A panel discussion at BIO 2012 pondered the questions as to whether the America Invents Act (AIA) provides a new option replacing patents to secure freedom-to-operate for internally used innovations in biotechnology. Amendments to 35 U.S.C. Section 273 provide for prior user rights, which protect trade secret owners against patent infringement lawsuits.

Therefore, if a company makes an innovation but decides — for economic or strategic reasons — not to seek patent protection for the innovation and instead elects to protect the invention as a trade secret. In such a case, if another company independently invents the same innovation and elects to file and prosecute a patent application — which issues as a patent — then the second to invent party cannot sue the first company for infringement, even though the second company holds a valid patent.

The AIA provides trade secret owners and other alleged infringers with the a prior user defense against patent infringement claims for all inventions if the trade secret owner or other accused infringer can demonstrate internal commercial use (or other commercial uses) of the patented invention at least one year prior to the effective filing date of the patent.  Prior user rights are a personal right. The patent remains valid and enforceable against other companies that are not entitled to a prior user right.

There is an exception to the requirement that a prior user right must be based on commercial use of the subject matter since “activities performed by a nonprofit research laboratory, or nonprofit entity such as a university, research center, or hospital,” if and only if “the public is the intended beneficiary of the use,” are statutorily deemed to be commercial uses for the purpose of obtaining the personal right to continue the use.   The defense is not available to a university or a technology transfer organization whose primary purpose is to facilitate the commercialization of technologies developed by a related university unless “the activities required to reduce to practice the subject matter of the claimed invention could not have been undertaken using funds provided by the Federal Government.”

The prior user right is also limited to a commercial process. The defense is limited to a person who, “acting in good faith, commercially used the subject matter in the United States, either in connection with an internal commercial use or an actual arm’s length sale or other arm’s length of a commercial transfer of a useful end result of such commercial use.”  In addition, “subject matter for which commercial marketing or use is subject to a premarketing regulatory review period during which the safety or efficacy of the subject matter is established…shall be deemed to be commercially used…during such regulatory review period.” Note that such regulatory review is normally either completely secret or substantially secret.

The personal defense “extends only to the specific subject matter for which it has been established that a commercial use that qualified under this section occurred, except that the defense shall also extend to variations the quantity or volume of use of the claimed subject matter, and to improvements in the claimed subject matter that do not infringe additional specifically claimed subject matter of the patent.”  Also, if the owner of the personal defense abandons commercial use of the subject matter at issue, it cannot later “rely on activities performed before the date of such abandonment in establishing a defense under this section with respect to actions taken on or after the date of such abandonment.”

While a user does not need to prove first to invent, there are still plenty of reasons to document inventions. In order to get prior user rights, the user must prove by a high level of proof amounting to clear and convincing evidence that it commercially used a process or a composition, manufacture or machine used in a manufacturing or commercial process at least one year prior to the effective filing date of a patent.  If the patent holder disclosed the invention prior to patent filing but filed the patent application within his one-year grace period for U.S. patent filing, then the prior user must establish the prior commercial use at least one year prior to the patentee’s public disclosure.

A potential prior user will need to take steps to create and maintain careful records.The documentation documentation should be signed and dated and detail the machine, apparatus or process. The records also should show the commercial nature of the use and, if possible, the documentation should be corroborated or witnessed to assist in meeting the clear and convincing standard.

However, it is not clear how closely a prior user’s use must match with the patent claim to get the benefit. A prior user must essentially concede patent infringement to raise prior use as a defense. This does not rule out other infringement defenses but could box in the defendant.  The prior user defense does not create any invalidating prior art against a third party’s patent.  Some wonder if a prior user might be better off raising a defense of patent invalidity.

Another issue is that users won’t want to assert this right lightly; a patent holder bringing an infringement suit can get attorney fees if the user fails to make a proper showing.

Mary Ann Dillahunty, VP of Intellectual Property for Oncolytics Biotech, detailed some of the drawback of prior user rights for biotech companies, including that the prior user may not assign, license or transfer this personal safe harbor to a third party, except as an ancillary and subordinate part of a good faith transfer of an the company or line of business.

This means that a smaller biotech company that makes an innovation cannot convey the defense of prior user rights  to a third parties for manufacturing or distribution purposes.  This makes prior user rights valuable only to full service biotech companies that can do their own manufacturing and marketing. The AIA also includes limitations on the manufacturing sites where prior user rights attach. Given the limitations, a small biotech would be better off filing for patent protection.

In addition, prior user rights add a level of uncertainty to the value of patents since patent holders will not know if there are prior users lurking in the field.  There is also the costs of litigation to determine the user rights and the costs to maintain trade secrets.

Another negative for smaller companies is that could be a question of whether there has been abandonment of the user rights. Smaller companies cannot afford to continue running several different processes in parallel while developing a product and it is not clear if setting aside one process to use another will constitute abandonment.

On the other side of the coin, Brian Barrett, Associate General Patent Counsel for Eli Lilly & Company, felt that prior user rights are mostly positive.  He pointed out that it can allow a company to benefit from prior commercial use while allowing a subsequent inventor to still secure a patent that is enforceable against other (non-prior) users.  It also encourages domestic manufacturing, reduces the need to seek (expensive) worldwide patent protection for minor process.  In addition, this is rarely used and there is little evidence that prior user rights have a negative impact on innovation.

On the negatives, Barrett did concede that it can reward companies that rely on trade secrets instead of filing patent applications, which would provide of public disclosure.  Prior user rights may also devalue patents that otherwise would apply and may be disproportionate in scope relative to risk of a post-eBay court granting an injunction.

So, is it worth the trouble to patent internally-used technology? It really depends on your situation.

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