You can’t swing a patent application around a room of IP lawyers without hitting a commentator who has written or spoken about the impact of the recently-enacted America Invents Act (AIA) on future patent prosecution and litigation. In contrast, very little, if anything, has been written about the impact of the AIA on the future of trade secrets. Will it lead to greater use of trade secret protection by companies? Are there particular categories of trade secrets that are more likely to be affected than others? These are just a few of the questions being raised in the wake of the AIA.

This will be the first of several posts over the coming months analyzing different aspects and provisions of the AIA and their potential impact on the use of trade secrets. Today’s post will focus on the AIA’s expansion of what is known as the “prior commercial use” defense (or as some are simply calling it, the “prior use” defense); I have have a follow-up post next week evaluating the impact that defense may have on trade secret and patent protections. 
Let me begin by predicting that expansion of the prior commercial use defense is going to inexorably lead to greater reliance on trade secret protections for many commercial activities. While my bias may be showing here, I am not alone in reaching this conclusion (no less an IP blogging authority than the IP Watchdog has concluded that that “the law now favors the party that keeps the trade secret over the party that dissemnates the information for the benefit of the public.”) 

I think this is the only conclusion that one can reasonably draw after looking at the statute, its exceptions, and the many situations and activities that will now potentially fall within this defense.  Simply put, a trade secret owner who thoroughly documents the commercial activity at issue should be able to withstand a claim of patent infringement if he or she meets the criteria below.

Recent History of the Prior Use Defense: To understand this defense, you have to look briefly at its recent history. Prior to the AIA’s enactment, 35 U.S.C. 273 limited the prior use defense to business methods patent infringement claims. Under that defense, a defendant could avoid liability if, acting in good faith, he or she “actually reduced the subject matter to practice at least one year before the effective filing date of such patent, and commercially used the subject matter before the effective filing date of such patent.” 

When this defense was codified in 1992 to address concerns in the financial industry about the scope of business method patents, it was greeted with skepticism by many in the patent community. One commentator later described it as a “reprieve” for trade secrets and a “disaster” for patent law, and expressed concern that it would dilute the importance of patents, undermine the policy of shared innovation so central to patent law, and possibly lead to dogs and cats sleeping together. In all seriousness, those concerns proved to be unwarranted, as it appears that most business owners elected to secure patent protection rather than rely on the perceived vagaries of that defense.

That may now change. The AIA now will extend the prior commercial use defense from business method patents to patents for processes, machines, manufactures, and compositions of matter issued after September 16, 2011. The prior commercial use must take place between the earlier of one year before the effective filing date of the patent application or public disclosure by the patentee. Assuming that it can meet that temporal standard, the defendant must also show that the invention or process was, in good faith, commercially used in the U.S. in an internal commercial use, in an actual arm’s length sale, or other transfer that resulted in a commercial use. (A link to the full text of the new provision can be found here). 

This is a significant expansion of this defense and it is important to understand what it can do for a company, as well as what it cannot do. Of course, it is important to remember this is simply a defense, not a right. In other words, it is a safe harbor that protects the inventor or company that wishes to use the invention or process in private. It is not, however, a means for invalidating or affirmatively challenging a patent.

To take advantage of this defense, a company will bear the burden of demonstrating its prior commercial use by clear and convincing evidence. Therefore, there will a premium on assembling and maintaining reports, logs, laboratory notebooks, and emails documenting that commercial activity.  (I will talk about this in greater detail next week).
Limitations on the Prior Commercial Use Defense: And, naturally, like any good sausage, I mean law, there are multiple exceptions to the prior commercial use defense.  For example, this defense is personal to the party performing or directing the performance of the commercial activities at issue and can only be transferred if the entire enterprise or business line is sold or transferred.  Other limitations include:

  • The defense is not valid if the commercial activity was derived from the patentee. 
  • This defense can only be used for the physical sites where the commercial activity took place before the effective filing date of the asserted patent (i.e., the prior use does not extend to other locations or facilities after the filing date).
  • This defense is not a general license of the asserted patent, but rather extends only to the subject matter of the relevant claims.
  • The defense requires continuous use.
  • This defense is not valid against an institution of higher learning or a technology transfer organization associated with such an institution.
  • This defense is not available for activities that the Federal Government is prohibited from funding.  

Next week, I will spar with my patent colleague, James Schweikert (who generously contributed his thoughts and time to this post) about the pros and cons of patents vs. trade secrets in this unfolding prior commercial use context. Until then, have a happy and safe holiday.