Impact of “America Invents” Patent Law on Global Sourcing
Posted October 20, 2011 by Bierce & Kenerson, P.C. · 
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On September 16, 2011, President Barack Obama signed the Leahy-Smith “America Invents Act,” H.R. 1249, 112th Cong., 1st Sess. The first major patent reform since 1952, this law restructures the processes for obtaining and maintaining the validity of U.S. patents. Given the troubles with certain business method patents, particularly those used in software for financial services, the law opens new avenues for challenging business method patents. This brief article will focus on the impact of the changes on domestic and international trade in technology-enabled services.
Key New Provisions of “America Invents Act.”
Effective Dates. The changes enacted by the Act have staggered effective dates. Some changes (notably, the “first-to-file” rule for priority in obtaining a patent) will be effective in eighteen months on March 16, 2013. Others (relating to litigation procedures) become effective in a year (September 16, 2012) or later. For a timetable, see uspto.gov/aia_implementation/aia-effective-dates
Patent Priority: First to File. The new law harmonizes the American priority rules with those of most industrialized nations. Instead of a “first to invent” priority, the “first to file” will have priority. Aside from the “land rush” “race to the courthouse” to file early, this provision will encourage more preliminary filings of incipient inventions rather than well-rounded, “ripe” inventions. The details can be added later. Such increased volume of filings will require more extended surveillance of pending patent applications. It will also expose American patent applications to earlier disclosure and enable competitors (domestic and foreign) to develop competing inventions that might be considered derivatives or innovations, depending on the national patent system.
As a substitute for “interference” litigation, the Act authorizes “derivation” proceedings for determining whether one inventor “derived” the invention from another inventor, without the prior inventor’s authorization. This change is immediately effective.
For outsourcing service providers and their customers, this “first-to-file” priority will be good news. It will give greater certainty to the limits of an indemnification against infringement, since infringement can be more easily discerned under the new priority rule.
Definition of “Prior Art.” “Prior art” is technical knowledge, known to others, that pre-dates the discovery of an invention. The Act expands the concept of “prior art” so that certain activities conducted outside the United States will now be considered, such as the prior use or sale of covered products abroad.
This definition will limit the number of U.S. patents that were based on the first knowledge of the public in the United States. In essence, foreign “prior art” will now be eligible for denying or invalidating a U.S. patent. This result internationalizes the standards and should be welcome by foreign manufacturers and foreign outsourcing service providers.
Ineligibility of Certain Business Method Patents. The Act renders ineligible for U.S. patent protection any business method patents that incorporate “any strategy for reducing, avoiding, or deferring tax liability.” [Section 14]. However, software patents remain eligible for patent protection if they meet two requirements: the “invention” must be
(1) is a method, apparatus, technology, computer program product, or system, that is used solely for preparing a tax or information return or other tax filing, including one that records, transmits, transfers, or organizes data related to such filing; or
(2) is a method, apparatus, technology, computer program product, or system used solely for financial management, to the extent that it is severable from any tax strategy or does not limit the use of any tax strategy by any taxpayer or tax advisor.
This enactment became effective on September 16, 2011 and applies to any patent application that was pending on, or filed on or after, that date, and to any patent that was issued on or after that date.
Invalidation of Existing Business Method Patents (Post-Grant Review). Recognizing wide dissatisfaction with the large number of business method patents issued “too easily” in the 1990’s and early 2000’s, the Act opens target practice to shoot down badly issued existing patents. This “transitional proceeding” allows post-grant invalidation proceedings to be filed between September 16, 2012 and September 15, 2020. However, a “person” may not file a petition for a transitional proceeding with respect to a covered business method patent unless “the person or the person’s real party in interest or privy has been sued for infringement of the patent or has been charged with infringement under that patent.” [Section 18.] A “covered” business method patent susceptible to invalidation (under administrative rules to be adopted before September 16, 2012) means a business-method patent that claims a method or corresponding apparatus for performing data processing or other operations used in the practice, administration, or management of a financial product or service, except technological inventions).
This “transitional proceeding” process will be used to weed out patents that were improvidently granted. A classic example is the Katz patents for integration of computers with telephony. Such patents cover the operation of the classic call center by enabling individuals to use the computer to receive, forward, store and respond to information received by telecommunications. Service providers that offer call center services may be threatened with infringement litigation, and now they can fight back with a broader opportunity than heretofore to invalidate such patents.
Such “transitional proceedings” will be welcomed by both outsourcing customer organizations and by service providers. Both will have a more enlightened, and more satisfying, negotiation on the allocation of the service provider’s liability for infringement of third party rights when performing customer-mandated functions that might be covered by such an imprudently granted patent.
Further, “patent trolls” (companies that acquire patents for portfolio investment purposes but not for commercial exploitation by their affiliates) will face a greater risk of invalidation of overly-broad patent claims. Since patent trolls have no incentive to negotiate a settlement based on cross-licensing of patent portfolios, the risk of a counterclaim to invalidate a possibly overbroad patent can be expected to reduce the costs and risks of infringement.
Finally, U.S. patents are limited to U.S. territorial service delivery operations that infringe. U.S. patents do not necessarily apply to foreign service delivery operations conducted abroad. Consequently, by reducing the risks of infringing on “imprudent” patents that could be invalidated under “transitional” proceedings, the America Invents Act invites enterprise customers to hire local U.S. service providers, who can feel less legal risk of infringement. (Of course, it does not eliminate such risk or the litigation costs associated with a patent infringement dispute.)
Anti-Troll Procedures. In addition to “transitional proceedings” rules, the Act targets “patent trolls” by narrowly limiting their rights to join dozens of unrelated defendants in one court (in a forum selected by the plaintiff). In the future, patent holders may only join multiple unrelated defendants if:
(1) any right to relief is asserted against the parties jointly, severally, or in the alternative with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences relating to the making, using, importing into the United States, offering for sale, or selling of the same accused product or process; and
(2) questions of fact common to all defendants or counterclaim defendants will arise in the action.
As a result, multiple unrelated “accused infringers” may not be joined in one action as defendants or counterclaim defendants, or have their actions consolidated for trial, based solely on allegations that they each have infringed the patent or patents in suit.
Other Changes. Most of the other changes do not have a direct impact on the sourcing of goods and services globally. Such changes permit accelerated “prioritized” examination, reduced fees for small and micro-entities, increased fees for others and expansion of the definition of “prior commercial use” that could prevent issuance of a patent. The Act expands the opportunities for litigation to invalidate a patent through pre-grant review procedures and post-grant review (including (i) ex-parte review, (ii) post-grant review (a.k.a. an opposition), (iii) inter-partes review (re-examination) and (iv) post-grant cure of perceived defects in the patent’s file wrapper).
Impact on Service Providers, Private Equity and M&A. The Act was heavily supported by “big” software and technology companies and opposed by “little” inventors. Smaller companies will have to spend more time and effort in monitoring patent developments and in defending their patents both before and after issuance. Given this allocation of expenses, the venture capital community will undoubtedly scrutinize even more carefully the patentability issues before funding a new venture or expanding existing funding. Mergers and acquisitions, particularly for rollups and consolidations of service providers, will require more careful scrutiny as well.
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