patent basics for accountants

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www.wscpa.org [email protected] el ( 42 5) 6 44 -4 80 0 .T oll fre e in W A (8 00 ) 2 72 -8 27 3

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B el le vu e, WA 98005 -3 48 0B OA RD O F D IR EC TO RS

Antonio M. La li ber t e PresidentJu ll ee n J . Snyde r President-electDav id E . Ka tr i VicePresidentJ am e s R . L ad d SecretaryM ark A . H ug h Treasurer

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Interstate Mobility E xp eriencesU nprecedented M om entumA p ro posed am en dm en t to ex istin g Wash in gton S tate law w ill be in trod uced when the 2 008 legislatu re co nv en es o n Janu ary 2 1, 2 00 8. F in d ouw hat you need to know about interstate m obility and w hat it m eans foWashing ton CPAs.

12 Shining a Light on FASB 159Fair value reporting enhances the usefulness of both the balance sheeand income s ta temen t. This a rtic le e xp la in s the ma jo r p rovis ions o fFASBS tatemen t Number 159 , th e p ro noun cemen t to a id th e p rac titio ner's comprehens ion o f the f air value option.18 Patent B asics for A ccountantsThe exodus of manufacturing assets out of the U.S. has ushered inr ep la cemen t by in te lle ctual p rope rty a ss ets . Today's a ccounta nts need toincr ea se their in te lle ctual p rope rty lite ra cy in o rder to a ccount fo r a nd helpman ag e th is d riv in g fo rc e o f mark et v alu e. T his artic le p ro vid es a n overv iew of the bas ic s o f pate nts , one impor ta nt type o f in te lle ctual p rope rty .21 Today's W orld Demands EnhancedBusiness Reporting

T he globalization o f b usiness is shrin kin g b ord ers an d exp and ing the needsof investors and shareholders. Historic financial reporting fram eworksim ply isn't sufficient any m ore. W hat is needed is an enhanced businessreporting system that respo nds to the g lob al m arketplace and b rings financial repo rtin g into the 2 1 s t century.

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PATENTS

Patent Basics for Accountantsby Jose L. Sanchez, JD, CPA

fi\revolution has occurred in the assetIi\\. . . f A ., b .comooSltlon 0 menca s usmesses.~~""\llfhe exodus of m anufacturing assets outof the U .S. has usher~d in a replacem entby intellectu al prop erty assets. In 1 97 8,tangible assets represented 80% ofco rp orate a ssets an d in tan gib les 2 0% . By1997, an invers ion occur red and intangib lesrepresented 73% of corporate assets.'L ooking at it in a slightly different w ay,th e v alu e o f in ta ng ib le s a s a p erc en ta ge o fm arket value of S& P 500 com panies hasgrown from 16.8% in 1975 to 79.7% in2005.2 Acc ord in gly , to da y's a cc ounta ntsneed to i nc re as e t he ir in te lle ct ua l p roper tyliteracy in order to account for and helpmanag e th is d riv in g f or ce o f mar ke t v alu e.Addit ional ly , i f pending leg is la tion banningta x p ate nts is n ot e na cte d, ta x a cc ounta ntsw il l be w is e to j o in eng inee rs i n t ak ing pat en tl aw e le ct ive cou rs es i n col lege . Th is a rt ic les eeks to i nt roduce accoun tants t o t he natu re ,a cquis itio n, a nd p ro te ctio n o f o ne c ommonintel lectual property asset : patents.

In tellec tu al p ro pe rty (IP ) re fe rs to th ebundle of rights, protected by law, thatsurround creative w orks m anifested in atan gible form . It is an intan gible interestdifferent an d sep arate from the m aterialobject in which the creative work isembodie d. The Un ite d S ta te s Cons titu tio ng iv es Cong re ss th e power ove r th is su bje cta re a a nd id en tifie s th e power 's p ur po se a ndth e m ean s fo r ac hiev in g it.3 C on gress h ase xe rc ised th is p ow er sin ce 1 79 0, w he n th efirst p aten t sta tu te w as e na cted . C ommonty pes o f IP inclu de patents, tradem arks,c opyr ig hts, tr ad e s ec re ts , a nd c on tra ctu alrights to use the foregoing (licenses).O th er ty pe s o f I P in clu de f alse a dv ertisin g,m isappropriation, publicity rights,and idea submiss ion .

I Kenneth E. Krosin, M a na ge me nt o f I P A ss et s,AIPLA BULLETIN76 (2000 Mid -Win te r Meeting Is sue).2 James E. M alackowski, l n te ll ecl lla l Proper ty asNat ional Pol icy , IP LAW360,(Sep 4,20007).3 T he U nited State Constitution grants Congressth e po we r in a rtic le I, se ctio n 8 , c la use 8 "T o p ro mote th eP ro gr es s o f S ci en ce a nd u se fu l A rt s, b y s ec ur in g f or li mit edT im es t o Aut ho rs a nd I nv en to rs th e e xc lu siv e R ig ht t o th ei rrespective Writ ings and Discoveries."

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Patent law4P ate nt law p ro te cts n ew , unobv io us, a nd

u se fu l in ve ntio ns5 by g iv in g th e in ve nto r alim ite d time w ith in whic h to e xc lu de o th ersfrom m aking, using, offering to sell, orsel ling, wi th in the Uni ted S ta tes or impor tinginto the United S ta tes6 the pa ten ted inventionin ex ch an ge fo r c omple te d isclo su re o f th ei nven ti on (hence t he name "pa tent ") . P atentl aw i s a t t he lega l i nte rs ec ti on o f ou r nati onalp olic ie s to b en efit th e pub lic b y p romotin gc ompetitio n a nd p romotin g th e p ro gr ess o fth e u se fu l arts. It is co ntain ed in T itle 3 5 o ft he Un ited S ta te s Code .The pat en t s ta tu te s r ecogn iz e th re e t ypeso f pat en ts : u ti li ty , des ign , and p lant pat en ts .U tility patents are the m ost common andencompass useful inventions such aspharmaceuti ca ls , appl iances, and proces sesfor m ak in g p aint. D esign patents protectthe ornam ental design of useful articleslik e fu rn itu re an d c lo th in g, P lan t p ate ntsprotect new and distinct plant varietiessuch as fruit trees. The balance of thisarticle w ill focus on utility patents. Theacq uisitio n, e nfo rcemen t, an d d efe nse o fdes ign and p lant pat en t r igh ts a re s omewha tsim ilar to what is discussed below.

4 The history of patent statutes can be tracedto a 1474 statute issued by the Republic of Venice offeringprotection against infringers for a ten year period to newin ve ntio ns th at w ere co mm un ic ated to th e R ep ub lic a fte r b ein gput into use. The concept embodied in patent law, however,precedes the enactm en t of this statu te. See History of patentlaw, ht tp: / /en.wikipedia.orglw/index.php?t it le=History_oCp ate nU aw &0 Id id =1 63 48 78 53 ( la st v is ited N ov . 2 6, 2 00 7).

5 Tomes have been written on the meaning of "new,unob vious, an d useful." For our pu rposes, suffice it to say thatin order for the invention to be new (novel), the inventionmust not have been known or used by others in this country, orpatented or described in a printed publicatio n in any coun try ,b efo re th e in ven tio n b y th e a pp lic an t. In a dd itio n, th e in ve ntio nmust not have been on sale in this country more than one yearprior to filin g the p atent ap plication. Further, the inventionmust not have been the subject of a patent application filedin a foreign country more than twelve months before filing ofth e U .S. a pp lic atio n. 3 5 U .S .C . 10 2. Section 103 deals w ithnonobviousness.

6 Patent law is territorial. A U.S. patent is onlyvalid in the U.S. If the infringing activity is taking place inA ustralia, yo u w ill need an Au stralian p atent to enforce y ourrig hts th ere . T he Pa te nt C oo pe ra tio n T re aty fa cilita te s fo re ig nfilings and h elps in establish ing the sam e effective filing d atei n m u lt ip le c ou nt ri es .

Acqu isition o f R igh tsPatents a re awarded to" [w]hoever inventsor discov ers any new an d u sefu l process,m ac hin e, m an ufac tu re , o r comp ositio n omatte r, o r a ny n ew and u se fu l imp rovemen tth ere of . . ." 7 I n g en er al, a p ate nt is awa rd edto th e first in div id ual to d ilig en tly re du cethe invent ion to prac ti ce .8To obtain a patent, an inventor9 m ustfile an a pp lica tio n co ntain in g a c omple te

disclosure of th e in ventio n w ith th e U .SPatent and T rad em ark O ffice (PTO). T heP TO e xam in es th e ap plic atio n a nd g ra nts ap ate nt if a ll c onditio ns a re met.The patent application contains adetailed description of the inventionin clu din g d rawin gs a nd at lea st o ne cla imThe description should be sufficient toe na ble one o f o rd in ary sk ill in th e p er tin enart to m ak e an d use the inv ention . C laim sprecisely define the boundaries of the

in ve ntio n muc h lik e a le ga l d escrip tio n orea l esta te d efin es a p arc el o f la nd . A t lea sin theo ry , it is p ossible to read a claim andd eterm in e w he th er o ne's a ctio ns in frin gethe patent. Just like one should be able toread a legal descrip tion o f a parcel of lan dand determ ine w hether one is standingin sid e o r o utsid e o f th e p arc el. T he p ro blemis th at a dv erse p arties w ill se ld om ag re e toth e m ea nin g o f te rm s u sed in th e claim s a ndcou rt s, a t g re at cos t, a re engaged t o a sc er ta inth e me an in g o f th e c la im la ngua ge .1OThe examinat ion p roce ss i s r ef er red to a sp ro secu tion and can last betw een o ne andth re e y ea rs o r lo ng er . P ate nt p ro se cu tio n isa back and forth p ro cess b etw een th e PTO

7 35 U.S.C. IOI.8 Actual reduction to practice occurs when the

in ve nto r b uild s a n e mb od im en t o f th e in ve ntio n th at fu nc tio nsas intended. C onstructiv e reduction to practice o ccu rs w henth e inventor files a paten t ap plication that fully d iscloses thein vention. In the case of constructive red uctio n to practice,th e invento r need n ot build or test th e inven tion befo re filin gthe application. Contrary to popular belief, a model of thein vention does not need to be subm itted with th e app lication,although one may be requested by the PTO.

9 An inventor may assign his or her rights bywritten in strum en t bu t m ust be listed as the inventor and m ustsign a declaration ackno wledging , am ong o th er thing s, that heo r s he is th e o rig in al an d firs t in ve nto r.

10 It is not unusual for patent litigation to bum uph un dre ds o f th ou sa nd s ifn ot m illio ns o f d olla rs.

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ex am in er" a nd th e in ven to r'z w hereb y allo f th e co nce rn s raise d b y th e ex am in er area dd re ss ed by th e in ve nto r. T he e xamin er 'sconce rn s r ange f rom cor re cti ng mi ss pe lle dwords to rejecting of some or all of theinven to r's c la ims . They a re commun ic atedin w ritten co rresp on den ce called "o fficeactions." The inventor responds byam en din g, ca nce llin g, o r su bm ittin g n ewc la ims , o r by a rgu ing that the o ri gi na l c la imsare paten table in ligh t o f th e exam iner'srejections.

If the exam iner allow s the claim s, thep ro se cu tio n e nd s a nd th e p ate nt w ill is su e.A lte rn ativ ely , th e e xamin er may r eje ct o neo r mo re c la im s a f in al time a nd th e in ve nto rm ay then cancel rejected claim s and haveth e patent issue w ith th e allow ed claim s;appeal to the Board of Patent Appealsan d In te rferen ces (BPA I); o r a ban do n th eap plica tio n. If th e in ven to r ap peals to th eBPA I a nd lo se s, h e o r sh e can file a n ap pealin t he f eder al cou rt s ys tem .The PTO collects various fees as parto f th e p ate ntin g p ro cess. A pp lican ts p ay afilin g fee that varies w ith th e number andtype of c la ims in the appl ica tion . In addi tion ,appl icants a re charged sea rch , examinat ion ,i ss uance, ma in tenance f ee s, and add iti onalfees for extensions of tim e to respond too ffice ac tio ns. T ota l P TO fe es ca n e xce ed$ 9,670 (one-h alf that am ou nt fo r "sm allent it ie s" I3 ). A tt orney f ee s vary and dependo n the am ou nt o f tim e required to draft theapp li ca ti on and the number and comp lexit yo f r es pons es t o o ff ic e a ct ions , bu t c an eas il ye xc ee d th e PTO fe es.Enforcement of RightsO nce a patent issues, th e patent ow nercan exercise h is or her righ ts. E xercise ofr ight s beg in s by ma rk ing pat en ted p roduct s

II Examiners work within a g iven area of technologyan d a re g en era lly k no wle dg ea ble o f th at a re a.

12 Inventors are usually represented by patent agentso r p ate nt a tto rn ey s. Pa ten t a ge nts a re in div id ua ls w ith sc ie nc eo r e ng in ee rin g d eg ree s th at h av e p as se d th e P TO re gistra tio ne xam. P ate nt a tt or ne ys a re l aw ye rs w it h s ci en ce o r e ng in ee rin gd eg re es th at h av e p ass ed th e P TO r eg is tratio n e xa m.

13 Small entities include individual inventors,small businesses (less than 500 employees), and nonprofiti n st it u ti ons and un ive rs it ie s .WWw.wscpa.org

PATENTS

with the word "patented" or" pa t" a nd th e p ate nt's n umber. I fth e p ro du ct is n ot s o mark ed , th eowner may not re cove r d amagesfor infringem ent that occursb efo re g iv in g th e in frin ge r actu al n otice.Patent owners will contact suspectedin frin gers a nd en ga ge in a d ialo g to g ath erin fo rm atio n ab ou t in frin gin g a ctiv itie s.O ften , suspected infring ers are loathedto cooperate and m ay be unresponsive.Filing suit m ay be the only w ay to ensureco operation. O th er tim es the infringer ish ig hly co op erativ e an d w ill see k a lic en seso th at th ey c an c on tin ue u sin g th e p ate nte dtechnology or process. Except on rareo cc asio ns, a p ate nt owner h as d is cr etio n tog rant o r r efus e l ic ense s.I fthe part ie s cannot reso lve the ir d ispute,the patent ow ner w ill turn to the federalc ou rts to e nfo rc e h is o r h er rig hts .1 4P ate ntowne rs a re s ol el y r es ponsi bl e for enfor ci ngtheir patents. If they learn of infringingactivities and sit on their rights, theirin ac tio n w ill b e u se d a ga in st th em when th ei nf ringer i s la te r sued .IS Therefore, patentowners should act prom ptly to addressinf ringement a ft er i t i s d is covered .In general, it is advantageous toc ommence litig atio n in th e p ate nt owne r'sb ac ky ar d. I t w ill tra nsla te in to lower c os tsfor the patent ow ner and higher costs forth e in frin ger, a fac to r th at can en co urag esettlem en t. S om etim es, th e p aten t own erw ill h av e n o ch oic e b ut to su e th e in frin geri n a d is tant loca ti on .Defense of RightsWhile a lawsuit will bring with ita cc ess to in fo rmatio n th at w as p re vio uslyu nav aila ble (lik e sa le s in fo rm atio n) a ndpressure on the infringer to settle, italso brin gs po ten tial risk. Since the bestd efense is a stro ng o ffense, th e infring erw ill ty pic ally c ounte rsu e a lle gin g th at th e

1 4 S in ce p atent law s are federal law s, fed eral cou rtshave sub jec t ma t te r j u ri sdi ct ion ove r pa ten t ca se s .15 T his eq uitab le defens e to infrin gem ent actio ns isknown a s l ac he s.

Today's accountantsneed to increase theirinte llec tua l propertyliteracy in order toaccount for and helpman ag e th is d riv in gforce of m arket value.

paten t is inv alid an d u nen fo rceable. T hpaten t o wner now fin ds him o r herself asdefen dan t in a battle that can cause h im oh er to lo se th e p aten t rig hts h e o r sh e fo ug hso hard to acqu ire and enfo rce. A ltho ughthe patent ow ner enters the ring w ith thp re sump tio n o f th e p aten t's v alid ity , it isreb uttable presum ptio n and it's all up fog rab s in th is b attle . T he co urt is n ot b ou ndby th e finding s o f th e P TO . E vidence w ilb e in tro du ced th at th e P TO mad e a m ista kin issuing the patent and the court is freto decide if any or all of the claim s in thpat en t s hou ld be s tr ic ken i nvali d.If the court upholds the validity of thpatent, it can be asked to interpret thla ngua ge o f th e c la im o r c la im s in que stio nTh is i s ano ther oppo rt un it y for t he i nf ri ngeto ch isel aw ay a t th e h old th e p aten t own ehas on the infringer. T he risk here is thathe court w ill agree w ith the infringer'sinterpretation of the claim and thereforef ind that the pat en t i s no t in fr inged .T he p ate nt own er must a lso p ro ve, w itha prepo nderan ce o f the evidence, that thaccused device or process does, in facin frin ge th e p ate nt. I t i s n o t e nough to h av eval id patent w it h c la im l anguage constr uedto your liking; you m ust also show that ale ast o ne c la im in you r p ate nt " re ad s" on tha cc use d d ev ic e o r p ro ce ss. T ha t is , e a ch a nev ery e lemen t in th e claim must b e p reseni n the accus ed dev ic e.RemediesThe last legal hurdle a successfupat en t owne r- li ti gant must c le ar i s p rov indamages in their quest for a remedy tth e in frin gemen t. P ate nt owners ty pic allys ee k in ju nc tio ns, c ompen sa to ry d amagespunit ive damages, int eres t, and a ttorney feea s r emedi es for patent i nf ringement . Cour tg ra nt in ju nc tio ns to p re ve nt in fr in gement

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patent basics for accountants

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