Morris Manning & Martin, LLP

IP Newsflash May 2009 : Patent Reform 2009: Is the Third Time the Charm?

05.01.2009

There is a wide range of opinion about the U.S. patent system and its effectiveness, and whether anything ought to be done. The economic downturn has amplified the concern in some quarters – there are those who believe that innovation and entrepreneurship can lift not only the U.S. economy, but also that of other parts of the world.

Spring 2009 has seen renewed activity in Congress to reform certain aspects of the patent laws, after failed attempts in 2005 and 2007. There is no widely accepted evidence that a reformed patent system will lift the U.S. or world economy, at least any time soon. But real improvements could boost the morale of the stakeholders, stimulate innovation and help create new jobs, and provide economic benefits around the world in the long run. Will reforms be enacted? Will those reforms actually be an improvement?

Arguably, Congress has the most comprehensive power to change the patent system for better or worse. The U.S. Constitution (Article 1, Section 8) gives Congress, not the courts or the administration, the power to create the substantive patent laws. Congress can react to unpopular Supreme Court decisions by changing the requirements for patentability, the ability to recover damages, or even the way that the U.S. Patent & Trademark Office (USPTO) runs the patent system. Of course, any changes to the patent laws are supposed to be within the bounds of constitutionality – as determined by the Supreme Court. In practice, however, a change to the patent laws will have a relatively long term effect because of the time it takes for legal changes to be implemented by the administration, for the impact to be felt by the community of stakeholders, for court cases to be brought and won or lost, and for appeals to be made to the Federal Circuit and then, ultimately, to the U.S. Supreme Court.

The most significant patent legislation (that affects contemporary stakeholders) occurred in 1951 with the passage of the current primary legal requirements for patents: novelty, nonobviousness, patentable subject matter, and disclosure (written description/best mode). Those primary legal principles have remained in effect to this day, and have been relatively unchanged for over 50 years.

The next major change occurred with the 1999 Patent Law Amendments, which went into effect for the most part in late 2000. These amendments were significant and related to:

  • Provisions for protection of inventors using the services of invention promotion companies;
  • Changes in the way patent fees were computed;
  • Establishment of a first inventor (prior user) defense for prior users of business methods to allegations of patent infringement (referred to as a “First Inventor Defense”);
  • Provision for extension of patent term if the application has been unduly delayed in prosecution in the PTO through no fault of the applicant;
  • Publication of U.S. patent applications where equivalent applications are published abroad and provision of a right to compensation from those who use the invention after such publication;
  • Optional inter partes re-examination of patents; and
  • Amendments to the organization of the USPTO.

These changes had a profound effect on the patent system and arguably accelerated the pace of patent filings. The changes may have contributed to an increased confidence in the patent system, as the number of users of the system (stakeholders) of both patent filings and patent litigation increased, despite a downturn in the overall economy after September 11, 2001.

We are now seeing a renewed effort at patent reform legislation – the third attempt within the past few years. Efforts in 2005 and 2007 stalled due in large part of the inability of two major patent stakeholders – large pharmaceutical companies (“Big Pharma”) and larger information technology companies (“Big IT”) – to agree as to the nature and extent of reforms needed. Big Pharma, which is a bedfellow with smaller companies and individual inventors on some issues, relies on strong patent protection to protect its significant investments in research. On the other hand, Big IT has heavily lobbied for some degree of weakening of patents, especially as regards the ability to obtain damages in patent lawsuits. According to a variety of commentators, the Big IT companies and certain others believe that too many bad patents are issuing, especially in IT (computer software, telecommunications, electronics, and related technologies), and that the damages awards are too big.

Coincidentally and anecdotally, on May 20, 2009, Microsoft, Inc. was ordered to pay $200 million in damages to a company called “i4i” out of Toronto, Canada, for infringing a patent relating to use of XML in certain Microsoft products. An appeal is expected.

On March 3, 2009, the Patent Reform Act of 2009 was introduced in both houses of Congress by Judiciary Committee Chairmen Conyers (H.R. 1260) and Sen. Patrick Leahy (S. 515). Although not identical, both bills were similar in many respects. There has been a lot of recent activity, counter-proposals, hearings, and press about these bills and there is anticipation in many quarters that a compromise will be reached.

The Senate Judiciary Committee approved a slightly modified bill in April 2009, that some thought both Big IT and Big Pharma could live with. But in recent weeks, a number of Silicon Valley companies (mostly Big IT) turned up the lobbying pressure on House members to keep this bill free of certain Senate changes — in particular, language limiting damages won from lawsuits that tech groups believe will hinder economic growth.

There is not enough space in this article to cover the details of the major proposals of the patent reform efforts for 2009. In addition, more changes are likely as the legislative and lobbying process continues. However, as of the date of this article, here are a few of the main proposals, together with notes on the potential effects such proposals would or could have on relevant stakeholders:

First inventor to file– In the event of a dispute over who is entitled to receive a patent, the law would give the right to the “first inventor to file” a patent application. Patent interferences would go away. This is a significant departure from the current system of “first to invent,” but arguably not as drastic as a “first to file” system that is used in much of the rest of the world. A “first to file” system arguably gives larger, more well-funded entities (like companies with established patent programs and budgets) a distinct advantage over smaller companies and individuals, which may need time to raise capital or refine an invention before filing.

Damages / royalties for infringement – Damages for patent infringement would be based on an invention’s “specific contribution over the prior art.” The so-called “Entire Market Value” rule would be limited. The law concerning lost profits would be unchanged. This was replaced with an amendment in April that would make the district judge a “gatekeeper” who would instruct the jury regarding the methodologies and factors that have a legal evidentiary basis for the computation of damages. This is likely to be a controversial change.

Post-grant review of patents – The bills provide for three types of “post-grant” review of patents, i.e. procedures for challenging patents outside of a court fight. Both ex parte and inter partes reexamination, which are already available, would be retained. A new type of challenge called a “cancellation proceeding” could be initiated within 12 months of patent grant with respect to patents issued after the effective date of the new law. Cancellation proceedings would be before administrative law judges. Grounds for both types of reexamination would still be limited to prior art, but expanded to include prior use or sale and patentee statements. Greater use of post-grant procedures has long been touted as a way to get rid of “bad” patents without going to court, but for reasons too complicated to address here, many stakeholders have perceived the use of post-grant procedures as too risky and open to abuse.

Quality Enhancements – The bills include a way for third parties to submit pre-issuance information relevant to the examination of an application. Proposals in early bills (2005 and 2007) that would have required searching by applicants and the filing of formal statements have been dropped from the current bills. Notably, the bills do not include any provisions or instructions as to how the agency should be run. Some (including this author) believe this is a significant shortcoming of the bill – clear evidence of putting the “cart before the horse” by trying to fix the patent system in the litigation phase instead of at the beginning stage when patents are being examined.

Venue (Where a Patent is Litigated) – Under the new bills, patent lawsuits can only be brought in these places: (1) the place of defendant’s principal place of business or incorporation, or that of the primary U.S. subsidiary of a foreign defendant corporation, (2) where the defendant has committed substantial acts of infringement and has a regular and established physical facility that the defendant controls and that constitutes a substantial portion of the operations of the defendant; (3) where the primary plaintiff resides, if it is an institution of higher education, or a nonprofit patent and licensing organization; or (4) the residence of a sole plaintiff, individual inventor who qualifies as a “micro-entity.”

These provisions are clearly intended to cut down on “forum shopping,” where patent owners seek to bring patent lawsuits in courts that allegedly display favoritism towards patent owners, such as the Eastern District of Texas.

Willful Infringement– This powerful right (which gives the ability to obtain treble damages and attorneys’ fees) cannot be asserted before a court determination that the patent in suit is not invalid, is enforceable, and has been infringed by the infringer. The method for determining willfulness, based on a recent In re Seagate court decision, would be codified, thus establishing “objective recklessness” as the standard for finding willful infringement.

USPTO Fees and Rules – The bills would permit the USPTO to set or adjust patent and trademark fees to reasonably compensate for the services performed. However, the bills do not permanently stop fee diversion (taking USPTO user fees and putting them in the general government coffers, which currently happens) or address the issue of procedural or substantive rule-making by the USPTO, as recently addressed by the Federal Circuit Court of Appeals in Tafas v. Doll. (See MMM IP NewsFlash from March 2009.) Some in Congress apparently do not want to end fee diversion – they apparently want to maintain the right of Congress to take funds from the USPTO to spend for other projects. However, fee diversion is effectively a tax on innovation, taking money from the users of the patent system and spending it elsewhere.

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Is the third time the charm for patent reform? Congress keeps talking of patent reform, having tried now 3 times since 2005 to enact significant reforms. Whether or not reforms pass in 2009, one thing is clear – the U.S. devotes far more attention and resource to its patent system at every level than any other country. When compared to other countries, the U.S. patent system is remarkably well thought out and thorough, despite the fact that some aspects of other countries’ systems may have better features here and there.

Stakeholders in the patent system should take this opportunity, while the Congress is showing interest, to contact their Representatives and Senators and provide their views. The best patent reforms, fixes to the USPTO, and equitable resolution to patent disputes can only occur after robust, well-informed debate and careful consideration of the issues.

John R. Harris, Author and Editor
Jack D. Todd, Editor

NOTE: This article represents the views of the author and does not necessarily represent the views or positions of the firm or of any of its clients. The information contained herein is of a general nature and is not intended to provide legal advice to or address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that this information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on this information without appropriate professional advice after a thorough examination of the particular situation.