Patent Basics For Accountants

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Patent Basics for Accountants The exodus of manufacturing assets out of the U.S. has ushered in a replacement by intellectual property assets. Today's accountants need to increase their intellectual property literacy in order to account for and help manage this driving force of market value. This article provides an overview of the basics of patents, one important type of intellectual property.

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PATENTS

Patent Basics for Accountants by Jose L. Sanchez, JD, CPA

fi\revolution Ii\\. . .

has occurred in the asset ., . A menca s busmesses. lfhe exodus of manufacturing assets out of the U.S. has usher~d in a replacement by intellectual property assets. In 1978, tangible assets represented 80% of corporate assets and intangibles 20%. By 1997, an inversion occurred and intangibles represented 73% of corporate assets.' Looking at it in a slightly different way, the value of intangibles as a percentage of market value of S&P 500 companies has grown from 16.8% in 1975 to 79.7% in 2005.2 Accordingly, today's accountants need to increase their intellectual property literacy in order to account for and help manage this driving force of market value. Additionally, if pending legislation banning tax patents is not enacted, tax accountants will be wise tojoin engineers in taking patent law elective courses in college. This article seeks to introduce accountants to the nature, acquisition, and protection of one common intellectual property asset: patents. Intellectual property (IP) refers to the bundle of rights, protected by law, that surround creative works manifested in a tangible form. It is an intangible interest different and separate from the material object in which the creative work is embodied. The United States Constitution gives Congress the power over this subject area and identifies the power's purpose and the means for achieving it.3 Congress has exercised this power since 1790, when the first patent statute was enacted. Common types of IP include patents, trademarks, copyrights, trade secrets, and contractual rights to use the foregoing (licenses). Other types of IP include false advertising, misappropriation, publicity rights, and idea submission. comooSltlon ~~""\l

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I Kenneth E. Krosin, Management of IP Assets, AIPLA BULLETIN 176 (2000 Mid-Winter Meeting Issue). 2 James E. Malackowski, lntelleclllal Property as National Policy, IP LAW360,(Sep 4,20007). 3 The United State Constitution grants Congress the power in article I, section 8, clause 8 "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries."

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WashingtonCPA

January/February 2008

Patent

law4

Patent law protects new, unobvious, and useful inventions5 by giving the inventor a limited time within which to exclude others from making, using, offering to sell, or selling, within the United States or importing into the United States6the patented invention in exchange for complete disclosure of the invention (hence the name "patent"). Patent law is at the legal intersection of our national policies to benefit the public by promoting competition and promoting the progress of the useful arts. It is contained in Title 35 of the United States Code. The patent statutes recognize three types of patents: utility, design, and plant patents. Utility patents are the most common and encompass useful inventions such as pharmaceuticals, appliances, and processes for making paint. Design patents protect the ornamental design of useful articles like furniture and clothing, Plant patents protect new and distinct plant varieties such as fruit trees. The balance of this article will focus on utility patents. The acquisition, enforcement, and defense of design and plant patent rights are somewhat similar to what is discussed below.

4 The history of patent statutes can be traced to a 1474 statute issued by the Republic of Venice offering protection against infringers for a ten year period to new inventions that were communicated to the Republic after being put into use. The concept embodied in patent law, however, precedes the enactment of this statute. See History of patent law, http://en.wikipedia.orglw/index.php?title=History_oC patenUaw&0Idid=163487853 (last visited Nov. 26, 2007). 5 Tomes have been written on the meaning of "new, unobvious, and useful." For our purposes, suffice it to say that in order for the invention to be new (novel), the invention must not have been known or used by others in this country, or patented or described in a printed publication in any country, before the invention by the applicant. In addition, the invention must not have been on sale in this country more than one year prior to filing the patent application. Further, the invention must not have been the subject of a patent application filed in a foreign country more than twelve months before filing of the U.S. application. 35 U.S.C. § 102. Section 103 deals with nonobviousness. 6 Patent law is territorial. A U.S. patent is only valid in the U.S. If the infringing activity is taking place in Australia, you will need an Australian patent to enforce your rights there. The Patent Cooperation Treaty facilitates foreign filings and helps in establishing the same effective filing date in multiple countries.

Acquisition of Rights Patents are awarded to "[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof. . ."7 In general, a patent is awarded to the first individual to diligently reduce the invention to practice.8 To obtain a patent, an inventor9 must file an application containing a complete disclosure of the invention with the U.S. Patent and Trademark Office (PTO). The PTO examines the application and grants a patent if all conditions are met. The patent application contains a detailed description of the invention including drawings and at least one claim. The description should be sufficient to enable one of ordinary skill in the pertinent art to make and use the invention. Claims precisely define the boundaries of the invention much like a legal description of real estate defines a parcel of land. At least in theory, it is possible to read a claim and determine whether one's actions infringe the patent. Just like one should be able to read a legal description of a parcel of land and determine whether one is standing inside or outside of the parcel. The problem is that adverse parties will seldom agree to the meaning of terms used in the claims and courts, at great cost, are engaged to ascertain the meaning of the claim language.1O The examination process is referred to as prosecution and can last between one and three years or longer. Patent prosecution is a back and forth process between the PTO 7 35 U.S.C. §IOI. 8 Actual reduction to practice occurs when the inventor builds an embodiment of the invention that functions as intended. Constructive reduction to practice occurs when the inventor files a patent application that fully discloses the invention. In the case of constructive reduction to practice, the inventor need not build or test the invention before filing the application. Contrary to popular belief, a model of the invention does not need to be submitted with the application, although one may be requested by the PTO. 9 An inventor may assign his or her rights by written instrument but must be listed as the inventor and must sign a declaration acknowledging, among other things, that he or she is the original and first inventor. 10 It is not unusual for patent litigation to bum up hundreds of thousands ifnot millions of dollars.

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PATENTS

Today's accountants need to increase their I ..

intellectual property

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literacy in order to account for and help examiner" and the inventor'z whereby all of the concerns raised by the examiner are addressed by the inventor. The examiner's concerns range from correcting misspelled words to rejecting of some or all of the inventor's claims. They are communicated in written correspondence called "office actions." The inventor responds by amending, cancelling, or submitting new claims, or by arguing that the original claims are patentable in light of the examiner's rejections. If the examiner allows the claims, the prosecution ends and the patent will issue. Alternatively, the examiner may reject one or more claims a final time and the inventor may then cancel rejected claims and have the patent issue with the allowed claims; appeal to the Board of Patent Appeals and Interferences (BPAI); or abandon the application. If the inventor appeals to the BPAI and loses, he or she can file an appeal in the federal court system. The PTO collects various fees as part of the patenting process. Applicants pay a filing fee that varies with the number and type of claims in the application. In addition, applicants are charged search, examination, issuance, maintenance fees, and additional fees for extensions of time to respond to office actions. Total PTO fees can exceed $9,670 (one-half that amount for "small entities"I3). Attorney fees vary and depend on the amount of time required to draft the application and the number and complexity of responses to office actions, but can easily exceed the PTO fees. Enforcement of Rights Once a patent issues, the patent owner can exercise his or her rights. Exercise of rights begins by marking patented products II Examiners work within a given area of technology and are generally knowledgeable of that area. 12 Inventors are usually represented by patent agents or patent attorneys. Patent agents are individuals with science or engineering degrees that have passed the PTO registration exam. Patent attorneys are lawyers with science or engineering degrees that have passed the PTO registration exam. 13 Small entities include individual inventors, small businesses (less than 500 employees), and nonprofit institutions and universities.

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with the word "patented" or "pat" and the patent's number. If the product is not so marked, the owner may not recover damages for infringement that occurs before giving the infringer actual notice. Patent owners will contact suspected infringers and engage in a dialog to gather information about infringing activities. Often, suspected infringers are loathed to cooperate and may be unresponsive. Filing suit may be the only way to ensure cooperation. Other times the infringer is highly cooperative and will seek a license so that they can continue using the patented technology or process. Except on rare occasions, a patent owner has discretion to grant or refuse licenses. Ifthe parties cannot resolve their dispute, the patent owner will turn to the federal courts to enforce his or her rights.14Patent owners are solely responsible for enforcing their patents. If they learn of infringing activities and sit on their rights, their inaction will be used against them when the

infringer is later sued.IS Therefore, patent owners should act promptly to address infringement after it is discovered. In general, it is advantageous to commence litigation in the patent owner's backyard. It will translate into lower costs for the patent owner and higher costs for the infringer, a factor that can encourage settlement. Sometimes, the patent owner will have no choice but to sue the infringer in a distant location. Defense of Rights While a lawsuit will bring with it access to information that was previously unavailable (like sales information) and pressure on the infringer to settle, it also brings potential risk. Since the best defense is a strong offense, the infringer will typically countersue alleging that the 14 Since patent laws are federal laws, federal courts have subject matter jurisdiction over patent cases. 15 This equitable defense to infringement actions is known as laches.

manage this driving force of market value. patent is invalid and unenforceable. The patent owner now finds him or herself as a defendant in a battle that can cause him or her to lose the patent rights he or she fought so hard to acquire and enforce. Although the patent owner enters the ring with the presumption of the patent's validity, it is a rebuttable presumption and it's all up for grabs in this battle. The court is not bound by the findings of the PTO. Evidence will be introduced that the PTO made a mistake in issuing the patent and the court is free to decide if any or all of the claims in the patent should be stricken invalid. If the court upholds the validity of the patent, it can be asked to interpret the language of the claim or claims in question. This is another opportunity for the infringer to chisel away at the hold the patent owner has on the infringer. The risk here is that the court will agree with the infringer's interpretation of the claim and therefore find that the patent is not infringed. The patent owner must also prove, with a preponderance of the evidence, that the accused device or process does, in fact, infringe the patent. It is not enough to have a valid patent with claim language construed to your liking; you must also show that at least one claim in your patent "reads" on the accused device or process. That is, each and every element in the claim must be present in the accused device. Remedies The last legal hurdle a successful patent owner-litigant must clear is proving damages in their quest for a remedy to the infringement. Patent owners typically seek injunctions, compensatory damages, punitive damages, interest, and attorney fees as remedies for patent infringement. Courts grant injunctions to prevent infringement.

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