Small Entity Status — be careful of non-exclusive licenses.

Is a company’s “small entity” status with the PTO put in jeopardy by granting a non-exclusive license to a major corporation — assuming that the non-exclusive license does not convey any right to exclude others from making or using the invention?

According to 37 CFR 1.27, a small entity includes:

an inventor . . . who has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention. . . .

MPEP 509.02 defines “rights in the invention” in this section of the rules as “the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States.”  This therefore appears to indicate that a non-exclusive license to a large entity that does not convey any right to exclude others would not fall within rule. However, if you read further in the MPEP, you notice a discrepancy involving non-exclusive licenses:

A grant of a non-exclusive license to a “non-small” entity will disqualify applicant from claiming small entity status. See Ulead Systems, Inc. v. Lex Computer & Management Corp., 351 F.3d 1139, 1142 (Fed. Cir. 2003).

In yesterday’s decision in Nilssen v. Osram Sylvania (N.D. Ill. 2006), the district court found Nilssen’s patents unenforceable because, inter alia, Nilssen had failed to pay a large entity fee even though the patents-in-suit were nonexclusively licensed to Philips Electronics.

In addition, the patents were unenforceable due to: (a) a patentability declaration submitted by an undisclosed business partner; (b) Nilssen’s admission that he “opposes government fees, taxes, and the present legal system;” (c) Nilssen’s improper priority claims; (d) failure to disclose ongoing litigation to the PTO; (e) failure to disclose material prior art; and (f) unclean hands due a failure of decorum and courtesy in interactions with the PTO.

Regarding Nilssen’s unclean hands, the Court cited a petition to the Commissioner that reads as follows:

a) [The Examiner] cannot be characterized as being skilled in the arts to which subject applications pertain . . .
b) [The Examiner] is severely deficient in his understanding and use of reason and logic . . .
c) [The Examiner] has an inadequate command of the English language . . .
d) [The Examiner] has repeatedly shown himself to be overtly non-cooperative and non-caring.

6 thoughts on “Small Entity Status — be careful of non-exclusive licenses.

  1. Methinks the MPEP overstates the holding of the Ulead case. The Ulead opinion states:

    “It is undisputed that the grant of the Adobe license and the other licenses to large entities disqualified Lex from claiming small entity status and paying reduced fees.”

    In other words, Lex Computer did not dispute Ulead’s contention that the patent was ineligible for small entity status. Lex prevailed on other grounds, so the rest is dicta.

  2. So the case proves what we all know: lawyers use ad hominem attacks because they work with judges.

  3. David French writes:

    In Canada, the small entity criteria threshold applies at over 50 employees. The definition as to whether an applicant is a small entity is written in terms of who holds any “right in the invention”. This expression on its face is not limited territorially. Nonexclusive licensees, wherever they are located, have a right to enforce a patent in Canada.

    Accordingly, a Canadian applicant may possibly qualify as a large entity under Canadian rules on the basis that any of the following are large entities:

    1. an employer holding a Shop Right.
    2. a bank holding a floating charge over the patent rights.
    3 a party having an option to acquire rights in the invention.

    These are just examples. The jurisprudence in Canada around this issue is so sparse that we are really stuck with the words of the regulations under the Canadian Patent Act. Being regulations, clarification could easily be provided by an executive order. But that is unlikely to happen if for no other reason than bureaucratic inertia.

  4. So, taking this to the extreme: Will all small software companies that sell their products (essentially, non-exclusive use licenses)to any large entity now have to pay (and, presumbly, fix by petition, where possible, erroneous past payments) large entity fees?

    Are software companies, then wise to start paying large entity fees once product is being sold, assuming that some customers will be large entities?

  5. Obviously in the minority (since having practiced prior to the 1980 mods to fees and the feeding frenzy it has so predictably engendered), I have always found it interesting that nowhere in Title 35 does it condition that a small entity must take a vow of “monetary abstinance” in order to retain its status as such. Cannot help by wonder if 37 CFR has overstepped the legistative authority. It would, of course, be entirely improper, and I am a stickler for propriety, to even deign to suggest that PTO rulemaking has and is being guided by “let’s maximize what we take in as fees”.

  6. I was a bit concerned when I saw that the patent was held invalid for “unclean hands” because of a petition to the commissioner complaining about an Examiner’s abilities. I would hate to think that a patent could be held invalid if one files a petition complaining about an Examiner – while I have never filed such a petition, I would not like to think that such an action is per se grounds to find the patent invalid or unenforceable.

    Reading the entire opinion, it is not true that this was held in this case to be the grounds for invalidity or unenforceability. In fact, the court found that the Defendents had failed to prove that the patents were unenforceable on those grounds (see page 43).

    The citation to the petition was in the “findings of fact”, page 20, as one of two specific examples of “numerous occasions” where Nilssen “inappropriately criticized patent examiners and the Board of Appeals”, and noted that the PTO had returned other papers for failure to conduct business with “Decorum and Courtesy”.

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