Patent Pendency: A Great Reason to Cherish Your Trade Secrets

By Steve McDaniel, JD, PhD; and Jon Hurt, PhD, Technology Litigators | April 19, 2012

So, rather than protecting your product and your market share using trade secrets, you opt to patent your new and exciting additive, coating formulation, paint container, paint sprayer, etc., in the United States. Let’s say the U.S. is a huge market for you, you have a strong presence here and you want to get ahead of the competition from the get-go with a strong patent position. As the relevant statute says, a United States patent grants you “the right to exclude others from making, using, offering for sale, or selling” the claimed invention within the United States, but not other countries/jurisdictions. You have to repeat the process and spend gobs more money in Japan, Europe, etc. to cover those markets. Additionally, a US Patent allows you to block others (the competition) from “importing” the claimed invention into the United States from say, a country that you did not obtain a patent in (e.g., Kiribati, Lesotho, Suriname, Vanuatu, etc.). What this actually means is that your hard-won patent is Plaintiff’s Exhibit No. One.

But, and here is the first snag, there is a lag period (“patent pendency”) between the time you file a patent application with the US Patent and Trademark Office, affectionately known as the PTO, and the time a patent granting you the above rights is issued, which is graphically depicted in the chart on the next page.

The trend is not your friend here, as the time for obtaining a final resolution on a US patent application—either issuance into an enforceable patent or abandonment by the applicant (you)—has increased from about two years to nearly three years over the last decade. Things have gotten so sluggish, that I have personally experienced waiting over three years and eight months not to get a final resolution on a patent application, but rather just to receive the first official action!

Further, your chances of getting a patent allowed aren’t that good. Only 44.8 percent of patent applications were actually issued relative to the number of patents applications filed in 2010, which is down from a 53.2 percent issuance rate in 2000. A caveat to patent prosecution—that’s what us IP nerds call butting heads with the PTO, though “persecution” might be a more apt name for the process—indicated in the graph is that, should you appeal a final rejection during pursuit of allowance, the recent years’ statistics show a near tripling in the pendency for an appeal of the rejection of your patent application.

The ratio of annually filed patent applications to examiners has steadily improved from about 105 in 2001 to about 79 in 2010. So, what is causing the slow-down? One factor is the quota system by which patent examiners are evaluated. Until 2010, examiners were credited with two “points” during prosecution of a case—one for a first office action on the merits and another for final resolution allowance or abandonment.

Abandonment is often not the end of the game though. There is a procedure called a request for continued examination (RCE), which allows prosecution of the invention to continue with a fee paid to the Patent Office, of course.  The quota system gave two points to an examiner whether the application was an originally filed patent application or RCE. However, in the last couple years examiners were credited two points for original patent applications and only 1.75 to 1.5 points for RCEs, incentivizing the examiners to focus on finalizing prosecution of the originally filed application. The previous quota system gave no points to a final office action, while the current system assigns 0.25 points. This gives the examiner motivation to go straight from a first office action to a final office action on the merits rather than issuing multiple non-final office actions, forcing you, the applicant, to choose between abandoning the application, and filing an RCE or outright giving up on getting a patent, or filing a notice of appeal to the Board of Patent Appeals and Interferences (BPAI).

The number or RCEs filed are not easily found in a search of the PTO’s published data, though in 2009 almost one out of three utility patents filed (30 percent) were from RCEs (i.e., wash, rinse, repeat). Interestingly, the average number of notice of appeals filed in years through 2006 to 2008 (prior to the switch to the new quota system) was 4,761, while the average for the years 2009-2011 jumped to 13,742. It seems that the recent “improvement” in patent pendency is actually just a transfer of time to the pendency in the appeals process. And trust me, you don’t want to know the stats on rejections being affirmed or partly affirmed upon appeal to the BPAI.  

The next step after that is an appeal filed in federal court, and ultimately, if things still don’t go your way and they are gracious enough to accept the case, the next step is the US Supreme Court. As each appeal along the way accumulates considerable legal expenses, you only appeal when you’re ready to reach deep into your pockets to win it. Most people (i.e., ~138,000 in 2009) stick with filing one RCE after another.

The second snag is a possible Sword of Damocles hanging over the examiners’ head promoting a reluctance to find a patent, whether original or RCE, allowable. In the 2005-2006 timeframe, enhanced standards for patent quality review were implemented at the PTO. For each examiner, a random sample of allowed applications and finally rejected applications are evaluated by the Office of Patent Quality Assurance for errors. If an allowed claim is un-patentable, then the prosecution of the application will be reopened. So much for that hard fought Notice of Allowance you just received, huh? But, to the examiner, the rate of such errors contributes to whether they receive a bonus, or are terminated. Coincident with these changes, the patent allowance rates dropped to a low of 37.7 percent in 2007, though as noted above, rates have improved a tad. Given the nature of the work at the PTO to critique the patentability of claims, it may be argued that there is a tendency to maintain a rejection rather than find the claims patentable, particularly when the patent applicant seeks moderately broader coverage rather than issuance of a narrowly phrased and often commercially irrelevant claim.   

There are commercially relevant considerations to these delays that are tough to balance. Should you file a patent application in both the US and any other jurisdiction (e.g., the European Patent Office), your patent application disclosing how to make and use the new product will be published within 18 months for all your competitors to read. Though you can market your product with “Patent Pending” as a warning to possible competitors that an enforceable patent may issue, a bold competitor may market a “knock off” product based on a published application while waiting to see if a patent ever issues and promptly cease activity if it does. The loophole out of this situation is to only file in the US and forego any foreign counterpart, which then gives the option for the patent application describing the invention to remain unpublished and thus “secret” until grant.

How much will these efforts cost you? Assuming that your paint company is large enough—more than 500 employees and affiliates—not to receive a small entity’s 50 percent fee cost reduction, a non-provisional patent application 100 pages or less, and 20 or fewer claims, including filing fees, an issue fee and maintenance fees so you can actually make full use of it against your competitors, will total about $11,700. Not bad for a day’s work at the PTO. In fact, the PTO is a very profitable government agency. Excess revenues are placed in the general treasury, so that the current balance with the Treasury Department is over $1.6 billion, with over $700 million of that total added in the last decade. Unfortunately, this money is generally unavailable to the PTO for use when other priorities such as the ongoing federal budget deficits take precedence—a third snag. So, don’t harbor much hope that revenue surpluses from your filing fees will be used to, say, hire more examiners to reduce the patent application logjam.

Let’s face it, getting a patent in the United States these days is an expensive crap-shoot with the dice moving in super-slow motion. Given this reality, what is the best use of your resources in protecting your profit making intellectual property? As discussed in the previous articles, your company’s internal “know-how” can be protected immediately by binding contracts and concrete actions. Patent protection has its own intrinsic value, but trade secrecy is like love—it’s yours to cherish forever and it shouldn’t cost you as dearly.

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