Are USPTO Entity Status Changes Affecting Your Company?
Posted on Feb 16, 2023 in Articles
Reprinted with permission from the February 3, 2023 issue of The Legal Intelligencer. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
For business owners, decision makers, and the attorneys who represent them, perhaps 2022 brought great change. Did your or your client’s company expand, downsize, or restructure? Did your client, an independent inventor, realize newfound success? With that, profits may change, and the number of employees may change, but what about the already-filed patent applications and existing patents? Change may need to occur in that arena as well.
Patent application fees and patent maintenance fees are based on “entity status.” An applicant or owner may qualify as a micro entity, small entity, or large entity, and the status system aims to make patent acquisition and maintenance more affordable for individual inventors, small businesses, and nonprofits. Recently, The Unleashing American Innovators Act of 2022, signed into law on December 29, 2022 and now in effect, increased small entity fee discounts from 50 percent to 60 percent and micro entity discounts from 75 percent to 80 percent.  This results in lower application filing fees, examination fees, and issue fees, among others. If your client or company filed an application under one type of entity status and now qualifies as a different type of entity, it is imperative to know what type of entity status now applies and when you need to notify the United States Patent and Trademark Office.
What Entity Status Applies?
An applicant or owner qualifies as a small entity if 1) the applicant or owner is an individual, a nonprofit (including universities), or a business that does not have a number of employees exceeding 500 people; and 2) has not come under an obligation to or has not actually assigned, licensed, granted, or transferred an ownership interest in the rights of the invention to any entity that would qualify as a large entity. Loss of small entity status can occur by conveying either exclusive or non-exclusive licenses, whether royalty-generating or not, to a large entity, as well as conveying certain implied licenses.  An implied license to a large entity to use and resell patented articles purchased from the small entity will not cause a loss of small entity status, nor will an order by an applicant to a firm to make a prototype of the invention for the applicant’s own use.  Transferring “rights of the invention” that will cause a loss in small entity status include transferring or incurring an obligation to transfer a “shop right” to a large entity employer—an act based in an implied license where the employer is permitted to use the invention for business in exchange for providing the applicant resources to create it— or any other right that allows a large entity to preclude others from making, selling, offering for sale, or using the invention throughout the United States or importing the invention into the United States. 
For micro entity status, which affords even greater fee discounts, there are two ways to qualify: gross income basis and institution of higher education basis. An applicant or owner that already qualifies as a small entity may further qualify as a micro entity and meet the requirements under a gross income basis if 1) neither the applicant, the inventor, nor a joint inventor has been named as an inventor on more than four previously filed applications; 2) neither of the applicant/inventor/joint inventor made an income in the previous year exceeding the “maximum gross qualifying income;” and 3) the “rights in the invention” as described above haves not been conveyed to any entity that would not qualify as a micro entity.  The “maximum gross qualifying income” is three times the medium household income from the previous year.  For example, for applications filed in 2022, the USPTO used the 2021 medium household income, $70,784, as reported by the U.S. Census Bureau.  Therefore, to qualify as a micro entity in 2022, no applicant, inventor, or joint inventor associated with the application could have an income greater than $212,352 in the 2021 year. As the U.S. Census Bureau has yet to finalize its statistics for the 2022 year, the maximum gross qualifying income remains at $212,352 as of early January until further notice. Applicants and attorneys should watch for changes to this number as 2023 progresses.
Large entity qualifications are far more simple, as large entities are entities that neither qualify as a micro entity or small entity.  These entities pay the full fee amount without a discount.
The Entity Status has Changed…Now What?
Sometimes, your client may not think to advise its intellectual property attorney of every business change, leaving attorneys with no signal that a previous entity status may no longer apply. If your or your client’s company has filed a patent application and since has had a change in income, expanded or downsized, or assigned, licensed, or conveyed any other interest in the application to another or entered into a contract incurring such a future obligation, you may need to correct the applicant’s entity status.
According to 37 C.F.R. § 1.29(i), a notification of change in micro entity status must be filed “prior to paying, or at the time of paying, any fee after the date on which status as a micro entity . . . is no longer appropriate.” This differs from reporting a change in small entity status, which, under 37 C.F.R. § 1.27(g), must just be reported after loss of status when the issue fee or maintenance fee is due, whichever comes first after the change in status. Therefore, loss of micro entity status must be reported on or before the next fee of any kind is due, whereas if small entity status was lost mid-prosecution, an applicant is not required to notify the USPTO until the issue fee is due, in which case it would need to pay the issue fee at the large entity rate. If it is found entity status has changed, knowingly and incorrectly claiming small or micro entity status for fee purposes is considered fraud on the USPTO if the Office is not notified at the required time. 
Further, downsized companies which may not have previously met small entity status for their number of employees may also reevaluate their status to determine if a more affordable rate is available. If no change has occurred and the applicant still qualifies as the same type of entity as originally asserted, no action is required.  As entity status is determined at the time of filing, companies and attorneys can help assure the correct fee amount is paid by reevaluating entity status before each payment is due during prosecution, as well as after prosecution before each maintenance fee is due.
What if I Have Been Accidentally Paying the Wrong Fee Rate?
To rectify a change in micro entity status, 37 C.F.R. § 1.29(k) states, “If status as a micro entity is established in good faith in an application or patent, and fees as a micro entity are paid in good faith in the application or patent, and it is later discovered that such micro entity status either was established in error . . . the error will be excused upon compliance with the separate submission and itemization requirements of paragraph (k)(1) of this section and the deficiency payment requirement of paragraph (k)(2) of this section.” A notification of loss of micro entity status is not treated as if small entity status is lost unless the notification specifically states small entity status is also not appropriate. Therefore, the corrections necessary under paragraphs k(1) and k(2) include:
- The Notification of Loss of Micro Entity Status filing, which also outlines in addition to the change in status:
- Which fees were erroneously paid as a micro entity, and what the corresponding fee should have been (small entity amount or large entity amount);
- The amount of micro entity fee paid for each fee and the dates paid;
- The total deficiency owed; and
- The deficiency payment.
No deficiency should be submitted for payments made as a micro entity if the applicant was a micro entity at time of fee payment, even if the entity later loses micro entity status. Therefore, if micro entity status is lost just before the issue fee, only the issue fee (and subsequent maintenance fees) must be paid as a small entity along with the notification of status change. However, any number of fees accidentally paid as a micro entity when that status was not applicable will require the applicant to pay the deficiency balance.
Refunds can also be issued for fees paid as large entities when it is later discovered a small entity fee applies. To receive a refund under 37 C.F.R. §1.28, the correction to small entity status and a refund request must be submitted within three months of the original large entity fee payment. If the USPTO finds the newly asserted entity status is correct, the overpaid portion of the fee is refunded. However, this refund procedure is not available for maintenance fee payments.  Moreover, the USPTO applies a “use it or lose it” policy to taking advantage of its significant micro entity discounts, as refunds are not available for true micro entities that later discover fees were erroneously paid as a small entity.  Refunds can be issued to achieve an end-result small entity rate, but not a micro entity rate.
Safeguards for Maintaining Correct Entity Status
To avoid payment of the wrong fee amount, attorneys and clients should be in regular communication regarding major business developments including but not limited to large increases in income for micro entities, mergers, acquisitions, expansions, consolidations, downsizing, and agreements transferring any type of interest in any invention potentially covered by a patent or application. For applicants and owners claiming micro entity status, attorneys should advise clients that this type of status requires more frequent communication, as the status must be verified with every fee payment. Attorneys should also give clients a brief primer on the entity status distinctions when determining initial entity status, arming clients with the knowledge to better determine when to bring a business event to the attorney’s attention. Finally, if it is found entity status has changed, attorneys should take the steps to determine when it is necessary to notify the USPTO. In a world where business moves fast but the law does not, a conscious effort on the parts of attorneys and their clients to maintain open communication can help ensure the right updates are made at the right time.
 S.2773 — 117th Cong. § 7 (2021-2022), available at https://www.congress.gov/bill/117th-congress/senate-bill/2773/text; see also USPTO Fee Schedule, USPTO (Jan. 1, 2023), https://www.uspto.gov/learning-and-resources/fees-and-payment/uspto-fee-schedule#Patent%20Exam%20Fee.
 13 C.F.R. § 1.27(a); 13 C.F.R. §121.802(a).
 Manual of Patent Examining Procedure (MPEP), § 509.02(V), https://mpep.uspto.gov/RDMS/MPEP/current#/current/d0e30961.html.
 37 CFR § 1.29.
 Id. at § 1.29(a)(4).
 Median Household Income, United States Census Bureau (Sept. 13, 2022), https://www.census.gov/library/visualizations/2022/comm/median-household-income.html.
 MPEP, § 2550(II), https://www.uspto.gov/web/offices/pac/mpep/s2550.html.
 37 C.F.R. §§ 1.27(h), 1.29(j).
 MPEP, § 2550(II).
 MPEP § 2550(I).