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The Patent Guy*Patent Prosecution News and Views

* e Randomly Published Internet Rag of ThePatentGuy.net #Wednesday, Oclober 26, 201 1 o(9o{90(9o(9g(9o Vancouver. B.C 10 {, cheapLeahy's Micro-Entity: What Tom-Foolery (IA[IF) is This?Section 10 of the Leahy-Smith America Invents Act of2011 (AIA) is titled "Fee Setting Authority." Sub-section 10(b) provides for the continuation of the well-established 50% reduction of some fees for "small-entities" (sm-En). ln addition, $10&) provides forfurther 25% reduction in the same fees for a new classof inventors called "nricro-entities" (p-En). AIA $10(g)adds $123 to Title 35, which defines what a p-En is andwhat one has to do to get the additional25% discount.This brief analysis of the new p-En program isorganized as a set of recommended steps patentpracUtioners might want to take in determiningwhether their clients qu:alrty.How deep is the p-En discount, really?To summarize this p-En situation as succinctly aspossible: if having sm-En staLus is analogous to beinga Wal-Mart shopper, then having F-En status isanalogous to belonging to Sam's Club: you can get thesane stuff from the same people but with deeperdiscounts - if you can quality.One presumes Senator Patrick Leahy andRepresentative Lamar Smith tossed the p-En nugget tothe super-unall inventors as a Robin Hood-typegesture to help balance out all the benefits their AIAextends to the corporate behemoths, particularly thebanks. In the eyes of the media and the ulsuspectingpublic this stunt seems to have worked. Theprofessional patent people seem to be onboard, too,iudgng {rom the gushing praise of the Internetcommentators - mostly patent lawyers and agents.Overall, the p-En gambit comes across as the best thingto happen to U.S. patent practice since Jon Dudasdrove out of the PTO parking garage in early 2009. Butlet's have a closer look at what's going on here.Before looking at the criteria for attaining F-En status,it would be helpful to understand why go to thetrouble. How much money can it save your clients?

The new $123 of the Patent Act refers explicitly to a75% dkcaunt, and that is the figure those who don'tunderstand what's going on keep bandying arourd.For instance, one writer calculates an p-En savings ofabout $2600 over the life of a single p-En patent. 1 Fliscalculation is done by, essentially, taking 25% of therelevant base fees that are charged large entities.But the reality is not nearly so impressive for thesimple reason that the p-En savings should beexpressed not in terms of the base PTO fees but withrespect to the sm-En fees. That is because anyone whogets the p-En discour-rt is, by defirritioo already entitledto the sm-En discount (see below). 16 claim that thediscount is75% is specious. It is employing the sametype of word-game high income earners employ whenthey complain that they are taxed at 35% wherL in fact,35% is just their marginal rate.As shown in the table below, the actual p-En savingsfor a patent - using the PTO fees set forth in $11 of theAIA and assuming those fees don't change over the lifeof the patent - is about $2500 per patent, in addition towhat the sm-En applicant already saves. (The"Savings" columrr represents the savings over the sm-En fees.) Multiply that by 4 to reflect that the p-Enapplicant is permitted 4 bites at this discount, and thetotal possible savings per client is on the order of$1O000. My more cynical readers will note the 4xmultiplier used here tacitly assumes that the first threepatents are losers, because if any of them is a winner,the applicant's windfall royalties would push him outof the p-En status.

The America lnvents Act and the lndividual lnventor, LeighMartinson, McDermott, Will & Emery. CNET News,Sep17.201 1 .

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Patent Prosecution News and Views, 0ct26.2011

Full fees sm-En p-En SavingsFiling $220.00 $110.00 $55.00 $55.00Search $s0.00 9270.00 $135.00 $13s.00Exam s220.00 $110.00 $55.0r0 $5s.00Issue $1,510.00 $7ss.00 fi377.50 $377.50Maint 1 $980.00 $490.00 $245.00 $245.00Maint 2 $2,480.00 $1,240.00 $620.00 $620.00Maint 3 $4,110.00 $2,055.00 $1,027.50 fi1,,027.50Total $10,060.00 $5,030.00 $2,515.00 $2,515.00

In addition to the spin on the amount of savings underthe p-En program/ the reality of who wiil benefit is alsoa lot less impressive than the hype. ln fact, like somany political flim-flams, the truth of the matter isratlrer disappointing. So let's anaTyze thls programand the p-En statute by determining what steps apractifioner has to take to secure p-En status forher/his client. I see lour steps.Step 1: Sort out small-entity stafilsFirst, please note, that contrary to a lot of what hasbeen written, one need not be a person/ an inventor, oran individual to acquire lLEn status. The stabuteclearly refers to the "applicant." This is parEicularlysignificaflt because the AIA amends $118 of the PatentAct so that assignees may now be applicants.Consequently, if your client rb a sm-En business, thatbusiness may be entitled to the p-En discount. Thjs ishardly surprising, since being a businesses has neverbeen grounds for disqualification from the sm-Enprogram.Another point that is worth mentioning at the outset isthat, like sm-En status, there is no citizenship orresidency restriction to obtaining the p-En discount.Anyone or any business in the world who meets thecriteria is eligible.Pursuant to $123{a)(1), in order to be considered an p-Eq the client must first qualify as a sm-En .2 And fairenouglL too, for it is intuitive that a micro should be asub-set of a small.

The AIA doesn't modify how sm-En status isdetermined. While the authority for the 50% sm-Endiscount has always been statutory t, the acb;aldefuiition of who/what is a sm-En is found only in theregulations.n Oddly, although sm-En is a creature ofregulations, p-Enis creature oflaw - $123.Consequently, while the politicians have ostensibiylegisiated who is a F-Eru that deternrination is actuallycontrolled by the bureaucrats who define sm-E& whichis the first p-En rriterion. But who is a sm-En?ff you've ever tried to sort out whether or not abusiness qualifies as a sm-En, you know what adisaster that exercise can be, and the PTO is not muchhelp. The PTO's sm-En regulation is 37 C.F.R. $1.27.But with respect to setting forth exactly what a sm-Enbusiness is, Rule 27 says, basically, "Don't ask us, askthe 5BA" and it gives you an address for the SBA.5Rule 27 is only marginally more helpful with respect todefining individual small entities. Rule 27 tells us thata sm-En individual is an "inventor or individual" whohas not transfened his/her patent nghts, or, if theyhave transferred the patent rights, the transferee is anindividual or enLity that qualifies as a sm'En. Thus, thePTO defines the term "small entit/' by reference toitself. These are the sorts of circular regulations thatproduce hypertensive nose-bleeds in life forms higherthan amoeba, bureaucrats, and politicians.Sulfice it to say, if your client is an individual who hasnot transferred any rights in the invention and is ulderno obligation to transfer any rights in the inventiorlthen sm-En stabus - the first step to attaining thecoveted g-En status - is not a problem. However, ifany businesses or assignees are involved, you'll need to

S41(hX1) of Title 3537 C.F.R. $1.27 defines individual and non-profit smallentities. 13 C.F.R. S 121 .802 defines what businesses aresmall entities.37 C.F.R. $1 .27(a) (2) Small business concern. A smallbusiness concern, as used in paragraph (c) of this section,means any business concern that: (i) Has not assigned,granted, conveyed, or licensed, and is under no obligationunder contract or law to assign, grant, convey, or license, anyrights in the invention to any person, concern, or organizationwhich would not gualify for small entity status as a person,small business concern, or nonprofit organization; and (ii)Meets the ske standards set forth in 13 CFR 121 .8U through121 .8O5 to be eligible for reduced patent fees. Questionsrelated to standards for a small business concern may bedirected to: Small Business Administration, Size StandardsStaff, 409 Third Street, SW., Washington, DC 20416.123{aXl )

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Patent Prosecution News and Views. Act26.2071

sit down with titles 13 and 37 of the C.F.R. and be sureyou understand who your client is and/or who yourclient is transferring his/her rights to. Try to keepyour head tilted back.Step 2: Sort out the &strikes statusIf there was ever any doubt about Patrick Leahy'sdisdain for small inventors, the new $123 shouldresolve that doubt. For what Leahy has done is todiscriminate against all individual inventors who havepreviously filed U.5. patent applications.Under $123(aX2) any person who is a named inventoron four or nrore U.S. patent applications is blacklistedfrom obtaining the p-En discount. Yes, your client'sprevious U.S. patent applications are counted as strikes- four of them and he/she is out. And it doesn't haveto be an application that matured into a patent or waseven examined. Simply filing a utility, plant, or designapplications and abandoning them *ould render yourclient's claims for p-En status DOA.Take me, for instance: by virtne of the 4-strikes rule, I,like tens of thousands of other individual inventors inthe U.S., was DOA before the ink dried on Obama'ssignature. I have filed five U.S. patent applications inthe last 16 years - three resulted in patents, one wasrejected, one is pending. I received the sm-En benefitfor ali five applica[ons. But, of course, I have neverreceived any p-En benefit - and I never will. Under theLeahy-Smith prior inventor discrimination provisiory Iwill not see a penny of the $1O000 p-En savings thatwill accrtre to other inventors. This is like Sam's ClubblacKisting anyone who has prewiously shopped atWal-Mart, in spite of Sam's Clab being Wal-Malt.To rub salt in this wound, if my previous applicationshad been assigned to my employer, I would have noproblem. If I were sti1l employed by a university or if Iwere to now become employed by a urriversity, Iwould have no problem. If I had only filedapplications in Mexico or Serbia, I would have noproblem. But because I have had the audacity to file inthe U.S. as an individual inventor, I am now requiredto sacrifice thousands of dollars of potential benefitsthat others who have never filed a U.S. application areentitled to obtain under the p-En program." Arbiftary" and "capricious" are the two words thatcome to mind first, but only Lrecause I'm a lawyer. AlaSrman's "idiocy" fl1ns a close third.What was Leahy thinking? Did he intend that the p-Endisseunl should be limited to four patents? Probably,but if so then the 4-strikes exclusion should apply orrly

to applications filed after the p-En rules kick in. Vfhyshould someone who has never filed a patentapplication in his/her life obtaln a $10000 benefit thatis denied to those of us who have filed applicationsand obtained patents in the past?It also is interesting that a micro entity business whoseemployees have filed dozens of applications and whoowns dozens of patents b not #fected by the 4-strikesrule - it only applies to named inventors, and, ofcourse, a business entity cannot have been a namedinventor on any patent application. This is significantbecause, as I note above, pursuant to Leahy'samendment of $118 of the Patent Act, assignees cannow become the applicants. That is fure, and it'sconsistent with accepted international practice, but italso means that a small entity business can get the p-Endiscount for unlimited numbers of patent applications,while individual inventors are limited to iust four -and those who have already filed four are SOL fromthe git-go.How many small entity inventors have unknowinglycut off their rights to the p-En discount by filing pastapplications? My guess is tens of thousands.Step 3: Sort out what "median household income"merursSection 123(aX3) of the new p-En statute prohibitsapplicants from getting the p-En discount if they havea gross income in excess of 3-times the "medianhousehold income for [the] preceding calendar year, asreported by the Bureau of the Census." Tlrissubsection also excludes applicants who assign or areunder an obligation to assign to anyone or any entityhaving that much income.Apparently, Leahy and Smith were not familiar withthe many ways the Census Bureau reports medianhousehold income."[M]edian household income . . . as reported by theBureau of the Census" could mean a number of things.For instance, it could mean: (1) the median of incomefar all. households; (2) the median of income for fa:nilyhouseholds; (3) the median of income for thehouseholds of whatever race the inventor is; or, (4) themedian income for the households of whatever regionthe inventor is from. A1l of these are "medianhousehold incomes" reported by the U.S. Census

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Patent Prosecution News and Views, 0ct26.2A71

Bureau.6 Depending on how one defines "median requirement she/he has to meet in order to takehousehold income," the 3x cut-off could range from advantage of the Hi-Ed loophole is that at least half ofabout $9O000 to about $fAO,gg0, based the Census her/his income comes from the institution. TheirBureau's report for 2010. t invention does not even have to be related to theirwork or connected to their employment.Notwithstanding this ambiguity built into the new p-En statute, the means test is not likely to be a problem Your client can be a $15K per year grad sfudent, a $25Kfor most individual inventors wanting to file uader the per year maintenance person, a $250K per yearp-En program. On the other hand, while the 4-strikes professor, or a $10M per year foottrall coach, and theyrule applies only to rurmed "inventors," the 3x means are entitled to be a part of PTO's Sam's Club so long astest applies to "applicants," arrd so it applies to half of that income comes from higher education.business applicants, which means it will likely prevent Virtually the only restriction to this loophole is that onemost businesses that quakfy for smzrll enhty from cannot be employedby a university that is outside thequalifying as micro entity. It's a hard point to pin U.S., because 20 U.S.C. 1001(a) applies only to higherdown quantita[vely because the IRS and the 5BA education instibutions in the states.(hence the PTO) define "small trusiness" in grosslydifferent terms. The mind boggles at the lobbying that went on toproduce this loophole.\A/hile it is difficult or impossible to get the incomedata one needs to assess how many sm-En businesses Summarywili be able to meet the p-En neans tesl I would guess There is no doubt that thousands of inventors allnot many. Assuning the cut-off to be a gross income around the world will benefit from the p-En program.of $150,000, clearly no businesses with more than a few Unfortunately, thousands of inventors who haveemployees wiil qualify. already filed four or more U.S. patent applications willstep 4: sort out the Hi-Ed status f;:'nffi;*: *i*" )'.n#JiH trH:'#::::#If your client passes the previous three steps, then he of some as yet uldetermined measure of medianor she qualiFies as an p-En. But if not, don t despair household income. So the population of individualsiust yet for there is still the Hi-Ed loophole provided by and businesses that qualify for p-En status isS123(dX1). In fact, if you are smart, you would rurr significantly less than the politicians, the media, andthis step fkst because if your client qualifies for the Hi- numerous overly-sanguine patent bloggers haveEd loophole, all of the other criteria are trumped. indicated.For reasons normal, naive, un-elected souls can only sit However, the news couldn't be better for that veryand wonder about, Leahy arrd friends decided that if special sub-population of inventors: those who areyour client works for an institution of higher employees of American institutions of highereducation, he/she automalically qualifies for the p-En education. For them, the p-En statute is money in thediscount. Yes, automattcalTy, for none of the previous pocket, which is why the AIA should have been calledrestrictions we have been discussing apply to the Leahy-Smith Hi-Ed Employees Patent Feesemployees of higher education institutions, as higher Windfall Act.education institution is defined by 20 U.S.C. 1001(a) .Merely by being employed in Hi-Ed, an applicantqualifies as a p-En. It makes no difference whether ornot they are a sm-En. It makes no difference how largetheir income is. It makes no difference how many U.S.patent applications they have fi1ed. The only6 Here is a link the the latest report.http://www.census.gov/prod/201'l pubs/p60-239.pdf7 The 3x threshold based on all 2010 household incomes is jusla hair short of $150,000.

Denis R. 0'Brien @ 2011deni s0ThePat entGuy. net'The Patent Guy" is the registered trademark of Denis R. 0'Brien