509.02 Small Entity Status — Definitions [R-07.2022]

509.02 Small Entity Status — Definitions [R-07.2022]

Under 35 U.S.C. 41(h)(1), fees charged under 35 U.S.C. 41(a), (b) and (d)(1) shall be reduced by 50 percent with respect to their application to any small business concern as defined under section 3 of the Small Business Act, and to any independent inventor or nonprofit organization as defined in regulations issued by the Director. Effective March 19, 2013, the availability of the small entity discount was extended to certain other fees not contained in 35 U.S.C. 41(a), (b) and (d)(1), but which are included among fees “for filing, searching, examining, issuing, appealing, and maintaining patent applications and patents” as authorized by Public Law 112-29, sec. 10(b), 125 Stat. 284 (September 16, 2011)(Leahy-Smith America Invents Act (AIA)). Effective January 1, 2014, the small entity discount also becomes available to certain “filing, searching, [and] examining” fees for international applications under the Patent Cooperation Treaty (PCT). Note that if applicant qualifies as a small entity under 37 CFR 1.27, applicant may also qualify for “Micro Entity Status” under 35 U.S.C. 123. See 37 CFR 1.29 and MPEP § 509.04et seq. for the requirements to establish micro entity status for the purpose of paying micro entity fees.

The fees which are reduced by 50% for small entities include patent application filing fees including the basic filing fee, search fee, examination fee, application size fee, and excess claims fees (37 CFR 1.16), extension of time, revival, and appeal fees (37 CFR 1.17), patent issue fees (37 CFR 1.18), and maintenance fees on patents (37 CFR 1.20). Fees which are reduced by 50% effective March 19, 2013, but which were previously not reduced, include certain petition fees, 37 CFR 1.17(f)–(h), the request for reexamination fees, 37 CFR 1.20(c)(1), the fee for submitting an information disclosure statement in certain time frames, 37 CFR 1.17(p), the surcharge for reinstating an expired patent, 37 CFR 1.20(i), and the fee for an unintentionally delayed claim for priority, 37 CFR 1.17(t). Fees which are reduced by 50% effective January 1, 2014, but which were previously not reduced, are certain PCT international stage fees, including the transmittal fee (37 CFR 1.445(a)(1)(i)(B)), the search fee (37 CFR 1.445(a)(2)(ii)) and the preliminary examination fee (37 CFR 1.482(a)(1)(i)(B)).

Fees which are not reduced include document supply fees, 37 CFR 1.19, certificate of correction fees, 37 CFR 1.20(a), and miscellaneous fees and charges, 37 CFR 1.21. There is only one fee for which a small entity discount was offered prior to March 19, 2013 that is now ineligible for a small entity discount – the fee for a statutory disclaimer under 37 CFR 1.20(d).

The Consolidated Appropriations Act, 2005, provides that the filing fee charged under 35 U.S.C. 41(a)(1)(A) shall be reduced by 75 percent with respect to its application to any small entity “if the application is filed by electronic means as prescribed by the Director” (35 U.S.C. 41(h)(3)). Therefore, the filing fee for a nonprovisional original utility application filed on or after December 8, 2004 by a small entity in compliance with the USPTO patent electronic filing system is reduced by 75 percent. See 37 CFR 1.16(a)(1). The 75 percent reduction set forth in 35 U.S.C. 41(h)(3) does not apply to design applications, plant applications, reissue applications, or provisional applications.

35 U.S.C. 41(h)(1) gives the Director the authority to establish regulations defining independent inventors and nonprofit organizations. The Small Business Administration was given authority to establish the definition of a small business concern. A small entity for purposes of paying reduced fees is defined in 37 CFR 1.27(a) as a person, a small business concern, or a nonprofit organization. The term “person” rather than “independent inventor” is used since individuals who are not inventors but who have received some rights in the invention are intended to be covered by 37 CFR 1.27.

I. PERSON

37 CFR 1.27(a)(1) defines a person as any inventor or other individual (e.g., an individual to whom an inventor has transferred some rights in the invention), who has not assigned, granted, conveyed, or licensed, and is under no obligation under contract or law to assign, grant, convey, or license, any rights in the invention. An inventor or other individual who has transferred some rights, or is under an obligation to transfer some rights in the invention to one or more parties, can also qualify for small entity status if all the parties who have had rights in the invention transferred to them also qualify for small entity status either as a person, small business concern, or nonprofit organization.

II. SMALL BUSINESS CONCERN

In order to be eligible for reduced patent fees as a “small business concern” under 37 CFR 1.27(a)(2), a business concern must meet the standards set forth in 13 CFR 121.801 through 121.805. Questions relating to standards for a small business concern may be directed to:

Small Business Administration
Office of Size Standards
409 Third Street, S.W.
Washington, DC 20416
(202)205-6618
Email: sizestandards@sba.gov

III. NONPROFIT ORGANIZATIONS

37 CFR 1.27(a)(3) defines a nonprofit organization by utilizing and interpreting the definition contained in 35 U.S.C. 201(i). The term “university or other institution of higher education” as used in 37 CFR 1.27(a)(3)(ii)(A) means an educational institution which

• (A) admits as regular students only persons having a certificate of graduation from a school providing secondary education, or the recognized equivalent of such a certificate,
• (B) is legally authorized within the jurisdiction in which it operates to provide a program of education beyond secondary education,
• (C) provides an educational program for which it awards a bachelor’s degree or provides not less than a 2-year program which is acceptable for full credit toward such a degree,
• (D) is a public or other nonprofit institution, and
• (E) is accredited by a nationally recognized accrediting agency or association, or if not so accredited, is an institution that has been granted preaccreditation status by such agency or association that has been recognized by the Secretary for the granting of preaccreditation status, and the Secretary has determined that there is satisfactory assurance that the institution will meet the accreditation standards of such an agency or association within a reasonable time.

The definition of “university or other institution of higher education” as set forth herein essentially follows the definition of “institution of higher education” contained in 20 U.S.C. 1000. Institutions which are strictly research facilities, manufacturing facilities, service organizations, etc., are not intended to be included within the term “other institution of higher education” even though such institutions may perform an educational function or publish the results of their work.

Nonprofit organizations also include organizations of the type described in section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) and which are exempt from taxation under 26 U.S.C. 501(a). Organizations described in 26 U.S.C. 501(c)(3) include corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation (limited exceptions may apply under 26 U.S.C. 501(h)) and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

IV. LOCATION OF SMALL ENTITY

Small entities may claim reduced fees regardless of the country in which they are located. There is no restriction requiring that the person, small business concern, or nonprofit organization be located in the United States. The same definitions apply to all applicants equally in accordance with the Paris Convention for the Protection of Industrial Property.

V. RIGHTS IN THE INVENTION AND TRANSFER OF RIGHTS

The “rights in the invention” under 37 CFR 1.27(a)(1), (a)(2)(i), and (a)(3)(i) are the rights in the United States. Rights in the invention include the right to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States. Therefore, for example, status as a small entity is lost by an inventor who has transferred or has an obligation to transfer a shop right to an employer who could not qualify as a small entity.

Individual inventors (37 CFR 1.27(a)(1)), small business concerns (37 CFR 1.27(a)(2)), and nonprofit organizations (37 CFR 1.27(a)(3)) can make an assignment, grant, conveyance, or license of partial rights in the invention to another individual(s), small business concern, or nonprofit organization who could qualify as a person (37 CFR 1.27(a)(1)), small business concern, or nonprofit organization. Under the circumstances described, the individual inventor, small business concern, or nonprofit organization could still qualify for small entity status. However, if the individual inventor, small business concern, or nonprofit organization assigned, granted, conveyed, or licensed, or came under an obligation to assign, grant, convey, or license, any rights to the invention to any individual, small business concern, or nonprofit organization which would not qualify as a small entity (37 CFR 1.27(a)), then the inventor, small business concern, or nonprofit organization would no longer qualify for small entity status.

With regard to transfer of rights in the invention, the rights in question are those in the United States to be covered by an application or patent. Transfer of rights to a Japanese patent, for example, would not affect small entity status if no rights in the United States to a corresponding patent were likewise transferred.

The payment of reduced fees under 35 U.S.C. 41 is limited to those situations in which all of the rights in the invention are owned by small entities, i.e., persons, small business concerns, or nonprofit organizations. To do otherwise would be clearly contrary to the intended purpose of the legislation which contains no indication that fees are to be reduced in circumstances where rights are owned by non-small entities. For example, a non-small entity is not permitted to transfer patent rights to a small business concern which would pay the reduced fees and grant a license to the entity.

If rights transferred to a non-small entity are later returned to a small entity so that all rights are held by small entities, reduced fees may be claimed.

The term “license” in the definitions includes nonexclusive as well as exclusive licenses and royalty free as well as royalty generating licenses. Implied licenses to use and resell patented articles purchased from a small entity, however, will not preclude the proper claiming of small entity status. Likewise, an order by an applicant to a firm to build a prototype machine or product for the applicant’s own use is not considered to constitute a license for purposes of the definitions. A grant of a non-exclusive license to a non-small entity will disqualify applicant from claiming small entity status. See Ulead Systems, Inc. v. Lex Computer & Management Corp., 351 F.3d 1139, 1142, 69 USPQ2d 1097, 1099 (Fed. Cir. 2003).

A security interest does not involve an obligation to transfer rights in the invention for the purposes of 37 CFR 1.27(a)(1) through (a)(3) unless the security interest is defaulted upon. See 37 CFR 1.27(a)(5). For example, an applicant or patentee may take out a loan from a large entity banking institution and the loan may be secured with rights in a patent application or patent of the applicant or patentee, respectively. The granting of such a security interest to the banking institution is not a currently enforceable obligation to assign, grant, convey, or license any rights in the invention to the banking institution. Only if the loan is defaulted upon will the security interest permit a transfer of rights in the application or patent to the banking institution. Thus, where the banking institution is a large entity, the applicant or patentee would not be prohibited from claiming small entity status merely because the banking institution has been granted a security interest, but if the loan is defaulted upon, there would be a loss of entitlement to small entity status. Pursuant to 37 CFR 1.27(g), notification of the loss of entitlement due to default on the terms of the security interest would need to be filed in the application or patent prior to paying, or at the time of paying, the earliest of the issue fee or any maintenance fee due after the date on which small entity status is no longer appropriate. See MPEP § 509.03(b), subsection I.

Once small entity status is established in an application or patent, fees as a small entity may thereafter be paid in that application or patent without regard to a change in status until the issue fee is due or any maintenance fee is due. 37 CFR 1.27(g)(1). 37 CFR 1.27(g)(2) requires that notification of any change in status resulting in loss of entitlement to small entity status be filed in the application or patent prior to paying, or at the time of paying, the earliest of the issue fee or any maintenance fee due after the date on which status as a small entity is no longer appropriate. 37 CFR 1.27(g)(2) also requires that the notification of loss of entitlement to small entity status be in the form of a specific written assertion to that extent, rather than only payment of a non-small entity fee. For example, when paying the issue fee in an application that has previously been accorded small entity status and the required new determination of continued entitlement to small entity status reveals that status has been lost, applicant should not just simply pay the non-small entity issue fee or cross out the recitation of small entity status on Part B of the Notice of Allowance and Fee(s) Due (PTOL-85), but should (A) check the appropriate box on Part B of the PTOL-85 form to indicate that there has been a change in entity status and applicant is no longer claiming small entity status, and (B) pay the fee amount for a non-small entity.

VI. RIGHTS HELD BY GOVERNMENT ORGANIZATIONS

Although the Federal government agencies do not qualify as nonprofit organizations for paying reduced fees under the rules, a license to a Federal agency resulting from a funding agreement with the agency pursuant to 35 U.S.C. 202(c)(4) will not preclude the proper claiming of small entity status. See 37 CFR 1.27(a)(4)(ii), which provides that “a license to a Federal agency… pursuant to 35 U.S.C. 202(c)(4) does not constitute a license for the purposes of paragraphs (a)(2)(i) and (a)(3)(i) of this section.” Furthermore, as provided in 37 CFR 1.27(a)(4)(i), the following situations do not constitute a license so as to prohibit claiming small entity status by a person under 37 CFR 1.27(a)(1):

• 1. a use license to the Government resulting from a rights determination under Executive Order 10096 , made in accordance with 35 U.S.C. 501.6;
• 2. a use license to the Government resulting from Federal agency action pursuant to 15 U.S.C. 3710d(a) allowing the Federal employee inventor to obtain or retain title to the invention; or
• 3. a use license to a Federal agency resulting from retention of rights by the inventor under 35 U.S.C. 202(d), provided the conditions under 35 U.S.C. 401.9 for retention of rights by an inventor employed by a small business concern or nonprofit organization contractor are met, and the license is equivalent to the license the Federal agency would have received had the contractor elected to retain title

Government organizations as such, whether domestic or foreign, cannot qualify as nonprofit organizations as defined in 37 CFR 1.27(a)(3). Thus, for example, a government research facility or other government-owned corporation could not qualify. 37 CFR 1.27(a)(3) was based upon 35 U.S.C. 201(i), as established by Public Law 96-517. The limitation to “an organization of the type described in section 501(c)(3) of the Internal Revenue Code of 1986 (26 U.S.C. 501(c)(3)) and exempt from taxation under section 501(a) of the Internal Revenue Code (26 U.S.C. 501(a))” would by its nature exclude the U.S. government and its agencies and facilities, including research facilities and government corporations. State and foreign governments and governmental agencies and facilities would be similarly excluded. 37 CFR 1.27(a)(3) is not intended to include within the definition of a nonprofit organization government organizations of any kind located in any country. A university or other institution of higher education located in any country would qualify, however, as a “nonprofit organization” under 37 CFR 1.27(a)(3) even though it has some government affiliation since such institutions are specifically included.

A wholly owned subsidiary of a nonprofit organization or of a university is considered a part of the nonprofit organization or university and is not precluded from qualifying for small entity status.