Due Diligence

Swimming with the (Duly Diligent) Sharks

Feeding Frenzy –

201611-lm-shark-closeupMost of us are familiar with the network TV show, Shark Tank® – but in case not, here is a brief summary of the premise.  Entrepreneurs seeking funding for their start-up business present their pitch to a panel of “Sharks,” apparently accomplished and successful entrepreneurs who have “cashed out,” and are now looking for opportunities as angel investors.  The “drama” of this “reality TV” show occurs when the Sharks ask tough questions, and then based on the answers, either pass on the opportunity (“I’m out!”), or make an investment offer.

Occasionally, a tech startup is in the Tank, and the start-up entrepreneurs claim that their product is “patent pending.”1 Recently, there was a cable rerun of an episode that originally aired2 in April 2014.  Reality TV that involves patents is quite rare, so this episode piqued our interest.  The company’s product was a “smart” light bulb that is controllable via wireless communication via a smart phone or tablet.  One of the founders of the company, Ilumi Solutions, Inc., made a point to state that their bulb was patent pending, and went on to describe the bulb and the phone app that controlled it.

At that point, we began shouting questions at the TV: “Ask them if it’s a provisional! Ask them if they’ve had an Office Action! Ask them if it’s been allowed!  Ask about a PCT! Ask them if the company has clear title!”  None of these questions were asked, nor any others that would be considered basic patent due diligence, particularly since the “smart light bulb” market is a very crowded space with some Fortune 500 players in the mix.

Instead, a bit of a feeding frenzy ensued, with three Sharks offering a $350K investment under various conditions. The episode concluded with the founders’ acceptance of an offer in exchange for a 25% stake.  We were left wondering, would three supposedly accomplished businessmen toss out those mid-six figure offers, just on the founders’ “We’re patent pending” claim?  Probably not.  Instead, we suspect that the producers of Shark Tank® think that getting into the weeds of patent prosecution doesn’t interest the average reality TV audience.  Maybe so, as TV tends to accomodate limited attention spans quite seamlessly.

What’s Beneath the Surface?

But now back to the real reality, where we can have two “patent pending” scenarios at opposite ends of the value spectrum: In Scenario 1, we have a provisional application that is pending, but is going to expire tomorrow, and we have no intention of filing a non-provisional application to continue to pursue a patent.  In Scenario 2, we have a pending application that has been allowed, the issue fee has been paid, and it is going to issue as a patent tomorrow.  In both scenarios, today, we can say that we have a “patent pending.”  (In fairness though, we note that the Ilumi founders were not blowing smoke.  As of press time, a quick patent search shows that the company has seven U.S. patents, all of which issued after the episode first aired.)

Thus the term “patent pending” encompasses a broad range of possibilities, the worst of which has a value of zero. If you are presented with a business opportunity that depends upon the outcome of “patent pending,” you need to perform due diligence so that you know what the term means for that particular opportunity.

DIY DD… for Pending Apps

Fortunately, plenty of information on pending patent applications is available online, making basic “do-it-yourself due diligence” quite easy with the right training. With some simple searching, you can answer the basic question, where does the patent application stand in prosecution?  This answer will allow you to judge the likelihood of the application maturing into a patent, or becoming abandoned.

First a caveat: all of the due diligence suggestions here are contingent on the patent application being published so that information on the application is in fact accessible to the public. If the application was filed less than 18 months ago, it will not have been published and will be unavailable for study.  For a published U.S. application, the key tool to use is Public PAIR3 at the USPTO website www.uspto.gov.  In Public PAIR, entering the application or publication number will take you to the Application Data page.  The first thing to check is the “Status” field, which will give you an indication of where the application stands with respect to possible issuance of a patent.  There are many different status indicators.  Some key indicators, and their significance, are as follows:

  • Docketed New Case – Ready for Examination: Application is awaiting a first Office Action by the Examiner, or an Office Action following a Request for Continued Examination filed by the Applicant.
  • Non-Final Action Mailed: Examiner has issued an action on the application, which could be a restriction requirement4 in which a subset of the claims must be selected by the Applicant for examination, OR an Office Action5, in which at least some of the claims have been rejected.
  • Response to Non-Final Office Action Entered and Forwarded to Examiner: Applicant has filed a response to an Office Action. Awaiting next action by the Examiner.
  • Final Rejection Mailed: Examiner has issued at least the second Office Action on the application, with another rejection of at least some of the claims.
  • Notice of Appeal Filed: Applicant is pursuing an Appeal of the Examiner’s rejection of the claims.
  • Notice of Allowance Mailed: Examiner has allowed the claims. Upon payment of the issue fee by the Applicant, the patent will issue in about 4-6 weeks.
  • Publications — Issue Fee Payment Verified: Applicant has paid the issue fee. Issuance of the patent is imminent, typically in no more than six weeks.
  • Abandoned — Failure to Respond to an Office Action: Applicant has abandoned the application, and no patent will issue directly from it. (However, click the “Continuity Data” tab, and see if any continuation application has been filed.  If one is listed, click the link to navigate to it, and repeat the steps described here.)

To summarize briefly, in the first five of the above status indicators, the application is either awaiting prosecution, or prosecution is in progress, but with the outcome uncertain with regard to a patent issuing. Under a Notice of Allowance, there is a very high probability that a patent will issue, but sometimes NOA’s are withdrawn and prosecution reopened.  Under the Issue Fee Payment Verified status, the patent will almost certainly issue, unless extraordinary circumstances arise.

Once you have seen the application status, the next step is to review the prosecution history (aka “file wrapper”) of the patent application. To see the history, click on the “Image File Wrapper tab, which will open the listing of all documents in the file wrapper, starting with most recent documents at the top, and ending with the initial application filing documents at the bottom.  Each document can be viewed or downloaded individually.  Additionally, the entire file wrapper can be downloaded in a single file for off-line study.

“Informed study of a patent application file wrapper is best done by an experienced patent practitioner. But by simply browsing through the list of documents, you can obtain some significant information on the case.”

Informed study of a file wrapper is best done by an experienced patent practitioner. If you need a high level opinion, including judgments of claim scope, and the likelihood of the application being eventually issued as a patent, you should consult a licensed patent agent or attorney.  However, by simply browsing through the list of documents, you can obtain some significant additional information:

  • As you scroll down, if you see multiple sequences of “Non-Final Action Mailed,” and “Final Rejection Mailed,” that means that the claims have been repeatedly rejected. The Applicant is likely continuing prosecution by filing a Request for Continued Examination with another response to a Final Rejection. In general, the more iterations of Office Action and Amendment there are in a file wrapper, the narrower the claims will be in any patent that issues, and the more likely that the Applicant will eventually abandon the application. At the very least, you know that prosecution is proceeding with difficulty, and the outcome is uncertain.
  • If the status is “Docketed New Case,” but you see at least one cycle of “Non-Final Action Mailed,” and “Final Rejection Mailed,” the case is not “New.” The claims have been rejected at least twice, and the Applicant has filed a Request for Continued Examination to continue prosecution. Oddly, the USPTO assigns the same “Docketed New Case” status to an application under an RCE as it does to a new, unexamined application.
  • If you do not see any “Information Disclosure Statement” filed by the Applicant (typically before a first Office Action), that could be cause for concern. There are two possibilities: The Applicant did no searching, and filed the application “blind,” with no idea of what prior art might exist. In that case, the odds of there being prior art that could “knock out” the claims is more likely, since no effort has been made to craft the claims with the prior art in mind.  The other possibility is that the Applicant did a search and is aware of prior art that may be material to patentability, but has not disclosed it to the Patent Office.  That is a violation of the “Duty of Disclosure”6 to the Office.  If a patent is issued under these circumstances, and the facts are discovered in litigation of the patent, it could be found unenforceable due to inequitable conduct.

As a last stop in the PAIR listing, click on the “Assignments” tab. This will produce the “Patent Abstract of Title” page, which lists all documents that have been recorded in the USPTO under the application number.  One key listing to check for is the “Assignment of Assignors Interest.”  Any such entries would show the initial assignment of rights in the application by the inventors to a third party, such as a corporation or university.  If no assignments are present, that could indicate that transfer of ownership of the application by the inventors to the corporation has not been properly executed, and even if so, has certainly not been properly recorded.

If the patent application has been sold by the first corporation to another corporation, another “Assignment of Assignors Interest” should be shown. Other transactions can also be recorded, such as a “Security Interest,” where the application is used as collateral, and any License of the patent application that has been executed.

The listing of these documents does not mean that everything is in order with regard to clear title of the patent application. They merely show what has been recorded in the USPTO, and made of public record.  For example, the documents themselves could be defective in some way.  So again, if you are considering a business opportunity where you need a high degree of confidence in proper title being established, you should consult a qualified patent attorney7 to review the entire chain of title and recorded documents, and provide an opinion.

And Yet There’s More…

As we note above, in this issue, we have covered some simple steps for doing basic DIY Due Diligence for a pending U.S. patent application.  There are similar steps that you can do for international and foreign applications using the WIPO and EPO databases.  And there is another set of steps that you can perform for basic due diligence related to issued patents.  We’ll cover those in a future column.  In the meantime, swim cautiously.

  1. See The Limited Monopoly®, May 2007.
  2. Trailer at https://www.youtube.com/watch?v=nJphfKwKADo.
  3. http://portal.uspto.gov/pair/PublicPair
  4. See The Limited Monopoly®, June 2008, September 2011.
  5. See The Limited Monopoly®, March 2009.
  6. See The Limited Monopoly®, December 2006.
  7. Readers may contact either of the authors if a referral to a qualified attorney is needed.

PHOTO CREDITS: “Canandaigua Patent Shark” by R.D. Gunderman

Do you need information on another patent topic?  The entire library of prior issues of The Limited Monopoly® from 2005 to present is keyword searchable using the “Search” box at the bottom of this page.

Authors John M. Hammond P.E. (Patent Innovations, LLC www.patent-innovations.com) and Robert D. Gunderman P.E. (Patent Technologies, LLC www.patentechnologies.com) are both registered patent agents and licensed professional engineers. Copyright 2016 John Hammond and Robert Gunderman, Jr.

Note: This short article is intended only to provide cursory background information, and is not intended to be legal advice.  No client relationship with the authors is in any way established by this article.