More than five years after Congress threw a little bone to start-up inventors, we’ve learned a few things.
The good news is that you might qualify for reduced patent fees under the patent laws, thanks to a “gift” from Congress to small inventors. I didn’t follow the battle, but I expect it was a way for them to look like they are being generous in some small way when they’re raising fees in a big way.
Half-price patent fees sounds like a good deal. I used to be nervous that it might be too risky to enjoy the benefit. I’ve mellowed out, and will explain why.
In the change in the patent laws, Congress created a “Micro Entity” status that provides reduced fees for the smallest inventors and start-up companies. Before, there were “Large Entities” (big companies with over 500 employees) and “Small Entities” (just about everybody reading this newsletter). Patent fees for Small Entities have long been half price compared to the fees the big corporations pay.
What’s a Micro Entity?
Count on Congress to be sure that’s a difficult question to answer, and that getting the answer wrong (taking the discount when you weren’t entitled) could be very painful (you could lose your patent!).
Micro Entity status is reserved for applicants who don’t have too much income, or too much patent experience. (Also for employees of higher education institutions, but that’s probably not pertinent here). The “gross income” threshold is $206,109 per year, and the threshold changes every year because it’s based on three times the national median household income under some federal small business law definition. This figure rises due to inflation.
If you’re close to the threshold, beware. (Actually, if you’re close, just fuggedaboudit, if you know what’s good for you).
As I recall from a tax law class in law school, the key final exam question usually is: “What is income?” (I aced the class, but I’m sure glad I didn’t become a tax lawyer!) In this case, “income” is individual gross income, excluding the income of others in the household. This would normally mean salary from all jobs, investment income, and profits distributed from your business (and the scary thing Congress did is to force non-tax specialists like me to end up giving what amounts to tax advice we’re not qualified to give!)
To qualify for Micro Entity status, you’ll need to certify that your “gross income” is below a certain threshold. Which makes you responsible for knowing exactly what that means, and I’ll always tell you to consult your tax attorney if you have any doubt.
If you know what “Adjusted Gross Income” is, or can find that line on your tax form, I suspect that “Gross Income” is before the “adjustment.”
Also excluded are patent applications filed under prior employment, as long as the employee really had no ownership of the patent rights, which is the usual arrangement in corporate America. If it was a borderline case of a small company that you had some ownership and control of, then you’ll need to get some legal advice that will likely cost more than the discount on what the patent fees is worth. That’s a big theme here: when in doubt, don’t bother.
If your patent rights are ever assigned or licensed to an entity that isn’t a Micro Entity, then you no longer qualify as a Micro Entity going forward for that patent. So if I were a qualified Micro on my inchmetric.com hex tool invention, I’d lose that status if I let Brownells sell tools with the patented concept for a buck a set in royalties. I’d simply have to pay maintenance fees at the normal “small” rate.
Which raises the important point that your qualification can change over time, as your income fluctuates, as your patent licenses might be arranged, and as your experience as an inventor changes. When you become a Micro Entity, you file the certification. When you stop being a Micro Entity, you must file (or hire your attorney to file) a notice that you have lost your status (simply paying the higher fee isn’t adequate).
This shows how just because a patent application was filed by a Micro Entity, it might not always be correct to pay Micro Entity fees for the life of the patent.
Micro Entity status is dangerous to claim if you’re uncertain about whether you qualify, because if you get it wrong, then proceed to enforce your patent rights in a lawsuit, you could end up having your patent invalidated for your false certification. I haven’t seen the lawsuits yet, but I can only imagine how your justified patent lawsuit to enforce your billion-dollar patent would spend extra days in disposition and hearings about your income during the critical times.
The law does provide an escape for innocent errors, but if a Micro-Entity patent is ever litigated, count on added days of deposition and trial to challenge the issue.
I must note that most of the investment in getting a patent is in the attorney fees, not Patent Office fees, which are small by comparison. The exceptions are the maintenance fees (due at 3.5, 7.5, and 11.5 years after the patent is granted). These fees total $67300 over the life of the patent (for small entities) and this is cut in half for Micro Entities, so it’s tempting to try to qualify.
The law allows your attorney to certify on your behalf, but I’m nervous enough about being responsible for an error invalidating a client’s patent that I normally have the client sign the certification at each fee payment stage.
• He signs without reading, and wasn’t qualified.
• He sorta knows he isn’t qualified, but feels pressured to sign to get you reduced fees.
• He thinks he’s qualified, but forgot about some income that will end up being revealed in your future patent litigation.
• He’s qualified according to your accountant’s diligent review of the employee’s tax filings, but it turns out that your employee cheats on his taxes.
Are you sure you want to bet your company on this kind of uncertainty, just to get some patent fees reduced?
Below is the certification that each inventor, and the company owner, must sign. It is preceded by the following disclaimer that each inventor and owner/applicant must sign.
Acknowledgment of Warnings and Consent to Filing for Reduced Patent Fees as Micro Entity
(Initial each paragraph)
____ I understand that I am advised by my patent attorney against certifying as Micro Entity if there is any uncertainty about my qualifications or the qualifications of any co-inventor or owner/applicant/employer/licensee.
____ I understand that incorrect certification can invalidate the patent, and that even innocent mistakes of fact and misunderstandings of the rules can invalidate patent rights.
____ I understand that I am responsible for verifying with a financial professional that my individual gross income (if an inventor) or my gross business income (if a business applicant) is below the threshold, and that my patent attorney is unable to advise on whether I meet the threshold or what constitutes “gross income.”
____ I understand that it is inadvisable for joint inventors or for a company employing inventors to seek Micro Entity status, because anyone who has a financial interest in the patent rights should diligently verify the income and other qualifications of all other co-inventors and owner/applicants.
____ I understand that I and all other inventors and owner/applicants are each responsible for notifying the patent attorney of income increases.
____ I understand that the income threshold may change up or down over time, and that even if my income does not change that a patent may be invalidated if I was close to the threshold.
____ I understand that as future fees arise, the patent attorney may opt to file on my behalf as a Small Entity (higher fees) if a current certification from all needed parties cannot be timely obtained.
____ I understand that if permission is given to another entity to operate under the patent, whether or not the permission is formal or informal, with or without compensation, if that other entity does not also qualify as a Micro Entity then this Micro Entity status is lost, and I am responsible for notifying the patent attorney so that the decertification can be made, and future fees be properly paid.
_____ I understand that if I claim Micro Entity status that in the event my patent is litigated (or valued in the due diligence process in a sale of assets) that the tax records of every inventor and every associated company will probably be required to be produced.
_____ I understand that Micro Entity status is unavailable if any inventor has applied for four or more patents (excluding provisional applications) and that if any inventor eventually applies for a fourth patent that Micro Entity status is then unavailable for any and all applications and patents including that inventor.
If you’re willing to bet your patent on getting your financial details and patent history just right, then you’re a braver soul than I am!
Watch your email for an invite to my usual happy hour at the end of the day in Houston on Friday Sept 3RD. It will truly be a pleasure to see y’all in the flesh here in Texas!