1. Presented at the 3 rd Annual Inland Empire Intellectual Property Institute Spokane, WA, October 2, 2010 Ron D. Katznelson, Ph.D. President, Bi-Level Technologies ron@bileveltech.com Patent Reform 2010 Selected Topics 1

2. Selected Patent Reform Topics  Who am I and Why do I care about proposed patent reform legislation?  A technology development executive, inventor and an entrepreneur; Founded two startups – raised $50M in capital; Named inventor in 23 U.S. Patents; Advisor for new technology startups  Extremely concerned about the proposed legislation’s harmful effects on small businesses and startups  Addressing here only two sections of S. 515:  Section 2: Grace Period elimination and First-To-File  Section 6: Attenuated judicial review of BPAI decisions 2

3. S. 515 - Section 2  Amends 35 U.S.C. §102 and § 103, transitioning U.S. patent law from invention-date-based system to a filing- date-based system  Our concern is not “First-To-File” – this is an irrelevant ‘red herring’; there are only 20 interferences per year out of 460,000 applications  Eliminates the One-Year Grace Period that protects non- public inventor’s fundraising, marketing and R&D activities prior to filing  Replaces interferences with derivation proceedings to resolve allegations of misappropriation of first inventor’s invention  S.515 Proponents, including the Administration, say: this will “codify best practices into the law” 3

4. S. 515’s conditional grace period 102(b) EXCEPTIONS [to filing date controlling priority].— (1)DISCLOSURES MADE 1 YEAR OR LESS BEFORE THE EFFECTIVE FILING DATE OF THE CLAIMED INVENTION.—A disclosure made 1 year or less before the effective filing date of a claimed invention shall not be prior art to the claimed invention under subsection (a)(1) if— (A) the disclosure was made by the inventor or joint inventor or by another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; or (B) the subject matter disclosed had, before such disclosure, been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor. (2) DISCLOSURES APPEARING IN APPLICATIONS AND PATENTS.—A disclosure shall not be prior art to a claimed invention under subsection (a)(2) if— (A) the subject matter disclosed was obtained directly or indirectly from the inventor or a joint inventor; (B) the subject matter disclosed had, before such subject matter was effectively filed under subsection (a)(2), been publicly disclosed by the inventor or a joint inventor or another who obtained the subject matter disclosed directly or indirectly from the inventor or a joint inventor; 4

5. Startups’ “Best Practices”  Startups and small business innovators’ “best practices” are manifested in all aspects of running their business  R&D procedures and efficient scheduling  Raising funding and engaging with strategic partners  Managing marketing and disclosure  Intellectual property protection and patent prosecution  In allocating the limited resources, patenting resources cannot trump other critical business and operational needs 5

6. Startups’ Patenting Realities differ from that of larger firms  Many startups need the “grace period” to develop, vet, and perfect their invention  Begin commercialization, advance sales, seek investors and business partners, and obtain sufficient funds to prosecute the patent applications  During the grace period, many inventors learn about starting a technology-based business for the first time  they often must learn from outside patent counsel (at considerable expense) about patenting and related deadlines  Many are also in a race against insolvency 6

7. Startups’ Patenting Realities differ from that of larger firms (Contd.)  Startups are significantly more exposed than large firms in this regard because  they must rely on far greater and earlier private disclosure of the invention to outside parties.  This is often required for raising investment capital and for establishing strategic marketing partnerships, licensing and distribution channels.  In contrast, large established firms seldom need early disclosure of their inventions to outside parties  have substantial patenting experience, often have in-house patent attorneys  often use internal R&D investment funds  can use their own marketing, sales and distribution chains 7

8. Startups’ “Best Practices”  Startups and small business inventors seldom publish their inventions right after they make them  Unlike some academic inventors operating under “Publish or Perish” practices, startups and small business inventors operate under “Perish if Published” Best Practices  Given limited resources, inventions are vetted, tested and perfected prior to filing patent applications  The grace period is required for all early activities  S.515 will effectively kill the business grace period  FTF Changes two centuries of American patent law. Seeking administrative convenience at the expense of judicial equity – anathema to American fact-finding jurisprudence 8

9. Example of Startup “Best Practices” from invention to product launch Current patent law is geared around innovators’ “best practices” that focus scarce resources on minimizing total development time and reducing technical risks 9

10. The loss of a grace period under S. 515 would result in costly deviations from “best practices” Under S. 515, innovators would be required to spend scarce financial resources on premature and more frequent patenting, instead of spending them on advancing their development 10

11. “Best Practices” use of the grace period under current law Rule 131 affidavit supporting early invention date Note that original invention records may disclose more than is ultimately required to support the claims. Current law gives applicants time to improve the disclosure and match it to commercially important claims 11

12. The American Grace Period  Works around innovators’ best business practices and provides patent protection in the course of normal technology and business development.  Preserves the patent systems’ quid pro quo  Helps avoid gratuitous disclosure of trade secrets with no claims in exchange. Disclosure of that which is required to support a claim – no more and no less. In contrast, S. 515 perilously deviates from the patent bargain and would have a chilling effect on patenting incentives  Helps prevent filing of untested “paper inventions” that later turn out to be useless. Prevents false teachings. 12

13. Consequences of eliminating the grace period  Fundamentally redefines the prior art and limits patentability by including prior art created after the invention date to bar a patent  Cause a rush to file many (ultimately) useless applications with the USPTO – increases in backlog and pendency 13

14. 14 Prior art published less than one year prior to filing date is the most frequent source for invalidating patent applications Relative date distribution of the invalidating prior art references cited in ultimately rejected EPO patent applications Relative reference publication date periods in years. Period bin definition: the τ = 0 bin contains references published less than one year prior to the priority filing date. The τ – 1 bin corresponds to references published no later than one year and no earlier than 2 years prior to filing date, etc. A small fraction of references published within one year after filing (τ + 1) were used by EPO examiners mostly as review of prior art cited within or as expositions of the level of skill in the art. Share of invalidating references Source: C. Sternitzke, Reducing uncertainty in the patent application procedure – Insights from invalidating prior art in European patent applications, World Patent Information Vol. 31, pp. 48–53 (2009). Courtesy: Elsevier B.V.

15. Consequences of eliminating the grace period  Fundamentally redefines the prior art and limits patentability by including prior art created after the invention date to bar a patent  Cause a rush to file many (ultimately) useless applications with the USPTO – increases in backlog and pendency  USPTO admits that there would be an increase but refuses to provide projections of increased filings or related costs to it and the public  I Estimate increase of 150,000 applications per year under S.515 15

16. 16 Applications with priority dependent on filing date are less mature and are more likely to be abandoned Data Sources: EPO Data from G. Lazaridis et al. World Patent Information 29, pp. 317-326, (2007). “After SR, before Exam” and “First Action” here means the withdrawal components (2)+(3) and (4) respectively, as defined in the heading of Table 2. Priority is determined by filing datePriority is NOT determined by filing date

17. 17 Many disclosures that are currently held back would be filed under a ‘First-To-File’ system Due to urgent attempts to establish priority, a significant fraction of these disclosures would not receive adequate scrutiny and would likely be filed as new applications under FTF

18. Does ‘First-To-File’ law eliminate First Inventor determinations?  No. Every derivation proceeding must have an embedded first inventor proceeding 1  Moreover, doesn’t Derivation contradict FTF law, which stands for vesting property right only after filing?  If no property right of first inventor exists prior to filing, what right does S.515’s Derivation provisions seek to protect?  Would States be justified in resurrecting old laws granting State patents to first inventors so as to maintain consistency with state property right laws? 1. Price v. Symsek, 988 F.2d 1187, 1190 (Fed. Cir. 1993) (Derivation is a question of fact. To prove derivation, the movant must establish prior conception of the claimed subject matter and communication of the conception to the adverse claimant.); Brand v. Miller, 487 F.3d 862, 869 (Fed. Cir.2007) (To meet the burden of proof on derivation, a claimant “must make two showings. First, he must establish prior conception of the claimed subject matter. Second, he must prove communication of that conception to the patentee that is sufficient to enable [him] to construct and successfully operate the invention.") (Internal citations and quotations omitted) (Emphasis added) 18

19. Are you ready for FTF? - FTF myths and reality check  Myth: “Under FTF, inventors would not have to keep corroborated invention records.”  If such records are discarded, what other evidence would you rely on in Derivation proceeding or other trade secret action? These actions will be more probable than under current law  Myth: “FTF can be addressed effectively by ‘educating’ applicants to file Provisional Applications”  A Provisional good enough to protect an invention is not cheap!  A Provisional with the ‘no-claims’ approach, or without attorney cost/time to meet non-provisional quality, is much less likely to support the desired claims.  Applicants already use Provisionals extensively (140,000 Apps./Year) 19

20. Are you ready for FTF? (Continued)  Under FTF, you must institute new procedures for:  Bi-Weekly or Monthly engineering project reviews, identifying new ideas that should be filed as patent applications; compelling developers to spend more time on more frequent patent disclosures and patent prosecution; modifying the employee incentive structures to achieve these goals  Reviewing every departure of a key employee (perhaps to join a competitor), as it may necessitate an immediate diversion of his former colleagues’ time to write and file patent applications on patentable subject matter developed by the departing employee  Fundamental change in client relations:  Constant tension with clients about pre-filing time allocation; Who is blamed for delay? Will searches be made and IDSs filed?  Educating clients about the inevitable lower yield process, wherein more applications must be filed per ultimate grant 20

21. S. 515 – Section 6  Amends 35 U.S.C. §141, canceling the long- established statutory right of de novo review of USPTO decisions in ex parte reexaminations in D.C. Federal District Court  Makes direct appeal to the Federal Circuit the only path for judicial review in such cases  Attempts to codify USPTO’s rulemaking in 37 C.F.R. § 1.303(d) and pronouncements in MPEP §1216(II) and § 2279, which long stand in irreconcilable conflict with 35 U.S.C. §§ 141, 145 and 306. 1 1. See Sigram Schindler Beteiligungsgesellschaft MbH v. Kappos, 93 U.S.P.Q.2d 1756 (E.D. Va. 2009) (Action under the APA, 5 U.S.C. § 706(2)(C), challenging the legality of the agency’s interpretive rule, 37 C.F.R. § 1.303. Dismissed due to plaintiff’s lack of standing as a consequence of non-ripeness, leaving the matter unresolved on the merits) 21

22. S. 515 Section 6’s Likely Consequences  Would the right under 35 U.S.C. §145 of de novo review of USPTO decisions on patent applications in D.C. Federal District Court be abolished next? - That is what the USPTO has long sought!  Will exacerbate ex-parte reexam abuses by creating an unprecedented end-run around Federal District Courts in potentially all patent disputes  Alleged infringers will simply file ex-parte reexam requests with USPTO, receive a final agency decision subject only to CAFC review, essentially bypassing Article III courts. Given the deference the CAFC must accord the agency (Zurko), what prospective/alleged infringer would not choose this new promising favorable path to challenge a patent? 22 Existing Reexamination StatuteProposed Statute in S.515 § 6 Examiner; BPAI District Court CAFCExaminer; BPAI CAFC

23. S. 515 Section 6’s Likely Consequences (Contd.)  Alleged/prospective infringers initiate the largest portion, and a growing flow, of ex-parte reeaxms  Under Sec. 6’s end-run around district courts, this favorable path to challenge patents will flood PTO with ex-parte reexam requests, dwarfing current flow 23

24. Further Information  Grace period:  Small Business Coalition on Patent Legislation, letter to SBA (December 15, 2009) at http://bit.ly/SB-Coalition-Letter-to-SBAhttp://bit.ly/SB-Coalition-Letter-to-SBA  Startup companies’ Letter to Senate leaders (June 1, 2010) http://j.mp/Startup-FTF-Letter http://j.mp/Startup-FTF-Letter  Steve Perlman, Presentation on the invention process - the development of Mova® (September 23, 2009) at http://j.mp/Mova-development http://j.mp/Mova-development  Attenuated judicial review of ex-parte reexam decisions:  Miller & Archibald on Section 6 of S.515 (September 2010) at http://bit.ly/Miller-Archibald-2010 http://bit.ly/Miller-Archibald-2010  Miller & Archibald on Section 6 of S.515 (shorter version, MIBJ, June 2010) at http://bit.ly/Miller-MIBJhttp://bit.ly/Miller-MIBJ 24

25. Thank You Any Questions? ron@bileveltech.com 25

26. Supplemental Questions & Answers  Q: The rest of the world (ROW) uses FTF; how can America go wrong by following their lead?  A: Perhaps the ROW forgoes benefits by not following the proven American system with its inventor protections and Small Business orientation 26

27. Consider Europe, for example:  Historical Lack of Substantial Small Business Protections  U.S. enacts Small Business Act in 1953 to encourage, develop, protect and assist small business growth. Europe discovers the need to do so only in 2008.  U.S. law provides for small-entity 50% patent fee structure. Americans understand that society as a whole benefits when affordable patent protections are extended broadly to all inventors – large or small. No European breaks to small patenting entities; governmental patent fees throughout its term in 13 EU states exceed $100,000 ( ~ 10x that of U.S. costs) 27

28. Age distribution of top 500 firms 28  The Schumpeterian “creative destruction” is much more prevalent in the U.S.  It has profound effects on the competitive dynamics that make patent protection essential for the startup innovators

29. Are Europeans ‘blind’ to Small Entity considerations?  EC/EPO’s considerations appear dominated by administrative conveniences  not wishing to verify or determine small-entity status, presuming abuse by applicants  High patent fees are admitted as tools to suppress purported “excessive” patent application filings  Neither reasons appear consistent with the purpose of the patent system or with any accountability to constituencies that depend on patent protection 29

30. Are Europeans ‘blind’ to Small Entity considerations? (Contd.)  While small businesses and startups in America complain about threats to the robust intellectual property system that has long protected them,  European small businesses complain about inability to obtain such protection:  82% of them indicated a need, or strong need, for improved IP protection. [see response to Question 4.5 at http://ec.europa.eu/enterprise/newsroom/cf/document.cfm?ac tion=display&doc_id=4072&userservice_id=1&request.id=0 ]. 30

31. Are Europeans ‘blind’ to Small Entity considerations? (Contd.)  Example: Estonia, Romania and Slovenia have had a grace period prior to joining the EPO after 2002. By such rules, have their original consideration for domestic constituencies been misplaced?  How accountable are the EC and EPO to these countries’ constituencies after they joined EPO?  EC’s grace period workshop had no participation of constituents most affected by eliminating the grace period. [see http://ec.europa.eu/research/era/pdf/ipr-gp- report.pdf. Of the 19 participants, zero participants were from a small business, a startup or an individual inventor].http://ec.europa.eu/research/era/pdf/ipr-gp- report.pdf 31

32. Are Europeans ‘blind’ to Small Entity considerations? (Contd.)  The fact that EC and EPO policy makers have not adopted certain patent policies originated in America, does not create a rebuttable presumption that such American policies are misplaced  Rather, does it not mean that the EC and EPO policies are to be questioned, because they were made under a chain of accountability that is too long to trace to an affected constituencies? 32