How the America Invents Act Revived the Prior-User DefenseBy Jeff Mikrut – February 20, 2012
In general, a “prior-user defense” is a defense to a claim of patent infringement that permits a person to continue their use of an invention even if that invention is subsequently patented by another. One specific area where this defense may be particularly applicable is where the dominions of trade secrets and patents intersect. For example, suppose that a manufacturer discovers a specialized process for making a product. The manufacturer can choose to keep the process as a trade secret or divulge its discovery in an attempt to obtain a patent on the process. If the manufacturer chooses to keep the process as a trade secret, then the manufacturer could potentially be liable for patent infringement if that process is subsequently patented by another entity. In many foreign jurisdictions, a prior-user right or defense exempts the manufacturer from liability for patent infringement because the manufacturer used the patented process prior to the other entity obtaining a patent on it. Until recently, however, the United States did not provide for any meaningful prior-user defense to prevent such manufacturers from incurring this liability.
The law in the United States on prior-user defenses has fluctuated between providing a broad, strong defense to omitting it entirely. The policy debates have generally been framed according to the issues demonstrated by the above example—whether to protect the interests of those entities who invented something first and were secretly commercially exploiting the invention versus promoting disclosure through the patent process. The Leahy-Smith America Invents Act of 2011 (AIA), Pub. L. No. 112-29 (2011), readjusted the prior-user defense once again. In particular, section 5 of the act substantially expanded the scope and applicability of the prior-user defense beyond the previous version codified at 35 U.S.C. § 273 (2010). The current modifications to section 273 provide for a more robust prior-user defense that will likely have far-reaching effects that impact both patentees and accused infringers.
The History of Prior-User Defense Rights
As noted above, the prior-user defense has had a continually shifting position in U.S. patent law. The first explicit appearance of the prior-user defense occurred in the Patent Act of 1839. 5 Stat. 353–55 (1839). This act included a broad prior-user defense that encompassed any machine, manufacture, or composition of matter that was obtained, constructed, or purchased prior to an application for a patent. Id. at § 7. Modified forms of this prior-user defense continued until the defense was explicitly repealed by the Patent Act of 1952. See Kyla Harriel, “Prior User Rights in a First-to-Invent Patent System: Why Not?,” 36 IDEA 543, 547–50 (1996) (discussing the history of prior-user defense up to the Patent Act of 1952).
Following the major reforms implemented by the Patent Act of 1952, the prior-user defense lay largely dormant until the 1990s. The defense came back to the forefront of U.S. patent law when the World Intellectual Property Organization attempted to harmonize the varying global patent laws through a proposed patent law treaty. In an attempt to spur the United States to join the harmonization efforts, members of each chamber of Congress introduced bills to implement the major substantive provisions involved in the patent law treaty—primarily switching to a first-to-invent system and including prior-user rights. See Patent Harmonization Act of 1992, S. 2605, 102d Cong. § 3 (1992); Patent Harmonization Act of 1992, H.R. 4978, 102d Cong. § 3 (1992). Each of these bills would create a new section, section 273, defining a prior user’s right or defense to patent infringement. While these attempts to harmonize U.S. patent law with the world proved unsuccessful, Congress continued to endeavor to revive the prior-user defense with varying degrees of success. See, e.g., Omnibus Patent Act of 1997, H.R. 400, 105th Cong. § 302 (1997) (passed by the House of Representatives only); Patent Prior User Rights Act of 1994, S. 2272, 103d Cong. (1994) (passed by the Senate only).
The Enactment and Scope of the Previous Section 273
Though Congress made prior attempts to enact varying iterations of the prior-user defense, it was not until the Federal Circuit’s unexpected decision in State Street Bank & Trust Co. v. Signature Financial Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998), that incited legislators into action. In brief, the Federal Circuit’s decision in State Street upended the commonly held belief that methods of doing business were not subject to patenting. Id. at 1375. Prior to State Street, novel business processes and procedures could only be protected as trade secrets. Following the State Street decision, however, the Patent and Trademark Office (PTO) was awash with new business-method patent applications. To alleviate concerns that business-method patents would issue that covered methods of doing business corporations and individuals had long held as trade secrets, Congress enacted the American Inventors Protection Act of 1999, which was incorporated into the Consolidated Appropriations Act of 2000, Pub. L. No. 106–13 § 4302 (2000). Section 273, titled the “Defense to infringement based on earlier invention,” thus revived the prior-user defense, albeit in an extremely narrow and convoluted context.
In brief, the previous section 273 provided that an accused infringer could assert a prior-user defense against a claim of infringement of a business-method claim only if the accused infringer had actually reduced the subject matter to practice one year prior to the effective filing date of the patent and commercially used the subject matter before the filing date of the patent. See 35 U.S.C. § 273 (2010) (prior to amendment in 2011). Both of these prongs needed to be proven by clear and convincing evidence. In addition to these strict requirements, the defense was also subject to a series of limitations that substantially narrowed the scope and applicability of the defense. For instance, the term “commercial use” was limited to commercial use in the United States (§ 273(a)(1) (2010)), abandonment of the use would reset the time requirements (§ 273(b)(5) (2010)), and the defense was limited to the person who performed the infringing acts and was rarely transferable (§ 273(b)(6) (2010)). These extensive limitations severely restricted the use and applicability of the prior-user defense.
One of the most restrictive limitations to the prior-user defense—limiting the defense to only business methods—was done as a direct reaction to the Federal Circuit’s State Street decision. In response to a question about limiting the defense to business methods, Representative Howard Coble of North Carolina, the sponsor of the American Inventors Protection Act, stated that the defense “is limited . . . to the State Street Bank case. There was some discussion early on that perhaps the first inventive defense should apply to processes as well as methods, but we finally concluded that we would restrict it to methods only, and that, by having done that, we were able to satisfy some folks who were opposed to the bill otherwise.” 145 Cong. Rec. H6942 (daily ed. Aug. 3, 1999) (statement of Rep. Coble). Additional statements by other members of Congress confirmed this strict limitation. 145 Cong. Rec. H6943 (daily ed. Aug. 3, 1999) (statement of Rep. Rohrabacher) (stating that the prior-user defense is limited to business methods only). Despite the enactment of a form of the prior-user defense, the restriction limiting its applicability to business methods severely hampered any effective use.
Case Law Following the Enactment of the Previous Section 273
Though the prior version of section 273 was effective for more than a decade, only a handful of cases invoked or even mentioned the section. In fact, the most prominent case involving section 273, Bilski v. Kappos, did not even apply it as a defense, but used the existence of the section as part of the Court’s justification for the patentability of business methods. 130 S. Ct. 3218, 3228–29 (2010). Moreover, the first case to discuss section 273 as a defense, Seal-Flex, Inc. v. W.R. Dougherty, 179 F. Supp. 2d 735 (E.D. Mich. 2002), did not reach any substantive analysis of the prior-user defense. In Seal-Flex, the defendant asserted the prior-user defense only after the district court entered summary judgment for the plaintiff. Therefore, the court found that the defense was untimely and did not rule on its merits. Id. at 741–42. The next case addressing section 273 as a defense, PB Farradyne, Inc. v. Peterson, No. C 05-3447, 2006 U.S. Dist. Lexis 67281 (N.D. Cal. Sept. 6, 2006), did not occur until four years after Seal-Flex. Though the defendant technically was successful in asserting the defense, this was only because the plaintiff failed to oppose the defense in the plaintiff’s response to a motion for summary judgment. Id. at *11–12. This win, by technicality, was the only successful assertion of the prior-user defense of section 273 since its revival.
The first and only case to substantively discuss the provisions of the prior-user defense was Sabasta v. Buckaroos, Inc., 507 F. Supp. 2d 986, 1002–5 (S.D. Iowa 2007). In Sabasta, the patent at issue was directed to a roll-bending die used to make saddles for pipe insulation. Id. at 988. In attempting to assert the prior-user defense, Buckaroos contended that the term “business method” applied to their use because they were “in business, and [were] using a roll-bending process as part of conducting [their] business.” Id. at 1002 (internal quotes omitted). The court ultimately rejected Buckaroos’s broad interpretation of “business method” and concluded that “[t]he fact that Buckaroos is in business and uses a process to manufacture ribbed pipe saddles does not, in light of the legislative history and the State Street case, bring it within the intended purview of § 273.” Id. at 1005. Thus, the first court to substantively address section 273 confirmed that the scope of the defense was limited to the kinds of business methods that resulted from the State Street decision. The defense did not encompass all methods or processes that were used by a business. However, while the foregoing cases demonstrated the limited effectiveness of the prior-user defense enacted by the American Inventors Protection Act of 1999, legislation to overhaul the U.S. patent laws, including an expanded prior-user defense, was pending in Congress.
The New Prior-User Defense and Its Enactment
The recent enactment of the AIA both broadened and narrowed different aspects of the prior-user defense of section 273. While the act modified a number of aspects of section 273, there are four significant changes:
- the expansion of the subject matter to which the defense applies;
- the slight broadening of the personal-defense aspect;
- the requirement that commercial use is made one year prior to the effective filing date of the patent; and
- the university exception.
In general, an accused infringer may now assert the amended prior-user defense of section 273 against any claimed invention provided that the accused infringer commercially used the subject matter in the United States at least one year prior to the effective filing date of the claimed invention. 35 U.S.C. § 273(a). According to the act, every patent that issues on or after September 16, 2011, is subject to this new prior-user defense, provided that the accused infringer also meets the additional requirements of section 273. One particular hurdle that carried over from the previous section 273 is that the defense must still be proven by clear and convincing evidence.
The most notable change in the new section 273 is the expanded scope that exposes almost all patents to the prior-user defense. One specific reason for this broadening amendment was to specifically insulate businesses from having to disclose their internal processes or manufacturing materials. Both of the named sponsors of the bill, Representative Lamar Smith of Texas and Senator Patrick Leahy of Vermont, discussed this reasoning during the debate over the bill. See, e.g., 157 Cong. Rec. H4483 (daily ed. June 23, 2011) (statement of Rep. Smith) (“The prior-use defense is not overly expansive and will protect American manufacturers from having to patent the hundreds or thousands of processes they already use in their plants.”); 157 Cong. Rec. S5426 (daily ed. Sept. 8, 2011) (statements of Sen. Blunt and Sen. Leahy) (discussing that “the prior user rights provided under section 5 of H.R. 1249 will allow developers of innovative technologies to keep internally used technologies in-house without publication in a patent”). In addition, the remarks from Senator Jon Kyl of Arizona explain that “[t]he prior-commercial-use defense provides relief to U.S. manufacturers . . . [by] allowing them to make long-term use of a manufacturing process without having to give it away to competitors or run the risk that it will be patented out from under them.” 157 Cong. Rec. S5430 (daily ed. Sept. 8, 2011). Accordingly, it is clear that a major driving factor for the broadening of the prior-user defense was to shield manufacturers who owned trade secrets from subsequent patent-infringement claims.
In addition, the new prior-user defense also broadened the entities that can assert the defense. As noted above, under the prior section 273, the defense was by and large limited to the person who performed the infringing acts of the business method. Section 273(e)(1)(A) now expands the defense to “the person who performed or directed the performance of the commercial use described in subsection (a), or by an entity that controls, is controlled by, or is under common control with such person.” While the previous personal-defense limitation was never interpreted by a court, the new provision is intended to expand the defense to include contractors, vendors, or other third parties over whom the person asserting the defense had control. See 157 Cong. Rec. S5430–31 (daily ed. Sept. 8, 2011) (statement of Sen. Kyl).
While some features of the prior-user defense expanded, other changes to section 273 narrowed the defense. In particular, the amended commercial use requirement slightly narrowed the applicability of the defense. While the previous requirement only required commercial use any time prior to the effective filing date, now, the prior user is required to demonstrate commercial use one year prior to the effective filing date of the patent. The extension of the commercial-use requirement is intended to account for the grace period that has been enacted as part of the first-to-file amendments. See 157 Cong. Rec. S5430 (daily ed. Sept. 8, 2011) (statement of Sen. Kyl) (discussing the increased commercial-use time requirement as addressing concerns that the prior-user defense would lead to a “morass of litigation over whether an infringer was entitled to assert it” or not). Additional commentary in the congressional record provides further insight regarding the commercial-use requirement. In particular, portions of the record imply that the commercial-use requirement may encompass the creation of prototypes (157 Cong. Rec. S5427 (statement of Sen. Blunt)) and that seasonal or infrequent commercial use may not constitute an abandonment of the use, 157 Cong. Rec. S5431 (statement of Sen. Kyl).
Finally, the amendments to section 273 include a specific exception to preclude assertion of the defense to certain patents developed by universities. 35 U.S.C. § 273(e)(5). Specifically, the “University Exception” precludes an accused infringer from asserting the prior-user defense against patents that were, at the time the invention was made, owned or subject to an assignment to a university or technology transfer organization for the university (for example, the Wisconsin Alumni Research Foundation). Congress added this exception because of the publication and disclosure requirements needed to advance scientific research. See 157 Cong. Rec. S5427 (daily ed. Sept. 8, 2011) (statement of Sen. Kohl). One exception to the broad University Exception explicitly permits the assertion of the defense against university-developed inventions that “the federal government is affirmatively prohibited, whether by statute, regulation, or executive order, from funding research in the activities in question.” 157 Cong. Rec. S5431 (daily ed. Sept. 8, 2011) (statement of Sen. Kyl). Despite this exception to the exception, the immunity provided to university-owned patents effectively excludes a large swath of patents from the prior-user defense.
The Potential Impact of the New Prior-User Defense
Though the ultimate impact of the new prior-user defense will not necessarily be known for some time, the amendments to section 273 provide a solid foundation for a more expansive and useful prior-user defense. For current patent holders, the new section 273 defense has no substantial effect because the new defense is limited to patents issued on or after September 16, 2011. For current trade-secret owners, the expanded prior-user defense appears to provide a longed-for shield to defend against those who might acquire a patent on a process the trade-secret owner may have been using for decades.
Going forward, however, the new section 273 defense will likely have a larger impact. For example, inventors of a new manufacturing process may now be better served by maintaining the process as a trade secret instead of pursuing patent protection. While there is a risk that a court may limit the prior-user defense to exclude trade-secret uses, the extensive legislative history addressing this point may guide courts to resolve the issue in favor of protecting those uses under the new prior-user defense. Inventors of other patentable subject matter, such as machines, compositions of matter, and manufactures, will likely be less affected by the new prior-user defense because the commercial-use requirement for a machine, composition of matter, or manufacture will likely prevent the subsequent patent from issuing under the new first-to-file system. In the rare instance that an inventor of a device uses it only during the internal manufacturing of a different product—for instance, the patented die from Sabasta v. Buckaroos—the inventor may be able to advantageously maintain its market position by only using the invented device internally. In the end, the new prior-user defense provides innovators with a clear and functional defense that will hopefully spur more innovation rather than less.
Keywords: litigation, intellectual property, prior-user defense, trade secrets, America Invents Act
Jeff Mikrut is an associate at Frost Brown Todd LLC, Cincinnati, Ohio.