It is a major overhaul of the country’s patent system. The America Invents Act, which was signed into law Sept. 16, dramatically changes both patent prosecution and patent litigation.

“This legislation is a big deal no matter how you slice it,” says James Mullen, a partner at Morrison & Foerster.

One controversial change made by the new law: The first person to invent something will no longer be entitled to a patent. Instead, the patent will go to the first inventor to file an application with the Patent Office.

This change to a first-to-file system, which will go into effect in September 2012, brings U.S. law into line with that of most other countries. It will thus make it cheaper and easier for businesses to obtain worldwide patent rights.

However, the first-to-file system will increase the pressure on inventors to race to the U.S. Patent Office. Even a short delay in filing a patent application could allow a rival to make off with the patent. That will put many smaller businesses in a difficult situation.

Startups and small companies often have many promising inventions in early stage R&D. These firms could, under the current first-to-invent system, refine their inventions, see which ones had market potential, raise investment capital and then file applications for only the truly promising inventions. That option won’t be available under first-to-file. In order to protect itself, a business will need to file patent applications for all its inventions—and file new applications each time the inventions are significantly altered. Smaller firms often won’t be able to spend the money and employee time required for all these filings, so many of their inventions won’t receive patent protection.

“This legislation will irreversibly damage the ability of small-business owners and entrepreneurs to create, develop and commercialize their innovations,” Todd McCracken, president of theNational Small Business Association, told Bloomberg.

Aiding Infringers

The new law will change patent litigation in a variety of important ways—almost all of which will aid alleged infringers. For starters, the law prohibits a patentee from suing multiple defendants in one lawsuit merely because the defendants allegedly infringed the same patent. Joinder will be allowed only when defendants allegedly are liable “jointly, severally, or in the alternative with respect to or arising out of the same transaction, occurrence, or series of transactions.”

This provision is expected to increase lititgation costs and hurt so-called patent trolls—nonpracticing entities that often sue multiple defendants in order to force them to license patent rights.

The law also creates two new ways for alleged infringers (and others) to attack the validity of issued patents. During the first nine months after a patent is issued, anyone can petition the Patent Office to initiate a “post-grant review” of the patent. This administrative proceeding will enable the requesting party to challenge the patent on the basis of prior art, lack of enablement or any other grounds for patent invalidity.

This Patent Office proceeding will be faster and less costly than district court litigation, in part because there will be significantly less discovery. The proceeding also will impose a lower burden of proof on challengers. A challenger in a post-grant review need only prove invalidity by a preponderance of evidence, while a challenger in district court would have to prove invalidity by clear and convincing evidence.

Challenge Scenarios

Even if a patent survives post-grant review, it still can be challenged administratively in an inter partes review. Anyone can bring such a proceeding and allege a patent should be invalidated because prior art anticipated the invention or made it obvious to one skilled in the art. A challenger need prove invalidity only by a preponderance of evidence.

A party can seek inter partes review after the expiration of the nine-month window for seeking post-grant review if no post-grant review has been sought. If post-grant review has commenced, that proceeding must end before an entity may file for inter partes review. And there’s one more time limit on seeking inter partes review: If a defendant is being sued for patent infringement, it can commence an inter partes review to challenge the patent only within one year of being sued.

Inter partes review will replace the current inter partes “reexamination.” The two types of Patent Office proceedings are similar, but the new one will allow somewhat more discovery, including expert declarations and depositions of experts, says Janelle Waack, a partner in Novak Druce & Quigg.

On the other hand, it will be harder to obtain an inter partes review. The Patent Office granted the old inter partes re-examination if a movant could show a substantial new question of patentability. “It was a pretty broad standard. It was easy to get a review,” says Yar Chaikovsky, a partner in McDermott Will & Emery. The Patent Office will grant the new inter partes review only if a movant can show a “reasonable likelihood” of proving at least one of the challenged claims invalid. “That’s a big difference,” says Chaikovsky.

Cheap and Easy

The new post-grant review and inte rpartes review will make it easier, faster and cheaper for companies to defend themselves in patent litigation. Rather than having to litigate the validity of a plaintiff’s patent in court, a defendant can commence one of these proceedings before the Patent Office, and that will stay the litigation until the Patent Office renders its decision. “Whenever a patent suit is brought, I imagine defendants will consider whether to do these post-review proceedings,” says Waack.

The legislation also provides that a defendant is not liable for infringing a patent if the defendant commercially used the covered invention in the U.S. at least one year before the plaintiff publicly disclosed or filed a patent application.

This prior-user defense used to be available only against business method patents. Now it will cover any “process” or any “machine, manufacture, or composition of matter used in a manufacturing orother commercial process.”

“This makes patents harder to enforce,” says Michael Gollin, a partner at Venable.