This is the third in a series of articles on the America Invents Act (AIA), the sweeping patent reform legislation signed into law in September 2011.
As I explained in the first post in this series, the AIA replaces the “first-to-invent” system with what is commonly called a “first-to-file” system. The first-to-file rules will apply to patent applications with an effective filing date of March 16, 2013 or later.
There has been much dispute over whether this shift will benefit American innovation over the long term. However, when it comes to the issue of intellectual property (IP) security, the verdict is already in: The first-to-file system increases the risk of invention theft.
To understand why, it’s helpful to consider an example. Suppose that an employee at your company, which we’ll call EthicalTech, has come up with a new invention. She has documented it internally and is currently engaged in discussions with colleagues and company management regarding when to file for a patent. Now suppose that one of her colleagues, in violation of his employment agreement (and quite possibly of various laws), decides to describe the idea to a friend who works for a competitor that we’ll call FraudCo. The friend presents the idea to his managers at FraudCo, who then quickly file for a patent on the stolen invention. A few weeks later, EthicalTech files its own patent application.
What happens? Under the outgoing first-to-invent system, the internal documentation created by the true inventor can ensure that the EthicalTech gets the patent, even though FraudCo filed first.
Under the incoming first-to-file system, however, things are more complicated–and far less favorable–for EthicalTech. Based on the dates alone, the U.S. Patent and Trademark Office (PTO) will assume that FraudCo has the rights to the patent since it filed first (and since neither company disclosed the invention prior to filing). To enable companies like EthicalTech to rectify the obvious injustice of this result, the first-to-file system includes a new “derivation proceeding” designed in part to provide a mechanism to recover stolen IP.
Under this proceeding, EthicalTech can file a petition with the PTO explaining the basis for its belief that FraudCo stole the invention. If the unscrupulous employee was foolish enough to use EthicalTech’s own email system to tell his equally unscrupulous friend at FraudCo about the invention, the theft can be easy to document. But suppose that the information was exchanged in a conversation.
In practice, it will often be difficult or impossible for EthicalTech to meet the PTO’s requirement of filing a petition “supported by substantial evidence” that the idea was stolen. An additional complication is that there is a relatively short window during which EthicalTech even has the right to file the petition. (The window lasts for one year and is tied to the PTO publication of a claim to the invention). EthicalTech can also choose to address the theft through litigation against FraudCo in federal court (under a different timing window for when it can file the complaint), though it would face challenges in establishing the theft in that venue as well.
The bottom line is that the first-to-file system is not friendly to companies that fall victim to IP theft. And, while it is seldom discussed in technology startup circles, IP theft is a significant and growing threat. If there’s any silver lining to this aspect of patent reform, it lies in spurring companies to reduce their exposure.
There are at least three ways in which IP can be stolen. First, a company’s computers can be accessed by an unauthorized outsider. Most corporate systems aren’t nearly as secure as their information technology managers would like to believe. As FBI Director Robert Mueller said in a March speech at the RSA Conference in San Francisco, “There are only two types of companies: Those that have been hacked, and those that will be.” Second, an unscrupulous insider can compromise IP. Third, a well-meaning but careless employee can inadvertently place company IP at risk.
Here are some steps that companies can take to increase IP security. These steps are useful in general, but will become particularly important with the move next March to the first-to-file system:
• Companies should educate employees regarding sound practices to safeguard IP. Unencrypted laptops, company emails forwarded to personal accounts, and careless conversations can all lead to IP landing in the wrong hands.
• In many technology companies, proprietary information is stored across a complex and rapidly evolving mix of local and cloud-based systems. In this type of dynamic environment, it’s important to make sure that a company’s IP security procedures keep pace with changes to its information technology infrastructure.
• Once the first-to-file system is in place, companies will have a much higher incentive to act quickly to protect new inventions. Protecting inventions quickly closes the window on both law-abiding competitors who independently arrive at the same idea and unethical competitors who apply for a patent based on stolen IP.
• Many technology employees change jobs often. This dynamism is an important ingredient in the success of technology hubs such as Silicon Valley and Austin. However, while exiting employees have every right to walk out the door with their talents, they don’t have the right to take company IP with them. Procedures should be reviewed and tightened to ensure that IP stays with the company when employees change jobs.
While much of the above is common-sense advice, startups often fail to follow it. The transition to first-to-file furnishes one more reason to ensure that one of your company’s most valuable assets–its IP–remains under your control.
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