Erroneous Small Entity Designation Can Jeopardize Patent Rights

A decision of the Court of Appeals for the Federal Circuit (CAFC) in Ulead Systems, Inc. v. Lex Computer Management Corp., 351 F.3d 1120 (Fed. Cir. December 9, 2003), highlights the importance of carefully determining whether a patent applicant or patentee is qualified for "small entity" status when paying fees to the U.S. Patent and Trademark Office (PTO).

The PTO rules define a "small entity" as an independent inventor, a non-profit organization, or a "small business concern." A "small business concern" is any business concern that, together with its affiliates, has no more than 500 employees and that has not assigned, granted, conveyed or licensed, and is not obligated to assign, grant, convey, or license, any rights in the invention to any person who could not be classified as an independent inventor or to any concern that would not qualify as a small business concern or a nonprofit organization. Being classified as a small entity entitles the patent applicant or patentee to pay 50% of the standard fees for application filing and maintenance charges.

In this case, the defendant Lex never had more than 20 employees and qualified as a small entity when it acquired the subject patent and paid the first maintenance fee at the reduced rate. However, Lex later granted at least 3 non-exclusive licenses to companies that each had more than 500 employees, after which Lex continued to pay the maintenance fees on the patent at the reduced small entity rates.

Ulead filed a declaratory judgment action in district court alleging that Lex's patent was unenforceable, invalid, and/or expired. Ulead claimed that the patent was unenforceable and/or invalid because of Lex's misrepresentation of its small entity status to the PTO, and that the patent had expired because Lex had failed to pay the correct maintenance fees and did not pay the incorrect small entity fee in "good faith" as required by PTO regulations. Lex acknowledged that it was not entitled to claim small entity status at the time it paid its second and third maintenance fees, and immediately petitioned the PTO to accept the balance of the deficiency owed on the maintenance fees. The PTO granted that petition and accepted payment. Lex then opposed Ulead's action on the grounds that it did not intend to mislead the PTO when it claimed small entity status, and that the patent was not expired because the PTO had properly excused its erroneous claim to small entity status and underpayment of fees.

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