US Patent Reform: Could 2007 Be The Year?

By Sarah Lai Stirland for Intellectual Property Watch
US information technology companies’ push to overhaul their country’s patent system made little progress in the US Congress in 2006 due to pushback from the pharmaceutical and biotechnology industries. But the hiring of a trio of well-connected lobbyists with a history in the tort reform movement promises to amplify the debate in 2007.

The lobbying effort was re-launched in May by Mark Isakowitz of the Republican lobbying firm Fierce, Isakowitz & Blalock, and Democrats Mark Gitenstein and Andy Pincus, who are partners at the law firm of Mayer Brown Rowe & Maw. The group has been hired by an extended group of 50 conglomerates calling itself “The Coalition for Patent Fairness.”

Gitenstein and Pincus have in the past built political support for the passage of a key piece of tort reform legislation called the Private Securities Litigation Act of 1995. The law makes it more difficult for investors to successfully launch class-action lawsuits against public companies for committing securities fraud, and was approved by Congress despite a veto from President Clinton. Isakowitz has worked extensively on small business issues. He has also represented insurance companies in the debate on Capitol Hill over the question of how victims of asbestos exposure should be fairly compensated for their healthcare costs. Like the patent reform issue, much of the debate centres on how best to resolve what some characterize as the litigation crisis caused by asbestos-related claims.

“What we’re trying to do is build a wave of momentum on a variety of fronts to get a good bill passed in 2007,” Isakowitz said in an interview with Intellectual Property Watch. “We’re also trying to build a wave of editorial support and grassroots support and have a number of senators and congressmen adopt this as their cause.”

The group appeared to make significant progress on that front with a 24 September New York Times Sunday Business section front page feature story about how the small town of Marshall, Texas has become a destination for plaintiff-friendly patent infringement lawsuits.

Tech industry executives have been meeting informally with their financial services counterparts to strategise over the patent reform issue for the past couple of years. In May, they ramped up their lobbying campaign to announce a formal coalition. The group includes 50 companies and trade associations in the fields of financial services, technology and telecommunications and energy. It also includes TechNet, which is a group of CEOs, financiers and venture capitalists who founded the organization to influence lawmakers on issues of importance to the technology industry. The group has a history of successfully lobbying for several pieces of tort reform legislation.

Like its Silicon Valley trade group predecessors and other legal trade associations, the coalition of companies advocates both improved processes for issuing better quality patents, as well as more efficient and less prohibitively expensive processes for challenging issued patents. (The average cost to each party engaging in a patent infringement lawsuit ranges between $500,000 and $4 million, depending on the value of the patent at issue, according to the American Intellectual Property Law Association.) A central goal expressed in a coalition letter to the leaders of the Senate Judiciary Committee in July is to disable “abusive patent litigation.”

The emergence of the coalition follows two years of lobbying from Silicon Valley trade groups such as the Business Software Alliance and the Information Technology Industry Association (which are currently members of the larger coalition.) Their efforts resulted in an ambitious but stalled piece of legislation in the House of Representatives in the summer of 2005, and a tentatively-introduced Senate version of the bill in August.

Good Chance for Passage in 2007 Despite Well-Financed Opposition

Congress is expected to re-introduce, hold hearings on, and move similar legislation in its 110th session in 2007 after the mid-term elections this November. Meanwhile, the coalition is laying the groundwork for its campaign in 2006’s remaining months by holding fundraisers for key members of Congress. It is expected to redouble its efforts when Congress convenes its new session next year.

Many of the patent reform concepts contained both in the House and the Senate bills enjoy support from the general counsels at large technology and telecommunications companies that are the subjects of numerous patent infringement lawsuits both among themselves and patent licensing entities. But those proposals will continue to face a considerable amount of opposition from the small business and independent inventor communities, as well as the well-financed pharmaceutical and biotechnology industries in 2007.

Yet common ground does exist between industries, and many observers believe that the chances of Congress enacting a patent reform bill are good in 2007. The big question is whether any final legislation will contain the sweeping proposals for change currently in both the House and Senate’s versions of the legislation, or whether a deadlock between industries, as well as opposition from the small business community, will relegate “reform” to more incremental changes to the law.

Senate Judiciary Committee Introduces Long-Awaited Bill

After protracted behind-the-scenes negotiations over the course of this year, the two leading senators on intellectual property issues, Utah Republican Orrin Hatch and Vermont Democrat Patrick Leahy jointly introduced their own ideas on how best to reform the US patent system just before Congress took its August recess. S.3818, the 45-page bill, mirrored many of the proposals offered in the House by Judiciary Subcommittee Chairman Lamar Smith of Texas, but it also omitted many of the House bill’s ideas. Instead, it included others that will be sure to face a significant amount of political opposition.

Like its House counterpart, the Senate bill focuses both on improving the level of information patent examiners have access to before they approve patent applications, as well as on changing the way patent rights are enforced in the courts. The Senate legislation contains proposals to rein in the financial damages patent owners can obtain through their patent infringement lawsuits, and it attempts to make the process for determining such damages more precise. And it would harmonize the US system with the rest of the world’s by rewarding patents to those while file for them first. [For a full side-by-side analysis of the different chambers’ proposals, see the Intellectual Property Owners Association’s chart here]

The United States is under pressure from Europe, Japan and elsewhere to harmonise its patent laws with the rest of the world. The issue is a hot point at the World Intellectual Property Organization, which at this week’s General Assembly is expected to decide its future work plan on harmonisation.

Perhaps the most controversial proposal within the Senate legislation is a provision that would automatically make losers in patent infringement lawsuits pay the opposing side’s attorneys’ fees. While such a system is the norm in countries such as the United Kingdom, the idea has long been viewed as unfair by Democrats and their vocal political constituency of trial attorneys in the United States. Unlike the Private Securities Litigation Act of 1995, which was one of the promised legislative to-do items in the Republicans’ “Contract with America,” Congress failed to enact similar “loser pays” proposals that Republican backers of the contract promised.

Mixed Reaction to the Senate Bill

Predictably, the reform coalition praised the Senate bill shortly after it was introduced, and inventors trade group the Professional Inventors’ Alliance blasted it for twisting the rules to favour corporate interests.

Inquiries to pharmaceutical trade group PhRMA (Pharmaceutical Researchers and Manufacturers of America) were not returned by press time. But the group has historically opposed many of the ideas contained in the reform legislation and characterized them as a fundamental attack on patent rights.

Meanwhile, the concerns about the bill voiced by the biotechnology industry trade group BIO illustrate why the process of overhauling the patent system is so arduous. BIO representatives said in an interview that the proposals advanced by the information technology industry and others would have substantial unintended consequences on the idiosyncratic dynamics of the biotechnology industry.

The biggest problem: A concept legal experts call “the second window.” The Senate proposal would allow potential patent challengers a second opportunity to question a patent’s validity through a legal proceeding at the US Patent and Trademark Office (USPTO) if the challenger “establishes a substantial reason to believe that the continued existence of the challenged claim causes or is likely to cause significant economic harm.”

Such a rule would place a huge cloud of uncertainty over biotechnology companies, which typically invest millions in clinical trials and field studies only after obtaining the necessary patents, said Hans Sauer, BIO’s associate general counsel for intellectual property.

“We need the certainty that our patents can’t be challenged at any time after we’ve made all the investments,” and after spending anywhere up to eight years to get new products to market, he said. And such a rule would encourage competitors to game the system to challenge each others’ patents for strategic reasons, he argued.

“We would have a system where competitors could have a go at each other, whereas before [the proposed change] they wouldn’t have had a cause of action in the courts,” he said. “Ninety percent of our members don’t have any products yet – they just have their patents, and to have their company under threat [and to introduce this element of uncertainty] would make it very difficult for them to find investors.”

BIO’s members are also uncomfortable with the idea of changing the rules to limit financial penalties against patent infringers to the value of only the most novel portions of a product. They believe that such a system would significantly lower the incentive not to infringe, Sauer said.

But both provisions are important action items for large technology companies because they are related to the costs of the numerous expensive court battles in which they are currently embroiled. Technology companies currently spend millions of dollars in protracted court proceedings to establish the scope of what a disputed patent covers, and whether it should have been granted in the first place. This all happens before any proceedings move forward to determine whether an entity is actually infringing.

Technology industry lobbyists hope that the proposed proceedings at the USPTO would be a cheaper and faster way of resolving such issues. In the realm of financial penalties for infringement, they charge that individuals trying to game the system are trying to milk deep-pocketed companies by obtaining disproportionately large awards for infringements of marginal contributions to products that may contain thousands of patented ideas.

Room for Consensus?

But there are areas of agreement. Sauer said that “[the biotechnology industry] will probably learn to live with a one-year window, like we’ve learned to live with it in Europe and Japan, where one-year windows exist.”

Both House and Senate versions of the patent reform legislation would implement a revamped process for challenging the validity of patents at the USPTO. The goal is to provide a more efficient and cheaper alternative to parties involved in a patent infringement dispute. Under the House proposal, would-be challengers could dispute the validity of a patent at the USPTO up to nine months after the patent issues, or within six months after the threat of a lawsuit. Under the Senate proposal, the first window of opportunity to do so would be a year after a patent issues.

In addition, BIO members approve of the House bill’s proposal to eliminate the current law that requires inventors to disclose in their patent application the best way of carrying out the functions of an invention. “It is an invitation in patent litigation to dig for an additional avenue of attack,” Sauer said.

BIO’s members feel that the judgment of the best method of practicing an invention is subjective. For example, skilful litigators may compare the information disclosed in patent applications with contemporaneous journal articles authored by company officers in order to misleadingly imply in court proceedings that those company officers did not disclose all the relevant information they should have, Sauer said.

BIO also supports both chambers’ proposal to award patents to those who file applications first, as well as a requirement to publish details of all pending applications 18 months after they have been filed.

Avenues of Progress

In addition to PhRMA and BIO, some members of the university and independent inventor communities and the generic pharmaceutical industry have their own specific concerns about various provisions of the patent reform legislation.

But asked how the coalition plans to overcome opposition to the sweeping reforms it advocates, Isakowitz replied: “We just feel we have an awful lot of support and we’ll just see how intense the opponents are. Our support is wide and deep.”

He added that Democrats have in the past supported specific kinds of tort reform. “If you look at situations where legal reforms were limited to a specific subject area, there was sufficient Democratic support to get those bills to the finish line,” he said. Examples he cited include: Legislation to curb class action lawsuits; limitation of Year 2000 (Y2K) legal liability; and the enactment of the PSLRA.

Other industry sources say that they hope that the pharmaceutical industry will break the legislative logjam by striking a deal with the proponents of patent reform to obtain provisions favorable to brand-name pharmaceutical companies.

Meanwhile, many large corporate interests, as well as those in the non-profit community are looking to the US Supreme Court for guidance on the fundamental question of when an idea is too obvious to be granted a patent. A well-thought through decision on KSR International Co. v. Teleflex Inc and Technology Holding Co could go a long way to address the concerns of proponents of patent reform because it would both change the standards the USPTO uses to judge what is too obvious, as well as the legal standards that courts use to decide whether a patent is valid or not. Some observers hope that this case can be decided in a way that will make it easier to invalidate suspect patents.

The Bush administration, the nation’s largest lobbying group the American Association for Retired Persons, the Business Software Alliance, Cisco, Ford, Hallmark Cards, IBM, Intel, Time Warner, Viacom and Fortune Brands are among those who have urged the Supreme Court to reverse the legal standards established on the issue by a lower court. They have all argued that those standards make it too easy to uphold questionable patents.

The Supreme Court has also been asked to decide the question of whether a company can be liable for infringing a US patent if the accused infringing product is located and marketed outside of the United States. The case is Microsoft v. AT&T. The court is waiting for a recommendation from the Bush administration on whether it should take the case. The Senate patent reform bill would repeal the provision in question that made Microsoft liable in this case for infringing upon one of AT&T’s patents – even though the Microsoft product under dispute was being sold outside of the United States.

Sarah Lai Stirland may be reached at Stirland at gmail.com.

Members of the “Coalition for Patent Fairness”: Adobe • Apple • Applied Materials • Aruba Wireless Networks, Inc. • Autodesk • Avaya • Business Software Alliance • CA, Inc. • Charter Communications • Chevron Corporation • Ciena Corporation • Cisco Systems • Comcast • Computer and Communications Industry Association • Computing Technology Industry Association • Countrywide Home Loans • Dell • eBay • Electrolux • Financial Services Roundtable • Fortune Brands • Hewlett-Packard • Information Technology Association of America • Information Technology Industry Council • Intel • Intuit • Juniper Networks • Lexmark International • MasterCard • Micron Technology • Microsoft • NCR Corporation • Nielsen Media Research, Inc. • Oracle • Palm • Red Hat • Research In Motion • SAP • Securities Industry Association • Software and Information Industry Association • Symantec • TechNet • Time Warner • Visa • Xilinx, Inc.