June 22, 2009

A Tale of Two Entrepreneurs

A comparison of two recent Board of Patent Appeals and Interferences (“Board”) decisions demonstrates the difficulty of establishing nonobviousness, to the Board’s satisfaction, through evidence of commercial success. While in KSR Int’l v. Teleflex Inc. the Supreme Court rejected a “rigid approach” to determining obviousness, instead calling for “an expansive and flexible approach” using a “broad inquiry,” the Board often too narrowly applies Federal Circuit precedent in deciding whether a product has been commercially successful.

Ex parte Bauman, Appeal 2008-3704 (B.P.A.I. Feb. 25, 2009) and Ex parte Albritton, Appeal 2008-5023 (B.P.A.I. Mar. 13, 2009), two entrepreneur inventors who recently attempted to show nonobviousness of their inventions through commercial success and met with very different fates, illustrate the problem. Commercial success is pertinent to patentability when the product or process has been a commercial success and when that success is attributable to the claimed invention rather than to other factors such as advertising, superior workmanship, and so on unrelated to claim features. If the market chose to purchase the claimed product because of a claimed feature that was not available in the prior art, the market by this action endorsed the merits of the claimed product. An evaluation of the evidence of commercial success provides “helpful insights” on nonobviousness if it measures what did happen for the claimed invention against what could have been expected for both an obvious variant of the prior art and a patentable invention. And what could have been expected will, in turn, depend on the particular circumstances.

Not all sellers stand on equal footing. A company already established and known to a market will reasonably be able to reach more purchasers than will an entrepreneur not in the market (maybe not in any market) who lacks name recognition, manufacturing capacity, supplier connections, a sales network, and possibly any substantial financial backing. Apropos of commercial success, a purchaser cannot be deemed to have chosen between two products if he remained unaware of one of the products. The market share that represents commercial success will be different for these two types of sellers—the company already established and the entrepreneur—due to their different circumstances.

Under Federal Circuit precedent, evidence of gross sales or units sold will not suffice to show commercial success without showing market share, sales captured from competitive, prior art products, what sales could normally have been expected in that market for the time period, growth of market share, or other such data that puts the raw sales numbers in perspective to judge whether they constitute a success. For an entrepreneur, who will need some time to make his product known to the entire potential market, market share alone will be a poor measure of whether or not the entrepreneur’s product was endorsed by those who became aware of it. The Federal Circuit’s alternative measures of what sales could normally have been expected, i.e., what growth or decrease was experienced by the market as a whole during that period, or growth of market share should better reflect the success of the entrepreneur’s product.

Dr. Natan Bauman invented a hearing aid that has a speaker in the ear canal and that does not block the ear canal with any obstructing mass. He formed a company and started selling the hearing aid at the beginning of 2004, with sales of $27,000 in his first quarter. His sales climbed each quarter, and by the fourth quarter of 2005 they stood at $3,375,000. The annual sales growth was from $3.42 million in 2004 to $14.5 million, a 424% increase, despite the company being unknown. (For 2004, the sales growth was from $0 in 2003 to $3.42 million in 2004, also extremely impressive.) During 2004 the company sold 3643 units and during 2005 12,332 units, a 339% increase. His sales were generated principally by word of mouth and side-by-side demonstrations of his hearing aid system with other hearing aids.

Instead of considering the growth trend, the Board looked at only total sales for 2004 and 2005 together (remember, in 2004 the company was starting at zero) compared to total sales of all hearing aids for those two years of 4,359,801, a 0.37% share. More telling though, was the more than three-fold increase in market share from 0.17% in 2004 (3643 units sold out of 2,145,378 industry-wide) to 0.56% in 2005 (12,332 units sold out of 2,214,423 industry-wide). The Bauman sales were growing at a much faster rate (339%) than was the hearing aid market as a whole (3.22%). The Board mysteriously stated that the claimed product’s “increase in sales from 2004 to 2005 generally matches the overall tend in domestic hearing aid sales for the same period.” It does not, unless one considers two orders of magnitude greater to “generally match.” The industry as a whole sold sixty-nine thousand more units in 2005 than in 2004, and Dr. Bauman himself accounted for nearly nine thousand of those. The Board, while conceding that the appellant “may be an entrepreneurial success story.” found its market share too small to overcome the prima facie case of obviousness.

In considering the Bauman evidence, the Board should have taken into account the circumstances of the individual inventor who was marketing his product in head-to-head comparisons and by word of mouth and against well-situated, nationally based competitors. The Board’s analysis should have included what sales growth could normally have been expected in that market for the time period—only 3.22% more— compared to actual sales growth—339%—or the three-fold growth of market share, two factors that are particularly able to put this entrepreneur’s data in perspective to judge whether it constitutes commercial success. As the Board admitted, “Vivatone’s sales are impressive considering they were achieved by a small startup company with no prior reputation or name recognition which generated nearly $18,000,000 in two years by selling products that were not advertised on radio or television. Given these facts, buyers were clearly interested in Vivatone’s products and were willing to pay for them.” The only other thing the Board should have added was “rejection reversed.” The market of buyers aware of the Bauman product endorsed its merits.

What should have happened in Ex parte Bauman was what did happen in Ex parte Albritton.

Kenneth Albritton persuaded the Board on evidence of a growth of sales, like Dr. Bauman’s, markedly greater than the sales growth for the whole market (i.e., the sales growth that could normally have been expected in that market for the time period). Mr. Albritton claimed a backpack that unzipped to provide a well-organized sports locker adjunct that can be hung over a locker door for easy access to equipment. Mr. Albritton’s sales were $56,150 in 2003 (a 384% increase over 2002, when he started the company) and $108,756 in 2004 (a 94% increase over 2003), relative to average sales increases for the general market (luggage) reported by Albritton to be a 10% increase in 2003 over 2002 and a 24% increase in 2004 over 2003. This evidence was complemented by industry praise and licensing agreement. Although the Board did not discuss the market share for the invention based on total sales in the identified market, Albritton’s market share in 2003 was a mere 0.0035% and for 2004 only increased to 0.0054% (roughly one percent of Dr. Bauman’s yearly market share). While the increase in market share was about 55%, and the increases in sales pointed out by the Board were greater than that of the market as a whole, one would be hard-pressed to describe 0.0054% as the substantial market share the Board looked for in the Bauman determination. But the Board made the right call by (implicitly) taking into account the circumstances of this entrepreneur when making its determination. The Board gave every consideration, as it should have, to the particular circumstances that colored the appellant’s ability to reach a market for his product. In the Albritton decision, the Board applied an “expansive and flexible approach” in evaluating the appellant’s evidence of commercial success that led to a just outcome.