Does the North Carolina Secretary of State have to file a patentable-intellectual-property report before licensing its homegrown business-registration software to other states?

Plain-English summary

Sheila Stafford Pope, the Secretary of State's General Counsel, asked the AG to interpret a new statutory reporting requirement. Section 15.1(a) of S.L. 2001-424 required state agencies to report proposed or pending transfers of "patentable intellectual property" so the state could protect its interests in any potentially valuable IP. Pope wanted to know whether the Secretary of State had to complete the report before licensing two pieces of software, both developed in-house: the principal "Secretary of State Knowledge Base" or SoSKB application, and a newer "RA9" module that handled the requirements of Revised UCC Article 9 (adopted in North Carolina as S.L. 2000-169).

Senior Deputy AG Ann Reed, Special Deputy AG Susan Nichols, and Assistant AG Richard Bradford broke the response into three subordinate questions: was the principal SoSKB software patentable, was the RA9 module patentable, and what counts as a "transfer" under Section 15.1(a)?

The AG opened with a candid caveat. The AG's office is not licensed to opine on substantive patentability; that requires an attorney licensed before the U.S. Patent Office and a prior-art search. The AG could address procedural patentability questions and offer general guidance on the reporting statute.

Question 1: Is the SoSKB software patentable?

On procedural grounds, almost certainly not. 35 U.S.C. § 102(b) imposes a one-year bar: an inventor cannot obtain a patent if the invention was in public use or on sale in the United States more than one year before the patent application was filed. The Court of Customs and Patent Appeals in In re Katz and the Federal Circuit in Vanmoor v. Wal-Mart applied this bar strictly. Pope had reported that SoSKB was placed in use around February 2000 and that some disclosures of its features had been made. By the time the question reached the AG, more than a year had passed since first use, and additional disclosures had occurred. The procedural § 102(b) bar therefore eliminated patentability for the SoSKB program. Because Section 15.1(a) of S.L. 2001-424 applies only to patentable IP, the SoSKB program did not need to be reported.

Question 2: Is the RA9 module patentable?

The RA9 module had a more recent first-use date (July 2001), so the § 102(b) one-year window had not closed. Whether RA9 satisfied the substantive patentability requirements of 35 U.S.C. §§ 101 (subject matter), 102 (novelty), and 103 (non-obviousness) was an inquiry the AG could not perform. Patent counsel would have to do a prior-art search and analyze the claims. Without that work, the AG could not definitively say whether RA9 was patentable.

The recommendation to report anyway. Despite concluding that SoSKB need not be reported because it was not patentable, the AG said the safest course was to disclose the software as potentially patentable property. For property covered by Section 15.1(a), the opinion said benefits of the Secretary's licensing program may be reportable as the "potential value" of the state's interest. The program preserved ownership and required licensees to share modifications with North Carolina without a royalty.

Question 3: What is a "transfer" under Section 15.1(a)?

The statute did not define "transfer." The AG concluded that transfers of SoSKB copies through licenses should fall within Section 15.1(a) when those transfers include patentable subject matter. The opinion separately concluded that the principal SoSKB program was not patentable.

The copyright-registration recommendation. Paragraph 1(c) of Section 15.1(a) requires the reporting agency to identify the best way to protect the state's interest. For software, that often means copyright rather than patent. The AG strongly recommended that the Secretary register the SoSKB and its components as copyrighted works with the U.S. Copyright Office. Registration is required to enforce most copyright rights and remedies under 17 U.S.C. §§ 411, 412. Copyright Circular 61 (Registration for Computer Programs) and Application Form TX were the relevant resources. Paragraph 10 of the Secretary's draft license agreement already contained standard copyright notice and warning language.

The licensing-program benefits. The Secretary's program was revenue-neutral but preserved state ownership and required licensee states to share their modifications. The AG described this as a "multi-state collaborative effort with concomitant economic benefits derived from savings of time and appropriations to the licensees." North Carolina's benefit was preserving asset ownership and gaining required access to licensees' future improvements at no royalty.

For the Secretary's 2002 decision, the AG advised disclosure of the software as a precaution, explained that a patent opinion was needed to assess whether Section 15.1(a) applied to RA9, and strongly recommended copyright registration for SoSKB and its components.

Currency note

This opinion was issued in 2002 and applies the patent law and state reporting provision as the Attorney General understood them then. Anyone evaluating a current software transfer should check current patent law and the current text of the state reporting provision before relying on this analysis.

Background and statutory framework

Section 15.1(a) of S.L. 2001-424. The General Assembly was responding to a perceived gap in state IP management. State agencies sometimes developed valuable technology and gave it away through informal licensing without the state knowing what it had. Section 15.1(a) required reporting before transferring patentable IP so the state could evaluate the asset, decide on protection strategy, and capture economic value if appropriate.

The Secretary of State Knowledge Base. SoSKB was a software application the Secretary's office had developed to support its business-registration functions. It used XML for web page content exchange, a then-standard technology. The Secretary had been licensing copies of SoSKB to other states' Secretaries of State, who could use it for their own business-registration operations. The licensee states agreed to share modifications back with North Carolina at no royalty, creating a multi-state collaborative pool of improvements.

The RA9 module. Revised UCC Article 9 (adopted as S.L. 2000-169) governs secured transactions in personal property. It required substantial software changes for filings, searches, and lien management. The Secretary developed a dedicated RA9 module to handle these new requirements. The module was first used in July 2001, putting its § 102(b) one-year clock on a much later schedule than the SoSKB program.

The 35 U.S.C. § 102(b) bar. The opinion describes a one-year filing limit following disclosure or use of an invention. It concluded that SoSKB's reported use beginning around February 2000 and disclosures of its features resolved its patentability on procedural grounds.

Why the dates mattered here. The opinion distinguishes the principal SoSKB program, placed in use around February 2000, from the RA9 module, whose use began in July 2001. It concluded that the first program was barred on procedural grounds but that the time restriction might not preclude a patent application for RA9.

Why disclose anyway. The AG read Section 15.1(a) as limited to patentable intellectual property and concluded that SoSKB need not be reported. Even so, the opinion recommended disclosure as the safest course. It identified preservation of ownership and access to licensees' improvements as possible "potential value" to report if the property fell within the statute.

The copyright pivot. Patent protects inventions; copyright protects expression. Software is protected by both, but copyright is automatic on creation and does not have a one-year bar. Registration is what enables enforcement (statutory damages, attorneys' fees, the ability to file suit) under 17 U.S.C. §§ 411, 412. The AG's recommendation to register SoSKB and components with the Copyright Office was straightforward and inexpensive, and it preserved the state's enforcement options against unauthorized copying.

The licensing-law definition of "transfer." Section 15.1(a) does not define "transfer." The AG reasoned from a licensee's recognized personal-property interest that transfers of SoSKB copies through licenses should be included when they contain patentable subject matter. That condition matters because the opinion concluded that the principal SoSKB program was not patentable.

Common questions

Q: Did the Secretary of State end up filing the Section 15.1(a) report?

A: The opinion does not address what the Secretary did next. The AG recommended disclosing the software as potentially patentable property even if the Secretary chose not to obtain a patentability opinion. Without such an opinion, the AG could not assess whether Section 15.1(a) applied to RA9.

Q: Did the SoSKB licensing program preserve anything valuable for North Carolina?

A: The opinion says the program was revenue neutral but preserved state ownership. It also says licensees had to provide their modifications and enhancements to North Carolina on a non-royalty basis.

Q: What if a state has already disclosed software more than a year ago but wants to patent it now?

A: Under the law applied in this 2002 opinion, disclosure more than one year before filing an application barred a patent. The AG concluded on the reported facts that the principal SoSKB program was not patentable on procedural grounds. Current patent questions require analysis under current law.

Q: How does this opinion apply to other state agencies developing software?

A: The reasoning extends. Any state agency developing software should track first-use and disclosure dates carefully and consult patent counsel within the first year if patenting is contemplated. Otherwise, plan for copyright protection and licensing-based monetization or sharing.

Citations from the opinion

• Section 15.1(a) of S.L. 2001-424
• 35 U.S.C. § 101
• 35 U.S.C. § 102 (especially § 102(b))
• 35 U.S.C. § 103
• 17 U.S.C. § 106
• 17 U.S.C. §§ 411, 412
• 17 U.S.C. § 501 et seq.
• In re Katz, 687 F.2d 450, 454, 215 USPQ 14, 17 (CCPA 1982)
• DeGraffenried v. United States, 16 USPQ 2d 1324, 1330, N.7 (Cl. Ct. 1990)
• Vanmoor v. Wal-Mart Stores, Inc., 201 F.3d 1363, 1366-67, 53 USPQ 2d 1377, 1379 (Fed. Cir. 2000)
• Copyright Circular 61 (Computer Registration for Computer Programs)

Source

• Landing page: https://ncdoj.gov/opinions/patentable-intellectual-property-pending-transfers/

Original opinion text

RE: ADVISORY OPINION: SECTION 15.1(A) OF S.L. 2001-424 REGARDING PROPOSED OR PENDING TRANSFERS OF PATENTABLE INTELLECTUAL PROPERTY

Dear Ms. Pope:

You requested an advisory opinion determining whether the Secretary of State must, pursuant to Section 15.1(a) of S.L. 2001-424 regarding potential transfers of patentable intellectual property, complete the reporting requirements therein prior to licensing certain computer software application(s) and coding developed by the Office of the Secretary of State. Because analysis requires distinguishing procedural and substantive aspects of your question, this letter addresses three subordinate queries. First, whether the principal software application is patentable. Second, whether the subsequently developed "RA9" application specifically addressing the requirements of Revised UCC Article 9 (adopted in North Carolina as SL 2000-169) is patentable. Last, the question of the meaning of "transfer" in the context of Section 15.1(a). Thank you for presenting a comprehensive context and history of the software application(s) denominated "the Secretary of State Knowledge Base" or "SoSKB".

We must first advise you that we are not licensed patent attorneys, and that this letter does not express any opinion as to the substantive patentability of any invention comprising the SoSKB, nor RA9, at the time of first use. A timely determination of an invention's patentability requires an opinion of patent counsel; i.e. an attorney licensed to practice before the US Patent Office.

Preparation of a patentability opinion includes substantive comparisons with existing similar technology, methods, etc. (typically referred to as "prior art") and procedural review to ensure compliance with applicable law and regulations. This generally involves a patent search, review of the proposed invention and development of patent claims describing the invention and at least a portion of the patent specification. Although such substantive review is outside the expertise of members of the Attorney General's office, we do address your first question on procedural grounds and some guidance is provided on the remaining questions.

Patentability refers to whether something, presumed an invention, is suitable to be patented. This is first determined with reference to subject matter, novelty, and obviousness: see generally 35 USC § 101 (subject matter), § 102 (novelty), and § 103 (non-obviousness).

The subject matter of patents most likely to affect the State pursuant to Section 15.1(a) comprise software operations and functionality, hardware, and processes. Processes may exist as a combination of hardware and software, or software alone. These will likely involve methods of conducting internal operations or "business" of the State. The SoSKB certainly falls within this area.

The SoSKB software application(s) may have been patentable when first reduced to practice on or about February 2000. But 35 USC 102(b) requires filing a patent application within one year of publication or placing the invention in use. Hence, if an inventor discloses the invention more than one year before filing an application, the inventor is barred from obtaining a patent. In re Katz, 687 F.2d 450, 454, 215 USPQ 14, 17 (CCPA 1982). This requirement has lead to the practice of filing within one year of reducing an invention to practice. The time limitation refers to disclosure in this or other countries wherein disclosure is understood to mean "prior art" or disclosure by the inventor sufficient to make the invention obvious, not novel, etc. and therefore non-patentable under §§ 101, 102 or 103 of the Patent Act.

DeGraffenried v. United States, 16 USPQ 2d 1324, 1330, N.7 (Cl. Ct. 1990). If an invention is reduced to practice before being sold or offered for sale more than one year before filing the application, however, the inventor is barred from obtaining a patent.

Vanmoor v. Wal-Mart Stores, Inc., 201 F.3d 1363, 1366-67, 53 USPQ 2d 1377, 1379 (Fed. Cir. 2000). You reported that the SoSKB uses extensible markup language (XML) as the current standard for exchanging web page content. You also reported that the SoSKB was placed in use (i.e., reduced to practice) on or about February 2000, and that some disclosures of its features and functionality have been made. These facts and the foregoing cited authorities resolve the issue of patentability on procedural grounds. Section 15.1(a) of S.L. 2001-424 specifically limits its application to patentable intellectual property (understood herein as patentable subject matter). Therefore, the SoSKB program need not be reported under Section 15.1(a) because the program is not patentable.

The second question regards RA9, and other subsequently developed components or modules. Your letter indicates that the RA9 application(s), components or modules were developed subsequent to the principal software comprising SoSKB, and that use of the RA9 began in July 2001. The time restrictions of § 102(b) may not preclude a patent application for the RA9 component of the SoSKB. Absent a patent opinion, it is not possible to assess the application of Section 15.1(a) to RA9 or other developments at this time. Although this Office cannot provide a substantive patentability opinion, we offer some further guidance regarding Section 15.1(a) and the licensing initiatives evident in your letter and sample licensing agreement. Developments or components such as RA9 may be patentable if the requirements of § 101, § 102 and § 103 are satisfied.

Section 15.1(a) is intended to identify a particular class of potentially valuable property, and to ensure sufficient management of any positive economic potential to protect the State's interests. This statute does not provide an exclusion from reporting if the "patentable intellectual property" lacks economic value. The Secretary of State's licensing program is revenue neutral, but preserves the State's interests in the licensed technology regardless of its patentability. The license agreements also provide a synergistic benefit to the State by requiring licensee states to provide their modifications, enhancements, etc. to the N.C. Secretary of State on a non-royalty basis. Your letter refers to this program as a multi-state collaborative effort with concomitant economic benefits derived from savings of time and appropriations to the licensees. North Carolina's benefit derives from preserving ownership of the asset(s) and required control and/or use of any further developments, enhancements, modules, etc. from the licensees. These benefits may be reportable pursuant to Section 15.1(a)(1)(b) as the "potential value" of the State's interest. We believe the safest course of action would be to disclose the existence of the software application(s) as potentially patentable property as required by Section 15.1(a) even though business and economic issues may lead the Secretary of State to choose not to obtain a patentability opinion.

Finally, the question of when a transfer occurs must be addressed. The term transfer is not specifically defined in Section 15.1(a). However, the meaning of transfer or license from licensing law is well established. The precise nature of the rights conveyed depends upon the nature of the intellectual property right(s) licensed. Because the law recognizes personal property interests of a licensee, we conclude that transfers of SoSKB copies through licenses, etc., should be included within the meaning of Section 15.1(a) when such transfers include patentable subject matter.

Paragraph 1(c) of Section 15.1(a) requires a reporting agency to identify the best method of protecting the State's interest in the technology, but does not provide further guidance. Other potential intellectual property protections include copyright and trade secret in addition to patent law. Registration of the SoSKB and any components as copyrighted works is strongly recommended. This may be accomplished with a minimum of cost and effort; see generally Copyright Circular 61, Computer Registration for Computer Programs. This document, Application Form TX, and other relevant documents may be obtained from the Copyright office, or online at http://lcweb.loc.gov/copyright/. Paragraph 10 of your license agreement contains standard notice and warning language regarding claims of copyright and concomitant rights of use. Enforcement of the rights identified in 17 USC § 106 and remedies provided in 17 USC § 501 et seq. for copyright owners requires registration prior to taking action to enforce such rights and remedies. 17 USC §§ 411, 412.

In summary, we conclude that the principal SoSKB software is not patentable based upon procedural analysis, and that separate developments may be patentable if the substantive requirements for patentability are met. Absent a patent opinion, it is not possible to assess the application of Section 15.1(a) to the RA9 component at this time. We strongly recommend completion of the copyright registration process.

Sincerely,

Ann Reed Senior Deputy Attorney General

Susan K. Nichols Special Deputy Attorney General

Richard H. Bradford Assistant Attorney General