Claiming Small Entity Status Can Present Big Risks

July 2006

By: N. Scott Pierce

Hamilton Brook Smith Reynolds Alert

Improperly Claiming Small Entity Status Can Lead to Loss of Patent
Nilssen v. Osram Sylvania, Northern District of Illinois

United States patent law offers a financial break to a “small entity” by allowing it to pay specific fees at a reduced rate. However, this financial relief is not without certain risks. Deciphering the United States Patent Office (USPTO) definitions of small entity can be challenging and, as a recent decision shows, improper designation can render patents unenforceable.

Who, or What, is a Small Entity?

Generally, the USPTO defines a “small entity” as any “person,” “small business concern” or “non-profit organization.” Among the  requirements within the definition of each of these terms is that, at the time small entity status is claimed, there must be no obligation to assign, grant, convey, or license any rights to the invention to any entity that would not, in turn, qualify for small entity status.

Understanding these qualifications can be, at best, difficult. For example, the USPTO definition for “small business concern” makes reference to a separate set of rules and presents one of the rare instances where the reader having questions is referred to another entity—in this case, the Small Business Administration.

In Nilssen v. Osram Sylvania, Nilssen sued Osram Sylvania for infringement of several patents, the maintenance fees for many of which had been paid by Nilssen on the basis of his professed status as a “small entity.” The court found that, at the time Nilssen claimed small entity status, he had previously entered into an agreement with Philips Electronics North America Corp. (Philips) that obligated Nilssen to license several of the patents to Philips. Because Philips is a large entity, the court concluded that the obligation to license to Philips required Nilssen to pay large entity fees.

Further, the court found Nilssen’s reliance on licensing the patents to an intermediate non-profit charitable organization, the Geo Foundation, to be unavailing. The court stated that, “Nilssen was required to pay large entity fees for all patents licensed to the Geo Foundation because the Geo Foundation itself licensed the patents to large entities.”

Nilssen Defense

Of particular note, the court found to be without merit “Nilssen’s argument that he would not have intentionally paid small entity fees because the amount of money he was saving was too small relative to what he might lose if his patents were declared unenforceable.” The court specifically referenced an earlier District Court case which states “Why [patentee] and his agents would put the enforceability of patents licensed for millions of dollars at risk to save a few thousand dollars in PTO fees is beyond reason. Yet, the evidence overwhelmingly supports the inference that they did so, and common experience confirms that the world has no shortage of individuals who commit irrational and self-destructive acts.”

Corrections Allowed for Good Faith

The USPTO provides for correction of errors in making small entity payments if establishment of small entity status was made in good faith and the consequent fees were paid in good faith. However, as noted by the court, “while the PTO is not required to make an inquiry into whether the patentee has established good faith as a condition of late payment, if a patentee seeks to correct an incorrect payment of fees as a small entity . . . [made] without good faith, the patentee may be found to have engaged in inequitable conduct.” Here, the court found inequitable conduct by Nilssen in establishing small entity status, and determined that all of his defenses in this regard were not credible or were without merit.

Considerations

  • Don’t Disregard Risk. Establish small entity status for the purpose of paying reduced USPTO fees at your peril. The small amount of money saved in proportion to the significant investment and value of a patent estate rarely justifies the risk involved in establishing small entity status.
  • Look Before You Leap. Assess the status of all those involved, directly and indirectly, in potential obligations. Your status may be dictated by that of your business partner or a business partner once-removed—or beyond.

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July 2006

By: N. Scott Pierce

Hamilton Brook Smith Reynolds Alert

Improperly Claiming Small Entity Status Can Lead to Loss of Patent
Nilssen v. Osram Sylvania, Northern District of Illinois

United States patent law offers a financial break to a “small entity” by allowing it to pay specific fees at a reduced rate. However, this financial relief is not without certain risks. Deciphering the United States Patent Office (USPTO) definitions of small entity can be challenging and, as a recent decision shows, improper designation can render patents unenforceable.

Who, or What, is a Small Entity?

Generally, the USPTO defines a “small entity” as any “person,” “small business concern” or “non-profit organization.” Among the  requirements within the definition of each of these terms is that, at the time small entity status is claimed, there must be no obligation to assign, grant, convey, or license any rights to the invention to any entity that would not, in turn, qualify for small entity status.

Understanding these qualifications can be, at best, difficult. For example, the USPTO definition for “small business concern” makes reference to a separate set of rules and presents one of the rare instances where the reader having questions is referred to another entity—in this case, the Small Business Administration.

In Nilssen v. Osram Sylvania, Nilssen sued Osram Sylvania for infringement of several patents, the maintenance fees for many of which had been paid by Nilssen on the basis of his professed status as a “small entity.” The court found that, at the time Nilssen claimed small entity status, he had previously entered into an agreement with Philips Electronics North America Corp. (Philips) that obligated Nilssen to license several of the patents to Philips. Because Philips is a large entity, the court concluded that the obligation to license to Philips required Nilssen to pay large entity fees.

Further, the court found Nilssen’s reliance on licensing the patents to an intermediate non-profit charitable organization, the Geo Foundation, to be unavailing. The court stated that, “Nilssen was required to pay large entity fees for all patents licensed to the Geo Foundation because the Geo Foundation itself licensed the patents to large entities.”

Nilssen Defense

Of particular note, the court found to be without merit “Nilssen’s argument that he would not have intentionally paid small entity fees because the amount of money he was saving was too small relative to what he might lose if his patents were declared unenforceable.” The court specifically referenced an earlier District Court case which states “Why [patentee] and his agents would put the enforceability of patents licensed for millions of dollars at risk to save a few thousand dollars in PTO fees is beyond reason. Yet, the evidence overwhelmingly supports the inference that they did so, and common experience confirms that the world has no shortage of individuals who commit irrational and self-destructive acts.”

Corrections Allowed for Good Faith

The USPTO provides for correction of errors in making small entity payments if establishment of small entity status was made in good faith and the consequent fees were paid in good faith. However, as noted by the court, “while the PTO is not required to make an inquiry into whether the patentee has established good faith as a condition of late payment, if a patentee seeks to correct an incorrect payment of fees as a small entity . . . [made] without good faith, the patentee may be found to have engaged in inequitable conduct.” Here, the court found inequitable conduct by Nilssen in establishing small entity status, and determined that all of his defenses in this regard were not credible or were without merit.

Considerations

  • Don’t Disregard Risk. Establish small entity status for the purpose of paying reduced USPTO fees at your peril. The small amount of money saved in proportion to the significant investment and value of a patent estate rarely justifies the risk involved in establishing small entity status.
  • Look Before You Leap. Assess the status of all those involved, directly and indirectly, in potential obligations. Your status may be dictated by that of your business partner or a business partner once-removed—or beyond.

PDF FileView as PDF

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