Changes to the Prior Use Defense under the AIA

By J. Wendy Davis and Steven M. Ritchey

In 1999, Congress created the Prior Commercial Use defense (35 U.S.C. §273) in response to State Street Bank & Trust Co. v. Signature Financial Group Inc., in which the U.S. Court of Appeals for the Federal Circuit held methods of doing business were patent eligible subject matter. The State Street decision meant that a company that had been secretly using an internally developed business method could now infringe a patent covering that business method that was issued to later inventor. Section 273 offered such prior users of a patented business method a defense so that they could continue to use the business method.

The Leahy-Smith America Invents Act (the “AIA”) was enacted in early 2011, and it substantially changed the prior use defense by, among other things, expanding the defense to all technologies, not just business methods. Importantly, this expansion is limited to those patents that issue on or after September 16, 2011. So, if the patent being asserted issued before September 16, 2011, and it is directed to a technology other than a business method, the prior use defense is not available. The prior use defense is still available for business method patents issued before that date.

For a person to take advantage of the defense, the person must have commercially used the technology, in good faith, for at least one year before the earlier of (a) the effective filing date of the claimed invention or (b) the date on which the claimed invention was publicly disclosed by the inventor. The AIA expands the category of persons that may take advantage of the defense to include not only the person that commercially used the technology but also “any entity that controls, is controlled by, or is under common control with such person.” Although the AIA expanded the applicable persons, it did not change the personal nature of the prior use defense and, as such, it still may not be licensed, assigned, or transferred except in connection with the sale of “the entire enterprise or line of business to which the defense relates” and is limited to the existing sites of use.

Another significant AIA change to the prior use defense is the creation of a so-called “University exception,” wherein the defense may not be asserted if the claimed invention was (at the time the invention was made) owned or subject to an obligation of assignment to either an institution of higher education or a technology transfer organization affiliated with such an educational institution. Congress created an exception to the University exception resulting in the prior use defense being available against a university-owned patent if any of the activities required to reduce the subject matter of the claimed invention to practice could not have been undertaken using funds provided by the Federal Government (e.g., research activities that involve the destruction of human embryos). Unlike the prior use defense, the University exception is not personal to an institute of higher eduction or its technology transfer organization. Instead, the University exception inures to the patent itself and may be licensed or assigned. Thus, by eliminating prior use defense for nearly all types of patented inventions developed at education institutions, the value of such a patent to an educational institutional and its licensee(s) may be enhanced.

In response to concerns expressed during the legislative debate about the impact of an expanded prior use defense on the patent system and innovation more generally, Congress mandated that the U.S. Patent and Trademark Office produce a report on several issues, including an analysis of the effect of prior user rights in other countries, an analysis of the correlation, if any, between prior user rights and the ability of start-up companies to attract venture capital, and analysis of the effect of prior user rights on universities, small businesses, and individual inventors. In its January 2012 Report to Congress, the USPTO found, among other things, that the AIA prior user defense is generally consistent with our major trading partners and there is no substantial evidence that it will have a negative impact on innovation, venture funding, small businesses, universities, or independent inventors. That said, the USPTO recommended reevaluating the impacts of prior user rights as part of its 2015 report to Congress on the implementation of the AIA, when better evidence might be available.

In general, the AIA significantly expanded prior user defense and as a result it is likely to be a viable option for many more patent infringement defendants. That said, one should keep in mind several factors before asserting the defense. For example, if the commercial activities necessary for the defense were stopped and restarted, one cannot rely on the activities that occurred before the restart. Additionally, a prior use defense must be established by clear and convincing evidence, which is a higher standard than the preponderance of the evidence standard for proving patent infringement. Still further, if a person is found to have infringed a patent and “fails to demonstrate a reasonable basis for asserting the defense, the court shall find the case exceptional for the purpose of awarding attorney fees” to the patent owner.