Authored by Scott J. Popma and Elizabeth A. Shah
As businesses prepare to launch crowdfunding campaigns, they should take special precautions not to give away the same ideas they are raising money to develop.
The recently enacted Crowdfund Act requires that a crowdfunded security offering provide "a description of the business of the issuer and the anticipated business plan of the issuer" and "a description of the stated purpose and intended use of the proceeds of the offering sought by the issuer." Such disclosures may later render an invention unpatentable if they contain a description of a new inventive concept. Similarly, grace periods may be triggered and patent rights may be barred if the crowdfunding campaign includes a pre-sale or promotional give-away of a product.
This article will provide strategies and best practices for preserving patent eligibility during a crowdfund offering under both the current patent laws and the new patent provisions scheduled to take effect in March 2013.
Congress passed the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure (Crowdfund) Act as part of the Jobs Act, which the president signed into law on April 5. H.R. 3606, Pub. L. 112–106. The law allows companies to raise capital by seeking small investments from a large number of unaccredited investors through authorized internet portals.
To ensure the accuracy and transparency of crowdfund offerings, the Crowdfund Act requires detailed disclosures regarding the business plans at the center of these offerings.
Statutory Bars to Patents
35 U.S.C. §102 is a statutory provision that governs conditions for patentability, including statutory bars. This statute has been revised by the America Invents Act, which transitions the United States from a first-to-invent patent system to a first-inventor-to-file patent system. H.R. 1249, Pub. L. 112-29 (82 PTCJ 681, 9/23/11).
These provisions of the AIA will affect patent applications filed on or after March 16, 2013. After this date, both the current and new versions of Section 102 will exist in parallel, and will be applied based largely on the date a patent application was filed.
Sales and Offers to Sell
Under current 35 U.S.C. §102(b), an applicant is barred from obtaining a patent if the invention was "on sale" in the United States more than a year before the filing of a patent application. To determine whether an invention was on sale for purposes of Section 102(b), courts review whether the invention (1) was the subject of a commercial offer for sale, and (2) was fully developed and ready for patenting at the time of the offer for sale.1 When assessing whether an offer for sale has been made, an interested purchaser is not required; an offer alone is enough.
The sale of crowdfunded securities will not bar patentability; only an offer to sell the invention itself will trigger the bar.2 However, the line between selling shares in a company and selling a product often becomes blurred in the crowdfunding context. Crowdfunding entrepreneurs may offer investors early access to product, access to discounted product, or even may give away product, to incentivize investment. Such hybrid sales of equity and product, or discounted, pre-sale fundraisers, could constitute a sale of product or an offer to sell.
It is important to keep in mind when crafting crowdfund offerings that even non-traditional offers may count as offers to sell under 35 U.S.C. §102(b). Crowdfunders should note:
- Conditional sales (i.e., in this context, conditioning the sale of a product on raising enough capital to launch the company) may qualify as an offer to sell and may act as a bar to patentability.
- A transaction that does not generate a profit (e.g., a giveaway) may constitute a sale.3
- An exchange of free product for a purchase of equity may constitute a sale, even if no money is given for the product itself.
- A seller need not deliver goods or have the goods on hand for courts to find a sale has occurred.4
Additionally, when disclosing anticipated business plans under the provisions of the Crowdfund Act, entrepreneurs may be tempted to offer proposed pricing schemes, marketing materials, and other information. If the validity of a patent is later disputed during litigation, such disclosures could be used as evidence that an invention was on sale. As discussed below, such disputes can be avoided if a patent application is filed before making any disclosures.
'Printed Publications,' 'Public Use,' and 'Known or Used'
In addition to the on-sale bar discussed above, Section 102(b) bars patentability if an invention was described in a printed publication or was in public use in the United States more than one year before filing a patent application.5 Section 102(a) prevents an inventor from receiving a patent if the invention was known or used by others in the United States, or was described anywhere in a printed publication before the invention thereof by the applicant for the patent.
To qualify as a printed publication, material must be made available only to the extent that interested persons wanting to locate it can do so using reasonable diligence.6 Advertising, websites, brochures, and investor materials all could constitute printed publications.
Common crowdfunding activities may be interpreted as making an invention accessible to the public under the public use restriction, and disclosing inventive details, especially for new products still in the planning stages, may complicate the question of whether an invention was known or used by others before the offeror's own invention of the product was complete. Again, as discussed below, such disputes can be avoided if a patent application is filed before making any disclosures.
The new Sections 102(a) and (b) enacted by the AIA will complicate the issue further. The AIA will transition the U.S. patent system into to a first-inventor-to-file system, and the definition of "prior art" will expand.
The new Section 102(a)(1) states that a patent will be barred if the subject invention was previously described in a printed publication, in public use, on sale, or otherwise available to the public before the filing date of a patent application. Section 102(b)(1) provides a one-year grace period in which to file a patent application after having made a "disclosure" of the inventive concept under Section 102(a)(1).
While it is likely that "public use" and "offers for sale" will be considered "disclosures" for the purpose of the grace period, this will not be certain until courts begin interpreting the AIA. If they are not covered by the grace period, any offer for sale made before filing a patent application would bar patentability immediately once the new regime takes effect in March.
Further, under the current law, only offers for sale in the United States can bar patentability, but as of March 2013, activity anywhere in the world can bar patentability.
Of equal importance, the AIA brings U.S. patent law more in line with the patent laws of other countries, which may have no grace period for disclosures.
Consequently, as soon as an inventor discloses an inventive idea to the public, he or she may forfeit international patent rights whether or not a grace period under U.S. law applies.
Strategies and Conclusion
For innovative companies, intellectual property protection should be a fundamental part of a crowdfunding business plan. Companies should take steps before commencing a crowdfund offering to protect their patent rights.
When possible, a company should file a provisional patent application before launching a crowdfunding campaign and before disclosing inventive information.
A provisional application is a lower-cost, low-maintenance placeholder patent application. An inventor can simply describe the inventive concept in the application and then file it at the Patent and Trademark Office (PTO) to preserve patent rights and stake claim to the filing date.
The PTO will not examine the application unless the applicant subsequently files a full, non-provisional patent application within one year. This gives the applicant time to refine the invention, assess the viability of the market, and raise the necessary funds to pursue the invention further.
If the crowdfunding campaign is successful, the applicant can proceed with acquiring patent rights. If the crowdfunding campaign generates inadequate interest, the applicant simply can allow the provisional application to expire and incur no additional costs.
If a disclosure already has been made or is occurring too soon to file a provisional patent application beforehand, a company should make sure that an application is filed as soon as possible. Provisional applications need not be formal submissions, so even filing available descriptions and images of the invention can help to preserve patent rights in a last-minute situation. These materials often are available during crowdfunding, and a patent attorney can help to quickly format and file the materials to preserve patent rights. Never allow one year to pass after making a public disclosure, because this may cause a forfeiture of all patent rights under both the current patent laws and the new provisions of the America Invents Act.
If a company does not file a provisional patent application, it must structure its crowdfunding campaign carefully. Keep the following points in mind:
- Providing the invention, or access to the invention, to investors may constitute a sale, an offer for sale, or a public use that may bar patentability if more than a year passes before filing a patent application.
- Companies should consider structuring the offer so that it is a pure equity or debt offer and should not sell or give away free product to incentivize investment.
- A website, brochures, advertising, or other disclosures required by the Crowdfund Act could constitute printed publications that can negatively affect patentability.
- Companies should avoid disclosing technical details of the invention in these materials if a patent application has not been filed.
- Any public disclosures made before filing an application immediately may result in the loss of foreign patent rights, limiting patent rights strictly to the U.S. market.
Crowdfunding promises to be an important tool for start-ups and small businesses. Done right, organizing an effective crowdfunding campaign can raise funds to develop an inventive idea without impairing long-term patent rights to that concept.
1 Pfaff v. Wells Electronics Inc., 525 U.S. 55, 67, 48 USPQ2d 1641 (1998).
2 Moleculon Research Corp. v. CBS Inc., 793 F.2d 1261, 126, 229 USPQ 805 (Fed. Cir. 1986) ("[A]n assignment or sale of the rights in the invention and potential patent rights is not a sale of 'the invention' within the meaning of section 102(b)."); Elan Corp. v. Andrx Pharmaceuticals Inc., 366 F.3d 1336, 1341, 70 USPQ2d 1722 (Fed. Cir. 2004) (68 PTCJ 33, 5/14/04).
3 See In re Cygnus Telecommunications Technology LLC, 536 F.3d 1343, 1355, 87 USPQ2d 1801 (Fed. Cir. 2008) (76 PTCJ 620, 8/29/08).
4 See Weatherchem Corp. v. J.L. Clark Inc., 163 F.3d 1326, 1333, 49 USPQ2d 1001 (Fed. Cir. 1998) (57 PTCJ 110, 12/10/98).
5 Invitrogen Corp. v. Biocrest Manufacturing L.P., 424 F.3d 1374, 1380, 76 USPQ2d 1741 (Fed. Cir. 2005) (70 PTCJ 663, 10/14/05) (holding that public use factors include whether an invention was (1) accessible to the public or (2) commercially exploited).
6 See Cooper Cameron Corp. v. Kvaerner Oilfield Products Inc., 291 F.3d 1317, 1324, 62 USPQ2d 1846 (Fed. Cir. 2002) (64 PTCJ 82, 5/24/02).
Reproduced with permission form BNA’s Patent, Trademark & Copyright Journal, 84 PTCJ 835, 9/14/2012. Copyright © 2012 The Bureau of National Affairs, Inc. (800-372-1033) www.bna.com. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm’s clients.