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The New Prior-User-Rights Defense: What Trade Secret Holders Need to Consider

The National Law Journal
June 19, 2012

Hartmann, Anthony A.


Authored by Anthony A. Hartmann

Among the sweeping changes the Leahy-Smith America Invents Act (AIA) has brought to U.S. patent law is a broadening rewrite of the prior-user-rights defense under 35 U.S.C. 273 (2011). Whether or not revised § 273 constitutes a meaningful prior-user-rights defense for trade secret holders remains to be seen. What is certain is that many factors must be considered before relying on the defense.

Section 273 was originally created in 1999 by the American Inventors Protection Act, Pub. L. No. 106-113, § 4302 (1999), as Congress' response to State Street Bank & Trust Co. v. Signature Financial Group Inc., 149 F.3d 1368, 1375 (Fed. Cir. 1998). In that case, the U.S. Court of Appeals for the Federal Circuit held methods of doing business to be eligible subject matter for patenting. The patentability of business methods meant that a corporation's continued use of trade secret business strategies could infringe a patent held by a later inventor. Section 273 was intended to offer trade secret holders a prior-user-rights defense so that they could continue to use a business method despite a later patent.

While the general intent of § 273 remains the same, AIA made four significant changes to the scope of the defense. It expanded both the categories of persons who may assert the defense and the applicable subject matters. It also raised the level of proofs required to successfully assert the defense and created the so-called "university exception," which removes prior-user rights to certain patents from certain institutions of higher education and their technology-transfer organizations.

When faced with an infringement suit, a litigant must consider several questions as to whether it can and should rely on the defense.

Am I entitled to assert the defense?

Under revised § 273, the defense is no longer limited to the direct user of a trade secret. It extends to those who performed or directed the use as well as to "an entity that controls, is controlled by, or is under common control with such person," such as contractors, vendors and corporate parents and subsidiaries. 35 U.S.C. 273(e)(1)(A). Thus, a party charged with induced or contributory infringement may be able to assert the defense. Since the use must be in the United States, most foreign litigants will not qualify. Id. § 273(a)(1).

The defense may also be available to successors-in-interest to the trade secret user. Although prior-user rights cannot be assigned, licensed or transferred to other parties, a third party may obtain the right "as an ancillary and subordinate part of a good-faith assignment or transfer for other reasons of the entire enterprise or line of business to which the defense relates." Id. § 273(e)(1)(B). However, for successors-in-interest, subsection (e)(1)(c) limits the defense to sites where the alleged infringing use was "in use before the later of the effective filing date of the claimed invention or the date of the assignment or transfer of such enterprise or line of business." The term "site" is undefined, leaving open the question whether the business at the acquired site can be expanded and covered by the defense or whether sites owned before acquiring the defense may be covered. Hence, the defense may be of limited value to expanding enterprises.

Is the subject matter of my prior use covered by the defense?

In principle, the applicable subject matter under § 273 was expanded to all technologies: any "process, or…a machine, manufacture, or composition of matter used in a manufacturing or other commercial process." Id. § 273(a). However, the defense may still be unavailable, depending on the asserted patent, which, at a minimum, must have issued on or after Sept. 16, 2011.

One must also consider the provenance of the patent. The university exception under subsection (e)(5)(A) eliminates prior-user rights when the "claimed invention…was, at the time the invention was made, owned or subject to an obligation of assignment to either an institution of higher education…or a technology transfer organization." Since the university exception is based on ownership at the time the invention was made, one cannot assume that the exception does not apply when the plaintiff is neither an institution of higher education nor a technology-transfer organization.

Subsection (e)(5)(B) provides an exception to the university exception when the subject matter of the patent "could not [have] been undertaken using funds provided by the Federal Government." For example, at certain times, embryonic stem cell research could not be funded by the federal government and thus prior-user rights might still apply for such inventions. Complicating the necessary considerations still further, while federal funding may or may not be permissible under current rules, the situation may have been different at the time the invention was made.

What prior use must be shown?

A qualifying entity must produce clear and convincing evidence of good-faith "commercial use" in the United States more than one year before the earlier of the patent's effective filing date or new § 102(b)'s public-disclosure date without derivation or abandonment. 35 U.S.C. 273(a), (e)(2) & (4). "Commercial use" here includes an actual use, such as an internal use, or an arm's-length sale or transfer of an end result of the use (subsection (a)(1)); marketing or use subject to a premarketing regulatory review period (subsection (c)(1)); or laboratory use for which the public is the intended beneficiary (subsection (c)(2)). The statute does not define "abandonment," leaving old § 102(g) cases as a possible source for its construction. In theory, abandonment might be an issue when the prior use has been redesigned, either before or after institution of the suit, when the use is seasonal or otherwise periodic, or the site of the use has changed.

No one can predict the scope of a future asserted patent claim and, thus, what details will be relevant to the defense, to meet the clear-and-convincing-evidence standard. It may be necessary to maintain detailed records of the trade secret process and all related aspects. For example, if a trade secret holder preserves evidence of only three claim elements because those were deemed relevant to its trade secret, there may be insufficient evidence to establish prior commercial use with respect to a patent claim that has a fourth element that is practiced.

Should I not assert the defense?

There are risks that may deter a qualified entity from asserting the defense. At a minimum, the cost and invasiveness of discovery will increase. It will extend to issues of good faith, derivation and abandonment. An entity admitting control under subsection (e)(1)(A) should also expect discovery regarding that "control" and attempts at general discovery from the other entities, even if they are nonparties to the suit. A successor-in-interest should anticipate discovery as to whether the transfer of rights was "ancillary and subordinate" and which sites should be covered by the defense.

When trying to establish the commercial use of the trade secret, one risks inadvertently establishing the patentee's infringement case. One's evidence may not be clear and convincing for the defense and yet meet the preponderance-of-evidence standard for infringement.

Further, if infringement is established, subsection (f) requires a court to find the case exceptional for purpose of awarding attorney fees under § 285 if the defense did not have a reasonable basis — a term that has yet to be defined. Hence, if assumptions were made with respect to, for example, claim construction or the meaning of abandonment, those assumptions will be assessed for their reasonableness.

Finally, there are AIA transition issues to be considered. In particular, prior to March 16, 2013, the public-disclosure exception under § 102(b) does not yet exist and the revised definition of "effective filing date" that includes foreign priority claims has not yet been enacted. Pub. L. No. 112-29, § 3(a), (b), (n), 125 Stat. at 285, 286, 293. The effect being that, for some cases, the burden to prove commercial use will be easier, such that patentees may accordingly delay filing suit.

Accordingly, while the scope of prior-user-right defense has certainly been expanded, at least in the short and medium term litigants will need to weight the many uncertainties and risks associated with the defense before asserting it.

Reprinted with permission from the June 19, 2012 issue of The National Law Journal. ©2012 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.