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Wednesday, Oclober 26, 201
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Leahy's Micro-Entity: What Tom-Foolery (IA[IF) is This?


Section 10 of the Leahy-Smith America Invents Act of 2011 (AIA) is titled "Fee Setting Authority." Subsection 10(b) provides for the continuation of the wellestablished 50% reduction of some fees for "smallThe new $123 of the Patent Act refers explicitly to a 75% dkcaunt, and that is the figure those who don't understand what's going on keep bandying arourd. For instance, one writer calculates an p-En savings of about $2600 over the life of a single p-En patent. 1 Flis

entities" (sm-En). ln addition, $10&) provides for 25% reduction in the same fees for a new class of inventors called "nricro-entities" (p-En). AIA $10(g) adds $123 to Title 35, which defines what a p-En is and what one has to do to get the additional25% discount.

further

calculation is done by, essentially, taking 25% of the relevant base fees that are charged large entities. But the reality is not nearly so impressive for the simple reason that the p-En savings should be expressed not in terms of the base PTO fees but with respect to the sm-En fees. That is because anyone who gets the p-En discour-rt is, by defirritioo already entitled to the sm-En discount (see below). 16 claim that the discount is75% is specious. It is employing the same type of word-game high income earners employ when they 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 savings for a patent - using the PTO fees set forth in $11 of the AIA and assuming those fees don't change over the life of the patent - is about $2500 per patent, in addition to what the sm-En applicant already saves. (The "Savings" columrr represents the savings over the smEn fees.) Multiply that by 4 to reflect that the p-En applicant is permitted 4 bites at this discount, and the total possible savings per client is on the order of $1O000. My more cynical readers will note the 4x multiplier used here tacitly assumes that the first three patents are losers, because if any of them is a winner, the applicant's windfall royalties would push him out of the p-En status.

This brief analysis of the new p-En program is organized as a set of recommended steps patent pracUtioners might want to take in determining whether their clients qu:alrty.

How deep is the p-En discount, really? To summarize this p-En situation as succinctly as possible: if having sm-En staLus is analogous to being a Wal-Mart shopper, then having F-En status is analogous to belonging to Sam's Club: you can get the sane stuff from the same people but with deeper discounts - if you can quality.
One presumes Senator Patrick Leahy and Representative Lamar Smith tossed the p-En nugget to the super-unall inventors as a Robin Hood-type gesture to help balance out all the benefits their AIA extends to the corporate behemoths, particularly the banks. In the eyes of the media and the ulsuspecting public this stunt seems to have worked. The professional patent people seem to be onboard, too, iudgng {rom the gushing praise of the Internet commentators - mostly patent lawyers and agents. Overall, the p-En gambit comes across as the best thing to happen to U.S. patent practice since Jon Dudas drove out of the PTO parking garage in early 2009. But let'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 the trouble. How much money can it save your clients?

The America lnvents Act and the lndividual lnventor, Leigh Martinson, McDermott, Will & Emery. CNET News,
Sep17.201
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Denis R. 0'Brien 0
"The Patent Guy"

2011

is

the registered trademark of Denis R. 0'Brien

deni s0ThePatentGuY. net

Patent Prosecution News and Views, 0ct26.2011

Full fees Filing


Search $220.00

sm-En
$110.00 9270.00 $110.00 $7ss.00 $490.00 $1,240.00 $2,055.00 $5,030.00

p-En
$55.00 $135.00
$55.0r0

Savings
$55.00 $13s.00 $5s.00 $377.50 $245.00 $620.00
fi1,,027.50

$s0.00
s220.00 $1,510.00
1

Exam
Issue

fi377.50 $245.00 $620.00 $1,027.50 $2,515.00

Maint

$980.00 $2,480.00 $4,110.00 $10,060.00

The AIA doesn't modify how sm-En status is determined. While the authority for the 50% sm-En discount has always been statutory t, the acb;al defuiition of who/what is a sm-En is found only in the regulations.n Oddly, although sm-En is a creature of regulations, p-Enis creature oflaw - $123. Consequently, while the politicians have ostensibiy legisiated who is a F-Eru that deternrination is actually controlled by the bureaucrats who define sm-E& which is the first p-En rriterion. But who is a sm-En?

Maint 2

Maint
Total

$2,515.00

In addition to the spin on the amount of savings under the p-En program/ the reality of who wiil benefit is also a lot less impressive than the hype. ln fact, like so many political flim-flams, the truth of the matter is ratlrer disappointing. So let's anaTyze thls program and the p-En statute by determining what steps a practifioner has to take to secure p-En status for

ff you've ever tried to sort out whether or not a business qualifies as a sm-En, you know what a disaster that exercise can be, and the PTO is not much help. The PTO's sm-En regulation is 37 C.F.R. $1.27. But with respect to setting forth exactly what a sm-En business is, Rule 27 says, basically, "Don't ask us, ask the 5BA" and it gives you an address for the SBA.5
Rule 27 is only marginally more helpful with respect to defining individual small entities. Rule 27 tells us that a sm-En individual is an "inventor or individual" who has not transfened his/her patent nghts, or, if they have transferred the patent rights, the transferee is an individual or enLity that qualifies as a sm'En. Thus, the PTO defines the term "small entit/' by reference to itself. These are the sorts of circular regulations that produce hypertensive nose-bleeds in life forms higher than amoeba, bureaucrats, and politicians. Sulfice it to say, if your client is an individual who has not transferred any rights in the invention and is ulder no obligation to transfer any rights in the inventiorl then sm-En stabus - the first step to attaining the coveted g-En status - is not a problem. However, if any businesses or assignees are involved, you'll need to

her/his client. I see lour steps.


Step 1: Sort out small-entity stafils First, please note, that contrary to a lot of what has been written, one need not be a person/ an inventor, or an individual to acquire lLEn status. The stabute clearly refers to the "applicant." This is parEicularly significaflt because the AIA amends $118 of the Patent

Act so that assignees may now be applicants. Consequently, if your client rb a sm-En business, that business may be entitled to the p-En discount. Thjs is hardly surprising, since being a businesses has never been grounds for disqualification from the sm-En program. Another point that is worth mentioning at the outset is that, like sm-En status, there is no citizenship or residency restriction to obtaining the p-En discount. Anyone or any business in the world who meets the criteria is eligible. Pursuant to $123{a)(1), in order to be considered an pEq the client must first qualify as a sm-En .2 And fair enouglL too, for it is intuitive that a micro should be a sub-set of a small.

S41(hX1) of Title 35 37 C.F.R. $1.27 defines individual and non-profit small entities. 13 C.F.R. S 121 .802 defines what businesses are small entities. 37 C.F.R. $1 .27(a) (2) Small business concern. A small business 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 obligation under contract or law to assign, grant, convey, or license, any rights in the invention to any person, concern, or organization which 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 through 121 .8O5 to be eligible for reduced patent fees. Questions related to standards for a small business concern may be directed to: Small Business Administration, Size Standards Staff, 409 Third Street, SW., Washington, DC 20416.
2011

$123{aXl

Denis R. 0'Brien 0
"The Patent Guy"

is

the registered irademark of Denis R.0'Brien

deni s@ThePatentGuy. net

Patent Prosecution News and Views. Act26.2071

sit down with titles 13 and 37 of the C.F.R. and be sure you understand who your client is and/or who your client is transferring his/her rights to. Try to keep your head tilted back.
Step 2: Sort out the &strikes status If there was ever any doubt about Patrick Leahy's disdain for small inventors, the new $123 should resolve that doubt. For what Leahy has done is to discriminate against all individual inventors who have previously filed U.5. patent applications.

to applications filed after the p-En rules kick in. Vfhy should someone who has never filed a patent application in his/her life obtaln a $10000 benefit that is denied to those of us who have filed applications and obtained patents in the past?

Under $123(aX2) any person who is a named inventor on four or nrore U.S. patent applications is blacklisted from obtaining the p-En discount. Yes, your client's previous U.S. patent applications are counted as strikes - four of them and he/she is out. And it doesn't have to be an application that matured into a patent or was even examined. Simply filing a utility, plant, or design applications and abandoning them *ould render your client'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 in the U.S., was DOA before the ink dried on Obama's signature. I have filed five U.S. patent applications in the last 16 years - three resulted in patents, one was rejected, one is pending. I received the sm-En benefit for ali five applica[ons. But, of course, I have never received any p-En benefit - and I never will. Under the Leahy-Smith prior inventor discrimination provisiory I will not see a penny of the $1O000 p-En savings that will accrtre to other inventors. This is like Sam's Club blacKisting anyone who has prewiously shopped at Wal-Mart, in spite of Sam's Clab being Wal-Malt.

It also is interesting that a micro entity business whose employees have filed dozens of applications and who owns dozens of patents b not #fected by the 4-strikes rule - it only applies to named inventors, and, of course, a business entity cannot have been a named inventor on any patent application. This is significant because, as I note above, pursuant to Leahy's amendment of $118 of the Patent Act, assignees can now become the applicants. That is fure, and it's consistent with accepted international practice, but it also means that a small entity business can get the p-En discount for unlimited numbers of patent applications, while individual inventors are limited to iust four and those who have already filed four are SOL from the git-go. How many small entity inventors have unknowingly cut off their rights to the p-En discount by filing past applications? My guess is tens of thousands.
Step

3: Sort out what "median household income"

merurs

Section 123(aX3) of the new p-En statute prohibits applicants from getting the p-En discount if they have a gross income in excess of 3-times the "median household income for [the] preceding calendar year, as reported by the Bureau of the Census." Tlris subsection also excludes applicants who assign or are under an obligation to assign to anyone or any entity having that much income.

To rub salt in this wound, if my previous applications had been assigned to my employer, I would have no problem. If I were sti1l employed by a university or if I were to now become employed by a urriversity, I would have no problem. If I had only filed applications in Mexico or Serbia, I would have no problem. But because I have had the audacity to file in the U.S. as an individual inventor, I am now required to sacrifice thousands of dollars of potential benefits that others who have never filed a U.S. application are entitled to obtain under the p-En program. " Arbiftary" and "capricious" are the two words that come to mind first, but only Lrecause I'm a lawyer. A laSrman's "idiocy" fl1ns a close third.

Apparently, Leahy and Smith were not familiar with the many ways the Census Bureau reports median household income. "[M]edian household income . . . as reported by the Bureau of the Census" could mean a number of things. For instance, it could mean: (1) the median of income far all. households; (2) the median of income for fa:nily households; (3) the median of income for the households of whatever race the inventor is; or, (4) the median income for the households of whatever region the inventor is from. A1l of these are "median household incomes" reported by the U.S. Census

What was Leahy thinking? Did he intend that the p-En disseunl should be limited to four patents? Probably, but if so then the 4-strikes exclusion should apply orrly
Denis R. O'Brien 0
"The Patent Guy"
2011

is

the registered tradenark of Denis R. 0'Brien

deni s@ThePat entGuy. net

Patent Prosecution News and Views, 0ct26.2A71

Bureau.6 Depending on how one defines "median household income," the 3x cut-off could range from about $9O000 to about $fAO,gg0, based the Census Bureau's report for 2010. t Notwithstanding this ambiguity built into the new pEn statute, the means test is not likely to be a problem for most individual inventors wanting to file uader the p-En program. On the other hand, while the 4-strikes rule applies only to rurmed "inventors," the 3x means test applies to "applicants," arrd so it applies to business applicants, which means it will likely prevent most businesses that quakfy for smzrll enhty from qualifying as micro entity. It's a hard point to pin down quantita[vely because the IRS and the 5BA (hence the PTO) define "small trusiness" in grossly
different

requirement she/he has to meet in order to take advantage of the Hi-Ed loophole is that at least half of her/his income comes from the institution. Their invention does not even have to be related to their work or connected to their employment. Your client can be a $15K per year grad sfudent, a $25K per year maintenance person, a $250K per year professor, or a $10M per year foottrall coach, and they are entitled to be a part of PTO's Sam's Club so long as half of that income comes from higher education. Virtually the only restriction to this loophole is that one cannot be employedby a university that is outside the U.S., because 20 U.S.C. 1001(a) applies only to higher education instibutions in the states.
The mind boggles at the lobbying that went on to

terms.

produce this loophole.

guess not many. Assuning the cut-off to be a gross income of $150,000, clearly no businesses with more than a few employees wiil qualify.
wili
be able to meet the p-En neans

\A/hile it is difficult or impossible to get the income data one needs to assess how many sm-En businesses

Summary
There is no doubt that thousands of inventors all around the world will benefit from the p-En program. Unfortunately, thousands of inventors who have already filed four or more U.S. patent applications will

tesl I would

step 4: sort out the Hi-Ed If your client passes the previous three steps, then he or she qualiFies as an p-En. But if not, don t despair iust yet for there is still the Hi-Ed loophole provided by S123(dX1). In fact, if you are smart, you would rurr this step fkst because if your client qualifies for the HiEd loophole, all of the other criteria are trumped.
For reasons normal, naive, un-elected souls can only sit and wonder about, Leahy arrd friends decided that if your client works for an institution of higher education, he/she automalically qualifies for the p-En discount. Yes, automattcalTy, for none of the previous restrictions we have been discussing apply to employees of higher education institutions, as higher education institution is defined by 20 U.S.C. 1001(a) .

status

of some as yet uldetermined measure of median household income. So the population of individuals and businesses that qualify for p-En status is significantly less than the politicians, the media, and numerous overly-sanguine patent bloggers have

f;:'nffi;*: *i*" )'.n#JiH

trH:'#::::#

indicated. However, the news couldn't be better for that very special sub-population of inventors: those who are employees of American institutions of higher education. For them, the p-En statute is money in the pocket, which is why the AIA should have been called the Leahy-Smith Hi-Ed Employees Patent Fees

Windfall Act.

Merely by being employed in Hi-Ed, an applicant qualifies as a p-En. It makes no difference whether or not they are a sm-En. It makes no difference how large their income is. It makes no difference how many U.S. patent applications they have fi1ed. The only

6 7

Here is a link the the latest report. http://www.census.gov/prod/201'l pubs/p60-239.pdf

The 3x threshold based on all 2010 household incomes is jusl a hair short of $150,000.

Denis R. 0'Brien
'The Patent Guy"

@ 2011

is

deni s0ThePat entGuy. net

the registered trademark of Denis R. 0'Brien

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