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BACKGROUND

For many years, patent applicants in Canada could pay reduced government fees, typically 50% less, as long as the associated title and licence rights remained in the hands of a small entity (a university or an entity with 50 employees  or less). The Canadian definition of a small entity does not include all non-profit organizations and is much more restrictive than the U.S. definition. The Canadian Patent Rules define small entity, and the term "large entity" is commonly used to refer to what the Patent Rules define as "other than a small entity". There are no express provisions in the Canadian Patent Act or Rules governing a situation in which a patent applicant pays fees as a small entity in good faith, but it is later discovered that the applicant was a large entity. However, the Commissioner of Patents had adopted the practice of accepting a supplemental payment to "top-up" a maintenance fee when a change in status from small to large entity was discovered, even if this occurred after the expiry of the time period for payment of the applicable fee set out in the Patent Rules. The Commissioner's practice of accepting top-up fees (now discontinued) gave patent agents in Canada an opportunity to correct errors in determining small entity status.

In August 2001, the Federal Court Trial Division decided in Dutch Industries Ltd. v. Canada (Commissioner of Patents) 1 that payment of an annual maintenance fee for a small entity, when in fact the Applicant's status was a large entity, resulted in abandonment of the patent or patent application, and that the Commissioner's "top-up" practice after expiry of the payment period was beyond the statutory powers of the Commissioner. As a result of this decision, declaring small entity status became impractical.

An abandoned application or patent may be reinstated without providing any justification for the abandonment, simply by paying a reinstatement fee of $200 along with the maintenance fee. However, the reinstatement must be effected within one year of the abandonment. The Patent Act has no express provision for restitutio in integrum or revival of an unavoidable abandonment beyond the one-year reinstatement period.

In light of the August 2001 decision, the practice of this firm was to pay small entity fees only when a declaration of small entity status very recently signed by the applicant was provided to us.

THE RECENT COURT OF APPEAL DECISION

On March 7, 2003, the Federal Court of Appeal accepted the earlier finding that the Commissioner's practice of accepting top-up fees is beyond his authority, and found that small entity status is determined "when the patent regime is first engaged (generally, when submitting a patent application)", rather than continuously as each fee is paid. Therefore, the Court of Appeal decided that a one-time only determination of small entity status is the law in Canada, and an applicant who qualified to pay fees as a small entity at the outset is entitled to pay fees as a small entity for the duration of the applicant's ownership of the patent. However, according to the Court of Appeal decision, an innocent error in payment of fees as a small entity at the outset if an applicant does not qualify as a small entity would be fatal to the validity of the patent.

A one-time only determination of small entity status is contrary to the Trial Division decision and to the past practice of the Commissioner, who allowed a post-filing switch from large entity status to small entity status, or vice versa. The Court of Appeal dismissed the notion that a one-time only determination of status would be unfair to any person who is a large entity when a patent application is submitted, but later becomes a small entity. Such post-filing changes from large to small entity status are very infrequent, however, the Court of Appeal decision makes these applications subject to abandonment, contrary to the lower court's approach.

This Court of Appeal decision will be a relief for those who had concerns about the validity of Canadian patent applications and patents for which fees were correctly paid as a small entity at the outset, and for which some maintenance fees were later paid "improperly" as a small entity. This certainly occurs much more frequently than a change from large to small entity status.

Application for leave to appeal the Federal Court of Appeal decision to the Supreme Court of Canada was filed on April 29, 2003. It is not yet known if the Supreme Court will hear the matter.2

CLAIMING SMALL ENTITY STATUS IN CANADA

In view of the possibility of a change in the law as a result of a Supreme Court decision, we are reluctant to pay small entity fees under any circumstances. In matters where the applicant or patentee insists on paying the reduced fees, with knowledge of the present circumstances, we will respect our client's wishes, although we cannot be ultimately responsible for the consequences. We find payment of small entity fees tolerable only when the applicant is clearly satisfied that the most conservative conditions for qualifying for small entity status are met. The following conditions are not based on any policy or law in Canada, but are simply provided as an example of conservative conditions:

Employee Count:

The applicant or patentee has 50 employees or less. When there is any risk that an applicant or patentee could be construed to have more than 50 employees, whether part-time or full-time, or consultants or temporary workers who form part of the applicant's or patentee's workforce, large entity fees should be paid.

Controlling Entity:

If the applicant or patentee is controlled by another entity, the number of employees in an entity should be calculated on the basis of the named applicant or patentee, including the number of employees of the controlling entity and any other entities controlled by the controlling entity.

University:

In the case of a university, the applicant or patentee must be, as would typically be the case in Canada, a non-profit institution of higher learning awarding post-secondary degrees, including undergraduate and graduate degrees, namely bachelor's and master's or doctoral degrees. A community college might not satisfy the definition of a university. The number of employees in a university may be greater than 50.

Conveyance of right to another party:

The applicant or patentee must not have conveyed any right to the invention in Canada or anywhere in the world to a large entity, such as a licence right, including conditional rights, such as a security interest, or right of first refusal for a licence.

Time of qualification:

The qualification as a small entity status must have existed, in the case of each owner of the application or patent, from the time that the first application for the invention was filed (the priority application) without interruption until the present day. A small entity which acquires full title to a patent or application from a large entity should not begin to pay small entity fees for the patent or application.

With respect to each of the above conditions, Canadian Patent Rules do not provide guidelines to allow us to determine with certainty in a particular case if an applicant or patentee rightfully qualifies as a small entity. For example, there are no guidelines about how to calculate the number of employees, there are no guidelines indicating whether employees of a controlling entity are to be included, there are no guidelines about the time for determining small entity status, or whether the determination is to be made only once or each time a fee is paid. Therefore, we think that a conservative approach is advisable.

The exercise of determining whether an applicant qualifies as a small entity each time a fee is paid may be more costly than any savings realized by paying reduced fees, namely about US$1700 over the 20-year life of the patent but about US$750 in the first 10 years. In our opinion, the fact that an unintentional error in the determination of entity status may not be correctable cancels any advantage of the small entity fee system. Consequently, the business case for claiming small entity status is generally not viable, and it is now our policy to discourage paying small entity fees in Canada.

The Federal Court of Appeal's decision did not clearly settle the issue of small entity status in Canada. We do not yet know how the courts will treat patent applications and patents in which the applicant paid large entity fees on filing, but the Commissioner later accepted evidence of small entity status and payment of small entity fees. In view of the Court of Appeal's decision, such patent applications and patents may be considered abandoned. It remains to be seen how the Supreme Court will decide this matter.

If a client continues to insist on maintaining its small entity status we will have no choice but to continue to require a small entity declaration every time a fee, such as a maintenance fee, is to be paid.

1. 14 CPR(4th) 499.
2. For updates on this topic, please see our website at http://www.ogilvyrenault.com/en/ResourceCenter/ResourceCenterDetails.aspx?id=96&pId=27
   

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

©OGILVY RENAULT 2003 - All Rights Reserved

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