A New Defense For First Inventors

Imagine your frustration . . .

Your rival just unveiled a patent that covers your proprietary business method, which you are currently using to control your company’s inventory. You had invented and adopted the method long ago—years before your rival even filed its patent application. You had even taken extensive measures to protect your method as a trade secret. But your rival independently developed the same method and now holds the patent.

To add to your frustration, you invented your business method at a time when business methods were thought to be excluded from patent protection. But your rival’s patent application was examined after the now famous State Street case (47 USPQ2d 1596 (Fed. Cir. 1998)), which denied the existence of a business method exception to patent protection.

A Catalyst for Reform

This scenario posed a serious dilemma. If an inventor (the “first inventor”) chose to conceal a business method to maintain trade secret protection (perhaps based on a belief that patent protection was unavailable), such concealment could disqualify that business method as prior art to a second inventor’s patent. The first inventor may therefore be left vulnerable to an infringement suit without a prior art defense. Alternatively, the first inventor could have disclosed the business method to the public so that it would be prior art to a later patent, but such disclosure would have dedicated the invention to the public.

Acknowledging this dilemma, and spurred to action by State Street, Congress sought to balance the interests of U.S. inventors of business methods with the interests of those whom later invented and patented those methods. Congress also sought to clarify the interface between two competing branches of intellectual property law: patent law (which encourages innovation by providing a right to exclude others from an invention in return for public disclosure of the invention) and trade secret law (which encourages innovation by protecting investments in new technology).

The Defense

Congress sought to balance the interests of U.S. inventors of business methods with the interests of those who later invented and patented those methods.

After prolonged legislative proceedings, Congress created a “first inventor defense” in the American Inventors Protection Act of 1999 (the AIPA). The first inventor defense took effect on November 29, 1999, but it does not apply to infringement actions pending on that date or to adjudications made before that date. 

The first inventor defense can be asserted by inventors accused of practicing a patented method. The defense is available if the accused infringer had, acting in good faith, actually reduced the invention to practice (i.e., demonstrated it to work for its intended purpose) at least one year before the earliest filing date of the patent. The accused infringer must also have commercially used the invention before the patent’s earliest filing date.

The newly created first inventor defense can be asserted by inventors accused of practicing a patented method if the accused infringer had:

  • actually reduced the invention to practice at least one year before the patent’s earliest filing date; and
  • commercially used the invention before the patent’s earliest filing date

The first inventor defense can be asserted to shield a first inventor from infringement liability or an injunction, irrespective of the extent to which the claimed invention was used.

The first inventor defense can also be asserted to limit, or “exhaust,” a patent owner’s rights. Generally, patent rights are exhausted with respect to a product upon the authorized sale of that product. When a person entitled to assert the first inventor defense has sold a product produced by a patented method, the patent owner’s rights under the patent are exhausted, with respect to that product, to the same extent as if the patent owner had made the sale instead.

The AIPA defines several key terms. The term “method” is limited to a method of doing or conducting business. Though earlier bills had proposed a broader defense for all types of trade secrets, the first inventor defense created by the AIPA is more narrowly directed to business method inventions such as the pooled mutual fund investment scheme at issue in State Street. Nevertheless, the Congressional proceedings leading up to the AIPA indicate that “method” may be construed to encompass a wide range of inventions including, for example, internal human resources management processes and preliminary or intermediate manufacturing procedures. Ultimately, the issue of whether an invention is a “method” within the scope of the defense should turn on the underlying nature of the invention as opposed to the technical form of the patent claims. For example, a method for doing business claimed in a patent as a programmed machine may be considered a method if it could have been claimed as a method.

Though earlier bills had proposed a broader defense for all types of trade secrets, the first inventor defense created by the AIPA is more narrowly directed to business method inventions such as the pooled mutual fund investment scheme at issue in State Street.

The terms “commercially used” and “commercial use” are limited by the AIPA to the use of a method in the United States. The use must be made in connection with an internal commercial use, an arm’s-length sale, or other arm’s-length transfer of a useful end result. The invention is also deemed to be “commercially used” during a regulatory review period while the safety or efficacy of the invention is being established. As for activities performed by a nonprofit research laboratory or a nonprofit entity (e.g., a university, research center, or hospital), a use for which the public is the intended beneficiary is considered a “commercial use“.

Limitations

The first inventor defense is subject to several significant limitations and qualifications:

  • The invention on which the defense is based cannot have been derived from the patentee.
  • The defense extends only to those patent claims for which the person can assert the defense—not to all claims of the patent at issue.
  • The commercial use of an invention on behalf of a nonprofit research laboratory or entity may be asserted as a defense only for continued use by and in that laboratory or entity.
  • A person who has abandoned commercial use of the invention at issue may not rely on activities performed before such abandonment to establish a defense with respect to actions taken after abandonment.

Caveats

The first inventor defense must be established by clear and convincing evidence, and the penalty for unsuccessful assertion of the defense can be costly. A court is required by the AIPA to find a case exceptional for the purpose of awarding attorney fees if the person asserting the defense is found to infringe the asserted patent and fails to demonstrate a reasonable basis for asserting the defense.

The first inventor defense must be established by clear and convincing evidence, and the penalty for unsuccessful assertion of the defense can be costly.  

Significantly, the AIPA also provides that a patent is not deemed to be invalid solely because the first inventor defense is raised or established. The patent can therefore be asserted against other infringers.

Transferring the Defense

The first inventor defense can only be asserted by the person who performed the acts necessary to establish the defense. The right to assert the defense cannot generally be licensed, assigned, or transferred to another person.

The defense can, however, be transferred to the patent owner. Also, the right to assert the defense can be transferred to another if it is part of a transfer of the entire enterprise or line of business to which the defense relates. When acquired as a part of such a transfer, however, the defense can only be asserted for uses at sites where the invention was in use before the patent’s filing date or the transfer date, whichever occurs later.

Looking Ahead

Until the first inventor defense is litigated, the exact scope of the defense remains in question, and the precise meanings of the terms “method” and “commercial use” are yet to be established. Nevertheless, the defense should be considered as a factor when deciding whether to pursue patent protection for a business method or to maintain that business method as a trade secret.

If trade secret protection is pursued, several steps can be taken to preserve the first inventor defense in the event that a second inventor obtains and asserts a patent. For example, it would be prudent to document and retain the following evidence:

  • dates and details of actual reduction to practice (to establish that the invention was reduced to practice at least one year before an asserted patent’s filing date);
  • dates and details of “commercial use” in the United States (to establish that the invention was commercially used before the patent’s filing date);
  • documentation of independent invention (to rebut an assertion that the invention was derived from the patentee); and
  • documentation of continued use (to rebut an assertion that commercial use of the invention was abandoned).

Joshua L. Cohen is a shareholder with Ratner & Prestia and concentrates his practice in all areas of intellectual property law. He can be reached at 610-407-0700 or jlcohen@ratnerprestia.com.

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