Patent Reform Passes US Senate, Makes History; Obama to Sign: IP-Watch Analysis Shows Who Wins

The United States Senate on Thursday passed historic patent reform legislation – but not before some heated debate on the chamber’s floor. It now goes to President Obama for his signature. Intellectual Property Watch offers a look at who wins and what will now change.

The America Invents Act, HR 1249, [pdf] passed by a vote of 89-9 without any amendments, but that wasn’t for lack of trying.

Senator Tom Coburn, an Oklahoma Republican, beseeched his colleagues to “do the right thing” and pass his amendment, which would ensure that the US Patent and Trademark Office (USPTO) be able to control the use of all fees and monies it collects for patent applications and other office activities.

Coburn’s amendment aimed to end “fee diversion,” which occurs when fees gained by one agency for certain uses are diverted to other uses or even other agencies for non-related uses. Although HR 1249 says any fees collected by the USPTO above those budgeted would be placed into a fund subject to appropriation and congressional oversight, Coburn said that wasn’t enough to ensure the USPTO got the money it needed to tackle the 700,000 patent application backlog.

“This is a critical, critical juncture for our country,” Coburn said. “If we’re going to make a decision to not do what’s right because someone is threatening that they won’t do what’s right and they won’t receive it … that’s how bullies operate. The way you break a bully is you challenge a bully.”

The “bully” Coburn was referring to was the US House of Representatives. Senate Judiciary Committee Chairman Patrick Leahy, a Vermont Democrat, said House leaders told him they would not accept a version of the bill that included the Coburn amendment, since they previously said it would violate House rules. Any amendment, particularly Coburn’s, would have threatened to derail patent reform altogether, Leahy stressed.

“The amendment would sink years of efforts,” Leahy said, as well as squelch any prospect of boosting America’s job market via a more efficient and effective patent process.

“I don’t buy the idea that the House isn’t going to take this if they modify and, what 95 percent of the people in this country would agree to – that the patent office ought to get money from the patent fees,” Coburn said. “Why would we run away from doing right things? That’s why we [Congress] have a 12 percent approval rating, that why people don’t have confidence in Congress – because we walk away from challenges with bullies.”

Coburn’s amendment failed by a vote of 48-50.

The bill will give the USPTO “the tools it needs to deliver cutting-edge technologies to the marketplace sooner, drive down the backlog of patent applications, and expedite the issuance of high-quality patents—all without adding a dime to the deficit,” USPTO Director Dave Kappos said in a statement. “Significantly, this legislation should enable us to access all of our fees. Having access to all of our fee collections will enable us to immediately start hiring new examiners, instituting new patent acceleration tools, and aggressively modernizing our IT infrastructure.”

Sharon Barner, former Deputy Undersecretary of Commerce for Intellectual Property and Deputy Director of the USPTO, who is now a partner at Foley & Lardner law firm, said the lack of stronger anti-fee-diversion language will allow fees to be diverted for non-USPTO uses. All fees taken in by the USPTO are technically paid to the US Treasury Department; the USPTO is then granted a certain amount of those fees by Congress during the appropriations process.

“So when they say all USPTO fees are only used for USPTO purposes, that means only the dollars they [Congress] appropriate,” she told Intellectual Property Watch. That means that without full access to the funds, the agency won’t be able to hire the examiners or other personnel necessary to examine patents, perform post-grant review proceedings, and otherwise deal with the backlog.

“All those things – unless there’s an assurance of fees, they’re unfunded mandates,” Barner added.

Without fee diversion protection, a three-track process that can be used to get patent applications reviewed in 12 months instead of an average of 33 months – a process that can be especially helpful to companies looking for financing based on a patent application maturing to an actual patent – likely will be derailed, Barner said. Plans for regional patent offices will also be scrapped.

A handful of other amendments were also voted down today. But included in the bill was a provision that prevents any individual or firm from patenting tax strategies, which could otherwise subject taxpayers to royalty fees for using the patented strategy when filing taxes. The bill also stops tax patents from providing windfalls to lawyers and patent holders by preventing them from holding exclusive rights to use loopholes, which could provide some businesses with unfair advantages over their competitors.

“Unfair patents can give a small number of people a stranglehold on tax strategies that should be open to anyone,” said co-sponsor Senator Max Baucus, a Montana Democrat who heads the Senate Finance Committee. “This bill will bring fairness to the system, and it will deter the use of tax shelters to evade the responsibility we all share.”

Who Benefits, Who Doesn’t

One of the main criticisms of the patent reform bill by groups such as the National Small Business Association and some inventor groups has been that it will benefit larger companies with deeper pockets over smaller companies and individuals with less cash on hand.

A “Pulse of the IP Industry” survey released Thursday by General Patent Corporation (GPC) and American Innovators for Patent Reform (AIPR) shows that a significant majority of innovators, entrepreneurs and patent professionals view key elements of HR 1249 unfavourably. The survey found that:

• 57.9% of respondents view the change to a first-to-file patent system unfavourably
• 68.8% of respondents do not believe the act will create more jobs
• 77.4% are not more inclined to hire as a result of the act
• 43.9% actually think the act will negatively impact their businesses (except for IP attorneys in private practice)
• 69.0% do not see the act as providing greater IP protection
• 61.6% believe that the act will actually increase the cost of securing a patent.

“Most inventors and patent practitioners are opposed to the ‘America Invents Act,’ said GPC CEO Alexander Poltorak. “It is widely viewed as anti-innovation legislation and a job killer.”

Lawrence Green, an intellectual property attorney at Wolf Greenfield in Boston, agrees that small businesses and universities, in particular, will be adversely affected by the bill, particularly if forced to file applications earlier, without being given a chance to raise proper funding for the application or the subject of the patent itself. It will also be harder to raise funds if potential donors think the patent is going to be subject to increased examination during a post-grant review process.

Universities “are particularly worried about the dampening effect all of this could have on funding,” Green said. “Universities are going to have to frontload all of these application costs upfront and they won’t know until years later if it’s going to pay off in terms of licensing revenue.”

Lewis Lee, the founder of IP Street and who represents six of the 20 largest patent filers in the US through his firm Lee & Hayes, said while the bill makes “incremental improvements … it fails to address secrecy, one of the most unsettling features of our patent system today. “

Patent ownership in the US remains “opaque,” he added, saying “making it difficult to efficiently trade patents as real property. This is a significant roadblock to the US retaining its number one status as the most trusted, transparent place to manage intellectual assets, and can only be addressed by more legislation.”

But groups representing large companies, like the American Intellectual Property Law Association, Biotechnology Industry Organization, Business Software Alliance, and the Coalition for 21st Century Patent Reform cheered passage of the bill.

Effect on Litigation?

Barner said the bill should have a significant effect on the amount of patent litigation clogging up courts in the future. There’s been a “significant uptick already” in the use of inter-partes reexamination proceedings as a defence against litigation, or as a way of discouraging a company with a patent from suing against what it thinks is an invalid patent. Plus, she added, changes to post-grant proceedings will enhance the ability for businesses and individuals to resolve claims at the patent office more efficiently than in the courts.

But Patrick R. H. Waller, an intellectual property lawyer and shareholder at Wolf Greenfield, doesn’t think the bill will reduce patent litigation significantly.

“The fundamental value of patents will not be changed. Patents owners will continue to assert their patents in order to seek injunctions/ITC [International Trade Commission] exclusion orders and/or monetary damages,” Waller said. “Having said this, the changes are significant and will impact certain aspects of patent procurement and enforcement.”

For example, first-to-file should impact only a subset of patent applicants who don’t already utilize this method in the global marketplace and for those who face a competing application. But, since single patents are often “very critical” for companies such as pharmaceutical firms – unlike high-tech companies that often have many patents covering a product – the first-to-file provision can have a “very significant impact in that case for the company” if another party is filing for the same single patent, Waller said.

Bruce Wexler, an intellectual property partner at Paul Hastings, said with this legislation comes even more litigation.

“We are entering unchartered waters,” Wexler said. “A significant chunk of the past 60 years of precedent is washed away and we now are bracing for a new wave of litigation.”

“Patent reform has excised a big piece of substantive patent law developed around who was the first to invent. In its place we are left with a statute creating a new paradigm,” Wexler continued. “We will be playing by a new set of rules.”

Wexler pointed to a new “supplemental examination” procedure that he said allows patent owners proactively to make voluntary disclosures of information to the USPTO after patent issuance to correct or remedy missing information in the original patent prosecution.

“Overall, this allows for stronger patents and protects patent owners from charges later in litigation that they committed fraud in the original patent prosecution,” he said. “Until enactment of this law, patent owners had no way to cure defects in patents like this.”

The act could reduce the number of patents since it narrows the applicability of the one-year grace period for obtaining patent rights in instances where an invention has been disclosed less than one year prior to the filing of the patent application, Waller continued. But this is only relevant for a small number of applications. The increased opportunities for pre- and post-issuance challenges to patentability may impact the scope of certain patent claims and reduce the rare overly broad patent claims, but likely won’t reduce the level of overall patent litigation. The increased availability of post-grant review should reduce the likelihood of “truly meritless patents from surviving and ultimately being asserted,” Waller said.

But, he said, the recent purchase of Motorola’s wireless business and patent portfolio by Google is probably a good example of what will not change. Google recently paid $12.5 billion for Motorola Mobility on 15 August, which gives it 17,000 Motorola patents to help the search engine giant defend itself, particularly in the mobile phone market with the Android, against companies like Microsoft and Apple with strong patent portfolios.

“Even if a small percentage of the patents in the portfolios of large companies are more susceptible to challenge as a result of patent reform, the value and scope of the patent portfolios will be largely unchanged in most cases,” Waller said. “Companies battling over important and valuable commercial turf will still engage in patent battles.”

On 8 September, Microsoft also struck deals with hardware makers Acer and ViewSonic, who were trying to avoid being sued for using Google’s Android and Chrome operating systems; Acer’s tablets and smartphones running the Android platform would not be protected by Microsoft’s patent portfolio, as will ViewSonic’s tablets and mobile phones running the Android or Chrome Platform.

“Today’s 2 agreements make for 5 Microsoft #patent deals in the last 75 days. It’s safe to predict more will follow this fall,” Microsoft General Counsel Brad Smith tweeted Thursday.

What We’ll See First

Many provisions in the act take part before a year after enactment. But after that year, we most likely will see an expansion of the definition of “prior art” to include the use and “on sale” activity anywhere in the world. Third parties will also be given more opportunity to submit relevant prior art before patent issuance.

“That will have a significant impact on being able to urge that certain prior art invalidates a patent or narrows the claims of a pending application,” she said.

Another more immediate change will be the removal of the qui tam provision from the current false marking statute. The current statute allows individuals to bring a qui tam action and to collect statutory damages up to $500 for each falsely marked, or expired, product. HR 1249 eliminates the ability to bring an action for false marking, except to recover actual competitive damages resulting from the false marking, according to Brinks Hofer Gilson & Lione IP law firm. Only the US Department of Justice can sue to recover statutory damages based on false marking under the act.

Waller said faster effects will be seen in the first-to-file arena, in that the legislation could impact a narrow set of cases where this change is relevant.

“I think one of the earliest changes would probably be in the post-grant review consent – I’m sure some people will start taking advantage of that fairly shortly and filing documents to challenge patents that were issued within the nine-month period,” he added.

Waller noted that during the European “opposition” process, third parties can file an opposition to challenge validity of a granted patent without being sued. Currently in the US, third parties cannot file validity challenges unless they are sued or facing a threat of a lawsuit.

“This would allow third parties – and they would probably be competitors or in the field the patent relates to – it gives them the opportunity to challenge the patent … in a process that should be less expensive, less time-consuming,” Waller said. “It could clear out a subset of cases that are based on patents that have very broad claims.”