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Commercial Use Defense's Effect on Patent and M&A Strategies
The Legal Intelligencer
The commercial use defense set forth in the America Invents Act created a new defense to patent infringement, and several best practices have been prompted as a result. Documentation policies should be revised to help ensure that important trade secrets for a product line can take advantage of this new defense. Due diligence checklists for mergers and acquisitions should also be updated to ensure that important information related to this new defense be obtained and evaluated because early assessments of such information can impact the negotiation strategy and valuation of the acquisition target.
SECRET COMMERCIAL USE AS PATENT INFRINGEMENT DEFENSE
When the America Invents Act was enacted on September 16, 2011, a new defense to patent infringement allegations was created under 35 U.S.C. § 273, the commercial use defense. The commercial use defense permits a defense of a patent infringement allegation asserted by a party that is not "an institution of higher education" (as defined in Section 101(a) of the Higher Education Act of 1965 (20 U.S.C. 1001(a))) "or a technology transfer organization whose primary purpose is to facilitate the commercialization of technologies developed by one or more such institutions of higher education."
The commercial use defense has implications for a number of businesses, including those that utilize one or more commercial trade secrets to make or design products or those that utilize one or more trade secrets to provide services. Examples of trade secrets that may utilize this new commercial use defense include: a confidentially kept manufacturing method used to make either a metal, chemical composition, consumer product, or capital asset; a proprietary device used to make a product that was not publicly disclosed; or a way in which a computer program is used to provide a service or facilitate business operations.
A business should take a number of proactive steps to ensure it is positioned to utilize the commercial use defense for any of its trade secrets and ensure that its ability to assert this defense is transferable to others as part of a sale of assets, transfer of a business line or other type of sale of a business. Businesses seeking to acquire another business should also be aware of the defense and of limitations that exist in the event a secret commercial method or apparatus is significant to an acquisition target.
PROACTIVELY UPDATE DOCUMENTATION POLICIES
The commercial use defense is available if it can be shown that an accused infringer has secretly utilized the claimed invention at least one year before the effective filing date of the claimed invention or one year before the first publication date to which priority is awarded for the claimed invention.
The defense may be unavailable if the commercial use of the claimed invention is not ongoing, but was stopped or abandoned. For instance, if a defendant utilized a first process to make a product for 20 years and changed manufacturing processes to utilize a new second process to make a product that is completely different than the first process, the prior use of the first process may not provide a basis for a commercial use defense.
A person asserting the commercial use defense has the burden of establishing the defense by clear and convincing evidence. The assertion of the commercial use defense by a party that fails to demonstrate a reasonable basis for asserting the defense can result in attorney fees being awarded against that party.
It is considered a best practice to maintain documentation for a relatively long period of time that establishes the use of trade secrets that are important to a business. Businesses should take the creation of this new defense as an opportunity to reassess how they keep their important trade secrets confidential. Businesses should also work with their information technology staff and employees who utilize trade secrets to develop ways in which the ongoing use of the trade secrets may be documented while also being maintained as confidential.
Documentation procedures do not have to be complicated. Easy-to-generate forms can be created for employees to document use of a trade secret in order to establish an ongoing use of a trade secret. For example, a word processing document or spreadsheet document may be developed so that an employee who utilizes a trade secret may use the form to periodically document the day or days of a week in which that trade secret was used. In addition, or as an alternative, a manager or supervisor who oversees use of the trade secret may generate a pre-populated form that identifies the trade secret and permit the inclusion of information related to any improvements to the trade secret that were utilized for that time period or other noteworthy information relating to the trade secret. Such a form may be generated weekly, monthly, or quarterly depending on what other documentation a business may want to utilize to establish its use of a trade secret. Such documentation efforts not only help ensure that a business can show a continuous use of a trade secret, but also records important improvements made to that trade secret and when those improvements were first utilized.
A relatively high level of detail may be needed to establish a secret commercial use. The level of detail needed for use of the commercial use defense is dependent on a number of factors, such as the terms of the claims in a patent a party may be accused of infringing. As a result, documents that provide detailed information relating to process parameters or other information related to a secret commercial use of a claimed invention may be needed to support this defense. It would be a best practice to ensure a documentation policy is in place that ensures at least some documentation is generated periodically that reaffirms detailed information about a particular trade secret or notes when and why changes to a secret process were made.
U.S. patents have a term of 20 years from an effective filing date, but are also subject to patent term adjustment time periods. It is prudent for documentation retention policies for documents establishing a secret commercial use to be kept about 25-30 years to account for when a patent infringement action may be asserted and patent term adjustment time periods, which can range from a few hundred days to a number of years. Of course, for purposes of establishing a trade secret and identifying who had access to the trade secrets, it may be prudent to keep some documents related to this defense for as long as the trade secret is maintained as confidential.
The above noted documentation is not merely helpful for litigation purposes of establishing a defense of a patent infringement allegation. It can also be useful for protecting important intellectual property by ensuring evidence of trade secrets is maintained. For instance, such documents may also be useful for establishing ownership of a trade secret and who had access to that trade secret for supporting an allegation of trade secret misappropriation.
The right to assert the commercial use defense can also be transferred. For example, the commercial use defense is transferable by assignment. The rights that are transferable, however, require an acquiring party to comply with certain prerequisites.
COMMERCIAL USE AVAILABILITY CAN AFFECT M&A STRATEGIES
For a commercial use defense under 35 U.S.C. § 273 to apply for a date preceding an acquisition of a business or line of business that may occur, the acquiring party must acquire the entire line of business or enterprise that previously utilized a trade secret and the same site before the date of the assignment or transfer of the enterprise or line of business must be utilized for purposes of practicing that trade secret. For instance, if a line of business is acquired, but the site of manufacturing is changed and a secret commercial manufacturing method is important to the line of business, the new site is unable to claim a date for that commercial use that predates the date of the transfer or the opening of the new site.
These prerequisites impact strategies that may be utilized by a party seeking to acquire a particular business unit. If an acquirer finds that one or more trade secrets is particularly important to the value of an acquisition target, the fact that a long prior-use date may be lost due to movement of a manufacturing site should be taken into account for purposes of developing an acquisition strategy.
To illustrate this point, in some situations a long prior-use date may be needed for a defense to patent infringement of one or more patents owned by a competitor. If that date is lost due to a need to move the site at which the important trade secret is utilized, the acquisition target may have a much lower value. Such a lost prior date may result in the business line needing substantial changes to avoid infringement of a competitor's patent due to a move of the site at which the trade secret was previously used. In such a situation, the business strategies for utilizing the trade secrets of an acquisition target may need to be tailored to take into account such liability issues. Additionally, the value of the acquisition target and the desired language in the acquisition agreement (e.g. asset purchase agreement, etc.), such as warranty terms or limitation on liabilities terms desired by an acquiring party, can be affected by such factors.
Ralph Fischer is a patent attorney in the intellectual property section of Buchanan Ingersoll & Rooney. He advises clients ranging from large international businesses to small manufacturers on various aspects of intellectual property law. He can be contacted at 412-392-2121 or via email at firstname.lastname@example.org.
This article originally appeared in The Legal Intelligencer.