In an important development for trade secrets, the United States Patent and Trademark Office (USPTO) submitted a report to Congress on January 13, 2012 affirming the “prior commercial use” defense to the recently-enacted America Invents Act (AIA). The USPTO’s website, which provides a PDF link to the 64-page Report, can be found here. 

As James Schweikert and I wrote last month, the prior commercial use defense was expanded from business methods patents to patents for all technologies, a change that is universally believed to favor trade secret protection. This defense requires clear and convincing evidence that the invention or process has been commercially used for more than one year prior to the filing of the patent application.

In its Report, the USPTO finds that the expanded prior use defense “strikes the appropriate balance” between patent rights and trade secret protection. Prior to the Report, the USPTO held a hearing on October 25, 2011, after having made a request for comments. The USPTO ultimately received 29 written comments from large and small companies, inventors, leading patent practitioners, universities, academics and professional organizations. At the hearing, 5 patent community stakeholders attended and gave their full support for the AIA’s expanded prior user rights, with none expressing any concerns either about any constitutional issues or negative impact on innovation.

One of the reasons that Congress expanded the prior use defense was to bring the U.S. in line with other countries that provide a similar defense and level the competitive playing field. Although the USPTO does not identify any data tying prior user rights in other countries to innovation, it notes that the speakers did identify several countries that provide prior user rights and discussed them in the context of how having rights overseas but not in the United States plays out competitively.

This Report will only intensify the alarm raised by many in the patent community over the prior use defense. Gene Quinn of IP Watchdog, for example, continues to be one of the most vocal critics of the new provision and insists that it is a “big mistake.” Gene has argued that the defense shifts the balance of power from patent law to trade secret law and has likened it to a Trojan Horse that will dilute patent protection and innovation (these comments were provided last fall in a fine panel presentation in PLI’s “American Invents Act: How the New Law Impacts Your Clients and Your Patent Practice”). Others have argued that the expanded defense violates the Takings Clause of the Fifth Amendment and that Congress exceeded its constitutional authority by eliminating the exclusivity of patent protection in favor of trade secrets.

The Trade Secret Litigator’s Initial Take on the Prior Commercial Use Defense: While I do agree that this new provision does have the potential to shift the balance of power from patent law to trade secret law, it hardly sounds the death knell for patent protection in the U.S.  Here are some of the reasons that I think the defense is a good idea:

No. 1:  Greater flexibility. The expanded defense provides small and large businesses with an additional option for their technology. If a company or inventor wants to patent an invention or process, they can patent it. If, however, a small or large company doesn’t want to incur the expense of a patent, it now can elect to use the underlying invention or process in secret if they so desire. Again, nothing prevents a company or inventor from filing for a patent and there is nothing that would put that patent at risk because it is simply a defense, not a means for challenging the validity or enforceability of the patent. 

No. 2:  Less costly.  Lawyers sometimes fail to appreciate the expense that accompanies a patent prosecution and application, let alone the staggering legal fees that can accompany a patent infringement case. The prior user defense permits a company to avoid those expenses and still commercialize its invention or process.

Protecting an invention or process as a trade secret is significantly less expensive then as a patent. However, it is critical to remember that given the clear and convincing standard for proving this defense, there will be a premium on thoroughly documenting the prior use.  Lab notebooks, quality control documents, engineering drawings and specifications will all need to be preserved for the inventions and processes that a user elects not to patent.

The defense should also reduce the number of “defensive” patent filings in which companies file patent applications simply to avoid being precluded from using or developing an invention, process or technology. These defensive patents, while a boon to the patent bar, are a drain on the resources of businesses and a strain on an already over-burdened USPTO. (Thanks to Xerox’s patent counsel, David Arthur, for making this point).

No. 3: No harm to a patent owner.  ll that a patent applicant loses is the potential monetary recovery from someone who can demonstrate that they were using it BEFORE in secrecy. If a company decides the invention is sufficiently novel or important, it can decide to patent the invention. As a result, I don’t see how this will dissuade anyone from filing a patent application if they think it is a truly important invention or process.
Impact on Innovation? Too early to tell. Gene Quinn’s primary objection to the expanded defense is that it will lead to greater use of trade secrets as opposed to patents, which will in turn lead to less disclosure, and less innovation as a result. This argument was made to the USPTO but there was no empirical data to support this position. The USPTO, however, emphasized the fact that prior user rights were included in U.S. patent law between 1836 and 1952 and that there was no evidence that those rights weakened innovation rates or economic growth during that time. It also noted that the prior use defense did not appear to have a significant impact on business method patents since its enactment in 1999. 

In sum, the USPTO has provided important support to the prior commercial use defense. Stay tuned as James Schweikert will provide the patent lawyer’s perspective later this week.