US Patent Reform Prospects Unclear; First-To-File Questioned

Patent reform may be chugging along in the United States Congress, but so far, with the Senate soon to be consumed with what could be a contentious Supreme Court nomination fight, and with President Obama still lacking a new director of the US Patent and Trademark Office (USPTO), some are questioning whether reform will actually happen this year. In addition, a key provision in the US bill to harmonise with other countries may be more appearance than substance.

Even if a bill does make it all the way through the legislative process, chances are no one “side” will be 100 percent satisfied.

The Senate Judiciary Committee on 12 May filed its report [pdf] to accompany S. 515, which was voted favourably out of committee on 2 April. There’s no word yet when the full Senate may vote on it, but it’s not expected to be until after Congress’ Memorial Day recess. The House Judiciary Committee held a hearing on the House bill, H.R. 1260, on 30 April, during which several issues – such as damages – were revisited that the Senate bill aimed to put to rest.

Generally speaking, small technology companies, large-cap manufacturers, pharmaceutical firms and inventors from the Coalition for 21st Century Patent Reform, Manufacturing Alliance on Patent Policy, Innovation Alliance, and National Venture Capital Association, would like to see fewer damages changes and are more in favour of the Senate version. S. 515 includes a “gatekeeper” function that allows a judge to give the jury more instruction on what to consider when determining damages.

“Big tech,” banks and high-tech councils, as well as some small technology companies, which are part of the Coalition for Patent Fairness, say legislation should go further in reducing potential damage amounts in infringement claims. The House bill could do just that, which would be a win for the latter group.

“I think there are both substantive and strategic reasons” the technology industry, for one, is pushing for stronger damages reform in the House, said Stanford University law professor Mark A. Lemley. “I’m not sure IT [the information technology industry] ever signed onto the idea of gatekeeper alone …I don’t think IT wants to be seen as giving up on the centrepiece of patent reform.”

Stakeholders continue to meet with lawmakers and aides in both chambers on language regarding post-grant review and damages, among others. There is pressure from some to get floor time as soon as possible for S. 515. On 12 May, a group of 13 unions, including the Communications Workers of America, United Steelworkers and Department for Professional Employees sent a letter to Senate Majority Leader Harry Reid, asking for S. 515, which they say represents “a good faith compromise,” to be acted on swiftly.

“On behalf of the millions of workers we collectively represent, we have been solely concerned about how changes in law might affect domestic investment and employment. As we have said before, patent reform is not an esoteric issues, it’s about jobs,” the letter said, adding that much progress has been made on damages, post-grant review and inter partes reexamination, although more work could be done on the latter two topics.

“Big-tech” would also like to see more effort made to reduce the financial burdens of patent litigation by tamping down on non-practising entities (NPEs), or so-called “patent trolls” – some of whom buy up patents to litigate them for cash. This topic was discussed at the 30 April House Judiciary Committee, but no solution was found as to how to protect companies against bad actors without punishing inventors who simply choose to sell their patent rather than manufacture products with it. There have been more informal discussions since then about how to deal with NPEs in the legislation.

“There’s just been these rumblings on how we can deal with NPEs … can we carve this out?” Taraneh Maghamé, vice president of patent policy and government relations counsel at Tessera, an Innovation Alliance member. “And this is a very dangerous road to go down. How do we even define these NPEs?”

But NPEs “have targeted their patent claims against technology companies,” Intel chief patent counsel Dave Simon testified to the House committee on 30 April. He noted that a recent survey of leading tech firms showed that NPEs accounted for 88 percent of the patent claims asserted against those companies, adding that the problem also plagues many small businesses.

First-to-File ‘Trigger’

In the United States, the first to invent is given priority in granting the patent. Every other industrialised nation except for the United States uses a first-to-file system in choosing to whom to grant the patent, and the US has been under pressure in international fora to harmonise its system. S. 515 calls for the adoption of “first-inventor-to-file” system with a one-year grace period; basing priority on the first application. But there appears to be a loophole for the inventor who first discloses his invention, noted Hal Wegner, partner at Foley & Lardner law firm, and certain language could put the US at odds with international norms.

S. 515 also creates a “derivation” proceeding to ensure that the first person to file the application is actually the true inventor. But there is some concern it won’t curb continuing application abuse.

Then there’s H.R. 1260’s first-inventor-to-file “trigger.” The House bill says the US will only adopt a first-to-file system with a one-year grace period 90 days after the president is satisfied that other major patent offices around the world have adopted a grace period “having substantially the same effect” as the bill. Many European patent offices and Japan have been reluctant in international patent harmonisation negotiations to agree to such a grace period – saying it adds to patent uncertainty – but it’s something the United States has consistently pushed for.

It’s feared if the House language is adopted in the final bill, first-to-file may never happen.

“It doesn’t seem to be something that … should be a tit-for-tat game,” Lemley said. “It’s not clear to me the rest of the world cares that much that we have first-to-file.”

Hans Sauer, associate general counsel for intellectual property at the Biotechnology Industry Organization (BIO), said, “if we don’t transition [to first-to-file], then a whole swath of the [House] bill either won’t transition or won’t work properly,” including provisions that deal with prior-art, interference proceedings, and other topics. “It looks like so far, the House has been very deliberate and consistent in including that trigger,” he continued. “That may very well be one of the provisions the House won’t let go.”

Separately, although both bills include some language on interlocutory appeals, Jeremy C. Lowe, partner at Axinn, Veltrop & Harkider LLP in Connecticut, thinks these policies remain “underdeveloped.” He said S. 515 could increase pressures on the federal circuit and have the unintended consequence of dragging patent litigation out even further. “I think Congress would miss a significant opportunity – if the goal is to reduce the reversal rate,” if it didn’t further address this issue, he added. Plus, Lowe said, the current legislation “does not even purport to fix the significant” application backlog at the USPTO.

USPTO Workload

To be sure, many would like to see those backlogs reduced by worksharing, deferred examination, or other methods. Deferred examination, specifically, is expected to receive more attention in the coming months. Richard Lazarus, counsel at Barnes & Thornburg’s Washington office and a former USPTO patent examiner, said some of the most critical problems at USPTO include: an increasing number of office actions per pending application, poor quality of rulemaking, low examiner morale, negative examiner attitude toward the public, insufficient examiner training and facilities, inadequate search system, and reduction in examiners’ ability to collaborate with other examiners.

But this is just the tip of the iceberg, Lazarus said. With the sheer size of the agency – almost 10,000 employees – and a backlog of 770,000 pending applications that haven’t yet been looked at, as of February, “there are many other problems that need to be addressed,” he added.

It’s feared that both bills would contribute to the backlog by calling for patent searches to be done by US patent examiners.

“You can try to harmonise the patent office to a greater extent to the rest of the world so that some of the burden of searching for prior art” is shared, Lemley said, but this language is a “step backward.”

Former USPTO Director Jon Dudas, now a partner at Foley & Lardner law firm in Washington, noted that it’s already US law that citizens of this country conduct search and examinations, but “it’s critically important to make sure the law allows and encourages collaboration” internationally, particularly given the success of initiatives like the Patent Cooperation Treaty and the Patent Prosecution Highway. He also voiced concern about the lack of inequitable conduct reform in either bill, saying it should be included “because it’s fundamental to giving inventors and applicants the security of disclosing more to the patent and trademark office and making the system more efficient.”

The inequitable conduct doctrine is aimed at making sure that patent applicants are honest in disclosing relevant information with the USPTO; currently, a court can decide if a patent is unenforceable if its owner was dishonest. The Generic Pharmaceutical Association (GPhA) and consumer groups like Consumers Union want to ensure they can fully employ this doctrine to get efficient market access for generic drugs, and to prevent filers from “cheating, misleading, or deceiving PTO” to get “dubious patent.” [GPhA statement here]

But innovator companies ideally want more reform. BIO would like to see the doctrine abolished, and only wants the USPTO to regulate applicant conduct. IBM has said the inequitable conduct defence by non-innovator entities is overused and that it creates too much uncertainty. That firm has called for reform that includes: clarifying that inequitable conduct must be established by “clear and convincing evidence”; requires more evidence of dishonest intent; requires the loser of an inequitable conduct defence to pay all costs incurred by the other party; and allows judges to determine the penalty for inequitable conduct, among other things.

Aside from still-lingering differences on bill specifics, there are other unknowns on patent reform.

With Supreme Court Justice David Souter resigning from the bench, President Obama has been meeting with senators to come up with potential nominees to fill his seat. The Senate Judiciary Committee oversees the nomination hearings and will either reject or confirm a candidate and send his or her nomination on to the full Senate for consideration.

Since Democrats control the Senate, it’s likely that whoever Obama picks will be confirmed, but Republicans could put up a full-blown fight anyway. That could suck the wind out of patent reform in that chamber, but a delay may be beneficial. The administration has not yet formally weighed in, and a delay would eventually give the yet-to-be-named USPTO director to do so. There is also some question over what the party switch of moderate Sen. Arlen Specter of Pennsylvania – a key negotiator on S. 515 who recently left the Republican Party for the Democratic Party – will have on that bill’s outcome. Sen. Jeff Sessions, an Alabama Republican, is now the ranking Republican on the Senate Judiciary committee.