Push for patent reform gaining momentum on Capitol Hill

With rare bipartisan support on Capitol Hill building momentum, U.S. patent laws may soon get their first major overhaul in more than 50 years.
The House recently passed a bill that promises sweeping changes to the patent system. The Senate Judiciary Committee approved a comparable measure in July that is expected to go before the full Senate later this fall, perhaps in late October.
Patent litigator Michael T. Siekman of Wolf Greenfield in Boston predicts more than a 50-50 shot at passage of a significant reform bill.
Siekman said the bills (H.R. 1908 and S. 1145) are designed “to produce patents of greater finality less subject to attack, [as well as] more efficiency in the patent process and certainty of litigation outcomes.”
Other experts agreed some kind of reform is likely, suggesting in-house lawyers should take the time to understand details of the proposed legislation and provide input to their trade association lobbyists as soon as possible.
The impetus for reform has been building in recent years because of mounting costs associated with patent prosecution and litigation. The U.S. Patent and Trademark Office is processing more than 200,000 patents a year presently, many of which are the subject of “interference” battles over who was first to invent a device or system. Meanwhile, the number of patent infringement lawsuits continues to triple every 10 years or so, according to experts.
But what really scares chief executive officers are the potentially huge verdicts in patent suits. Multi-million dollar awards have become routine, and over the last five years more than 10 cases have resulted in verdicts exceeding $100 million with two of those exceeding $1.3 billion.
These monster verdicts are why a majority of CEOs surveyed by the Financial Services Roundtable put patent reform at the top of their 2007 legislative agenda.

Many key reforms
The proposed legislation contains as many as 10 key reforms affecting the patent process as well as litigation over patent rights (see sidebars “Key reform proposals” and “Likely impacts of patent reform”).
Stuart T. F. Huang, a registered patent attorney and litigator for Steptoe & Johnson in Washington, D.C., said switching from a “first-to-invent” to a “first-to-file” system would be a major change.
“Most countries follow first-to-file rules, and this move will bring us one step closer to an end goal of filing one application for examination of a worldwide patent,” he said, noting that patent treaties already allow for what is essentially one simultaneous filing in all subscribing countries.
Observers added that this change will essentially put an end to the costly practice of filing interference actions over who was “first-to-invent” a device or system, because the “first-to-file” approach provides a bright line of demarcation for patent issuance.
Two other proposals expected to have a big impact on patent holders and applicants, according to Los Angeles trial lawyer Charles Barquist, are post-grant opposition proceedings to challenge questionable patents promptly, and expanded interlocutory appeals to challenge patent claims construction by trial judges.
Barquist also called attention to forum-shopping restrictions on plaintiffs and tightened standards for finding “willful infringement” to support treble damages.
“General counsel are losing sleep over inability to predict the outcome of a patent dispute, patent issuance or survival,” said Barquist, a partner at Morrison & Foerster. “These reforms are intended to help, but the jury is out on whether they will.”

Predictability and certainty
Under current law, inventors generally have one year to file for a patent after they make any kind of “public disclosure” about the device or system they have invented. Because of the cost and time involved in preparing a patent application, many inventions are not even patented until they are put into use.
This often leads to “interference actions” in which competing parties battle over who was first to actually invent something. But the “first-to-file” rule would eliminate this practice.
While this change would create more certainty as to patent ownership, it could also create more work for an already overburdened PTO.
“There will be more pressure to rush to the patent office and get something on file with the idea you can amend it later,” said Brian T. Moriarty, intellectual property litigator with Hamilton Brook Smith Reynolds in Concord, Mass.
“General counsel will need to get their CEOs to budget for more patent applications. If you don’t identify and harvest patentable material quickly, you could lose it in a race to the PTO,” Moriarty explained.
Corporate patent committees, which often ruminate over patent filing decisions at length, will need to become more decisive, he added.
Cynthia E. Kernick is a member of the Western District of Pennsylvania’s court advisory committee on patent rules, and is an intellectual property litigator for Reed Smith in Pittsburgh.
Kernick predicted that a flood of patent applications could gum up the PTO’s busy pipeline: “The patent office already has growing pains from the technology explosion,” noting that statistical studies show the U.S. is experiencing the biggest patent boom since the industrial revolution.
“While this reform is favored by many,” she added, “it will be harder on those young inventors who may not have thousands of dollars to do basic applications for every invention right away.”
But on the plus side, Huang said the reform legislation will relieve all inventors from the routine of keeping signed, witnessed books and records related to timing of the invention process.
And according to Barquist, harmonization of U.S. patent laws with other countries could provide the foundation for shared information systems, shared searches and shared costs among participating patent offices worldwide.

New post-grant patent actions
Harmonizing U.S. and European law involves creating a post-grant opposition procedure allowing challenges to questionable patents within 12 months of issuance before a new PTO Board of Appeals and Trials (a reconstructed version of the current Board of Patent Appeals and Interferences).
“The feeling is that this will create greater efficiency and certainty by giving practicing entities [those who actually put patents to work in products that enter the stream of commerce] a chance to knock down any questionable patents,” said Siekman. “We have no way of handling a patent challenge, short of litigation [in federal court] now.”
But Christopher D. Engebretson raised concerns about this potential change.
“Europe has a civil law system where judges act as inquisitors, and we have an adversarial system that requires a stake in the controversy for well-developed advocacy to set sound precedents,” said Engebretson, a business litigator with intellectual property focus for Pierce & Mandell in Boston. “This reform raises the possibility of instituting post-grant oppositions without a ripe and well-developed justiciable interest in the outcome.”
Engebretson added: “Some start-up companies and investors wanting to get into the market with a new device could be hobbled by the prospect of multiple post-grant opposition proceedings.” He noted that typically skittish financial backers could require another round of funding just to usher start-ups through oppositions.
It’s also uncertain whether PTO proceedings will mirror arbitrations or mediations. “You need clear rules, and you want a chance to do thorough discovery and get clear written opinions, but we don’t know if that will happen,” said Moriarty.
Barquist also cautioned those who might be enthusiastic about screening for and knocking out weak patents. “High-tech devices can require dozens of patents, so a company like HP would have to monitor patents issued for hundreds and hundreds of inventions that go into every device,” he said.
It is unclear whether parties will still have the option of pursuing declaratory judgments in state court to knock out competing patents that involve infringement. The House bill provides for no second window of opposition to a patent grant, while the Senate bill offers one only for petitions filed within 12 months of any notice alleging infringement that involves “significant economic harm.”
Barquist said the Senate’s second window is crucial because “the first-year period for opposition doesn’t solve the problem of need for a relatively inexpensive but expert review process once a patent becomes the subject of commercial interest [and dispute].”
However, Barquist lauded a proposal to expand re-examination of patent rights between parties, which the House bill offers only in lieu of a second post-grant window to contest. This procedure allows administrative patent judges to narrow or eliminate competing patent claims – paving a way for the PTO to re-cut patents rather than merely picking a winner or loser.
“The existing inter partes re-exam dates back to 1999, and it has consistently improved with more experts working at the patent office over time,” said Barquist.
Siekman said the House bill makes re-examination of patent rights between parties more attractive for patent challengers because the bill loosens restrictions on estoppel arguments. Patent laws currently penalize unsuccessful challengers by estopping them from defending against later infringement suits by using arguments they actually raised or could have raised.
The House bill would strike the ‘could have raised’ language. This would allow challengers “to keep other grounds [not used] in their back pocket for future defenses” and “to predict the scope of any future estoppel they would face, unlike the relatively unpredictable ‘could have raised’ standard,” said Seikman.

Damage control
The legislative proposals are also designed to make verdicts more predictable and consistent. The damage provisions, together with post-grant opposition proposals, are also aimed at reining in the abuses of “patent trolls” – entities that make no products but score verdicts and settlements because they hold a bagful of patents.
Under a precedent set by the 2nd Circuit in Georgia Pacific v. U.S. Plywood, courts must construe a flexible 15-factor test in calculating damages from patent infringement. “The 15-factor test has become a litigation free-for-all with different courts calculating damages in many different ways,” said Huang.
Siekman agreed, saying some judges and juries just throw up their hands and apply a damage measure that falsely attributes all revenue from sales to one innovation out of dozens or even hundreds that go into one commercial device.
That could be exactly what happened when a jury in Alcatel v. Microsoft rendered a $1.5 billion verdict based on 185 pages of jury instructions.
“Even the chief justice of the Federal Circuit has said that damage apportionment may be too difficult for federal courts to apply consistently now,” Moriarty said. “Something is needed to bring damages more in line with economic reality.”
Congress has fashioned a slimmed down test that offers fewer alternative measures of damages, including: established royalty payments for specific inventions; other measures of value attributable to an incremental improvement in an overall product; and the entire market value of a product only when clearly appropriate.
But not everyone applauds this reform. “This is an attempt to give more direction to judges, but the tools are there now to value an invention properly and a good lawyer should be able to focus the [court] on the most relevant [of 15] factors,” said Barquist.
Current law also allows for treble damages on any willful infringement, but the proposed legislation would make this harder to prove by requiring proof of knowledge, intent and other elements.
“This has been a real headache for accused infringers because it is easy to allege and hard to dispose of without a trial because it often involves a factual dispute,” said Barquist, adding that 92 percent of cases allege willful infringement now.
“It is pernicious because it creates uncertainty due to the treble damage risks, and leads to many companies compromising on good patents,” he said.
Barquist also pointed out the new law allows for bifurcated trials to defer a decision on willfulness until after the merits of infringement are decided. This is very helpful where allegations are made to justify mud-slinging that can dim a jury’s view on the merits of the case.
Siekman said many large companies are so afraid of willful infringement allegations they even avoid some otherwise salutary research on competing patents in the invention stage. He also noted that many companies obtain separate and costly “opinions of counsel” just to avoid willful infringement actions, a practice most recently addressed in August by the Federal Circuit in In re Seagate Technologies.
However, the Biotechnology Industry Organization opposes the damage reforms. “They can invest hundreds of millions of dollars in one drug, so they want the biggest hammer possible to prevent infringement,” noted Engebretson.
Bio-tech companies, according to Engebretson, are similarly less enthusiastic about venue proposals that would force plaintiffs to sue where a defendant resides or has committed an infringement with a regular place of business.
“They are often plaintiffs or they match up against other big entities who simply aren’t patent trolls,” he said.
But companies with high-tech products containing many inter-related patented mechanisms are pushing hard for change.
“The venue dispute could be a real stumbling block,” Kernick said, noting that the Eastern District of Texas is often sought out for its history of large awards and greater than average chance of victory for plaintiffs.

* * *

Key reform proposals

Both the House (H.R. 1908) and Senate Judiciary Committee (S. 1145) have approved
bills that would significantly change how patents are processed and litigated.

Below is a summary of 10 key reform proposals:

1 First inventor to file – Both bills would grant patents to those who are first to file for a patent, rather than those who are first to invent a device.

2 Apportionment of damages – Both bills would narrow and simplify the tests for calculating damages, favoring methods of measuring the incremental value of a patented improvement that is just part of the total market value of an existing device.

3 Willful infringement – Both bills create stricter standards for alleging and proving any case of willful infringement resulting in treble damages.

4 Post-grant opposition proceedings – Both bills provide for opposition actions within 12 months after a patent is granted. The Senate provides for a second window of attack within 12 months of any notice alleging infringement based on a showing that a continued challenge is likely to cause “significant economic harm.”

5 Inter partes re-examination – The House bill provides for expanded inter partes re-examination of questionable patent grants in lieu of a second window of post-grant attack.

6 Venue – Both bills include defendant-based venue provisions and transfer provisions.

7 Interlocutory appeals – Both bills provide for expanded interlocutory appeal rights for patent construction claims, conditioned on district court approvals.

8 Inequitable conduct – The House bill would require a prima facie showing of “unpatentability” of any device allegedly patented because of inequitable fraud. Both bills would require independent proof of intent and materiality. The Senate bill would also impose a “clear and convincing” evidence standard on such claims.

9 Prior user rights – Both bills, to different degrees, would expand the “prior use” defense to all industries. This defense, currently restricted to the financial industry, protects against patent infringement for use of patented methods or systems prior to the issuance of any patent grant to a competitor.

10 Residency requirement for judges of the Federal Circuit – The Senate bill would repeal the existing Washington, D.C.-area residency requirement for Federal Circuit judges hearing appeals of patent cases.