US Patent Reform Advances But Outcome, Global Impact Uncertain

By Dugie Standeford for Intellectual Property Watch
Legislation for sweeping reform of the US patent system emerged from House and Senate committees last week. Among other changes, the bills would more closely align the US scheme with international patent practice, create an additional opportunity to challenge the validity of questionable patents, and limit damages in some infringement lawsuits. But the bills’ future is unpredictable, observers say.

Although there has long been pressure for reform from many parts of the patent community, the proposals now on the table are sparking strong criticism from some industry sectors. Given the controversy surrounding some provisions, and the 2008 presidential election, it is uncertain whether the current text, or some version of it, will be adopted, legal experts said.

The House Judiciary Committee adopted its version of “The Patent Reform Act of 2007,” H.R.1908, by voice vote on 18 July. The Senate Judiciary Committee approved its measure, S.1145 (the two are said to be very similar), on 19 July by a vote of 13-5.

Three Key Reforms

The legislation is intended to harmonise US patent practice with that of other countries, improve patent quality and reform infringement litigation, said Washington, DC IP attorney Jonathan Band, who represents the financial services industry in the debate.

In particular, the measure would bring the US into line with the “first-to-file” practice followed in most other countries. The American system is “the only one in the world that still grants patents to the first inventor rather than the first to file an application,” Senate Judiciary Committee Chairman Patrick Leahy (D-Vermont) noted after the vote.

A European official said that the way the first-to-file concept is presented in the US legislation is complicated, but appears to be different from EU practice. “Aspects of [the US legislation] are better, but it doesn’t necessarily bring us closer to harmonisation,” the official said.

International harmonisation is not very controversial among stakeholders, said Band. Some smaller players are less than enthusiastic about first-to-file but most do not care, he said. The absence of a strong lobby in favour of the change means that it could be dropped from the text during negotiations, he added. Another source suggested that independent inventors might take issue with the first-to-file provision.

The “Second Window”

Nor is there much division over a provision requiring any initial challenge to a patent’s quality to be filed with the US Patent and Trademark Office (USPTO) within 12 months after its grant (the “first window”), said Band. However, the high technology and financial services industries are pushing for a second window of opportunity in which to contest patents, a move hotly opposed by pharmaceutical and biotechnology companies, he said.

Because high-tech patents tend to be extremely complex and to touch upon many different patents and disciplines, because of the “fuzziness” of so-called business method patents, and because many companies wait years before seeking royalties for claimed infringements, high-tech businesses want to be able to challenge a patent’s validity in the USPTO as soon as they are notified of an alleged infringement, Band said.

Biotechnology firms, however, see the second window as a threat to investment, Biotechnology Industry Organisation (BIO) President Jim Greenwood said after the House panel vote. Most of their value is tied up in their patents and that is where their certainty lies, said Michael Siekman, an attorney in the biotech and pharmaceutical group of Wolf, Greenfield & Sacks in Boston. If they can be dragged back to the USPTO at any time to defend the original granting of the patent, there is little incentive to invest in development, he said.

The Intellectual Property Owners’ Association (IPO), whose members include biotech, high tech and other companies, also opposes the second window, President Marc Adler said in a series of online columns about this and other provisions of the bill.

The second window provides a “private right of action for manufacturers to challenge questionable patents in the USPTO rather than in court,” Adler wrote. The IPO believes the existence of a second window will “substantially reduce or eliminate the incentive for effective use of the first window,” and encourage a “wait and see” approach to questionable patents, he said.

Damage Apportionment

The proposal’s third major goal, to revamp patent litigation, is focussed on the apportionment of damages in infringement cases. It revolves around the question of whether a reasonable royalty should be based on an entire product or on the proportional contribution of a patented component, Band said. The existing statute contains no guidance, and courts have devised an array of tests and “rules of thumb” for gauging royalties, he said. The bill attempts to impose some order on when each should be used.

The high-tech sector wants damages based on components, while the pharmaceutical sector prefers them based on the whole product, Band said. Calculating damages according to the bill language would “often make infringement cheaper,” BIO’s Greenwood said. The IPO is backing language it believes gives clearer guidance than the proposal, Adler said.

Last week’s committee action drew fire from other patent groups as well. The Innovation Alliance, which says its mission is to improve the US patent system, and whose members include high-tech companies, called the damage calculation provisions “controversial and problematic.” The Coalition for 21st Century Patent Reform, whose members are drawn from the information technology, consumer products, energy, financial services, pharmaceutical, biotechnology and manufacturing sectors, accused Congress of trying to skew the patent system “in favour of the infringer over the inventor.”

Coalition for Patent Fairness Counsel Jonathan Yarowsky, however, applauded lawmakers’ “seriousness in dealing with the overwhelming need” for reform. The group, whose supporters include Apple, Google, Microsoft, Visa and other major high-tech players, backs damages apportionment, “fair standards” for awarding punitive damages in infringement cases, the second window, and an end to “forum-shopping,” the practice of filing cases in courts that historically favour patent claims.

“No Chance” for Passage?

There is “absolutely no chance” that Congress will pass the bill as drafted before it adjourns ahead of the 2008 presidential election, said Harold Wegner, an IP attorney at Washington, DC’s Foley & Lardner. There is only a small chance that any sweeping patent legislation on the order of the current measure would be enacted at all, he said.

Small snippets of the bills that prove least controversial could be grafted onto other legislation at the last minute, Wegner said. But he added: “Speculation on a current text is probably no more useful than a poll as to whether Mickey Mouse or Donald Duck is the more important figure in the Magic Kingdom.”

Band, however, said the measure stands a fairly good chance of passage in the House, although its fate in the Senate is less certain. “There’s a long road ahead,” he said.

The reason why some provisions have become so contentious is that this Congress seems to have “true momentum” on patent reform after attempts in the last two failed, Siekman said.

If ultimately enacted, the legislation would affect the process for foreign companies seeking US patents, Band said. The first-to-file standard is already in use in Europe, and European inventors would also enjoy seeing enormous American infringement litigation damages held down, he said.

Getting rid of some of the more complex or unclear requirements of US patent law might make more foreign companies comfortable about filing for patents and help them avoid the pitfalls they now experience, Siekman said.

William New contributed to this story.

Dugie Standeford may be reached at info@ip-watch.ch.