The following are a collection of posts on trade secrets. Trade secrets are essentially of two kinds. On the one hand, trade secrets may concern inventions or manufacturing processes that do not meet the patentability criteria and therefore can only be protected as trade secrets. This would be the case of customers lists or manufacturing processes that are not sufficiently inventive to be granted a patent (though they may qualify for protection as a utility model). On the other hand, trade secrets may concern inventions that would fulfill the patentability criteria and could therefore be protected by patents. In the latter case, the SME will face a choice: to patent the invention or to keep it as a trade secret.
Hyatt is a highly successful patentee with more than 75 issued patents and hundreds of millions of dollars in licensing revenue. He also has over 400 patent applications pending before the USPTO that were all filed more than 20-years ago. Hyatt’s applications represent 80% of the applications still-pending that were originally filed prior to the June 1995 patent term transition. Because these old patent applications were filed under the old regime, if they ever issue they will be given a 17-year patent term extending from the issue date (barring a terminal disclaimer or prosecution laches finding). Many of these applications claim priority to much earlier filed applications – some claiming priority back in to the 1970s and most having a complex set of continuation and continuation-in-part applications.
According to the USPTO, these 400 pending applications have – on average – 300 claims each – resulting in about 120,000 pending claims – roughly the equivalent of 6,000 ordinary-sized applications.
I expect that many of Hyatt’s patent claims would cover chip and display technology that is now ubiquitous. If valid and enforceable then we’re talking billions of dollars in licensing fees. If the USPTO has anything to do about it, that result is not coming anytime soon.
Over the years, the USPTO has developed a number of special procedures for Hyatt applications. In 2013, the USPTO began issuing requirements that Hyatt limit each patent family to <600 claims absent a showing of necessity and also identify the earliest priority date for each chosen claim (along with links to the supporting disclosure).
The USPTO also indicated that it would publicize the family linkage of Hyatt’s (otherwise secret) applications. In particular, the disclosure would occur by placing the requirements in the file histories of all of Hyatt’s pending applications, some of which are public. Apparently, this requirements document includes a number of examples of how Hyatt applications overlap claim scope – relying upon specific claim texts of Hyatt’s otherwise secret applications.
In response, Hyatt filed a complaint in the E.D. Virginia asking the district court to enjoin the USPTO from disclosing information in violation of 35 U.S.C. 122(a) (“applications for patents shall be kept in confidence by the Patent and Trademark Office and no information concerning the same given without authority of the applicant or owner unless necessary to carry out the provisions of an Act of Congress or in such special circumstances as may be determined by the Director”). However, the district court dismissed the case for lack of jurisdiction and – in the alternative – held that the extraordinary nature of Hyatt’s situation created “special circumstances” that allowed for the publication.
Although the statute provides the PTO with seeming authority to determining when to disclose the confidential information (“special circumstances as determined by the director”), the Federal Circuit on appeal here found that the PTO’s power is both “narrow and reviewable.” In particular the appellate panel found that the PTO must “determine that special circumstances exist” and those special circumstances must be sufficient and particular enough to “justify the specific content to be disclosed.” However, because of the seeming discretionary nature of the statute, the Federal Circuit determined that it should review the PTO’s determination of these factors with deference and only overturn the PTO’s decision upon finding of an abuse of discretion.
In determining that the PTO had then acted within these requirements, the panel first held that the requirements were proper – given Hyatt’s unique and special status among patent applicants. The court also found that the disclosure of confidential claim scope proper.
In light of the nature of Mr. Hyatt’s applications, longstanding PTO rules justify the issuance of the Requirements. 37 C.F.R. § 1.75(b) provides that, in a patent application, “[m]ore than one claim may be presented provided they differ substantially from each other and are not unduly multiplied” The PTO issued the Requirements to ensure that Mr. Hyatt’s applications complied with § 1.75(b). Given the extraordinary number and duplicative nature of Mr. Hyatt’s various pending applications, all drawn from the same 12 specifications, it was reasonable for the PTO to be concerned that the claims did not “differ substantially from each other,” and that some claims were “unduly multiplied.” § 1.75(b). In fact, in the Requirements the PTO demonstrates that across these applications, Mr. Hyatt has in numerous cases filed identical or nearly identical claims. This sort of redundant, repetitive claiming is inconsistent with § 1.75(b).
These special circumstances, which justify issuing the Requirements, also justify the disclosure of the confidential information contained in them. . . .
We hold that the Director did not abuse her discretion when she found that the “special circumstances” exception justified the otherwise-prohibited disclosure of the Requirements
It is fairly amazing to look at the effort going-in on both sides in Hyatt’s patent applications. One that is public and available in PAIR Application No. 05/849,812 that claims priority back to 1970 through a series of 20 continuations-in-part.
There are a number of patent and trade secret related bills pending in Congress. Here are a few updates:
INNOVATION ACT: Rep. Goodlatte’s Innovation Act (H.R. 9) proposes a set of changes to our “patent-enforcement system.” A newly released 200-page report from the Judiciary Committee explains the proposed legislation and its purposes. The report also includes dissenting views from a group of seven Democratic members who argue that the proposal goes too far in diminishing patent rights. That said, the dissenters agree that “Congress must respond to the problems of abusive patent litigation in the courts and the gaming of the patent process at the USPTO.” [LINK].
In July, the Defend Trade Secrets Act of 2015 was introduced in both the House and Senate. The proposal would create a federal civil cause of action for trade secret misappropriation that would run in parallel to the state causes of action already available. [DTSA2015][Dave Levine explains his Opposition]
The Innovation Promotion Act of 2015 is a tax-bill that would cut the corporate income tax rate on profits from the use of innovations and intellectual property.(Down to 10% from ~30%). The amount of qualifying profits is reduced by the percent of corporate expenses from the past five years spent on U.S. R&D. The way that the bill is designed is that it basically serves as an additional incentive to conduct R&D within the U.S. R&D activities are already deductible as business expenses, but the proposal here would allow those to be double-counted (more particularly, counted 1.71 times).
On writ of mandamus, the Federal Circuit has vacated N.J. District Court Judge Chesler’s decision to allow confidential documents disclosed in the U.S. patent case to be used in the somewhat parallel actions in Japan and Korea.
The underlying infringement action here involves Nippon Steel suing the Korean company POSCO for infringing its patents covering a grain-oriented electrical steel strip having high magnetic flux density. (See., e.g., Patent No. 7,442,260). Additionally, Nippon Steel sued POSCO in Japan for trade secret infringement and POSCO filed a declaratory judgment action in Korea asking for a no-infringement holding.
In the U.S. lawsuit, the district court entered a discovery protective order that disclosed confidential materials ‘be used by the receiving Party solely for purposes of the prosecution or defense of this action.’ U.S. discovery rules require much more extensive disclosures than do those in Korea or Japan. Thus, when POSCO disclosed “several million pages of documents containing confidential information” in the U.S. lawsuit, Nippon Steel looked to use some of those documents in the foreign courts. In particular, Nippon Steel asked for, and the district court granted, a modification of the protective order that would allow it to use about 200 pages of documents relating to POSCO’s manufacturing process in the foreign court actions. POSCO then petitioned for a writ of mandamus to stop the disclosure.
Here, the district court relied upon the Third Circuit precedent of Pansy v. Borough of Stroudsburg, 23 F.3d 772 (3d Cir. 1994), which holds that a “party seeking to modify the order of confidentiality must come forward with a reason to modify the order. Once that is done, the court should then balance the interests, including the reliance by the original parties to the order, to determine whether good cause still exists for the order.” Based upon that holding, the district court determined that the foreign court proceeding was sufficient justification for the modification.
In its mandamus decision, the Federal Circuit found that Pansy should not be controlling but that the court should also consider 28 U.S.C. § 1782 and Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241 (2004) when determining whether to allow disclosure of confidential protected information to a foreign court.
Section 1782 provides that a U.S. district court “may order” disclosures for use in a foreign tribunal. In Intel, the Supreme Court recognized that a district court should consider “comity and parity concerns” when deciding whether to grant disclosure. In particular, there is a recognized concern that parties will “abuse” the U.S. discovery process and “attempt to circumvent foreign proof-gathering restrictions.”
On remand, the district court will “conduct the proper assessment giving due consideration to the Intel factors.”
Opinion by Justice Kagan. Justice Alito filed a dissenting opinion joined by Chief Justice Roberts and Justice Thomas.
Drawing heavily on stare decisis, the Supreme Court has declined to overrule the rule in Brulotte v. Thys that a patentee cannot continue to receive royalties for sales made after the expiration of the patent based on principles of stare decisis. However, the Court leaves open the possibility of creative license drafting. From the opinion:
Patents endow their holders with certain superpowers, but only for a limited time. In crafting the patent laws, Congress struck a balance between fostering innovation and ensuring public access to discoveries. While a patent lasts, the patentee possesses exclusive rights to the patented article—rights he may sell or license for royalty payments if he so chooses. See 35 U. S. C. §154(a)(1). But a patent typically expires 20 years from the day the application for it was filed. See §154(a)(2). And when the patent expires, the patentee’s prerogatives expire too, and the right to make or use the article, free from all restriction, passes to the public. See Sears, Roebuck & Co. v. Stiffel Co., 376 U. S. 225, 230 (1964). This Court has carefully guarded that cut-off date, just as it has the patent laws’ subject-matter limits: In case after case, the Court has construed those laws to preclude measures that restrict free access to formerly patented, as well as unpatentable, inventions.
***
Brulotte was brewed in the same barrel. There, an inventor licensed his patented hop-picking machine to farmers in exchange for royalties from hop crops harvested both before and after his patents’ expiration dates. The Court (by an 8-1 vote) held the agreement unenforceable—“unlawful per se”—to the extent it provided for the payment of royalties “accru[ing] after the last of the patents incorporated into the machines had expired.” 379 U. S., at 30, 32. To arrive at that conclusion, the Court began with the statutory provision setting the length of a patent term. See id., at 30 (quoting the then-current version of §154). Emphasizing that a patented invention “become[s] public property once [that term] expires,” the Court then quoted from Scott Paper: Any attempt to limit a licensee’s post-expiration use of the invention, “whatever the legal device employed, runs counter to the policy and purpose of the patent laws.” 379 U. S., at 31 (quoting 326 U. S., at 256).
***
As against this superpowered form of stare decisis, we would need a superspecial justification to warrant reversing Brulotte. But the kinds of reasons we have most often held sufficient in the past do not help Kimble here. If anything, they reinforce our unwillingness to do what he asks.
Slip Op. at 3-4, 6, 10. Nonetheless, wary license drafters can work around Brulotte:
Yet parties can often find ways around Brulotte, enabling them to achieve those same ends. To start, Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain. See 379 U. S., at 31; Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U. S. 100, 136 (1969). A licensee could agree, for example, to pay the licensor a sum equal to 10% of sales during the 20-yearpatent term, but to amortize that amount over 40 years.That arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long time frame. And parties have still more options when a licensing agreement covers either multiple patents or additional non-patent rights. Under Brulotte, royalties may run until the latest-running patent covered in the parties’ agreement expires. See 379 U. S., at 30. Too, post-expiration royalties are allowable so long as tied to a non-patent right—even when closely related to a patent. See, e.g., 3 Milgrim on Licensing §18.07, at 18–16 to 18–17. That means, for example, thata license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone). Finally and most broadly, Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention.
Slip Op. at 6. Tom Cotter has already provided his own insightful commentary on the opinion over on ComparativePatentRemedies.
Side note: this may be the only judicial opinion ever to quote both my colleague Herb Hovenkamp and Stan Lee & Steve Ditko.
Here is a 1-hour quiz that I recently gave my patent law students on some of the basics of 101; 102; 103; and 112. Questions:
1. An employee at Freya’s small start-up company has come up with a new smartphone-app that helps cat-lovers meet. Essentially, the app causes the phone to “meow” when another user is nearby; “purr” when a good match is nearby; and “hiss” when an identified cat-hater or non-compatible is nearby. In her patent application, Freya claims:
A mobile device having a memory and a processor and operating as part of a social network, wherein the memory includes a stored program configured to:
cause the mobile device to emit a first sound based upon the proximity of a mobile device associated with a member of the social network;
cause the mobile device to emit a second sound based upon the proximity of a mobile device associated with a member of the social network who has been identified as a match; and
cause the mobile device to emit a third sound based upon the proximity of a mobile device associated with a member of the social network who has been identified as a bad match.
Is Freya’s claim subject-matter-eligible under 35 U.S.C. § 101? (120 words).
2. Regarding back to Freya’s claim above. Provide a concise argument that the yet-unpatented claim fails for lack of definiteness. (60 words).
3. Sometime during the past decade, Thor invented a new metal alloy known as Midguardium that is extremely hard and exhibits boomerang-like properties when thrown. Thor would like to patent a hammer made from the alloy but keep the actual process of making the alloy a trade-secret. May he do this? (50 words).
4. Following your advice above, Thor does fully disclose the process of making the alloy in his patent application (claiming “A hammer comprising a hammer-head made of Midguardium and a handle”). After Thor created his hammer (but before he filed his patent application), Loki independently invents Midguardium and forms it into scepter that he uses publicly in New York City. Loki does not, however, file for patent protection.
Concisely explain how the dates of invention, public use date, and Thor’s filing date may impact whether Loki’s disclosure counts as prior art against Thor’s patent application (250 words).
5. Assuming that Loki’s public-use counts as prior art against Thor’s patent application, can you make an argument that the scepter anticipates the aforementioned hammer claim? (60 words).
6. Still assuming that Loki’s public-use counts as prior art against Thor’s patent application, what can Thor do/argue in order in order to overcome the USPTO’s initial conclusion that the patent claim is obviousness based upon Loki’s use? (describe up to three approaches/arguments). (100 words).
Note: You are allowed to use a statutory reference (both pre and post AIA) and look-up relevant case law.
Guest post by Cynthia M. Ho, Clifford E. Vickrey Research Professor, Loyola University of Chicago School of Law.
Philip Morris and Eli Lilly think that they are entitled to millions in compensation from countries that limit or deny desired intellectual property rights. These companies are the first to challenge IP issues pursuant to international agreements protecting investments of foreign companies. However, they join a trend of companies increasingly suing states before a panel of private arbitrators pursuant to investor-dispute settlement (ISDS). The substantial financial stakes may have a chilling effect on traditional domestic laws and policies.
Although there are only two IP related ISDS disputes so far, IP policy makers should be concerned and oppose pending fast-track legislation that would permit President Obama to easily conclude more agreements with these problematic provisions. Indeed, pending agreements have been criticized by a diverse group of individuals and countries including Nobel Prize winner Joseph Stiglitz, Elizabeth Warren, the Cato Institute and countries such as France and Germany. The USTR recently issued a fact sheet, which was promptly debunked.
What is ISDS?
ISDS is a mechanism in over 3000 international agreements that permit foreign investors to seek compensation against countries. The agreements guarantee freedom from discriminatory measures, a guarantee of being treated no less favorably than domestic companies, compensation for expropriation of investments, and “fair and equitable treatment.” If these rights are allegedly violated, investors can bring a dispute before a tribunal of private (usually commercial) lawyers chosen by the parties to the dispute. There is not only no independent judiciary, but also no binding precedent and no appellate review, such that there can be inconsistent and unpredictable results.
Historically, these provisions were first added to international agreements promoting investments after World War II when newly independent nations wanted to encourage foreign investment. ISDS was intended to provide protection to companies that lacked any legal recourse against unlawful state action. ISDS was conceived as an improvement over “gunboat diplomacy” that nations used to protect their companies.
Why is ISDS relevant to IP?
Although ISDS was not originally designed to protect IP, companies are trying to use it for this purpose.
Most agreements providing ISDS do so only for investments of foreign companies. These investments can include not only tangible, but also intangible property, which would seem to include IP.
Is a Canceled IP Right an “Investment” Subject to ISDS?
Even if IP is within the scope of covered investments, a critical question is whether this should include canceled IP. IP lawyers and even students know that IP is at most presumptively valid, such that it can and often is canceled when found to not meet basic requirements. Although canceled IP has never been considered to provide rights, Eli Lilly assumes it has rights. In particular, it is seeking $500 million from Canada after failing to convince both a trial and appellate court that two of its patents were valid.
Highlights of Existing ISDS Claims Regarding IP
Eli Lilly’s case involves a challenge to Canada’s “promise doctrine” for assessing utility of patents and applications that make certain promises. The promise doctrine is unusual as a utility requirement, but similar to disclosure and other patentability requirements of other countries. Eli Lilly claims that because this doctrine developed after its patents were granted (a point that is contested, even by some lawyers), it is improper to retroactively apply it to invalidate its patents, such that its patents have been improperly “expropriated,” which is roughly similar, but broader than US takings. However, patents are routinely invalidated after common law modifications to laws, such as the scope of patentable subject matter with no claims of takings.
Eli Lilly seems to assume both that an issued patent is a state representation that it will remain forever valid and also that a nation can not modify its laws without violating legitimate expectations. The supposed violation of its legitimate expectations figures prominently in a claim for denial of the amorphous condition of “fair and equitable treatment.”
Problematically, although a patent lawyer would readily reject the idea that patents are always valid and untouchable by subsequent law, they will not be deciding Eli Lilly’s case. Notably, when I presented a forthcoming article about this case to an international law colloquium, I was surprised that the audience resisted the basic principle that patent rights can and should be invalidated when found not to satisfy fundamental requirements.
Philip Morris also claims its legitimate expectations were violated, but in a different way. Philip Morris asserts that it had a legitimate expectation that Australia would uphold its obligation to comply with TRIPS requirements for trademarks. This suit fundamentally challenges the process for resolving alleged TRIPS violations. Only countries, not companies, have standing to adjudicate alleged violations under TRIPS. Thus far, countries have been cautious in doing so since there are often political implications for their actions. Moreover, permitting violations of TRIPS to be litigated outside of the WTO forum would seem wholly inconsistent with the WTO dispute settlement process that is intended to be the only forum for litigating such disputes. In addition, there could be conflicting results; indeed, there is a pending WTO case.
ISDS for IP Threatens Flexibilities Under TRIPS
Eli Lilly’s case poses a serious threat to the minimum standard approach of TRIPS (and NAFTA). Although these agreements have been widely understood to permit nations flexibility to define key terms, such as what is “new” or what counts as “useful,” Eli Lilly falsely claims that Canada’s definition is impermissible.
Ironically, these cases are arising at a time when many academics and policy makers (Eastern Europe,South Africa) have been encouraging countries to take greater advantage of their already limited flexibilities under TRIPS. The present disputes may have chilling effects at a time when countries such as South Africa and Brazil have been considering modifying patent laws.
Future Problems
In the near future, companies may use ISDS to challenge patent provisions, such as compulsory licensing and India’s patent law designed to prevent “evergreening” of drugs that have attracted criticism, but no WTO dispute. Moreover, regulatory provisions are also ripe for challenge. For example, countries that fail to provide data exclusivity desired by the pharmaceutical industry could be subject to challenge. In addition, a pending EU lawhailed by public health advocates for increasing transparency concerning data of approved drugs is also at risk.
Now that USPTO Director Michelle Lee has fully taken office as Director, the next position-filling step will be to hire a Deputy Director. The Patent Act provides that the USPTO Director (Lee) will nominate a Deputy Director but that the Secretary of Commerce (Pritzker) has the power to make the actual appointment. 35 U.S.C. 3. According to the statute, the Deputy Director must “be a citizen of the United States who has a professional background and experience in patent or trademark law.” In a speech yesterday, Director Lee added her goal of “identifying the perfect individual for this position, someone who from day one can join with me and the rest of the agency’s leadership in promoting intellectual property and advancing innovation.”
Hal Wegner has mentioned two possible nominees: Russ Slifer (Director of the USPTO Denver Office) and Christal Sheppard (new Director of the USPTO Detroit Office). Slifer and Sheppard are current USPTO executives who have spent most of their careers outside the agency. Mike Walker (DuPont) has also been suggested as an excellent candidate, but it may be difficult to draw him away from his chief-IP-counsel role. It would be fun to have Kevin Noonan.
The U.S. Senate has now confirmed President Obama’s nomination of Michelle Lee as Undersecretary of Commerce and Director of the USPTO. Congratulations to Director Lee on this expected but long awaited final step to filling the post left by David Kappos more than two years ago. Lee has been with the PTO since 2012 and was previously Google’s chief patent counsel.
We will see Director Lee staying the course that she has already set with a focus on patent quality and efficient operations. The larger and ongoing battles will be fought over patent litigation reform and the role of our post grant review system. Lee is the first female director of the agency, whose top three leaders are now all women (with Peggy Focarino as Commissioner of Patents and Mary Boney Denison as Commissioner of Trademarks).
Lee will likely be given latitude in naming her deputy director. Hal Wegner – very often correct in his insight – suggests two potential candidates: Russ Slifer (Director of the USPTO Denver Office) and Christal Sheppard (Director of the USPTO Detroit Office). Slifer and Sheppard are current USPTO executives who have spent most of their careers outside the agency.
Guest Post by Dr. Kate Gaudry and Prof. Shine Tu. Professor Tu is an Associate Professor of Law at the West Virginia College of Law. Dr. Gaudry is a patent attorney with Kilpatrick Townsend.
The Sensitive Application Warning System, or SAWS, program is a secretive program operated by the U.S. Patent and Trademark Office that flags certain patent applications for a heightened level of scrutiny. In October 2014, the PTO responded to one of our requests for information about SAWS. This post discusses the data the PTO provided, highlights areas where it is incomplete, and explains our concerns about the information the PTO declined to provide.
The SAWS program operates like this: If an examiner determines that a criterion applied to an application being examined, he/she is to propose that the application be characterized as a SAWS applications. When an application is entered into the SAWS program, multiple other people (seemingly up to eight or more people) must review and approve examiner-proposed notices of allowances. This enhanced-scrutiny review can negatively impact the applicant. For example, it would likely result in a reduced probability that an application would be allowed, an increased number of office actions issued and an increased pendency. Further, it would appear to prevent the applicant from being able to talk to (via an interview) or even identify the decision-makers controlling an application’s fate. Despite these potential consequences, applicants are not informed when an application is entered into the SAWS program, and the PTO refused to respond to multiple of our requests to identify SAWS application numbers. The PTO instead has insisted that SAWS has a minimal impact on prosecution. (See http://www.corpcounsel.com/id=1202678064286/Secret-PTO-Program-Delays-Patent-Approvals.) This conclusion would be surprising given the structure of the program, and is contradicted by our preliminary data.
Sixty pages of memos indicated that there were approximately 100 SAWS-eligibility criteria. Some criteria seem reasonable: for example, “applications claiming inventions which would endanger individuals, the environment, the security of our nation, or public safety.” However, some criteria seem extremely broad, vague and/or frivolous, such as applications “dealing with inventions, which, if issued, would potentially generate unwanted media coverage;” “disclosing seemingly frivolous or silly subject matter;” “with claims of pioneering scope;” “claiming the prevention or curing of diseases which were previously considered impossible to prevent or cure, such as … Alzheimer’s disease, … [or] HIV infection;” and “[directed to] smartphones and other convergence-intensive devices.”) (A full summary of the released SAWS information and criteria can be found here: http://www.kilpatricktownsend.com/en/Knowledge_Center/Publications/Articles/2014/12/Secret_PTO_Program_Subjects_Apps_To_Heightened_Scrutiny.aspx). Given the breadth and vagueness of these categories, we are concerned that the SAWS program seems to be designed to allow the PTO to arbitrarily heighten the criteria of patentability for certain applications.
The PTO recently granted one or our requests to identify high-level statistics pertaining to the program. An initial report of some of these statistics can be found here [http://www.kilpatricktownsend.com/en/Knowledge_Center/Publications/Articles/2015/01/Secret_PatentExamination_Program_Rare_But_Consequential.aspx]. In sum, the PTO provided data regarding the total number of applications that were flagged for SAWS evaluation in fiscal years 2006, 2008, and 2010 having each of three statuses: patented, pending or abandoned. Additionally, the PTO provided information segmenting these applications based on technology center assignment and prosecution statistics for individual application sets (each set corresponding to a SAWS designation, filing year and current status).
In short, very few applications are evaluated under the SAWS program (approximately 1 in 2500). However, for those that are – contrary to the PTO’s contentions – the PTO’s own data shows that the SAWS program has a sizable impact on prosecution, both in increasing prosecution duration and reduction in allowance rates.
SAWS Impact
Reduced Allowance Rate
One impact is that SAWS applications appear to be less likely to issue as patents and more likely to be pending for extended durations. We had requested data identifying the status for published, utility SAWS applications filed in fiscal year 2006 and for published, utility applications filed in the same time period. As reported in the January 2015 Law360 article [http://www.kilpatricktownsend.com/~/media/Files/articles/2014/Secret%20Patent-Examination%20Program%20Rare%20But%20Consequential.ashx], far fewer SAWS applications had issued as compared to the greater application set (see Table 1), and many more were pending.
FIG. 1 below breaks this result down by technology center. (“BM” is representative of the business-method art units in technology center 3600, which includes art units 3621-29, 3681-89 and 3691-96.) As shown, SAWS applications are generally substantially less likely than other applications to have issued as patents (FIG. 1A) and are substantially more likely to be pending (FIG. 1B).
Figure 1
It is impossible for us to evaluate the appropriateness of SAWS applications being less likely to be patented 9 years after filing than other applications because the PTO has not released the application numbers. Potentially, these SAWS applications include “silly” applications (however that is defined), or potentially these SAWS applications include a novel drug that will cure Alzheimer’s disease. But without the application numbers, we can only hypothesize about the contents of the SAWS-tracked applications.
Extended Prosecution of Patents
What we can, at least quantitatively, evaluate are those applications that the PTO eventually determined were worthy of a patent. As initially reported in the above-referenced Law360 article, the prosecutions of these patent-worthy applications were dramatically affected. In particular, it took substantially longer to receive notices of allowances. FIG. 2 is a new graph showing the time from application filing to patent issuance for SAWS patents and other patents filed in fiscal year 2006, separated by technology center.
Figure 2
Thus, years (on average, three years) are added to a patent’s pendency, and this delay will likely be even more substantial as the pending SAWS applications reach final disposition. Technology Center 1600 is one center where this delay is quite apparent. Given that Technology Center 1600 examines patent applications relating to (amongst other subjects) drug compounds and that SAWS applications are more common in Technology Center 1600 than many other technology centers, the delay may be of great societal concern, as it may affect investments devoted to the innovations and thus the accessibility of new treatments. Further, the number of SAWS applications in Technology Center 1600 has approximately doubled between filing year 2006 and 2010.
The prosecution delay could be, due to additional office actions issued against SAWS applications. For applications filed in fiscal year 2006 that have issued as patents, the average number of office actions issued per patent was 4.3 for SAWS patents and 2.3 for the corps-wide patent set. Another one of our upcoming articles on IPWatchDog shows the discrepancy in office-action counts and RCE filings for individual technology centers. This increase in office-action issuances and RCE filings likely requires applicants to invest substantially more money in procurement of a patent. (In our Law360 article [http://www.kilpatricktownsend.com/~/media/Files/articles/2014/Secret%20Patent-Examination%20Program%20Rare%20But%20Consequential.ashx], we estimate the additional costs to be roughly $7000.)
Concerns and Oddities Surrounding SAWS
The PTO is Not Recognizing the Impact of SAWS
This data seems to suggest that the enhanced scrutiny of SAWS is not innocuous. Nonetheless, the PTO seems to be in denial of the data that the agency itself provided. As reported by Corporate Counsel [link to: http://www.corpcounsel.com/id=1202716358836/Data-Shows-Impact-of-PTOs-Secretive-Patent-Program] a PTO spokesperson said, in response to this data that “any time added to the prosecution of the patent is usually minimal.” Given that the average added delay is three years, this assessment seems to be inaccurate.
The PTO is Hiding its SAWS Classifications
The PTO has been repeatedly asked, by us and by others, to indicate whether particular applications are being evaluated under SAWS and/or to identify all SAWS applications. The PTO repeatedly refuses to do so. The agency asserts that the information is privileged as part of an agency’s deliberative process. Dennis Crouch has previously explained why he believes that this privilege assertion is misplaced. [Link to https://patentlyo.com/patent/2015/01/sensitive-application-warning.html] Even if the privilege was proper (which the authors concur is not for multiple reasons), such privilege in this instance could be waived by the PTO. For the sake of transparency and to allow applicants to stay informed as to the true status of their applications, the PTO should choose to release such information. Such disclosure would also allow applicants to be able to identify who the true decision-makers are in relation to SAWS matters, rather than undergoing frustration with seeming inconsistencies between conversations (at which allowable subject matter is identified) with an examiner and official papers issued by the office (nonetheless rejecting an application).
SAWS Violates Proper Rulemaking
If we assume the SAWS program is a procedural, and not a substantive, rule, the PTO could have authority to promulgate such a rule. (The PTO does not have authority to make substantive rules.) However, procedural rules must be appropriately enacted. The PTO frequently complies with informal notice-and-comment rulemaking procedures (e.g., as opposed to formal rulemaking procedures). However, with regard to SAWS, neither notice nor comment opportunity were provided.
Possible property rights seem to be affected by SAWS. Applicants subjected to SAWS appear to be less likely to be patented, and patent issuance is delayed. This delay in issuance may preclude an applicant from protecting an invention during a critical time (e.g., critical in view of a competitive landscape, litigation, or investment opportunity). Despite these consequences, the PTO does not abide by fair procedures in relation to the program.
There is no clear criteria indicating what types of applications will be subjected to SAWS. Rather, the very broad, extensive SAWS-eligibility list could seemingly qualify many more applications to be reviewed under SAWS than the reported 0.04%.
Further, there is no disclosure as to how the program actually operates and which applications are affected. This precludes applicants from challenging or even understanding SAWS designations and immunizes the PTO from improper selection processes.
Our Call to the PTO: Be Transparent about SAWS
The PTO claims that SAWS is a mere quality-control effort, that SAWS applications undergo the same examination review as other applications, and that the SAWS process minimally affects processing delays. Nonetheless, to outsiders, this program is suspicious for at least the following reasons:
One of the top SAWS-eligibility criteria relates to reducing PTO embarrassment.
While the PTO has repeatedly asserted that SAWS does not affect examination delays, we have shown that contention to be wrong.
The SAWS-eligibility list could seemingly qualify most patent applications for SAWS, while only 0.04% are entered into the program. Thus, the actual SAWS-selection criteria is unknown to the public (and creates bias opportunity).
SAWS violates the PTO’s rulemaking authority.
SAWS violates due process.
The PTO has refused to identify which applications are in SAWS, such that it appears as though they are attempting to make the program immune from challenge or embarrassment.
If this program is a fair program, we call for the PTO to release the SAWS application numbers and, going forward, to inform applicants when their applications have been selected for SAWS review. We are not alone in this call, as attorneys from a variety of firms [http://www.law360.com/articles/614522/attys-want-uspto-to-open-up-about-sensitive-patent-apps] stand with us in asking why the PTO has kept this program a secret for decades and why the agency is reluctant to be transparent about its prior and current SAWS reviews.
The Hispanic National Bar Association and Microsoft are once again sponsoring their week-long HNBA/Microsoft Intellectual Property Law Institute (IPLI). One of my students participated in the 2013 IPLI and raved about it for months afterwards.
The “HNBA/Microsoft IP Law Institute” will provide opportunities for Latino students interested in intellectual property law, including patents, copyrights, trade secrets and trademarks. This summer, up to twenty-five Latino law students from law schools across the country will be chosen to participate in an IP immersion program in Washington, DC with all necessary expenses covered. Candidates will be selected in a highly competitive process, and the selected students will be provided substantive instruction, the opportunity to observe first-hand U.S. IP institutions at work, and the chance to meet leading members of the IP legal community who will serve as mentors and potentially provide pathways for future job opportunities.
Notice has been prepared for Subject-Matter-Eligibility Guidance, but the USPTO and White House is reviewing that notice based upon Ultramercial and will be released “as soon as we can.” Will provide an avenue for written and verbal comments from the public.
RCEs Backlog is again under control.
Average pendency (filing-to-issuance) is 38 months for FY2014. Only about 11 months of that represents time where the PTO is waiting on applicant responses. Track-One (the fast-track) applications are averaging 16-months to issuance/abandonment.
1.1 million utility applications are in the pipeline (not counting provisional or PCT applications) has remained relatively steady. The number of applications awaiting a first action on on the merits has dropped to about 600,000. These figures are major accomplishments considering that more applications are being filed than ever before.
Patent examiner attrition rate is low <5%. This means that the USPTO needs to take steps to make sure that more experienced examiners continue to do an excellent job.
Interviews continue to rise – about 30% of applications involve an interview prior to the initial disposal (marked by an allowance, abandonment, RCE).
USPTO along with the IP5 is rolling out a “Global Dossier” for patent applications filed in the various countries with the hope of facilitating the sharing of information between offices. Expected in FY2015.
PTAB now has over 200 judges – up from 80 in 2010 with a goal of hiring 60 more judges in FY2015. About half of judge time is spent on ex parte appeals.
Of the 161 IPRs with final written decisions, in 63% all challenged and instituted claims were found unpatentable while in only 16% of cases were all claims found patentable.
The backlog of ex parte appeals remains over 25,000 pending cases. Most of these have been waiting 18-months or more.
In FY2014, the USPTO collected $3.17 billion in user fees. The USPTO’s IT Department (OCIO) has a budget of $670 million.
USPTO Expects that Congress will address patent reform as well as trade secret reform.
The current outlook for legislative patent reform in 2015 is not so much whether reforms will be enacted but instead how far they will go. In a Chamber of Commerce IP event on November 18, Representative Goodlatte and Senator Coons will discuss their outlook on IP legislation in the new term. Goodlatte has championed strong legislative patent reforms that include a presumption of attorney fee shifting, broadening of post-issuance review proceedings, heightened pleading requirements, and patent ownership transparency. Senator Coons has also favored patent reform as well as sponsoring bills to nationalize trade secret law.
Emerging as a leading Senate Republican on patent reform is Senator Cornyn of Texas. Julian Hattem (The Hill) quotes Sen. Cornyn as saying that the 2015 Senate will “absolutely” pass legislative patent reforms to address the problem of “patent trolls.” In 2014, Senators Cornyn and Schumer drafted a compromise bill that was less extreme than the Goodlatte version (that passed the House). However, that compromise was never strongly supported by members of either party. For his part, President Obama appears to be willing and ready to sign the Goodlatte bill if approved by Congress.
In the longer game, members of both parties see these patent reforms as potentially offering experimental results for major tort reform initiatives. The test of success is whether the reforms limit the enforcement of “bad” patents while upholding both the value of “good” patents and the research-incentives offered by the patent system.
With Democrats out of the majority in the Senate, it is unclear whether patent reformers will now push for reforms that go beyond the recent legislative proposals. A major open issue is that of the short nine-month window for filing of post-grant review proceedings. A simple proposal would extend that window to 18-months post issuance and additionally open a second window to challenge very old patents. In the past, I have proposed a USPTO claim-construction proceeding that could be a simple and cost-effective tool for formally establishing claim scope.
First, to confirm Dennis’s anecdotal belief on the main page that firms are moving toward trade secrets, I heard that repeatedly at the IMPI conference, which had chief IP counsel from lots of big players. Any benefit that the quid-pro-quo of our system is eroded by Myriad and CLS. I have no clue whether that affects stock liquidity, but it sounds intuitively correct.
But, I’m writing because what I heard, and what others are saying on line, are making me concerned that the enormous impact on patent value represented by Myriad and CLS, and the years of absolute confusion that we’re facing, may trigger disclosure obligations by lawyers in some circumstances. While most firms, I am told, do not capitalize patents, some do. Sarbanes Oxley could be implicated by that. In M&A transactions, valuation statements need to be thought through. Google, for example, after it recently acquired a slew of patents said it had acquired certain value of patents. That value is down.
Here is what one author has said:
It would be an unwise publicly-traded tech company in the US that is not currently doing a full audit of its patent portfolio to assess where it stands in this post-Alice world.
The full article is here. Another article from ipwatchdog is here. (Both link to a study that I personally find very unreliable and so I’m not linking to it.)
I’m not sure that’s good advice. I am sure that, without legislative investigation, consideration of actual policies and data, the Supreme Court has radically changed our patent system.
What a mess. Read the statute, Supreme Court. Read the statute.
Anecdotal whispers in my ears suggest that many companies are now looking more toward trade-secrecy as well as confidentiality and non-compete protections in reaction to both (1) shifts in patent law that have incrementally weakened the power of patent rights and also (2) to the potential creation of a national trade secret cause of action under the new Republican congress.
Disclosure vs Secrecy: A major public policy difference between patents and trade secrets is that patents require full public disclosure prior to obtaining rights while trade-secrecy requires just the opposite – affirmative steps to keep the information from the public.
Most discussions of the differences focuses on the public value of disclosure on a macro-economic scale. However, an interesting new articleby a group of economists at Georgia Tech (N. Dass) and Rutgers (V. Nanda and S. Xiao) look instead to the micro-economic impact — asking whether a relative shift in legal rights toward either patents or trade secrecy impacts the innovative companies. To be clear, these economists are not experts on intellectual property law, but instead are experts on stock market liquidity and ways that information impacts that liquidity.
Information Asymmetry: Market transactions generally have some amount of information asymmetry where the seller may know more about the product than the buyer or perhaps one buyer knows more than other buyers. Major asymmetry tends to gum-up market transactions because buyers encounter more risk and may need to do more due-diligence investigation. This is a recognized problem and, as such, many of the rules associated with publicly traded companies serve as attempts to avoid the information asymmetry. Prior studies have found that information asymmetry tends to decrease stock liquidity for publicly held corporations.
Public Information and IP Rights: Patents provide investors with direct information regarding the rights held by various companies. On the other hand, companies generally cannot disclose their trade-secrets to investors (except for closely-held private companies). From these origins, the Dass makes the following hypothesis:
We expect the choice between secrecy and patenting to be affected by the degree of relative protection provided and to have distinct implications in terms of stock liquidity and equity financing. Our hypothesis is that stronger secrecy protection will encourage firms to adopt more secrecy, therefore increases information asymmetry and reduces stock liquidity. By contrast, better patent protection is hypothesized to cause firms to disclose more information by patenting their inventions, resulting in higher stock liquidity.
To test this hypothesis, the authors conducted a retrospective study that looked to historic changes in patent law (TRIPS implementation) and trade secret law (states strengthening law) and considered market reaction to those changes:
We find that exogenous, staggered passage of state-level statutes that strengthened trade-secret protection increase opaqueness, reduce stock liquidity and worsen the market’s reaction to announcement of seasoned equity offerings (SEOs). By contrast, implementation of [TRIPS], that strengthened patent protection, enhanced transparency and stock liquidity of patenting firms and reduced the stock market reaction to SEOs.*
The basic result here is that a relatively stronger patent regime provides companies with an incentive to obtain patents which, in turn, makes it easier for those companies – especially smaller companies – to raise money in the capital market. Now, although the study was primarily focused on market liquidity, the authors also found that increasing either IP-schema (patents or TS) has the impact of increasing R&D activity.
In recent history (up until the past few years), both patent and trade secret rights have only been on the rise and so the authors were unable to study if the market phenomena also work in reverse. Lucky (at least for these academics), Congress and the Supreme Court have offered a natural experiment for a follow-on investigation in a few years.
= = = = =
* Here, although not entirely clear from the study, the authors apparently use “transparancy” and “opaqueness” to actually mean that the company received respectively more or less patents following the legal change.
I’m attending, I think for the fourth year in a row, the International Performance Management Institute IP meeting. It’s always at a nice place, and this year is no exception: The Island Hotel in Newport Beach, California. It’s also always attended by people who are high up (usually chief IP counsel) in high end organizations, like Dupont, AOL, Energizer, GlaxoSmithKline, IBM, and you name it.
Then there’s me.
First, the guy from the PTO says the new 101 guidelines are, they hope, out in a couple of weeks. They won’t be “interim” guidelines any more, but they will be subject to improvement.
From industry, I’ve heard some things very different this year, consistently, and perhaps of interest to you.
First, several speakers said, given the mess that 101 is, that they are moving back toward trade secret protection. That was true among several people who spoke, as well as just in my conversations, and it went across technologies — from bio onward.
Second, the role of IP in business is changing. I am not sure I can fully explain what’s going on, but the use of patents as business, not litigation, tools appears to be a central and growing theme. Each speaker again from whatever industry talked about this development. The monetization — through licensing or otherwise — trend is hitting big time.
Third, trolls are the primary litigants, still. My idea that 285 can be used to impose fees on the troll’s lawyers, as opposed to the asset-less troll, will be floated in full tomorrow, so I’ll let you know how that goes. Of course, when I talked to these big shots privately, they were “ooooooo.”
Finally, and it always hits me here, the disconnect between trial lawyers and clients, and between academia and both of them, is wide and deep.
The White House has announced President Obama’s plans to nominate Michelle Lee for the position of Undersecretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office. Although Lee is already the de facto Director of the office, this move has important political implications because it will help to better ensure both USPTO autonomy and USPTO influence within the Beltway. Congratulations to Michelle Lee and the Patent Office on this important move forward.
It was almost one year ago that Michelle Lee was appointed as deputy director and de facto director. At the time, I praised the selection of Lee, but questioned both the legality and the wisdom of appointing a prominent deputy director while leaving the slot of director still vacant. Because of legal limitations, Lee has not be identified as the “Acting Director” but only “acting as Director.”
Part of the willingness of the White House to now appoint Lee may have come from the country’s new Chief Technology Office Megan Smith who is a former Google executive. (Lee led Google’s patent strategy for a decade).
Up to now, Lee has largely followed the lead set by former Director Kappos and Acting Director Rea. The unanswered question is whether the new role will now embolden and empower Lee to shift USPTO policies in a new direction.
In April 2013, the Obama Administration announced the first wave of winners of the Patents for Humanity competition, an innovative program to provide recognition and incentives to companies that use their patented technologies to help the world’s poorest people. The winners and honorable mentions were diverse and impressive. For example, Gilead Science was recognized for making HIV/AIDS drugs available through innovative licensing mechanisms.The University of California at Berkeley developed lower cost ways to product anti-malarial compounds. DuPont developed an improved strain of sorghum that was fortified with more protein and vitamins for use among starving populations in sub-Saharan Africa. Procter & Gamble removed impurities from drinking water. Nokeros delivered solar light bulbs and phone chargers for off-grid villages through local entrepreneurs. In addition to well-deserved recognition for these and other laudable initiatives, companies recognized through the Patents for Humanity program received something else: a voucher to accelerate applications in one of several processes at the U.S. Patent & Trademark Office (USPTO).
This February, the White House reaffirmed its commitment to the Patents for Humanity program, removing it from pilot status and making it an annual program. The second wave of applications is due at the end of thismonth and we are sure to see another impressive group of innovators seeking recognition. But the program could be even more impactful in incentivizing humanitarian uses of patented technology if awardees were free to transfer their acceleration vouchers to other companies. This would increase the incentive effect of the program by making the vouchers more valuable. That is the idea behind the Patents for Humanity Program Improvement Act, introduced by Senator Patrick Leahy, the chair of the Senate Judiciary Committee, and Senator Chris Coons. The Obama Administration has supported this common sense, cost-neutral measure to strengthen an innovative program.
The challenges facing the world’s poor are daunting. One in eight people on the planet suffers from malnutrition. AIDS, tuberculosis, and malaria kill more than 6 million people a year. More than a billion lack access to safe drinking water. To overcome these challenges will require a sustained commitment, as well as many new ideas and inventions. The global fight against disease, hunger, poor sanitation, and other development challenges is urgent and bipartisan, and we hope Congress will act without delay to pass Senator Leahy’s and Senator Coons’ bill.
David Kappos is the former Under Secretary of Commerce and Director of the United States Patent & Trademark Office. Quentin Palfrey, a special counsel at the law firm WilmerHale, is a former Senior Advisor for Jobs & Competitiveness in the White House Office of Science & Technology Policy.
Dennis highlighted two calls for papers below. In addition, the American Bar Association’s Intellectual Property Section will be holding an IP scholarship symposium in late March 2015 and is seeking scholars interested in presenting their works. The full description:
The ABA Section of Intellectual Property Law will host its second annual Intellectual Property Law Scholarship Symposium during the ABA-IPL Section’s 30th Annual Intellectual Property Law Conference, March 25-27, 2015. IP Scholars are encouraged to submit an abstract describing a current scholarship project by December 12, 2014, for a chance to present their work during the Intellectual Property Law Scholarship Symposium at the 30th Annual Intellectual Property Law Conference. The symposium seeks authors and papers for three simultaneous sessions (each of which attracted 50-70 attendees in 2014): patent/trade secret; copyright; and trademark/unfair competition.
• Susan Barbieri Montgomery, Northeastern University School of Law
• Andrew Beckerman-Rodau, Suffolk University Law School
• June M. Besek, Columbia Law School
For several years now, I have been thinking about how the changes that the America Invents Act (the AIA) wrought to the definition of prior art will change trade secret practice. Specifically, were they intended to narrow the definition of prior art in ways that would make it easier for inventions to be kept as trade secrets and used commercially without triggering the one-year grace period in which to file a patent application?
My initial interest in this topic was sparked by the noticeable deletion of the word “known” from section 102. Former section 102(a) used to state that “[a] person shall be entitled to a patent unless the invention was known or used by others in this country. . . before the invention thereof by the applicant for patent.” Most of the language of “old” section 102(a) is now in “new” section 102(a)(1), but not the word “known.” Also, what is to be made of the added phrase “otherwise available to the public.”
To date, the debate about whether the AIA intended to narrow the definition of prior art in ways that would heighten the ability of inventors to protect their inventions as trade secrets has focused on the meaning of “public use” and whether the phrase “otherwise available to the public” is a new category of prior art or was intended to modify the other listed categories. This makes sense when you consider that the previous “known” category focused on what others knew at the time of the invention, and the issue of whether the grace period is triggered concerns the acts of inventors. Thus, one way to look at the deletion of “known” is to realize that new section 102 simplified things by removing the only type of prior art that applied to “others” but not to the inventor. Now, all the categories of prior art listed in section 102(a)(1) apply to acts of others and inventors, and section 102(b) focuses on the acts of inventors.
I want to suggest another way of looking at the new section 102 and the deletion of the word “known” that helps make sense of both section 102(a) and 102(b). Under well-established trade secret doctrine, the prior art that prevents information from qualifying as a trade secret is expressed as that which is “generally known” and “readily ascertainable.” What is generally known is broadly defined to include what is known to the general public and what is known within discrete industries or groups of individuals who are experts in the field. Information is readily ascertainable if, even though it is not generally known, it can be found without much time, trouble or expense. Among trade secret scholars, we say that the difference is between what is “known” to the public and what is “knowable.”
Applying the categorizations of “known” and “knowable” to the AIA, it can be seen that new section 102(a) refers to what is knowable. What is stated in a patent or a printed publication or what is in use or on sale, is probably not generally known, but it is readily ascertainable. Read this way, the phrase “otherwise available to the public” makes perfect sense because it captures the essence of the other listed categories and establishes that any information that is ascertainable before the effective filing date would constitute prior art. How readily available the information must be is an question that the AIA does not address directly and that will have to be determined by the courts.
Applying the trade secret concept of “known” to new section 102(b) helps make sense of the language of 102(b)(1)(B) which refers both to “the subject matter that was disclosed” and information that was “publicly disclosed” before such disclosure and, in a round- about way, establishes that section 102(a) does not require information to be generally known by the public. The language “the subject matter that was disclosed” must mean the information that is listed in section 102(a) which only needs to be “knowable.” Information that is “publicly disclosed,” in contrast, means information that was actually disclosed to the public (i.e., “generally known” in trade secret parlance).
