United States: Paying "Large Entity" U.S. Patent Office Fees As An Insurance Policy

Last Updated: January 8 2019
Article by Frank L. Bernstein

You are the CEO of a startup company with lots of inventive ideas, and the company is applying for patents. Patent counsel tells you there are fees to pay to the US Patent and Trademark Office (USPTO) in connection with the company's patents, and that the fees depend on whether your company is a "large" entity, a "small" entity, or a "micro" entity. Micro entity fees are minimal but rarely apply. But small entity fees may apply, and are usually half of those for a large entity.

Which fees can you pay? Which fees should you pay?

Under the Rules of Patent Practice, specifically 37 CFR 1.27(a), a "small entity" has fewer than 500 employees; has not "assigned, granted, conveyed, or licensed"; and is not obligated to do so to any entity that is not also a small entity. Paying the small entity fees can make a difference of thousands of dollars over the life of each patent in a company's portfolio. If your company qualifies as a small entity, it is worth it to take advantage of the cost savings wherever possible. And there is no reason to pay the higher fees if there clearly is no obligation to do so.

Yet some patent attorneys always pay large entity fees, no matter what, "just in case". So, if your company qualifies as a small entity, when if ever should the company pay large entity fees?

As a startup, your company almost certainly has fewer than 500 employees but, as with so many startups, it probably aspires to get a big company (for our purposes and the USPTO's, a large entity – call it BigCo) interested. Maybe there is a desire for BigCo to acquire your startup. Maybe your startup is willing to license its patents and other intellectual property to BigCo. What does that mean for your startup and its USPTO fee obligations?

If BigCo has not actually acquired the company, and the company has not assigned or licensed its patent rights to BigCo, it should be just fine to pay the lower small entity fees, right? Technically, yes, so long as there is no other agreement that commits the company to an acquisition, assignment, or license. Once the obligation begins, if ever, the company will need to start paying the large entity fees.

But coming to closure with BigCo for acquisition of the company or of the company's patent rights can take a long time and a lot of steps. At any point along the way, the deal may go south, even though you feel confident that things will work out. Sometimes, there are milestones of some kind, imposing different levels of obligation on both your company and BigCo, before the transaction is complete.

In this situation, the future may be cloudy or uncertain. Or it may be hard to tell when that future obligation begins. This is a situation in which prudence might dictate paying the large entity fees. Think of it as taking out an insurance policy just in case the future obligation begins without you realizing it.

An insurance policy makes a lot of sense if your company contemplates enforcing its patents. If the company files suit, it is virtually certain that the adverse parties – the accused infringers – will probe every aspect of the history of the patent(s), including not only history in the USPTO, but history of licensing or assignment. If the other side finds anything in the patent history that permits even an argument that your company pulled a fast one with the USPTO in either getting or maintaining your patents, you will see that argument being made, and you will have to pay your lawyers to deal with it.

How might those lawyers argue that you paid the wrong fees?

  • Agreement to license or assign to a large entity if certain milestones are met (a future obligation).
  • Agreement to give a license to a large entity for a product not yet produced (another future obligation)
  • Agreement to give a license to a large entity for certain products being produced now which are not currently being licensed (i.e. where the license obligation may kick in at some future time).

Accordingly, if there is uncertainty about whether BigCo actually has a license obligation under your company's patents, and you have a nontrivial expectation that your company will be asserting one or more of its patents against a competitor at some point down the road, you can save your company lots of attorneys' fees by paying the large entity fees up front, and avoiding the argument. That would be the insurance policy.

More generally, it is good to bear in mind that your company's business dealings may affect its intellectual property rights and obligations. Your company's patent counsel can advise about such possibilities, and should be kept in the loop about substantial intellectual property licensing or acquisition deals in which the company becomes involved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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