Was your intellectual property negatively affected by the recent government shutdown?

Damage assessments of the partial government shutdown, the longest in U.S. history, place the cost of the government shutdown to the U.S. economy between $6 billion and $11 billion. Although the threat of another shutdown seems to have passed for now, speculation continues to abound as to what catastrophes await in the event of another government shutdown.

Operations at the U.S. Patent and Trademark Office (PTO) were largely unaffected, and the PTO remained open during the wider governmental shutdown due to the PTO's unique structure among governmental agencies, as will be explained hereinafter. This is not to say, however, that every intellectual property owner found shelter from the storm; some patent rights were affected more so than others. Going forward, the intellectual property community may not avoid the negative effects of further government shutdowns.

The PTO has an unusual funding setup when compared to other governmental agencies as most years it actually has an operating surplus in the fees that it collects. Since the America Invents Act was passed in 2011, the PTO has placed portions of the operating surplus of prior-year fee collections that exceed expenses into an operating reserve account, or “rainy day fund.” The PTO maintains this reserve for exactly the types of disruptions posed by a government shutdown. For instance, lapses in funding risk “significant degradation in service levels, such as patent and trademark pendency timeframes,” see U.S.P.T.O., Fiscal Year 2019 Congressional Justification (2018), at 105, available at https://www.uspto.gov/sites/default/files/documents/fy19pbr.pdf.

The reserve is crucial because the PTO may not access funds collected during a shutdown period without an appropriations bill. Just a few weeks before the shutdown, the reserve stood at $312 million, far below the “recommended” level of $747 million, which would fund the PTO's operations for up to three months. Patent Public Advisory Committee: 2018 Annual Report (2018), at 23, available at: http://src.bna.com/ELR. Accordingly, the PTO had approximately six weeks of operating funds. Absent additional measures to fund operations, further lapses in appropriations would likely have forced the PTO to furlough examiners and cease all operations.

Why would this matter? Patent applicants are at risk in such an instance because patent lifespans are calculated 20 years from their application filing date, see 35 U.S.C. Section 154(a)(2). Fortunately, the Patent Act mitigates, to a limited extent, the delays attributable to the PTO and extends the time during which the patent is enforceable. Section 154(b) permits patent term adjustment (PTA) by adding days to the end of the patent term in the event of PTO-caused delays. For example, the patent term may be adjusted when the PTO fails to timely respond to an office action, or fails to issue a patent within three years of the filing of an application. Roughly half of all U.S. utility patents issue with at least some amount of PTA awarded.

However, an adjustment to the term of a patent might not always be an acceptable remedy, especially if a government shutdown prevents the PTO from timely publishing patent applications. Under Section 154(d)(1)(A), a patent owner may claim reasonable royalties from an infringer for activities performed before a patent is granted. Actual notice by the accused infringer is required, but a published patent application may afford such notice if the claims within are “substantially identical” to those in the later granted publication, see Innovention Toys v. MGA Entertainment, 611 Fed. Appx 693, 695 (Fed. Cir. 2015) (nonprecedential) (applying Laitram v. NEC, 163 F.3d 1342 (Fed. Cir. 1998), in context of Section 154).

In this instance, even if the PTO awards time on the back end of a patent's lifespan, PTA does nothing to compensate the patentee for valuable days lost at the front end that otherwise might have captured infringing activity. Patent holders may lose out on damages in the event an infringer does not already have notice of the patent and the patent holder intends to assert a patent soon after its grant date. This is relevant considering that comparatively fewer patents are litigated during later years of their potential lifespan, and statistics indicate that as many as 28 percent of patents are asserted before they turn 3 years old.

Even if the PTO remains open during future government shutdowns, patent holders may still be affected due to closings at government offices other than the PTO. The Food and Drug Administration (FDA), for example, was forced to halt certain nonessential operations during the most recent shutdown. The FDA ceased accepting applications for review of medical devices and drugs, including pre-market authorizations (PMAs) and 510(k)s, the approvals of which are necessary for manufacturers to place products on the market. The resulting backlog may well lengthen time-to-approval, which already may be over a year in some cases.

For holders of patents covering pharmaceuticals or medical devices, a lengthened approval process may impact valuable months at the front end of the patent term, during which the right to exclude provides little benefit. Applicants who have already secured patent protection will see valuable patent term dwindle away as they await FDA approval to sell the covered product.

As a trade-off, changes introduced by the Hatch-Waxman Act permit patentees to seek patent term extensions (PTEs, not to be confused with the aforementioned patent term adjustment (PTA)). Section 156. But there are many limits to this process. These extensions are available only for products that have entered the PMA approval process and are not available for those in the 510(k) approval process. An applicant may only extend the term of a single patent covering the product under FDA review. In any event, a PTE may not extend the patent term by more than five years. The five-year limitation has potential significance considering that the length of a PTE is directly based on the FDA's determination of the Regulatory Review Period (RRP). This, in turn, is based on durations of the testing phase and (2) the approval phase. Thus, if a testing phase is lengthy enough to bring the RRP close to or beyond the five-year limit, patent holders may be out of luck if a government shutdown extends the approval phase even further.

Another more important issue surrounding PTEs is that the FDA did not merely cease review of pharmaceuticals and medical devices during our most recent government shutdown—it outright refused to accept PMAs and 510(k) submissions. In an official statement, the FDA concluded it could not continue accepting and processing user fees without funding appropriations, much less pay personnel responsible for such tasks. This may be critical for proper calculation of PTEs since the approval phase of the RRP does not begin until an application for review is submitted to the FDA along with the appropriate fee. Valuable portions of a patent's lifespan may go to waste if the patentee cannot recover time lost while the FDA first sits idle and later becomes bogged-down with a flood of applications following a shutdown.

Taking each of these issues into consideration, there may be no readily apparent means for applicants, patentees, and patent holders to seek shelter. Examination and regulatory review at the PTO and FDA are much shorter processes now than in decades past, thus reducing the necessity of PTA and PTE during periods of normal operation. But it is unclear how the PTO and FDA will prepare for the next government shutdown, whenever that may be. With an expected surplus of only $20 million during fiscal year 2019, the PTO may find it difficult to increase its operating reserve without additional funding or fee hikes. Even more drastic changes may be necessary on the FDA's account. Whether further lapses in funding are on the horizon remains to be seen, but efficiency at all government offices is likely to become a greater priority.

Jay Halt, an attorney at Volpe & Koenig, focuses his practice on securing, licensing and enforcing the value of intellectual property rights. His practice includes litigation, inter partes matters, administrative proceedings, licensing of trademarks and technology, validity opinions and due diligence reviews. Halt also serves as president of the firm.

Josh Schmid is a technical adviser at the firm.