With patent reform expected to be introduced sooner rather than later in this 111th United States Congress, calculating damages for infringement remains one of the main sticking points.

Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat, said on 10 February that he plans to introduce a bill soon that much resembles his bill last session (which ended in December). In the last Congress, Pennsylvania Republican Sen. Arlen Specter was a main holdout from passage, specifically because of the damages provision.

Last week, the Manufacturing Alliance on Patent Policy (MAPP) – a group of 135 manufacturing companies and groups – sent a letter to US President Obama outlining its concerns about the damages issue. MAPP’s recent report found that an apportionment system of damages – in which only the value of the patented invention is considered, not the value of the overall product in which the invention is housed – would cause US manufacturing job loss, decrease the value of US patents by $34.4 billion, decrease the value of US public companies by $38.4 billion, and decrease research and development spending in the United States by $33.9 billion per year. US courts now generally consider the value of the entire product even when only a small part of it infringes a patent. (Link to MAPP economic analysis here [pdf].)

“The letter makes clear that, contrary to the statements of some who call for drastic change, there is no crisis in patent litigation or patent damages,” said MAPP, whose members have been briefing congressional and federal staff on its analysis of various patent reform proposals. (Manufacturing letter here [pdf].)

“Manufacturers and other patent stakeholders make great investments in inventing new products for sale at home and abroad, and we rely upon a balanced patent system that is good for all innovators,” the letter said. “Drastic changes, such as reducing penalties for patent infringement, will discourage innovation, resulting in reduced investment and lost jobs at a time when the United States can least afford it.”

Congress is trying to pass patent reform as the courts and patentees try to understand the full ramifications of recent Supreme Court and federal circuit decisions on licensing issues, injunctive relief, and patentability. Some groups – such as the Coalition for 21st Century Patent Reform – are urging Congress not to pass sweeping patent reform without fully realising the ramifications. (Link to Coalition for 21st Century Patent Reform patent reform stance here [pdf]).

FTC Hearing on Legal Decisions

The Federal Trade Commission last week had a public hearing on how recent legal decisions have affected the more controversial issues, such as damages. Within the next two years, the courts are expected to address compensatory damages and inequitable conduct.

Many legal experts and others warn against legislating a specific calculation for damages, and that such a tailoring could exclude whole areas of technology. Any sort of apportionment mandate could also leave it up to juries to decide which parts of a patent claim are “inventive,” and could cause patentees to forego negotiated, market-based royalties in favour of potentially more lucrative jury awards.

“Just be careful of legislation that tries to prescribe a calculation,” for determining damages, Gail Levine, assistant general counsel for Verizon Communications, said during last week’s FTC hearing.

Large tech companies such as Hewlett-Packard, which make products with many patented parts, years ago started pushing for legislation to reduce the number of patent infringement lawsuits with which they are slapped. They argue that high damage awards encourage lawsuits, specifically by so-called “patent trolls,” or “speculators,” (sometimes referred to as “non-practicing entities”) who buy up patents but do not use them, hoping to litigate them in the future. If the awards are reduced and focused solely on the specific invention in question, these firms believe that would deter some from filing costly lawsuits. They argue that generous damages cause a type of high-stakes gambling game to be played in industry that results in marketplace uncertainty and risk.

“There is too much diversion from where things should be operating efficiently,” said Marian Underweiser, intellectual property law counsel to IBM. That firm wants to focus on the damages in what it considers a more objective way, such as the economic value of the specific invention in question – not the overall product of which the invention is part of.

“What did the inventor really contribute? What’s that economic value? That’s fair to the patentee” but still does not overcompensate the patentee for what was not his or her direct contribution, she said.

But other tech companies, pharmaceutical companies such as Eli Lilly and manufacturers such as General Electric and Caterpillar argue that lower damages would leave them more vulnerable to infringement and that the fewer patents they typically hold – often the lifeblood of their companies – are too valuable to not defend in court. They also challenge the argument that a rising tide of patent litigation and settlements are impeding innovation.

According to the University of Houston Law Center’s Institute for Intellectual Property & Information Law, patent suit filings actually decreased 5 percent last year, as compared to 2007.

Kevin Rhodes, chief intellectual property counsel for 3M Innovative Properties, which has thousands of research and development patents in the US, said his company sees no reason to abandon current law in favour of new rules that have “unknown economic ramifications.” “I think this is just not the time to be making new rules,” he added.

Johnson & Johnson stressed that it needs to be able to enforce patents and obtain remedies for infringement because of the 8- to 10-year life cycle of their biotechnology products.

“If we can’t rely on our patents to protect against competition and provide a reasonable return on our investment, then the hundreds of millions of dollars we spend on investment are really at risk the whole time,” said Chief Patent Counsel Philip Johnson.

Inventors need to be able to capture the full value of their invention in order to keep venture capital flowing to those inventions, as well, added Jack Lasersohn, partner at The Vertical Group, which works with medical technology and biotechnology startups.

“The reason that damages are so critical as one of the elements of the innovation system is that it, together with other components… [i.e., injunctive relief] is a huge issue for us” in that it changes the way they think about funding companies, he said.

“If you decrease returns, you will decrease investments,” he said. “That I can guarantee.”

[Update: the Innovation Alliance, a group of technology companies, has posted the recommendations made to the FTC by its member companies Tessera and AmberWave. The comments are available here.]