Small Entity

04 Apr Small Entity

Small entity status became law through Public Law 97-247, when the USPTO increased patent fees and allowed small businesses a discount. Congress authorized the Small Business Act (SBA) to define the small entity entitled to get the discount. In establishing reduced fees for persons, small business concerns, and nonprofit organizations, the Congressional consideration of the legislation which became Public Law 97-247 indicated an intent that the U.S. Patent and Trademark Office rely exclusively on a self-certification that a patent applicant qualifies as an independent inventor (now person), small business concern, or nonprofit organization. In addition, it was also stated during Congressional consideration of the legislation that no additional resources would be required to administer the system whereby fees would be reduced for small entities.

Under 35 U.S.C. 41(h)(1), fees charged under 35 U.S.C. 41(a), (b) and (d)(1) shall be reduced by 50 percent with respect to their application to any small business concern as defined under section 3 of the Small Business Act, and to any independent inventor or nonprofit organization as defined in regulations issued by the Director.

Effective March 19, 2013, the availability of the small entity discount was extended to certain other fees not contained in 35 U.S.C. 41(a), (b), or (d)(1), but which are included among fees “for filing, searching, examining, issuing, appealing, and maintaining patent applications and patents.”^[1] Effective January 1, 2014, the small entity discount also became available to “filing, searching, [and] examining” fees for international applications under the Patent Cooperation Treaty (PCT).

Note that if applicant qualifies as a small entity under 37 CFR 1.27, applicant may also qualify for “Micro Entity Status” under 35 U.S.C. 123^[2].

I. What is a small entity?

The following entities are qualified as “small entity” for the purpose of discounted USPTO fees. A small entity means any party (person, small business concern,or nonprofit organization) under paragraphs (a)(1) through (a)(3) of § 1.27^[3]:

1. Person^[4]

Per 37 CFR 1.27(a)(1), a person means any inventor or other individual (e.g., an individual to whom an inventor has transferred some rights in the invention), who has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention. An inventor or other individual who has transferred some rights, or is under an obligation to transfer some rights in the invention to one or more parties, can also qualify for small entity status if all the parties who have had rights in the invention transferred to them also qualify for small entity status either as a person, small business concern, or nonprofit organization^[5].

2. Small Business Concern^[6]

A small business concern under 37 CFR 1.27(a)(2) means any business concern:

i) Has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention to any person, concern, or organization which would not qualify for small entity status as a person, small business or nonprofit organization.

ii) Meet the standards set forth in 13 CFR 121.801 through 121.805. Questions relating to standards for a small business concern may be directed to:

Small Business Administration, Office of Size Standards, 409 Third Street, S.W., Washington, DC 20416, (202)205-6618, E-mail: sizestandards@sba.gov

A concern eligible for reduced patent fees is one (13 CFR 121.802):

(a) Whose number of employees, including affiliates, does not exceed 500 persons; and

(b) Which has not assigned, granted, conveyed, or licensed (and is under no obligation to do so) any rights in the invention to any person who made it and could not be classified as an independent inventor, or to any concern which would not qualify as a non-profit organization or a small business concern under this section^[7].

Per the regulations of the SBA, total employees of a business include all of the “employees” who worked for your business or its “affiliates” at any time during the previous 12 months.

3. Nonprofit Organizations^[8]

Per 37 CFR 1.27(a)(3), a nonprofit organization means any organization that has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention to any person, concern, or organization which would not qualify as a person, small business concern, or a nonprofit organization, and is either:

a) a university or other institution of higher education located in any country (per 35 U.S.C. 201(i)^[9], the term university or other institution of higher education means an educational institution which admits as regular students only persons having a certificate of graduation from a school providing secondary education, or the recognized equivalent of such a certificate; b) is legally authorized within the jurisdiction in which it operates to provide a program of education beyond secondary education, c) provides an educational program for which it awards a bachelor’s degree or provides not less than a 2-year program which is acceptable for full credit toward such a degree, d) is a public or other nonprofit institution, and e) is accredited by a nationally recognized accrediting agency or association, or if not so accredited, is an institution that has been granted preaccreditation status by such agency or association that has been recognized by the Secretary for the granting of preaccreditation status, and the Secretary has determined that there is satisfactory assurance that the institution will meet the accreditation standards of such an agency or association within a reasonable time. Institutions which are strictly research facilities, manufacturing facilities, service organizations, etc., are not intended to be included within the term “other institution of higher education” even though such institutions may perform an educational function or publish the results of their work.

Nonprofit organizations also include organizations of the type described in section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) and which are exempt from taxation under 26 U.S.C. 501(a). Organizations described in 26 U.S.C. 501(c)(3) include corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation (limited exceptions may apply under 26 U.S.C. 501(h)) and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

4. Rights Held By Government Organizations

Also, although the Federal government agencies do not qualify as nonprofit organizations for paying reduced fees under the rules, a license to a Federal agency resulting from a funding agreement with the agency pursuant to 35 U.S.C. 202(c)(4) will not preclude the proper claiming of small entity status. Furthermore, a license to the Government resulting from a rights determination under Executive Order 10096 does not constitute a license so as to prohibit claiming small entity status by a person under 37 CFR 1.27(a)(1).

5. Location of Small Entity^[10]

Small entities may claim reduced fees regardless of the country in which they are located. There is no restriction requiring that the person, small business concern, or nonprofit organization be located in the United States. The same definitions apply to all applicants equally in accordance with the Paris Convention for the Protection of Industrial Property.

6. Rights in the Invention and Transfer of Rights^[11]

The “rights in the invention” under 37 CFR 1.27(a)(1), (a)(2)(i), and (a)(3)(i) are the rights in the United States. Rights in the invention include the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States. Therefore, for example, status as a small entity is lost by an inventor who has transferred or has an obligation to transfer a shop right to an employer who could not qualify as a small entity.

a. CONVEYANCE

Individual inventors (37 CFR 1.27(a)(1)), small business concerns (37 CFR 1.27(a)(2)), and nonprofit organizations (37 CFR 1.27(a)(3)) can make an assignment, grant, conveyance, or license of partial rights in the invention to another individual(s), small business concern, or nonprofit organization who could qualify as a person (37 CFR 1.27(a)(1)), small business concern, or nonprofit organization. Under the circumstances described, the individual inventor, small business concern, or nonprofit organization could still qualify for small entity status. However, if the individual inventor, small business concern, or nonprofit organization assigned, granted, conveyed, or licensed, or came under an obligation to assign, grant, convey, or license, any rights to the invention to any individual, small business concern, or nonprofit organization which would not qualify as a small entity (37 CFR 1.27(a)), then the inventor, small business concern, or nonprofit organization would no longer qualify for small entity status.

With regard to transfer of rights in the invention, the rights in question are those in the United States to be covered by an application or patent. Transfer of rights to a Japanese patent, for example, would not affect small entity status if no rights in the United States to a corresponding patent were likewise transferred.

The payment of reduced fees under 35 U.S.C. 41 is limited to those situations in which all of the rights in the invention are owned by small entities, i.e., persons, small business concerns, or nonprofit organizations. To do otherwise would be clearly contrary to the intended purpose of the legislation which contains no indication that fees are to be reduced in circumstances where rights are owned by non-small entities. For example, a non-small entity is not permitted to transfer patent rights to a small business concern which would pay the reduced fees and grant a license to the entity.

If rights transferred to a non-small entity are later returned to a small entity so that all rights are held by small entities, reduced fees may be claimed. The term “license” in the definitions includes nonexclusive as well as exclusive licenses and royalty free as well as royalty generating licenses. A grant of a non-exclusive license to a non-small entity will disqualify applicant from claiming small entity status^[12].

b. IMPLIED LICENSES

Implied licenses to use and resell patented articles purchased from a small entity, however, will not preclude the proper claiming of small entity status. Likewise, an order by an applicant to a firm to build a prototype machine or product for the applicant’s own use is not considered to constitute a license for purposes of the definitions.

c. SECURITY INTEREST

A security interest does not involve an obligation to transfer rights in the invention for the purposes of 37 CFR 1.27(a)(1) through (a)(3) unless the security interest is defaulted upon. See 37 CFR 1.27(a)(5). For example, an applicant or patentee may take out a loan from a large entity banking institution and the loan may be secured with rights in a patent application or patent of the applicant or patentee, respectively. The granting of such a security interest to the banking institution is not a currently enforceable obligation to assign, grant, convey, or license any rights in the invention to the banking institution. Only if the loan is defaulted upon will the security interest permit a transfer of rights in the application or patent to the banking institution. Thus, where the banking institution is a large entity, the applicant or patentee would not be prohibited from claiming small entity status merely because the banking institution has been granted a security interest, but if the loan is defaulted upon, there would be a loss of entitlement to small entity status. Pursuant to 37 CFR 1.27(g), notification of the loss of entitlement due to default on the terms of the security interest would need to be filed in the application or patent prior to paying, or at the time of paying, the earliest of the issue fee or any maintenance fee due after the date on which small entity status is no longer appropriate^[13].

37 C.F.R. 1.28   Refunds when small entity status is later established; how errors in small entity status are excused.

(a) Refunds based on later establishment of small entity status. A refund pursuant to § 1.26, based on establishment of small entity status, of a portion of fees timely paid in full prior to establishing status as a small entity may only be obtained if an assertion under § 1.27(c) and a request for a refund of the excess amount are filed within three months of the date of the timely payment of the full fee. The three-month time period is not extendable under § 1.136. Status as a small entity is waived for any fee by the failure to establish the status prior to paying, at the time of paying, or within three months of the date of payment of, the full fee.

(b) Date of payment.

(1) The three-month period for requesting a refund, pursuant to paragraph (a) of this section, starts on the date that a full fee has been paid;

(2) The date when a deficiency payment is paid in full determines the amount of deficiency that is due, pursuant to paragraph (c) of this section.

d. THE EXHAUSTION DOCTRINE

The exhaustion doctrine, also referred to as the first sale doctrine, is a U.S. common law patent doctrine that limits the extent to which patent holders can control an individual article of a patented product after an authorized sale. Under the doctrine, once an unrestricted, authorized sale of a patented article occurs, the patent holder’s exclusive rights to control the use and sale of that article are exhausted, and the purchaser is free to use or resell that article without further restraint from patent law. However, under current law, the patent owner retains the right to exclude purchasers of the articles from making the patented invention anew, unless it is specifically authorized by the patentee.^[14] The exhaustion doctrine is triggered only by a sale authorized by the patent holder.

e. SHOP RIGHTS

A shop right is a right (either grounded in principles of estoppel or in the form of an implied license) that permits an employer to use without charge certain inventions of his or her employees without liability for infringement, a right that is nontransferable and extends only to the manufacture and use of the invention. According to the USPTO, such a nonwritten, limited, implied license results in disqualification.

II. How to Claim the Status?

An assertion of Small Entity status may be made when filing the application by checking the “Applicant claims small entity status” box on the transmittal form, or by paying the small entity fee exactly.

Any status changes must be filed in a written assertion of new status. In order to establish small entity status for the purpose of paying a maintenance fee, a written assertion of entitlement to small entity status must be filed prior to or with the maintenance fee paid as a small entity. A written assertion is only required to be filed once and will remain effective until changed^[15].

Once established, Small Entity status continues until (a) a continuing application (continuation, division, CIP), (b) a reissue application, (c) the issue fee, or (d) any maintenance fee is required. A new determination of the eligibility for small entity treatment, as set forth in the Patent Rules at 37 CFR 1.27(f) and (g) has to be performed:

(f) Assertion requires a determination of entitlement to pay small entity fees. Prior to submitting an assertion of entitlement to small entity status in an application, including a related, continuing, or reissue application, a determination of such entitlement should be made pursuant to the requirements of paragraph (a) of this section. It should be determined that all parties holding rights in the invention qualify for small entity status. …

(g) (1) New determination of entitlement to small entity status is needed when issue and maintenance fees are due. Once status as a small entity has been established in an application or patent, fees as a small entity may thereafter be paid in that application or patent without regard to a change in status until the issue fee is due or any maintenance fee is due.
(2) Notification of loss of entitlement to small entity status is required when issue and maintenance fees are due. Notification of a loss of entitlement to small entity status must be filed in the application or patent prior to paying, or at the time of paying, the earliest of the issue fee or any maintenance fee due after the date on which status as a small entity as defined in paragraph (a) of this section is no longer appropriate. The notification that small entity status is no longer appropriate must be signed by a party identified in § 1.33(b). Payment of a fee in other than the small entity amount is not sufficient notification that small entity status is no longer appropriate.

III. Federal Cases

a) Ulead Systems

In a recent case, Ulead Systems, Inc. v. Lex Computer & Management Corp., the Federal Circuit held an erroneous payment of small entity fees might be excused as long as the patentee is not guilty of inequitable conduct^[16]. The court explained, “inequitable conduct” would render a patent unenforceable “when there is ‘evidence of affirmative misrepresentations of a material fact, failure to disclose material information, or submission of false material information, coupled with an intent to deceive.’”^[17]

b) DH Technologies

In DH Technology, Inc. v. Synergystex International, Inc., the patentee paid small entity fees during a time it was undisputed that its total number of employees exceeded 500^[18]. The Federal Circuit explained that the “regulations permit correction of honest mistakes, but prevent attempts to fraudulently pay the small entity issue fee while maintaining an enforceable patent.”^[19]. The court emphasized the reasoning of the district court that “where there is the slightest doubt about an applicant’s entitlement to claim small entity status, the applicant would be foolish not to pay the full issue fee.”^[20]. This alone seemed to raise doubt regarding the defendant’s intent; an issue the lower court did not address^[21]. The court remanded the case back to the district court to “assess whether [the patentee] acted in “good faith,” i.e. whether [the patentee] fraudulently established status as a small entity or fraudulently paid the small entity issue fee.”^[22]

c) Cardiac Pacemakers

In Cardiac Pacemakers, Inc. v. St. Jude Medical, Inc., 381 F.3d 1371 (Fed. Cir. 2004), the Federal Circuit addressed the erroneous payment of small entity fees in the context of a patent term extension. Cardiac Pacemakers, Inc. (“CPI”) paid erroneous small entity fees for some 10 years, but later corrected its error before the PTO. Under 35 U.S.C. §41(c)(1) the Director of the PTO has the authority to accept the payment of a maintenance fee after the 6-month grace period provided under the regulation governing payment of maintenance fees. Such a payment acts like an on-time payment in that the patent is treated as if it never expired^[23].

Further, in Nilssen, the district court found 11 patents unenforceable due, inter alia, to erroneous small entity payments^[24]. In Lemelson Medical, the district court viewed a false verification of small entity status as material and found that the patent owner had the requisite intent to deceive^[25]. In DaimlerChrysler, the district court found that there was substantial evidence that the patent owner was neither wholly dependent on his lawyers nor ignorant of the law surrounding patent prosecution, and suggested that his patent attorneys were more than merely negligent, although “would not impose the penalty of unenforceability since failure to pay appropriate fees does not directly relate to patentability^[26].”

IV. Conclusion

Normally, the USPTO will not question a claim to status as a small entity. Small entity status may be scrutinized when a small entity asserts a patent against an infringer for which a small entity fee was paid. If a small entity status was claimed improperly, the patent may be deemed unenforceable, if the court also finds that the claim was made with intent to deceive the USPTO^[27]. 37 CFR 1.27(h) indicates that any attempt to fraudulently establish status as a small entity or pay fees as a small entity will be considered as a fraud practiced or attempted on the Office. Applicants should not rely on any oral advice inadvertently given by an Office employee as to entitlement to small entity status. In addition, improperly and with intent to deceive establishing status as a small entity or paying fees as a small entity will be considered as a fraud practiced or attempted on the Office^[28].

Alleged infringers or grasshoppers scrutinize the small entity status, seeking to place the small business on the defensive with significant amounts of capital lost to litigation-related expenses to justify the modest savings in patent fees^[29].

Therefore, it may be a good idea to forego the small entity discount, eliminating the cost of determining small entity status as well as future litigation costs. The USPTO advises: “For some applicants it may be desirable to file as a non-small entity (by not filing a written assertion of small entity status and by submitting non-small entity fees) rather than undertaking the appropriate investigations which may be both difficult and time-consuming and which may be cost effective only where several applications are involved”^[30].

The intent of 37 CFR 1.27 is that the person making the assertion of entitlement to small entity status is the person in a position to know the facts about whether or not status as a small entity can be properly established. That person, thus, has a duty to investigate the circumstances surrounding entitlement to small entity status to the fullest extent. It is important to note that small entity status must not be claimed unless the person or persons can unequivocally make the required self-certification^[31].

To avoid any potential invalidation of patents and for peace of mind, at least some U.S. practitioners recommend payment of fees as a large entity. It is estimated that approximately at least one quarter of small business concerns may have chosen to pay large entity fees, resulting in an approximate overpayment to the USPTO on the order of $10 million per year during that time period^[32].

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