Improper Claiming of Small Entity Status Can Cost You Your Patent

September 2006

By: N. Scott Pierce

Boston Patent Law Association Newsletter

Illinois Court Holds Patents Invalid Pursuant to A Finding of Inequitable Conduct Based on Improper Claim to Small Entity Status

 

United States patent law permits individuals, non-profit corporations and small businesses to pay certain fees at a discounted rate. Qualification for discounted fees, however, is strictly limited to “small entities,” as that term is defined by rules of practice promulgated by the United States Patent and Trademark Office as Title 37 of the Code of Federal Regulations (37 C.F.R.).

Generally speaking, a “small entity” means any “person,” “small business concern” or “non-profit organization,” as those terms are defined in the rules. 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 (e.g., person, concern or organization) that would not, in turn, qualify for small entity status.

Determining whether the qualifications for any of the defined terms can be met is, at best, difficult. For example, the definition for “small business concern” makes reference to a separate set of rules (i.e., 13 C.F.R. §§ 121.801 - 121.805) 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 (N.D. Ill. 2006) (Case No. 01 C 3585) the plaintiff, 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 purported 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 Phillips Electronics North America Corp. (Phillips) that obligated Nilssen to license several of the patents to Phillips. The court also found that Phillips did not qualify as a small entity at the time of agreement and “[b]ecause Nilssen had an obligation to license to Phillips, all the patents subject to the [agreement] were not entitled to a small entity status and required payment of large entity fees.” Further, the court found unavailing reliance by Nilssen on licensing of patents to an intermediate organization, the Geo Foundation, which was established as a non-profit charitable organization. Specifically, 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.”

The Patent Office specifically 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, and as also 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 to be not credible or without merit. 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.” In response to Nilssen’s argument, the court stated, in a footnote, that “people are dishonest and break the law even when small amounts of money are at stake” (referencing DaimlerChrysler AG v. Feuling Advanced Techs., Inc., 276 F. Supp. 1054, 1062 (S.D. Cal. 2003) (“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.”)). With respect to payment of small fees on the basis of small entity status, the court concluded that “Nilssen’s declarations of small entity status and small entity payments rendered Nilssen’s repeated misconduct so culpable as to render the patents at issue unenforceable.”

Continued qualification for small entity status must be reviewed prior to payment of each maintenance fee. Further, establishment of small entity status to qualify for reduced filing fees must be reviewed prior to payment of an issue fee. Applicants are strongly advised that they establish small entity status for the purpose of paying reduced fees at the United States Patent Office at their peril. As suggested by Nilssen in his defense, and as noted by the court by implication, the small amount of money to be saved in proportion to the significant investment associated with development of a patent estate rarely justifies the risk involved in establishing small entity status before the United States Patent and Trademark Office.

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September 2006

By: N. Scott Pierce

Boston Patent Law Association Newsletter

Illinois Court Holds Patents Invalid Pursuant to A Finding of Inequitable Conduct Based on Improper Claim to Small Entity Status

 

United States patent law permits individuals, non-profit corporations and small businesses to pay certain fees at a discounted rate. Qualification for discounted fees, however, is strictly limited to “small entities,” as that term is defined by rules of practice promulgated by the United States Patent and Trademark Office as Title 37 of the Code of Federal Regulations (37 C.F.R.).

Generally speaking, a “small entity” means any “person,” “small business concern” or “non-profit organization,” as those terms are defined in the rules. 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 (e.g., person, concern or organization) that would not, in turn, qualify for small entity status.

Determining whether the qualifications for any of the defined terms can be met is, at best, difficult. For example, the definition for “small business concern” makes reference to a separate set of rules (i.e., 13 C.F.R. §§ 121.801 - 121.805) 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 (N.D. Ill. 2006) (Case No. 01 C 3585) the plaintiff, 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 purported 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 Phillips Electronics North America Corp. (Phillips) that obligated Nilssen to license several of the patents to Phillips. The court also found that Phillips did not qualify as a small entity at the time of agreement and “[b]ecause Nilssen had an obligation to license to Phillips, all the patents subject to the [agreement] were not entitled to a small entity status and required payment of large entity fees.” Further, the court found unavailing reliance by Nilssen on licensing of patents to an intermediate organization, the Geo Foundation, which was established as a non-profit charitable organization. Specifically, 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.”

The Patent Office specifically 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, and as also 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 to be not credible or without merit. 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.” In response to Nilssen’s argument, the court stated, in a footnote, that “people are dishonest and break the law even when small amounts of money are at stake” (referencing DaimlerChrysler AG v. Feuling Advanced Techs., Inc., 276 F. Supp. 1054, 1062 (S.D. Cal. 2003) (“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.”)). With respect to payment of small fees on the basis of small entity status, the court concluded that “Nilssen’s declarations of small entity status and small entity payments rendered Nilssen’s repeated misconduct so culpable as to render the patents at issue unenforceable.”

Continued qualification for small entity status must be reviewed prior to payment of each maintenance fee. Further, establishment of small entity status to qualify for reduced filing fees must be reviewed prior to payment of an issue fee. Applicants are strongly advised that they establish small entity status for the purpose of paying reduced fees at the United States Patent Office at their peril. As suggested by Nilssen in his defense, and as noted by the court by implication, the small amount of money to be saved in proportion to the significant investment associated with development of a patent estate rarely justifies the risk involved in establishing small entity status before the United States Patent and Trademark Office.

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