Strategy Considerations Under the Enhanced Prior User Rights Defense

Should your company spend additional resources to file a new patent application for purely defensive purposes? How should you respond to a cease and desist letter claiming that your company’s product, which has been commercially available for the past five years, is infringing a patent that issued only two years ago? Should your company file a new patent application or retain the invention as a trade secret? Should your company take a license from a U.S. university? When faced with such questions, the enhanced Prior User Rights Defense must be considered. While this defense is not new, it was significantly expanded by the America Invents Act (AIA) and may impact your company’s IP strategy.

The Prior User Rights Defense, which may be referred hereinafter to as ‘the defense,’ is a defense to patent infringement based on the prior use of a patented invention before the patent holder filed for patent protection.

For patents issued before September 16, 2011 (i.e., prior to the enactment of the AIA), the defense was only available for defending against a charge of infringement of a business method patent. If a first party did not patent or otherwise publicly disclose an invention that had been in place for many years, a subsequent party could independently obtain a patent for the same invention and enjoin the first party from continuing to use the invention (i.e., assuming that the invention was unrelated to a business method). As a result of this seemingly inequitable consequence, many companies filed patent applications for purely defensive purposes.

Among other significant provisions, the AIA extended the defense to patents covering all technologies, not just business methods. Thus, for patents issued on or after September 16, 2011, the first party now has a broadened Prior User Rights Defense beyond business methods subject to the requirements and limitations set forth in the AIA (discussed below).

Turning to the first question of whether or not to file a patent application for purely defensive purposes, it may no longer be worthwhile to file patent applications for purely defensive purposes if it is possible to rely on the defense. This strategy consideration could represent a significant cost savings to your company.

Turning to the second question of how to respond to a cease and desist letter, the defense may be used to quickly quash a charge of infringement of a patent where your company’s product was commercially available for at least one year before the effective filing date of a patent that issued on or after September 16, 2011 (or earlier if the asserted patent is directed to a business method). If your company’s commercial use was kept as trade secret, then the defense is applicable. If your company’s commercial use was not concealed as a trade secret, then your company’s prior commercial use could also serve as grounds for invalidating the asserted patent under either Pre-AIA 35 U.S.C. 102(b) or AIA 35 U.S.C. 102(a)(1). The prior commercial use may cause the owner of the asserted patent to quickly back down when faced with the possibility of invalidation of the asserted patent.

The AIA includes several limitations and exceptions to the Prior User Rights Defense, including (i) a prohibition against license, assignment or transfer of the defense, other than in connection with an assignment or transfer of the entire business to which the defense relates; (ii) a geographic limitation of the defense covering only those sites where the invention was used before the critical date; and (iii) an exception to the defense for patents owned by or assigned to universities or affiliated technology transfer organizations. According to the U.S. Patent and Trademark Office, these limitations and exceptions to the defense address the equitable interests of patentees, universities and affiliated organizations. These qualifications, carve outs and exceptions must be carefully considered, as is explained hereinafter.

Qualifying for the Prior User Rights Defense

The Prior User Rights Defense can be used as a defense to patent infringement with respect to a commercial process (i.e., manufacturing or other type of commercial process) or a “machine, manufacture, or composition of matter” used in a commercial process. Provided below is a list of some of the key requirements set forth in the AIA that must be met in order to qualify for the defense:

The use must be a good faith commercial use in the United States. Since the commercial use must be in the United States, some foreign commercial activity will not qualify.
The use must occur at least one year before the earlier of (1) the effective filing date of the asserted patent; or (2) the date on which the claimed invention was disclosed to the public in a manner that qualified for the prior art exception from under AIA 35 U.S.C. 102(b).
The use must be in connection with (i) an “internal commercial use” or (ii) an arm’s length sale or transfer of a useful end result of the internal commercial use. For example, a drug product that undergoes a pre-marketing regulatory review period, during which the safety or efficacy of the product is established (including a period of FDA review), qualifies as being “commercially used” during the regulatory review period.
The party asserting the defense has the burden of establishing the defense by clear and convincing evidence. The clear and convincing evidence standard is generally considered a more rigorous standard to meet than the preponderance of the evidence standard.

Limitations to the Prior User Rights Defense

The AIA sets forth several important limitations to the defense:

The Prior Commercial Use defense is “personal,” which means it cannot be separately licensed, transferred, or assigned to a third party, except that the defense can be transferred as part of a good faith transfer of an entire business or relevant line of business.
In the event that the defense is transferred as part of such a good faith transfer, the defense may only be asserted for use at sites where the use occurred prior to the later of the date of the transfer or the effective filing date of the claimed invention. If the purchaser begins practicing the commercial use at the new sites after the effective filing date and after the transfer takes place, those uses will not qualify for the defense.
The defense is not a “general license,” which means that it does not provide a general license to all the claims of the asserted patent. For example, if a party qualifies for the defense, but only has practiced claims 1-5 of a patent, that does not mean the party can also practice claims 6-10 of the same patent without being liable for infringement.
The defense is not available if the commercial use is derived from the patentee or persons in privity with the patentee.
If the commercial use is abandoned, the defense may not be relied upon with respect to activities that occur before the abandonment. Certain legislative history, however, suggests that processes that are used periodically or seasonally may still qualify for the defense (i.e., the periodic or seasonal use does not render them abandoned), even though they are not continuous.

Third Parties

The sale of a product of a qualifying commercial use exhausts the patent owner’s rights. Thus, the defense also affords certain protections to downstream customers of a qualifying party.

The defense also extends to certain affiliates of the qualifying party. Specifically, the defense extends to a third party that “controls, is controlled by, or is under common control” with the qualifying party. This would be expected to include a vendor or contractor that is affirmatively directed by the qualifying party to carry out the commercial use.

The University Exception

A special exception is provided for U.S. universities in an effort to promote research and development at U.S. universities. More particularly, the defense is not available to a party charged with infringement if the claimed invention, at the time that it was made, was owned or subject to an obligation of assignment to a U.S. university or a U.S. technology transfer organization that facilitates the commercialization of technologies developed by U.S. universities. The asserted patent need not be owned by a university at the time of a lawsuit, or even at the time the invention was made, rather, it is only necessary that the claimed invention was subject to an obligation of assignment to a U.S. university at the time it was made, in order to qualify for the exception. This exception may enhance the monetary value of a patented invention that was developed at a U.S. university or a U.S. technology transfer organization because such a patented invention would not be subject to the defense.

Strategic Considerations

The Prior User Rights Defense provides individuals and companies with a powerful tool to defend against patent infringement claims, provided that they maintain sufficient records of their prior use. Bearing in mind that the defense must be proven by clear and convincing evidence, companies should carefully document the development and implementation of their commercial activities to establish the earliest possible date of prior use, and should maintain records that are detailed enough to preserve the defense with respect to each claim that may be asserted.

It should be understood that there are risks to asserting the defense. For example, when trying to establish the commercial use of the trade secret, the party asserting the defense also risks inadvertently establishing the patent holder’s infringement case. Also, employing the defense may drive up the cost and invasiveness of discovery because the defense may extend discovery to issues of derivation, good faith and abandonment.

We encourage you to discuss your options for relying on the Prior User Rights Defense with an Attorney at RatnerPrestia.