Trade Secrets and the AIA: The Practical Considerations of Establishing Prior User Rights by Clear and Convincing Evidence  

July 27, 2015

By Tom Leach & Emily Wessels

The Expansion of Prior User Rights Under 35 U.S.C. § 273

The Leahy-Smith America Invents Act (“AIA”) ushered in a new era in intellectual property law, creating new opportunities for patent holders as well as potential pitfalls to the unwary.  In addition to radically altering the landscape of patent law by implementing a first-to-file system, the AIA also brought significant changes to a doctrine known as prior user rights.  More than three years after the enactment of the AIA, the expanded doctrine of prior user rights remains largely undeveloped, but its existence nonetheless should remain a consideration for businesses as they implement strategy to protect intellectual property rights.

Prior-user rights shield an entity from patent infringement liability for certain internal commercial uses of an invention that predate another’s patent filing.  Theoretically, the expansion of this doctrine should encourage the use of trade secrecy protection by insulating against the risk that a later independent inventor will obtain patent rights that can be used to exclude the trade secret owner from practicing the invention.  Practically, however, the true value of expanded prior user rights is only as good as an entity’s ability to prove those rights with clear and convincing evidence—a standard many underestimate.      

Prior user rights represent a relatively recent development in patent law.  They first found their way into the Patent Act in 1999 after the Federal Circuit determined that business methods could be patented.[1]  In response to concerns that the Federal Circuit’s decision threatened companies’ ability to practice business methods that they had previously thought were only protectable via trade secrecy, Congress enacted 35 U.S.C. § 273, or the “first inventor defense.”[2]  This provision created a defense to patent infringement for “prior users” of business methods, provided that the method was reduced to practice and used commercially at least one year prior to the effective filing date of the patent.[3]  The statute further required that this defense be established by clear and convincing evidence.[4] 

Under the changes implemented by the AIA, the prior user defense is no longer limited to business methods.  Instead, § 273 now provides a defense for the prior commercial use of any process or machine, manufacture, or composition of matter used in a manufacturing or other commercial process.[5]  But while the scope of subject matter eligible for protection has changed, the requirement that the elements of the defense be established by clear and convincing evidence has not.[6] 

The threshold criteria for invoking a prior user defense include establishing that the invention was used commercially in the United States in connection with either an internal commercial use or an arm’s length transfer or sale of a useful end result of such commercial use.[7]  This commercial use must occur at least one year before the earlier of either (1) the effective filing date of the claimed invention or (2) a qualifying public disclosure of the claimed invention under § 102(b).[8]  Abandoned commercial activities do not qualify for purposes of establishing a prior use.[9]  The alleged infringer must also have used the invention in good faith and cannot assert the defense if it derived the invention from the patentee.[10]  Importantly, the statute provides that the failure to demonstrate a reasonable basis for asserting the defense shall result in the award of attorney fees.[11] 

There are several exceptions to the general framework of the prior user defense established under § 273.  To start, the rights provided by the statute do not constitute a general license under the asserted patent; rather, protection from infringement liability only extends to the specific subject matter corresponding to the qualifying commercial use.[12]  The statute further limits prior user rights to a personal defense against patent infringement liability; only the entity that actually performed or directed the use—or that controls, is controlled by, or is under common control of such an entity—may assert the defense.[13]  Prior user rights also cannot be licensed, assigned, or transferred to an entity other than the patent owner unless part of the good-faith transfer of an entire business line or enterprise.[14]  Even when properly transferred as part of a going concern, the defense only applies to activities at sites where the invention was used before the later of the transfer or the effective filing date of the patent.[15]  

Clear and Convincing Evidence as the Burden of Proof

For the defense to succeed, each element must be proved by clear and convincing evidence, which creates its own challenges.[16]  Clear and convincing evidence technically represents a median burden of proof; it is more difficult to establish than the preponderance of evidence standard applied in most civil cases but provides a lesser standard than demanding proof beyond a reasonable doubt.

Exactly what constitutes clear and convincing evidence, however, can be difficult to quantify.  Citing Supreme Court precedent, one Federal Circuit panel has described the clear and convincing standard as requiring “evidence which produces in the mind of the trier of fact an abiding conviction that the truth of a factual contention is ‘highly probable.’”[17]  Unfortunately, this and other similar definitions of the standard only provide an ambiguous notion of exactly what level of evidence is necessary to evoke this conviction in the mind of a typical juror.  Generally, however, the clear and convincing evidence standard requires more than mere testimonial evidence; it requires corroborating documentary evidence.[18]  The issue of sufficient evidence is further complicated in the specific context of prior user rights by the fact that no successful assertion of the defense was reported under the pre-AIA version of § 273.[19]  A review of decisions issued since the AIA was enacted also indicates no significant activity regarding prior user rights since the statute was amended.

The uncertainty surrounding the evidence necessary to satisfy the burden of proof should give pause to companies relying on the prior user defense to tip the scales in favor of pursuing trade secrecy over a patent.  Successfully accumulating and keeping up-to-date clear and convincing evidence likely entails significant documentation responsibilities and a potentially increased discovery burden if litigation were to ensue.  Additionally, evidence of a prior use that fails the clear and convincing standard may nonetheless satisfy the preponderance of evidence threshold for establishing patent infringement against the trade secret owner.  Still, because a prior user has the burden of proving its own conduct, it can prospectively evaluate the risks and take affirmative action to increase its chances of satisfying the clear and convincing burden of proof.

Practical Considerations

Although no magical threshold exists for ensuring that a body of evidence rises to the level of clear and convincing, the greater the volume and detail of the evidence, the better the chance of satisfying the standard.  Producing multiple sources of evidence and demonstrating corroboration often have an integral role in crossing the clear and convincing threshold.  Keeping this in mind, a company choosing to pursue trade secrecy should design its business practices to maintain detailed, updated documentation of the process or products.

When it comes to establishing prior user rights specifically, at least three primary areas of concern that exist include establishing a commercial use, demonstrating that the use took place prior to the critical date, and providing a reasonable basis for asserting the defense.  Relatedly, documenting what was used should be just as critical as when the use took place.  The following paragraphs provide some practical strategies for accumulating evidence in support of each of these three elements.  Each element is presented separately for convenience, but it is important to note that many of the suggestions are likely pertinent to more than one element.

Commercial Use

The challenge of providing clear and convincing evidence of commercial use is compounded by the uncertainty surrounding just what types of activities constitute a “commercial” use under the statute.  As a starting point, § 273 does specify certain conduct that qualifies as commercial; this includes premarketing regulatory review activities performed to establish the safety or efficacy of the subject matter and nonprofit laboratory use effected for the public benefit.[20] Beyond that, however, the statute leaves room for ambiguity, particularly when it comes to establishing an internal commercial use.

The lack of successful prior user defense precedent complicates the issue.  Further, existing case law interpreting “commercial use” and “sale” under pre-AIA § 102(b) demonstrates the ambiguity of these terms.[21]  The legislative history of the AIA fortunately provides some guidance, suggesting that the term “commercial use” should be interpreted broadly and that prior user rights from an internal commercial use “vest when innovative technology is first put into continuous internal use in the business [to develop] commercializable products.”[22]  Still, until the case law develops, uncertainty as to the exact contours of what constitutes commercial use is unavoidable.  In anticipation of this ambiguity, entities relying on prior user rights should consider:

  • Quantifying the value of all processes in business records, if possible.
  • Documenting the relationship between internal processes and the production of external goods and services.
  • Preserving internal and external correspondence regarding arm’s length agreements related to the invention for both goods and services.
  • Familiarizing oneself with the types of activities considered commercial under pre-AIA § 102(b) and considering emphasizing those types of activities in business logs.
  • Differentiating between foreign and domestic activities and evaluating the possible ramifications of performing a process in one country that results in the sale of goods in another.

Critical Date

Establishing prior use one year before the critical date presents a particularly challenging undertaking because the critical date only becomes apparent once the patentee files its application; even then, the true critical date may not be revealed until discovery divulges a qualifying public disclosure under § 102(b).  Changing technology further complicates the matter as establishing a timely prior use is immaterial if the only activities able to be traced back to that point are outdated or obsolete to the entity’s current business practices.  In anticipation of this moving target, a prior user must remain vigilant to ensure that all relevant activities are documented as of the earliest possible date.  Practices to consider include:

  • Keeping business logs designed to show continuous use or chain of custody, including the dates and specifics of the practiced invention.
  • Detailing all aspects of each constructive version of the invention.
  • Documenting all entities and locales utilizing the subject matter.

Reasonable Basis

Providing significant evidence of a commercial use prior to the critical date should greatly increase the likelihood of demonstrating a reasonable basis for claiming prior user rights.  Still, the prior user must show a lack of derivation and withstand other possible challenges to the proper assertion of the defense.  Here the statute is not entirely clear if the reasonable basis requirement carries the same clear and convincing burden, a point that is unlikely to be resolved absent litigation.  Nonetheless—because the failure to demonstrate a reasonable basis results in the imposition of attorney fees, in addition to likely placing the party on the hook for infringement liability—the stakes are high enough that an entity is well-advised to approach this element with the same evidentiary diligence as the others.  Some strategies for establishing a reasonable basis include:

  • Corroborating and retaining all evidence of independent invention.
  • Conducting routine due diligence inquiries or patent searches regarding similar technology and documenting these activities, including date, frequency, and search strategy.
  • Considering obtaining a legal opinion when implementing changes to existing practices.

While not the most groundbreaking development to come out of the AIA, expanded prior user rights nonetheless merit attention from any company considering trade secrecy to protect its intellectual property.  By keeping the above considerations in mind, prior user rights may prove a valuable tool in the intellectual property toolkit.
 

Published as a two-part series in Inside Counsel:
Part 1
Part 2


[1] See State St. Bank & Trust Co. v. Signature Fin. Grp., Inc., 149 F.3d 1368 (Fed. Cir. 1998), abrogated by In re Bilski, 545 F.3d 943 (Fed. Cir. 2008).  

[2] Jacob Neu, Patent Prior User Rights: What’s the Fuss?, 66 Vand. L. Rev. En Banc 1, 5 (2013), available at http://www.vanderbiltlawreview.org/content/articles/2013/05/Neu_66_Vand_L_Rev_En_Banc_1.pdf.

[3] Act of Nov. 29, 1999, Pub. L. No. 106-113, § 1000(a)(9).  

[4] Id.

[5] 35 U.S.C. § 273(a) (2012). 

[6] Id. § 273(b).

[7] Id. § 273(a).

[8] Id.

[9] Id. § 273(e)(4).

[10] Id. § 273(a).

[11] Id. § 273(f).  A proposed amendment to 35 U.S.C. § 285 to provide for fee-shifting to a non-prevailing party generally, currently pending before Congress as part of the Innovation Act, would also eliminate this subsection from § 273.  H.R. 9, 114th Cong. (2015).

[12] 35 U.S.C. § 273(e)(3).

[13] Id. § 273(e)(1)(A).

[14] Id. § 273(e)(1)(B).

[15] Id. § 273(e)(1)(C).

[16] See id. § 273(b).

[17] Price v. Symsek, 988 F.2d 1187, 1191 (Fed. Cir. 1993) (citing Colorado v. New Mexico, 467 U.S. 310, 316 (1983)). 

[18] Id. at 1194.

[19] David J. Kappos & Teresa Stanek Rea, USPTO, Report on the Prior User Rights Defense 38 (2012), available at http://www.uspto.gov/aia_implementation/20120113-pur_report.pdf.

[20] See 35 U.S.C. § 273(c).

[21] See, e.g., Phillip W. Goter, The Commercial Exploitation Continuum, 13 Minn. J.L. Sci. & Tech. 795 (2012).

[22] 157 Cong. Rec. S5427, S5440 (daily ed. Sept. 8, 2011) (statement of Sen. Leahy).

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