Large and small entities in patent law

An entity, including its affiliates, may have up to 500 employees before being disqualified for small-entity status. Federal regulations define what persons qualify as employees and over what time periods employee counts are made.

All individuals employed on a full-time, part-time, or other basis are counted in determining a business concern's number of employees. 13 C.F.R. § 121.106(a). This includes employees obtained from a temporary employee agency, professional employee organization or leasing concern. The totality of the circumstances, including criteria used by the IRS for Federal income tax purposes, are considered in determining whether individuals are employees of a concern. Volunteers (i.e., individuals who receive no compensation, including no in-kind compensation, for work performed) are not considered employees.

Part-time and temporary employees are counted the same as full-time employees. § 121.106(b)(2). Where the number of employees fluctuates over the course of a year, the number of employees may be taken to be the average number of employees over the preceding 12 calendar months. § 121.106(b)(1). The average number of employees of a business concern with affiliates is calculated by adding the average number of employees of the business concern with the average number of employees of each affiliate. § 121.106(b)(4)(i). If a concern has acquired an affiliate or been acquired as an affiliate during the applicable period of measurement or before the date on which it self-certified as small, the employees counted in determining size status include the employees of the acquired or acquiring concern. Furthermore, this aggregation applies for the entire period of measurement, not just the period after the affiliation arose. The employees of a former affiliate are not counted if affiliation ceased before the date used for determining size. § 121.106(b)(4)(ii). This exclusion of employees of a former affiliate applies during the entire period of measurement, rather than only for the period after which affiliation ceased.

Small business concerns as defined by federal regulations for the purposes of receiving small-entity discounts on patent fees may have a maximum of 500 employees, including affiliates. Thus, a business concern that might otherwise qualify for small-entity status might be disqualified if it is affiliated with one or more other business concerns that cumulatively have more than 500 employees. Affiliation is determined under a control test. Concerns are "affiliates" of each other for the purposes of 13 C.F.R. § 121.802(a) when one concern controls or has the power to control the other, or a third party or parties controls or has the power to control both. 13 C.F.R. § 121.103(a)(1). It does not matter whether control is exercised, so long as the power to control exists.

The test for determining control takes in account ownership, management, previous relationships with or ties to another concern, and contractual relationships. § 121.103(a)(2). The federal regulations that describe control set out a number of circumstances where control obviously exists, as where one entity owns more than 50% of the stock in another entity, § 121.103(c)(1), or where one or more officers, directors, managing members, or partners who control the board of directors and/or management of one concern also control the board of directors or management of one or more other concerns, § 121.103(e).

There are also a number of "safe-harbor" exceptions to affiliation coverage found in 13 C.F.R. § 121.103(b), mostly involving ownership by certain kinds of investment companies, venture capital operating companies, Indian tribes, § 501(c) nonprofits like charitable trusts, foundations, endowments, etc.

If the assignee of a patent application has difficulty determining for itself whether it qualifies for small-entity status, authorized SBA officials may make formal entity size determinations, based upon a specific patent application pursuant to USPTO rules. 13 C.F.R. § 121.803. Such determinations, which may be thought of as analogous to a private letter ruling issued by the IRS to resolve questions relating to federal taxation, are binding upon the parties. Other SBA opinions provided to patent applicants or others are only advisory, and are not binding or appealable.

Once a good faith determination of small entity status has been made and appropriately established with the USPTO, the lower small entity fees may be paid in the application without regard to change in status until the issue fee or maintenance fee is due. 37 C.F.R. § 1.27(g)(1). In practical terms, this rule relieves applicants and their representatives of the burdensome duty to constantly reevaluate the determination of an application's assignee organization(s)' small entity status(es) throughout the pendency of the application up to and until the issue fee is paid.

Small entity status is lost when the patent is licensed, exclusively or non-exclusively, or assigned to an organization that would not itself qualify for small entity status. Special care should be taken by an organization licensing technology to the government. Except for licenses under the Bayh–Dole Act, the government is not a small entity for these purposes and small entity status would be lost.

If an organization (including affiliates) has fewer than 500 employees, an application data sheet may be filed, the box as a small entity may be checked, and subsequently the small entity fees may be paid until the patent is allowed or a maintenance fee on a resulting patent is due. At those points in time, the patent agent or attorney might need to send a notification of loss of small entity status.[3][4]

Changes to U.S. patent law in December 2012 created a sub-category of small entity status called "micro entity status"[5] for inventors who qualify for small entity status, but also have a gross income less than three times the current gross median income and have applied for no more than four patents previously, or who have[6] an association with an institution of higher education.[7]

Misrepresenting a firm's size status can result in suspension or disbarment, as well as civil and criminal penalties. 13 C.F.R. § 121.108(e). Moreover, all claims of a patent issued following an intentional misrepresentation of small entity status may be held to be unenforceable as the result of inequitable conduct, i.e., fraud upon the United States Patent and Trademark Office. See MPEP § 2016; 37 C.F.R. § 1.27(h). As long as any small-entity assertions are made without any intent to deceive, any improper assertion of small-entity status should not be considered fraud. See DH Technology, Inc. v. Synergystex Intern., Inc., 154 F.3d 1333 (Fed. Cir. 1998); Turbocare Corp. v. General Electric Company, 45 F. Supp. 2d 110 (D. Mass. Mar. 31, 1999).

Case law

• Ulead Systems Inc. v. Lex Computer & Management, 351 F.3d 1139 (2003)

Statutes

• 35 U.S.C. 41(h)(1).

Patent office procedures

• Manual of Patent Examination Procedure, section 509.02

Commentary

• "How can an Investment Invalidate a Patent?" by James Goepel, Greenberg Traurig LLP