Provisional Rights Under 35 U.S.C. §154(d): The First, Sleepy Decade

Only a handful of district courts have addressed the application of 35 U.S.C. §154(d), the provisional rights statute, since it was codified as part of the American Inventors Protection Act in 1999. The provisional rights statute thus perhaps stands as one of the most under-used provisions of U.S. patent law. This article examines the judicial decisions that have applied the statute over the past decade, and explores the potential reasons for the neglect of provisional rights by patent litigants.

I. Origins of Provisional Rights Under 35 U.S.C. §154(d)

Prior to 1999, all U.S. patent applications were maintained in secrecy by the Patent and Trademark Office until their issuance as patents. This contrasted with the treatment of most foreign patent applications, which were typically published 18 months after their filing.

This disharmony resulted in a competitive disadvantage to American patent applicants: while their foreign patent applications were being published in foreign languages 18 months after filing (thus enabling their foreign competitors to readily review them), their foreign competitors’ U.S. patent applications (in English) were not being published prior to issuance. Thus English language versions of these applications were not being made available prior to issuance.

Through the Domestic Publication of Foreign Filed Patent Applications Act of 1999 (DPFFPA), a subtitle under the American Inventors Protection Act of 1999 (AIPA), Congress sought to remedy this disparity, while also achieving the parallel, related goal of further harmonizing domestic and foreign patent law. ¹See Intellectual Property and Communications Omnibus Reform Act of 1999, Pub. L. No. 106-113, §4502, 113 Stat. 1501 (H.R. 3194 Pub. L. No. 106-133; 59 PTCJ 330, 12/2/99).

The publication of U.S. patent applications prior to their issuance as patents also had its drawbacks for applicants. Specifically, by having their patent applications published, companies faced both the early loss of any trade secret rights in their inventions, and the specter of copiers who might take advantage of the early publication of a valuable invention. This begat provisional rights: a mechanism providing the applicant a remedy against persons who practiced their invention during the period between publication of a patent application and the issuance of the patent.

II. Provisional Rights Under 35 U.S.C. §154(d)

The provisional rights provision allows a patent owner to obtain a reasonable royalty from any person who, during the period beginning on the date of publication of a patent application for such patent until the issuance of the patent, made, used, offered for sale, sold, or imported the invention or products made by the invention. ²35 U.S.C. §154(d). Provisional rights are available based on either (a) the PTO’s publication of a U.S. patent application or (b) the World Intellectual Property Office’s publication of a Patent Cooperation Treaty application that has been designated for filing in the United States. Id. Note that for PCT applications that publish in a non-English language, provisional rights accrue only after both the PTO and the potential infringer receive an English translation of the publication. See 35 U.S.C. §§154(d)(1)(B), (d)(4)(A). Actual notice of the published patent application by the accused party is required, and the invention as claimed in the patent must be substantially identical to the invention as claimed in the published application. ³35 U.S.C. §154(d).

III. Treatment of the ‘Actual Notice’ Requirement

The “actual notice” requirement of the provisional rights statute differentiates provisional rights violations from patent infringement in that the former requires awareness of the published patent application before liability can accrue, while the latter is a strict liability offense. The justification for this comes from the historical roots of a patent—a document authorized by the Constitution and having an effect similar to that of a statute or decree. A patent application is not afforded such status, and no constructive knowledge is imputed, thus a violation of provisional rights requires “actual notice” of the published application.

The U.S. Court of Appeals for the Federal Circuit and the district courts have on several occasions visited the “actual notice” requirement, and have generally done so strictly so as not to elevate the provisional rights remedy to the level of patent infringement.

In one case, Stephens v. Tech International Inc., the Federal Circuit examined what can be considered a prototypical provisional rights “notice” situation: the patent applicant, after publication of the application, informed the alleged violator of the existence of the published patent application. ⁴See, e.g., Stephens v. Tech International Inc., 393 F.3d 1269, 1275-76, 73 USPQ2d 1369 (Fed. Cir. 2004) (69 PTCJ 218, 1/7/05). The court found that this constituted “actual notice.” ⁵Id.

Importantly, the notice need not identify the accused product. For example, in First Years Inc. v. Munchkin Inc., ⁶No. 07-cv-558-bbc, 2008 WL 4283122 (W.D. Wis. Sept. 17, 2008). plaintiff’s counsel had mailed defendant a copy of the published U.S. patent application at issue, but did not communicate “a specific charge of infringement by a specific accused product or device.” ⁷Id. at *1. Indeed, the letter merely stated the following: “On behalf of our client The First Years Inc., we draw to your attention to [sic] the enclosed documents” and “[i]f you wish to discuss these publications, please contact me.” ⁸Id. Observing that §154(d) requires no more than “actual notice of the published patent application,” the court held that “there is no requirement that a patentee provide notice of the specific manner by which a defendant is believed to be practicing the inventions claimed in a patent application.” ⁹Id. at *2. This contrasts with the “notice” requirement for patent marking under 35 U.S.C. §287, which requires that both the patent and the product be identified. ¹⁰Id., citing 35 U.S.C. §287(a) (“[T]he statute limit[s] damages for infringement to those that occur after ‘the infringer was notified of the infringement and continued to infringe.’”) (emphasis in original); see also Amsted Industries
Inc. v. Buckeye Steel
Castings Co., 23 F. 3d 374, 30 USPQ2d 1470 (Fed. Cir. 1994) (40 PTCJ 544, 4/21/94) (Actual notice required by Section 287(a) “must be of ‘the infringement,’ not merely notice of the patent’s existence or ownership. Actual notice requires the affirmative communication of a specific charge of infringement by a specific accused product or device.”).

Other activities short of an express notice letter may also constitute “actual notice.” In K-Tec Inc. v. Vita-Mix Corp., the court found that the “[e]vidence show[ed] that [defendant] monitored the application which matured to the [patent-in-suit].” ¹¹No. 2:06-CV-108-TC, 2010 WL 2079682, at *8 (D. Utah May 24, 2010). The court found that defendant’s monitoring of the application raised a genuine issue of material fact concerning whether and when defendant had actual notice of the published patent application, and concluded that “[a] reasonable jury could find that [defendant] was actually aware of the [] publication at some point before the [patent-in-suit] was issued.” ¹²Id. Thus, “actual notice” has not been construed to mean the affirmative act of being noticed by the applicant, but instead means an awareness of the published application. This too contrasts with the “notice” requirement for patent marking under 35 U.S.C. §287, which requires that the patentee affirmatively give notice to the infringer. ¹³“The notice of infringement must … come from the patentee, not the infringer.” American Medical Systems Inc. v. Medical Engineering Corp., 6 F.3d 1523, 1537 n.18, 28 USPQ2d 1321 (Fed. Cir. 1993).

On the other hand, the mere possession of a document indicating that a patent application had been published, as part of a large volume of documents received by a party, may not constitute “actual notice.” In Arendi Holding Ltd. v. Microsoft Corp., the plaintiff had produced 126 pages of documents related to a patent application, including the PTO’s Notice of Publication, in a prior litigation with defendant wherein thousands of pages of documents were produced by plaintiff. ¹⁴No. 09-119-JJF-LPS, 2010 WL 1050177, at *2 (D. Del. Mar. 22, 2010). The magistrate judge stated that “[i]t is not enough that the alleged infringer had information from which it could or should have become aware of the existence of the published patent application.” ¹⁵Id. at *8. Consequently, the magistrate judge found that the plaintiff’s production did not provide the defendant with actual notice, stating that “[i]n some respect, a single-page Notice of Publication dropped into nearly 7,000 pages of document production is analogous to a published application being available in a database but not expressly drawn to the attention of the alleged infringer.” ¹⁶Id. at *7.

The “actual notice” requirement for the application of provisional rights thus requires the accused party to gain specific awareness of the published patent application, but neither requires the notice to come from the patent applicant nor an identification of the product or process.

IV. Treatment of the ‘Substantially Identical’ Requirement

Provisional rights may only be asserted when the final issued patent is “substantially identical” to the published patent application. ¹⁷35 U.S.C. §154(d). This “substantially identical” standard is the same as the standard applied under 35 U.S.C. §252, the reissue statute. ¹⁸Under Section 252, amended patent claims are “substantially identical” to the original claims “if they are without substantive change.” Laitram Corp. v. NEC Corp., 163 F.3d 1342, 1346, 49 USPQ2d 1199 (Fed. Cir. 1998) (internal quotations omitted). The standard ensures that the property rights underlying provisional rights—which are framed by the published claims—are equivalent to claims that have been fully examined by the PTO and deemed to have satisfied the requirements of patentability under the patent statute. ¹⁹In most instances, the claims subject to provisional rights are the original application claims filed by the applicant and published by the PTO. However, the PTO allows republication of patent applications (including amended claims) upon the filing of a request and the payment of a fee. See 37 C.F.R. §1.221(a). Thus, if republication occurs, provisional rights would attach to the republished claims.

In one case, Pandora Jewelry LLC v. Chamilia LLC, the plaintiff amended the claim-at-issue during prosecution in order to overcome a prior art rejection. ²⁰No. CCB-06-600, 2008 WL 3307156, at *10 (D. Md. Aug. 8, 2008). The district court found that the plaintiff’s amendment was not only necessary to overcome the PTO’s rejection, but was also “a critical feature of the Pandora jewelry.” ²¹Id. Because the plaintiff “substantively altered the scope of the claim when it amended the patent,” the published application and patent were not substantially identical. ²²Id.

On the other hand, an amendment during prosecution is not per se “substantial” for purposes of Section 154(d). In K-Tec, the published claim-at-issue was amended twice before issuance of the patent, the first by a preliminary amendment and the second after receiving a rejection from the PTO. ²³K-Tec, 2010 WL 2079682, at *9. Neither amendment constituted a substantial change. Indeed, the court found that the second amendment merely “clarifie[d] what was in the claim already,” and thus did not constitute a substantial change to the claim language. ²⁴Id. Thus, the defendant’s “substantial change” argument failed, as did its “actual notice” argument.

A court’s claim constructions may also impact whether an amendment to claim language during prosecution constitutes a substantial change. The Arendi court noted that “[a] determination of whether the two claims are ‘substantially identical’ may be impacted by the court’s claim construction ruling in this case.” ²⁵Arendi Holding Ltd. v. Microsoft Corp., No. 09-119-JJF-LPS, 2010 WL 1050177, at *9 n.14 (D. Del. Mar. 22, 2010).

Determining whether or not a published application’s claims are substantially identical to the claims of an issued patent is not always a straightforward exercise. The timing and purpose of the amendment, as well as a court’s construction of disputed claim terms, may affect the analysis.

V. Computation of Reasonable Royalty Damages

The “right to obtain a reasonable royalty” set forth in 35 U.S.C. §154(d) echoes the “in no event less than a reasonable royalty” language of 35 U.S.C. §284, the patent statute’s damages provision. ²⁶Compare 35 U.S.C. §154(d) with 35 U.S.C. §284. Superficially, any such reasonable royalty calculation would seem to be a simple matter of applying the decades of case law decided under Section 284 for reasonable royalties in the patent infringement context. Some early commentators suggested that the provisional rights royalty was to be computed in the same manner as the patent rights royalty, as opposed to a separately negotiated royalty. ²⁷See John M. Skenyon et al., New Provisional Rights Section Creates a New Reasonable Royalty Award, Patent Damages Law and Practice §3:21 (1999). Others opined that reasonable royalties for infringement of provisional rights would be difficult for courts to determine and would have the potential to undervalue the actual harm to the applicant arising from infringement. ²⁸Patrick J. Birde, Nicholas J. Nowak, Analyzing Provisional Rights for Patent Applicants, 9 No. 12 Intell. Prop. Strategist 1 (2003). Since the enactment of the provisional rights statute, only one published decision has addressed this issue, with the result being that a reasonable royalty computation in the provisional rights context requires a modified version of the traditional Georgia Pacific analysis.

In Parker-Hannifin Corp. v. Champion Laboratories Inc., the court held that it must conduct a modified Georgia-Pacific analysis to determine “what royalty rate two hypothetical negotiators would have entered into as of the beginning of the provisional rights period.” ²⁹No. 1:06-cv-2616-PAG, 2008 WL 3166318, at *8 (N.D. Ohio Aug. 4, 2008). The Parker-Hannifin decision also sheds light on how certain Georgia-Pacific factors may affect the royalty rate in a provisional rights situation differently than they would in the context of a reasonable royalty for patent infringement.

As background, the district court in Georgia-Pacific Corp. v. United States Plywood Corp., set forth a non-exhaustive list of factors that courts could use to calculate a reasonable royalty for patent infringement under Section 284. ³⁰Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1120 (S.D.N.Y. 1970), modified and aff’d, 446 F.2d 295 (2d Cir.), cert. denied, 404 U.S. 870 (1971). The factors were designed for the patent infringement context. The foundation for the reasonable royalty analysis in the infringement context is a hypothetical negotiation between the patentee and the accused infringer at the time the infringement began. ³¹Fujifilm Corp. v. Benun, 605 F.3d 1366, 1372, 95 USPQ2d 1985 (Fed. Cir. 2010) (80 PTCJ 196, 6/11/10) (citing Rite-Hite Corp. v. Kelley Co., 56 F.3d 1538, 1554, 35 USPQ2d 1065 (Fed. Cir. 1995) (en banc). Moreover, case law explains that a hypothetical “book of wisdom”—meaning certain information that occurred after the initial time of infringement—can be considered in the analysis. ³²See Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1575, 7 USPQ2d 1606 (Fed. Cir. 1988), overruled on other grounds by Knorr-Bremse Systeme Fuer Nutzfahrzeuge GmbH v. Dana Corp., 383 F.3d 1337, 72 USPQ2d 1560 (Fed. Cir. 2004) (en banc) (68 PTCJ 529, 9/17/04) (observing that the hypothetical negotiation analysis “permits and often requires a court to look to events and facts that occurred thereafter and that could not have been known to or predicted by the hypothesized negotiators”).

Pivotal to the Parker-Hannifin court’s analysis was the difference between the time that the provisional rights royalty accrued and the time of first infringement. The difference, which in the Parker-Hannifin case was approximately seven months, was critical because of the numerous Georgia-Pacific factors that rely on the first date of the accrual period. For example, factor 5 examines “[t]he commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business.” ³³

Georgia-Pacific factors 1 through 6 are:

1.  The royalties received by the patentee for the licensing of the patent in suit, proving or tending to prove an established royalty.

2.  The rates paid by the licensee for the use of other patents comparable to the patent in suit.

3.  The nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold.

4.  The licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly.

5.  The commercial relationship between the licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promotor.

6.  The effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his non-patented items; and the extent of such derivative or convoyed sales.

Georgia-Pacific, 318 F. Supp. at 1120.

This relationship may change over time, and thus may be not be the same on the provisional rights accrual date, as compared to the date of the issuance of the patent.

In the Parker-Hannifin case, the fact that the defendant’s allegedly noninfringing alternative was conceived and made available to customers after the hypothetical negotiation for the provisional rights royalty (the accrual date for the provisional rights period) was important. This affected a number of Georgia-Pacific factors.

The provisional rights royalty rate may also be computed differently from the patent rights royalty rate in view of other events occurring after the provisional rights hypothetical negotiation. For example, if either party were to enter into a licensing agreement for the patented technology after the end of the provisional rights period, Georgia-Pacific factors 1 through 6 may affect the patent rights royalty rate but not the provisional rights royalty rate. This is because the “book of wisdom” at the time the parties hypothetically negotiate a provisional rights royalty may be different from the “book of wisdom” in the patent infringement context.

Accordingly, the reasonable royalty for a violation of provisional rights may be different from the reasonable royalty for infringement of patent rights. This is especially so if a noninfringing alternative became available after the provisional rights hypothetical negotiation date, or if other material activity occurs after the provisional rights period.

VI. Conclusion

The provisional rights statute has not had a busy first decade, having been examined only by a few courts. The principal reasons for this are facially apparent—the published application claims must be substantially similar to the issued claims, the defendant must have had actual knowledge of the published application, and the defendant must have been practicing the invention prior to the patent’s issuance.

Nonetheless, the statute is not as narrow as its application has been, and case law has shown that it can be a potent remedy. The “actual notice” and “substantially identical” requirements of the provisional rights statute have been construed to allow application of the statute in reasonable circumstances, and the royalty available to the patentee for the provisional rights period can be substantial. ³⁴Recent proposed litigation, H.R. 5980 (introduced July 29, 2010), would, if enacted, halt the publication of U.S. patent applications (80 PTCJ 531, 8/20/10). Thus, H.R. 5980, if enacted, would have the effect of limiting provisional rights to only those published PCT applications that designate the U.S. for filing. There appears to be very limited support (or logic) in enacting this provision of H.R. 5980.