summary of what we believe to be some of the more important aspects of this transition to a firstinventor-to-file system: Interference Proceedings. Interference proceedings and similar types of contests over priority in litigation will be eliminated entirely. In a first-inventor-to-file system, it is no longer necessary to provide specialized proceedings for the PTO to engage in lengthy fact-finding exercises or wade through murky areas of the law to decide which of two inventors was first to invent the claimed invention. Instead, the respective filing dates of the two applications will be the only information a decision-maker generally needs to determine priority. Derivation Proceedings. One important function of the old interference proceedings that is still necessary in a first-inventor-to-file system is a mechanism for ensuring that the first person to file is a true inventor and not a mere copier. The patent reform act provides for this by creating a new type of administrative proceeding before the PTO, called a derivation proceeding, in which a patent applicant requests that the PTO consider whether the inventor of an earlier-filed application did not invent the claimed invention at all but derived it from the applicant. One important limitation of this option is that any request for a derivation proceeding must be submitted within a one-year period after the date of publication of the earlier-filed application. Modified One-Year Grace Period. Under the first-to-invent approach of the current patent system, a first-inventing applicant has a one-year grace period after the first public disclosure of an invention to file a patent application, and this grace period is available regardless of whether the applicant or another inventor was the first-public-discloser. The patent reform act preserves the one-year grace period but restricts it to cases where the applicant was the first-publicdiscloser. If another inventor was second to invent but first to publicly disclose (and did not derive the invention from the applicant), only that first-disclosing inventor will be entitled to a patent on the claimed invention. Broadened Scope of Prior Art. The patent reform act changes the definition of prior art that can be used to invalidate a patent to include material patented, described in a printed publication, or in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention. This definition removes the requirement under current law that prior public uses or sales must occur in this country to be invalidating. In addition, the amended definition includes a potentially new category of prior art that is otherwise available to the public. Whether courts will interpret this new language as expanding the scope of prior art over existing law is unclear, but parties can expect litigation on this topic. The vast bulk of these changes are implemented by amendments to the Section 102(a) and Section 102(b) novelty and statutory bar provisions and through the elimination of the Section 102(g) interference -2-

and prior art provisions. (Related provisions in Sections 135 and 291 are also deleted.) The effective date of these amendments is 18 months after the date of enactment of the patent reform act. Post-Issue Review Proceedings The patent reform act also contains provisions that significantly overhaul the way parties can seek review by the PTO of claims in already-issued patents. Most significantly, the legislation provides third parties seeking to challenge a patent s validity with two new types of post-issue review proceedings: (1) postgrant review proceedings for challenges based on any invalidity ground, which must be submitted within nine months of a patent s grant or reissue; and (2) inter partes review proceedings available anytime after that nine-month period, but which may be based only on grounds of anticipation or obviousness based on prior art patents or printed publications. The following describes all of the types of post-issue review proceedings available under the new legislation: Ex parte reexaminations will continue to be available in more or less their present form with some minor changes. As before, requests may be based on prior art patents or publications only and the threshold for granting an ex parte reexamination will continue to be whether the request raises a substantial new question of patentability. Inter partes reviews, which will replace inter partes reexaminations after a one-year transition period, are limited to issues of novelty and obviousness over prior art patents and publications. A request for an inter partes review may be made after nine months have elapsed from the date of grant or reissue (or any time after the termination of a post-grant review). The threshold requirement for a review to be ordered will be raised slightly to showing a reasonable likelihood that the petitioner will prevail on at least one claim. During the one-year transition period, the existing inter partes reexamination proceedings will continue in their present form except that the new reasonable likelihood threshold will be applied. Post-grant reviews are a new type of proceeding allowing for challenges to patentability based on all potential invalidity grounds, but a request for post-grant review must be made within nine months of the date of grant or reissue. The threshold for granting a post-grant review is whether (1) it is more likely than not that at least one of the claims in the patent is unpatentable, or (2) the petition raises a novel or unsettled legal question. Supplemental examinations are a new procedure created by the patent reform act allowing patentees to bring new information before the PTO regarding prior art or other validity concerns that were not considered during the initial prosecution. The threshold question here is whether the information presented in the request raises a substantial new question of patentability, in which case a full reexamination will be ordered. One of the principal benefits to a patentee requesting a supplemental examination is that the information presented in the request may not be used as a basis for any subsequent unenforceability claim. (This is true regardless of whether any substantial new questions of validity are found.) Accordingly, patent owners can use supplemental examinations to cure acts that might otherwise be deemed inequitable conduct in subsequent litigation. Finally, the patent reform act calls for the PTO to set up a temporary administrative program for specialized, post-issue reviews, available to parties accused of infringing covered business method patents, which are patents with claims relating to data processing or other operations used in the practice, administration, or management of a financial product or service. This provision will expire after eight years. -3-

Important Litigation Provisions The legislation contains several provisions addressing patent infringement litigation matters. The most important are discussed below. Prior Commercial Use Defense. Under current law, a party may defend itself against infringement of method claims by showing that it reduced an invention to practice more than one year before the effective filing date of a patent and that it commercially used the invention before the effective filing date of the patent. The patent reform act expands this defense to cover commercial use of the subject matter of a patent in the United States without the current restriction to method claims. 1 However, the prior commercial use must have taken place at least one year before the effective filing date of the patent (or, if the patentee became the first-public-discloser prior to filing the patent, then at least one year before the date of that disclosure). These amendments will be effective with respect to patents issued on or after the date of enactment. 2 Failure to Disclose Best Mode Defense. Amendments to Section 282 of the patent act provide that the failure to disclose the best mode of practicing an invention may no longer be used as an invalidity or unenforceability defense during litigation. These amendments take effect on the date of enactment and apply to all proceedings commenced on or after enactment. It should be noted that disclosure of the best mode is still a condition of patentability and therefore a proper subject for consideration by an examiner during patent prosecution. Advice of Counsel and Willful Infringement. The legislation adds a provision stating that the failure of an accused infringer to obtain advice of counsel with respect to any allegedly infringed patent cannot be used to establish willful infringement or intent to induce infringement. Somewhat surprisingly, this provision, unlike the other provisions discussed in this section, does not have its own effective date clause. Accordingly, plaintiffs can be expected to argue that this provision only applies to patents that issue on or after one year after the date of enactment. 3 Joinder of Accused Infringers. The legislation adds a provision restricting joinder of defendants accused of infringement to cases arising out of the same facts and transactions, and specifically prohibits joinder based solely on the allegation that each defendant has infringed the same patent. These 1 2 3 Specifically, the legislation allows parties to rely on the defense for claims directed to a process, or consisting of a machine, manufacture, or composition of matter used in a manufacturing or other commercial process. The legislation sets forth certain circumstances in which the prior commercial use defense may not be available, such as against patents owned by institutions of higher learning. The patent reform act contains a fallback effective date provision, applicable here, stating: Except as otherwise provided in this Act, the provisions of this Act shall take effect upon the expiration of the 1- year period beginning on the date of the enactment of this Act and shall apply to any patent issued on or after that effective date. (Emphasis added.) -4-

amendments, intended to end the practice of treating as codefendants unrelated parties who make completely different products, apply to any civil action commenced on or after the date of enactment. Other Significant Reforms Patent Office Fees and Funding. The patent reform act includes provisions intended to end the practice of fee-diversion at the PTO, whereby the examination fees collected by the PTO were diverted for unrelated projects or earmarks, by requiring that the fees imposed by the PTO for examinations and other services be collected and used only for the PTO s purposes. However, spending by the PTO will continue to be limited to the amounts set by Congress in its annual appropriations. The legislation also contains a provision giving the director of the PTO the authority to set and adjust fees subject to a rule-making and review procedure, and the condition that fees be reduced by 50 percent with respect to certain small entities and by 75 percent with respect to micro entities (a new category of applicant which will include small, individual inventors as well as universities and other institutions of higher learning). As an interim measure, the bill sets fees at close to their current levels with a 15 percent surcharge. The fee-setting provision expires after seven years. Pre-Issuance Submissions by Third Parties. The legislation adds a provision whereby third parties may submit prior art patents or publications for the examiner s consideration at any time before the examiner s first rejection of a pending patent application (and, if the examiner s first rejection occurs less than six months after the patent office published the application, then the relevant time period is extended up to the six month post-publication mark). Pre-issuance submissions will not be considered after the date a notice of allowance is given. This provision takes effect one year after the date of enactment, at which point it will apply to any patent application, whether filed before or after that date. Virtual Marking. The patent reform act amends Section 287 of the patent act to allow a patentee to mark a product by reference to an Internet address. This change will apply to all cases pending or commenced on or after enactment. False Marking. The current law allowing any person to sue for false marking is amended to provide that only the United States may sue for a penalty under the current false marking provisions and a new provision is added providing that only individuals who have "suffered a competitive injury as a result of a product being falsely marked may bring a civil action for compensatory damages. These amendments will apply to all cases pending or commenced on or after enactment. Tax Strategies Deemed Within the Prior Art. Responding to criticism about the practice of patenting methods of complying with the tax code, the patent reform act deems any tax strategy to be insufficient to avoid the prior art, effectively banning the issuance of all such patents after the date of enactment. Applicants will still be permitted to claim inventions directed to tax preparation or filing technologies. -5-

Venue. The bill modifies jurisdictional and venue provisions concerning certain actions involving the PTO to specify that such actions will be heard by courts in the Eastern District of Virginia instead of the District of Columbia. * * * Copyright Sullivan & Cromwell LLP 2011-6-

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