Patent Reform Legislation Brings Host of Changes to US Patent Law

The Leahy-Smith America Invents Act, signed by President Obama into law on September 16, 2011, is the culmination of patent reform efforts taking years. Making several significant and long-awaited changes to US patent law and a myriad of potentially less significant changes, the Act as a whole likely represents the most substantial change to US patent law since 1952. This blog entry summarizes the Act’s most important changes.

Adoption of a "First to File" Patent System

Harmonizing American patent practice with the rest of the world’s most advanced economies – and representing its single biggest change – the Act converts the US patent system from "first to invent" to "first to file." In other words, priority will be established on the basis of when a patent application is filed, and not on the basis of which inventor first conceived and reduced the invention to practice. Limited exceptions to the "first to file" regime are available for an inventor who files an application within one year of his or her first disclosure (for example, at a conference).

Some critics charge that this change will create a "race to the PTO" that unfairly burdens individuals and small entities that may not have the resources to file applications as promptly as large companies. Advocates contend that the change will reduce the expense of the patent process and of patent infringement litigation, enabling innovators to put the money saved to research, development and the creation of new industries and jobs. Time will tell who is right.

The Act will eventually eliminate patent interference practice because the earliest filing date of competing applications will establish priority. Consequently, to address claims that a patentee copied his or her claimed invention from an earlier inventor, the Act creates a new category of "derivation" petitions. Derivation petitions allow an alleged first inventor to file a petition with the PTO – or a civil action in US District Court – within one year of a patent’s issue date or one year of a patent application's publication date, seeking to have the patent or patent publication deemed derivative.

Post-Grant Proceedings

The second significant change comes in the form of two new post-grant opposition proceedings. The first – "inter partes review" – will replace the inter partes reexamination process. It allows any person (except the patent owner) to challenge an issued patent within the first nine months following its issuance on grounds of anticipation or obviousness. The PTO standard for allowing the review to proceed is "that there is a reasonable likelihood that the requester would prevail with respect to at least one of the claims challenged in the request." Discovery is available. Although the existing ex parte reexamination process is left intact, a patent owner dissatisfied with the result of an ex parte reexamination may appeal only to the Federal Circuit; it no longer may do so in district court.

"Post-grant review," the second new mechanism, allows a party to oppose a patent within the first nine months following issuance on any invalidity ground (including any requirement under Section 112 of the Patent Act other than best mode).

Prior Commercial Use

Section 273 of the Patent Act has provided alleged infringers of business method patents with a "prior commercial use" defense. The Act’s third significant change is its expansion of this defense to infringement claims involving any type of patent. Doing so will protect innovators who have chosen to maintain inventions or processes as trade secrets against infringement claims brought by later claimed inventors.

False Marking

The rash of recent false marking cases that have flooded district courts over the past two years will soon be gone. The Act eliminates the private enforcement of false marking claims except as to those who can show a competitive injury. Because the Act expressly covers all cases pending on the Act’s effective date, we expect all but a very few cases around the country will be dismissed.

The Good and Bad News Regarding PTO Fees

After siphoning off the funds collected by the PTO over the years, Congress heeded the PTO’s call to cease doing so. The Act thus allows the PTO to keep essentially all of the fees that it collects, which presumably will be used to hire more personnel and reduce the ever-increasing backlog of pending applications, reexaminations and PTO appeals. That’s the good news.

The bad news is that on September 26 (10 days after the Act’s effective date), all patent fees – including filing fees, national fees, examination fees, issue fees, disclaimer fees, appeal fees, maintenance fees, patent search fees and continued examination fees – rise by 15 percent. The Act also introduces a "prioritized examination" mechanism that, for an additional fee of US$4,800, will accelerate examination of an application deemed "important to the national economy or national competitiveness."

Nuisance Claims Are Out: Supreme Court Removes Weapon From Activist Arsenal

On June 20, 2011 the US Supreme Court issued its long-awaited decision in American Electric Power Co., Inc. v. Connecticut, holding that the Clean Air Act’s scheme for US EPA regulation of carbon dioxide and other greenhouse gases (GHGs) displaces federal common law nuisance claims seeking reduction of GHGs to address global warming. The decision reinforces the Court’s prior decision in Massachusetts v. EPA that the Clean Air Act authorizes federal regulation of GHGs and places US EPA, as opposed to the courts, front and center in the debate over control of GHG emissions.

In 2004 eight states, New York City and several private land trusts filed suits in the US District Court for the Southern District of New York against five major electric power companies alleging that the defendants were the "largest emitters of carbon dioxide in the United States," and their emissions substantially and unreasonably interfered with public rights in violation of the federal common law of interstate nuisance or, alternatively, state nuisance law. The plaintiffs alleged that these emissions were a public nuisance for contributing to global warming and sought injunctive relief requiring the defendants to cap and reduce GHG emissions by specific percentages each year for at least a decade.

The district court dismissed both suits as involving non-justiciable political questions. On appeal the Second Circuit reversed and found that plaintiffs had stated a claim under the federal common law of nuisance because US EPA had not promulgated any rule regulating GHGs. The Second Circuit found that until US EPA exercised its authority to regulate GHGs, displacement of the claim by the Clean Air Act could not occur.

The US Supreme Court was divided on whether the plaintiffs had standing to bring this claim and affirmed the lower court’s exercise of jurisdiction by default. The Court was united, however, in its conclusion that "the Clean Air Act and the EPA actions it authorizes displace any federal common law right to seek abatement of carbon-dioxide emissions from fossil-fuel fired power plants." In Massachusetts v. EPA, the US Supreme Court clearly identified carbon dioxide as "air pollution." The Clean Air Act directs US EPA to identify categories of sources that contribute significantly to air pollution and are reasonably expected to endanger public health or welfare. Once US EPA identifies those categories, it must regulate the existing sources and establish performance standards for emissions from new and modified sources in each category. The Court found that these provisions of the Act provide an adequate avenue for the plaintiffs to petition US EPA to initiate rulemaking and to seek judicial review of US EPA’s regulatory decisions. Under this framework, the Clean Air Act "speaks directly" to the issue of carbon dioxide emissions from power plants, displacing federal common law public nuisance suits and leaving no room for courts to issue ad hoc decisions through common law suits.

The Court disagreed with the Second Circuit’s conclusion that federal common law could not be displaced until US EPA had actually exercised its jurisdiction over carbon dioxide emissions by issuing regulations. The Court found that it was Congress’s delegation of authority to US EPA that displaces federal common law, not US EPA’s exercise of that delegation. Citing the Massachusetts decision, the Court concluded such a delegation had occurred here for GHG emissions, thus placing the burden of balancing regulatory policies on US EPA, not the courts. If US EPA decides against regulating a particular source category in making these policy choices, the courts may not step in and force regulation under common law theories.

While the Supreme Court’s decision removes federal nuisance law as a mechanism for plaintiffs to seek to impose emission controls on GHG emitters, the decision leaves open the possibility for that relief under state nuisance law. The Court indicated that the availability of state law claims would depend upon the preemptive effect of the Clean Air Act, an issue that remains open on remand. Disposition of these issues will provide yet another important indication of the role courts will play in the continuing regulation of greenhouse gas emissions, if any.

CNX Deal Bellweather for Future Utica Valuations?

CONSOL Energy Inc. (NYSE: CNX) announced this morning that it sold a fifty-percent JV interest in nearly 200,000 Ohio Utica Shale acres to Hess Corporation (NYSE: HES) for $593 million. This equates to $6,000 per acre (without a discount applied). The purchase price includes an up front payment of $59 million and $534 million in a “drilling carry” whereby HESS pays for half of CNX's share of investment.

Is this transaction value unique to the acreage or do you believe it is representative of pricing on future Utica transactions?

Will WTI Discount Hamper Unconventional Resources Growth?

Historically, cash flow from legacy assets has helped many companies fund investment in unconventional resources in such plays as Eagle Ford. However, the recent discount to WTI has put a crimp in that cash flow (despite the small bump to $85.44 yesterday) and could result in CAPEX deficits for some companies who made assumptions about higher oil prices (a potentially dangerous mistake in a high cost environment). Will external funding be needed to bridge the gap? Will it be available? Will hedges suffice (probably not for many)? Will companies have to divest assets to fund development or will they make new offerings of equity?

What are your thoughts on how price discounts will influence CAPEX budgets and unconventional development?

ConocoPhillips Separation Looks Good for Shareholders, with a Few Legal Hoops Remaining

ConocoPhillips announced separation into separate E&P and R&M companies today. The spin-off is likely during the first half of 2012. ConocoPhillips' major businesses are well positioned in their respective markets, so the resulting spin-off companies should look strong from a financial perspective. See my article on Spin-Off transactions.

ConocoPhillips was a top performer among integrated oil companies during 2010. Leading analysts project that the company will earn $7.75 per share and dividends will rise by 10% annually in 2011 - 2012.

THE LEGAL DETAILS:

The ConocoPhillips board approved the separation yesterday.

A ruling from the IRS is required to ensure this transaction qualifies for tax-free treatment (though meeting the requirements does not appear to be an issue).

Neither FTC nor shareholder approval is required.

FTC and DOJ Revise HSR Form and Filing Requirements with Special Focus on Energy MLPs

The Federal Trade Commission (FTC) and the Department of Justice (DOJ) have announced major revisions to the Hart-Scott-Rodino (HSR) Report Form and the Premerger Notification Rules.

See http://www.ftc.gov/opa/2011/07/hsrform.shtm

The revisions are expected to come into effect in early August, 30 days after publication in the Federal Register.

The changes sweep away the requirements for parties to provide information including:

(i) Copies of documents already filed with the Securities and Exchange Commission;

(ii) Economic code "base year" data; and

(iii) Detailed breakdowns on all the voting securities to be acquired.


Despite the FTC’s aim to streamline the filing process, in some areas the filing burden has arguably increased. In particular, some controversial changes survived an 11-month consultation, albeit in a watered-down form.

In new Item 4(d) of the Form, all parties will be required to disclose all "confidential information memoranda" prepared by or for officers or directors of their ultimate parent companies in the year before the date of filing. This extends to studies, surveys, analyses and reports prepared by investment bankers, consultants and other advisers.

Perhaps more significantly, the revised Form provides a broad definition of a new term, "associate," to define entities under common management with the acquiring person, but not controlled by the acquiring person. The FTC has been concerned about the lack of information available about families of entities that fall outside the scope of the HSR Rules, and the antitrust ramifications of acquisitions involving them. (Master Limited Partnerships in the energy industry are highlighted in particular.) The new reporting demands apply to entities under "common investment or operational management" with the filing party and place detailed notification requirements upon them. The change means that private equity and investment funds could now be caught by disclosure requirements.

Under new Item 6(c)(ii), an acquiring party must report associates' holdings of voting securities and non-corporate interests in the target, where they are of five percent or more but less than 50 percent. This requirement extends to entities that have six-digit NAICS industry codes that overlap with the target's. Similarly, Item 7 will require information about "associate" entities.

The method of reporting revenue has also been revised (Item 5). All manufacturers – whether domestic or foreign – will be required to report revenue from sales of their products only under 10-digit NAICS codes. Sales of products that are only sold, and not manufactured, by the parties will continue to be reported under wholesaling or retailing codes.

Other minor revisions have been made to complete the changes made to the HSR Rules in 2005 that related to unincorporated entities.

The revisions will be published in the Federal Register within the next few days and will take effect 30 days after the date of publication.

EPA and Coast Guard Announce Agreement to Jointly Enforce US and International Air Pollution Requirements

The US Environmental Protection Agency (US EPA) and the US Coast Guard (USCG) recently announced an agreement (MOU) to jointly enforce US (Act to Prevent Pollution from Ships) and international air pollution (MARPOL Annex VI) requirements for vessels operating in US waters. These requirements establish limits on nitrogen oxides (NOx) emissions and require the use of fuel with lower sulfur content, in the latest efforts to protect human health and the marine environment by reducing ozone-producing pollution. The most stringent requirements apply to ships operating within 200 nautical miles of the coast of North America.

See http://www.epa.gov/compliance/resources/agreements/caa/annexvi-mou062711.pdf

In US EPA’s words, "[t]oday’s agreement forges a strong partnership between EPA and the US Coast Guard, advancing our shared commitment to enforce air emissions standards for ships operating in US waters. Reducing harmful air pollution is a priority for EPA and by working with the Coast Guard we will ensure that the ships moving through our waters meet their environmental obligations, protecting our nation’s air quality and the health of our coastal communities."

These sentiments were echoed by USCG leadership. "This agreement demonstrates the Coast Guard’s long-standing commitment to protecting our nation’s marine environment," said Rear Adm. Kevin Cook, Director of Prevention Policy for the USCG. "Aligning our capabilities with EPA enhances our commitment to the marine environment while minimizing the impact on shipping."

By way of background, MARPOL was developed through the International Maritime Organization (IMO), the United Nations agency dealing with maritime safety and security, as well as the prevention of marine pollution from ships. MARPOL is the main international agreement covering all types of pollution from ships. Air pollution from ships is specifically addressed in Annex VI of the MARPOL treaty, which includes requirements applicable to the manufacture, certification, and operation of vessels and engines, as well as fuel quality used in vessels in the waters of the United States. Since January 2009 all vessels operating in US waters must be in compliance with MARPOL Annex VI regulations, but enforcement has lagged.

See http://www.epa.gov/oecaerth/civil/caa/annexvi-mou.html

The purpose of the MOU was to establish terms by which US EPA and USCG can work together to implement and enforce Annex VI requirements. While the MOU does not add any new compliance requirements, it does signal that enforcement of the requirements has become a top priority. US EPA and USCG also sent a letter to the maritime industry notifying them of the MOU, and to advise that US EPA and USCG are taking measures to promote compliance, including investigating potential violations and pursuing enforcement actions with penalties for violations. The central provisions of the MOU relate to vessel inspections, certification, examination and investigations. Importantly, the MOU also discusses enforcement by criminal prosecution and penalties.

More information is available on US EPA's website.

See http://www.epa.gov/otaq/oceanvessels.htm#emissioncontrol

This development signals upcoming enforcement on the part of both agencies. Shipowners, ship operators, shipbuilders, marine diesel engine manufacturers, marine fuel suppliers and marine insurance providers should be prepared to deal with increased enforcement and prosecution of air pollution laws.