Micro Entity v. Small Entity at the Patent Office?

With the American Inventors Act, on March 19, 2013 the patent office created an entirely new status for patent applicants. The office established what is now known as a “micro entity” status for those who qualify. Presumably, the intent of the Act and the new “micro entity” status was to create an easier entry into the patent process for individual inventors with income under a certain threshold and with little patent experience.

Whether or not a person qualifies has much to do with income. In short, if a person makes less than $150,162 per year, then they may qualify to receive some fairly significant discounts on filing fees, office fees, issue fees, and maintenance fees. This dollar amount is the current maximum qualifying income as of the date of this post, which is calculated based on three times the median household income for the preceding calendar year as reported by the Bureau of the Census. 37 C.F.R. 1.29(a).

The savings in filing fees can be significant to start ups and some individual applicants. By way of example, a “small entity” currently has a filing fee of $730 for a new utility patent application. By contrast, a “micro entity” will enjoy a filing fee of $400. The issue fee for a “small entity” is currently $890 whereas the issue fee for a “micro entity” is $445. The 3.5 year maintenance fee for a “small entity” is $800, whereas a “micro entity” is $400. So, at first glance it would seem like an obvious choice to use the micro entity category, if eligible.

But, not so fast. Our firm, has looked into the issue, and determined there may be some reason for pause before selecting such a filing status. Knowing exactly when a person qualifies for micro entity status, or loses the status can be tricky—and there may be consequences down the road for errors in determining this status.

Firstly, there is a distinct possibility that micro entity status could change. A variety of factors can cause the status to change. The eligible income changes every calendar year. People’s incomes can also change. Somebody who qualifies for small entity status in 2013 may not be eligible in subsequent years, particularly if his or her invention that is the subject of the patent is successful, if that applicant receives a bonus at work, or has a capital gain that no longer qualifies the applicant. Under the current law, somebody whose income increases beyond the threshold will fall out of eligibility for the micro entity status and they are obligated to inform the PTO of this fact. 37 C.F.R. 1.29(i). Also, it appears that if any one of several joint-inventors earns over the income threshold, or assigns, licenses, or transfers ownership of their patent rights, all the applicants would lose the micro entity status. 37 C.F.R.1.29(a)(4). An accidental payment of a maintenance fee as a micro entity when status was lost could nearly certainly be used as a basis to challenge the patent later. Minimally, it could result in the headache of calculating “deficiencies” and attorney fees while patent attorneys and accountants try to decipher matters of “gross income” under the Code of Federal Regulations and monstrous U.S. tax code.

Secondly, by selecting a micro entity status under penalty of perjury, the applicant may open him or herself up to scrutiny during enforcement proceedings later about statements of income and whether or not the status was claimed or maintained appropriately. This could become a fertile ground for litigants down the road to: (1) seek access to an applicant’s tax returns and financials, which an applicant may prefer to keep private; and (2) seek to invalidate an applicant’s patent based on “fraud on the patent office” in the event of any discrepancy of income reported to the patent office. A failure to notify the patent office of a change in status will be alleged as a fraud, and 37 C.F.R. 1.29(j) essentially codifies this defense. Patent litigants already routinely use alleged misconduct at the patent office as a basis to challenge patent holders.

Thirdly, you cannot use micro entity status if you have more than four applications pending. This could quickly become a problem and require complicated accounting for an applicant whose patent application must split into multiple applications. Currently, the patent office will often issue restriction requirements and require applicants to split one application into two or more applications, so it would be quite easy to go beyond the four patent limit and lose micro entity status.

Conclusions: The discounts for micro entity status will make selecting the micro entity status beneficial in certain circumstances. However, if an applicant has an income that could come anywhere close to $150,162 per year, or if the applicant is likely to license or sell his or her patent rights any time soon, then it is probably better to select “small entity” as opposed to “micro entity.” Also, the difficulty with tracking the status (and incomes) of co-inventors may warrant paying the extra fees and not selecting “micro entity” status on multiple inventor applications. Someone who chooses the “micro entity” status will have to be extra vigilant later to change status at the patent office if income increases or the invention is sold.