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31 July 2007. Legislation that would dramatically overhaul U.S. patent law appears to be on a fast track in Congress, with Senators Patrick Leahy (D-Vermont) and Orrin Hatch (R-Utah) leading the charge.

But legal and business groups are finding themselves at odds over the legislation, with some saying it would reduce patent litigation costs and improve patent quality while others say it would do just the opposite. Everyone, it seems, can find parts of the measure to love and others to hate.

In April, identical bills were filed in the Senate and House, each titled the Patent Reform Act of 2007. In the Senate, Leahy and Hatch introduced S. 1145, while in the House Representatives Howard Berman (D-California) and Lamar Smith (R-Texas) introduced H.R. 1908.

On May 16th, a House subcommittee approved the bill for further review by the full Judiciary Committee, which held hearings on it in June. The committee released a revised version of the bill June 21st.

In an effort to help make sense of this legislation, we offer this guide to its key provisions, together with summaries of the arguments being raised for and against.

CONVERT U.S. TO FIRST-TO-FILE

What it would do: In what would be a fundamental shift in U.S. patent law, the bill would bring the United States into conformity with the rest of the world by converting it from a first-to-invent to a first-inventor-to-file system.

Arguments for: Proponents maintain this would simplify the patent process, reduce legal costs, improve fairness, and enhance the opportunity to make progress toward a more harmonized international patent system. A first-to-file system, they say, provides a fixed and easy-to-determine date of priority of invention. This, in turn, would result in greater legal certainty within innovative industries.

Proponents also believe that this change would decrease the complexity, length, and expense associated with current USPTO interference proceedings. Rather than tie up inventors in lengthy proceedings seeking to prove dates of inventive activity that may have occurred many years earlier, inventors could continue to focus on inventing.

Finally, because this change would bring the U.S. into harmony with the patent laws of other countries, it would enable U.S. companies to organize and manage their portfolios in a consistent manner.

Proponents include: Biotechnology industry.

Arguments against: Opponents argue that adoption of a first-to-file system could promote a rush to the USPTO with premature and hastily prepared disclosure information, resulting in a decline in quality. Also, because many independent inventors and small entities lack sufficient resources and expertise, they would be unlikely to prevail in a "race to the patent office" against large, well-endowed entities.

Opponents include: The USPTO opposes immediate conversion to a first-to-file system, in part because this remains a bargaining point in its ongoing harmonization discussions with foreign patent offices. Inventors also oppose this.

APPORTIONMENT OF DAMAGES

What it would do: The bill would significantly change the apportionment of damages in patent cases. Under current law, a patentee is entitled to damages adequate to compensate for infringement but in no event less than a reasonable royalty. Section 5(a) of the bill would require a court to ensure that a reasonable royalty is applied only to the economic value attributed to the patented invention, as distinguished from the economic value attributable to other features added by the infringer.

The bill also provides that in order for the entire-market rule to apply, the patentee must establish that the patent’s specific improvement is the predominant basis for market demand.

Arguments for: Proponents say this measure is necessary to limit excessive royalty awards and bring them back in line with historical patent law and economic reality. By requiring the court to determine as a preliminary matter the "economic value properly attributable to the patent's specific contribution over the prior art," the bill would ensure that only the infringer's gain attributable to the claimed invention's contribution over the prior art will be subject to a reasonable royalty. The portion of that gain due to the patent holder in the form of a reasonable royalty can then be determined by reference to other relevant factors.

Complex products, the proponents contend, often rely on a number of features or processes, many of which may be unpatented. Even where the patented component is insignificant as compared to unpatented features, patentees base their damage calculations on the value of an entire end product. This standard defies common sense, distorts incentives, and encourages frivolous litigation.

Further, courts in recent years have applied the entire-market-value rule in entirely dissimilar situations, leaving the likely measure of damages applicable in any given case open to anyone's guess.

Proponents include: Large technology companies and the financial services industry.

Arguments against: Opponents argue that Congress should not attempt to codify or prioritize the factors that a court may apply when determining reasonable royalty rates. The so-called Georgia-Pacific factors provide courts with adequate guidance to determine reasonable royalty rates. The amount of a reasonable royalty should turn on the facts of each particular case.

Although intended to guard against allegedly inflated damage awards, this mandatory apportionment test would represent a dramatic departure from the market-based principles that currently govern damages calculations, opponents say. Even worse, it would result in unpredictable and artificially low damages awards for the majority of patents, no matter how inherently valuable they might be.

Opponents further argue that this change would undermine existing licenses and encourage an increase in litigation. Existing and potential licensees would see little downside to "rolling the dice" in court before taking a license. Once in court, this measure would lengthen the damages phase of trials, further adding to the staggering cost of patent litigation and delays in the judicial system.

Opponents include: The USPTO, Federal Circuit Court of Appeals Chief Judge Paul Michel, the biotechnology industry, smaller technology companies, patent-holding companies, medical device manufacturers, university technology managers, the NanoBusiness Alliance and the Professional Inventors Alliance.

WILLFUL INFRINGEMENT

What it would do: Section 5(a) of the bill would limit a court's authority to award enhanced damages for willful infringement. It would statutorily limit increased damages to instances of willful infringement, require a showing that the infringer intentionally copied the patented invention, require notice of infringement to be sufficiently specific so as to reduce the use of form letters, establish a good faith belief defense, require that determinations of willfulness be made after a finding of infringement, and require that determinations of willfulness be made by the judge, not the jury.

Arguments for: Proponents say that willfulness claims are raised too frequently in patent litigation – almost as a matter of course, given their relative ease of proof and potential for windfall damages. For defendants, this raises the cost of litigation and their potential exposure.

A codified standard with fair and meaningful notice provisions would restore balance to the system, proponents say, reserving the treble penalty to those who were truly intentional in their willfulness and ending unfair windfalls for mere knowledge of a patent.

Further, tightening the requirements for finding willful infringement would encourage innovative review of existing patents, something the current standard discourages for fear of helping to establish willfulness.

Proponents include: Large technology companies, the financial services industry, and the biotechnology industry.

Arguments against: Opponents argue that willfulness is already difficult to establish under existing law. The additional requirements, limitations, and conditions set forth in the bill would significantly reduce the ability of a patentee to obtain treble damages when willful conduct actually occurs. The possibility of treble damages under current law is an important deterrent to patent infringement that should be retained as is.

Opponents include: The USPTO, the Professional Inventors Alliance.

INTERLOCUTORY APPEALS

What it would do: Section 10(b) of the bill would permit an interlocutory appeal to the Federal Circuit Court of Appeals after a Markman hearing on claim construction, rather than waiting for a final judgment from the district court.

Arguments for: Proponents say these appeals would reduce the length and cost of litigation. Claim construction, they argue, is a fundamental predicate that goes to the heart of any patent infringement case. Until a claim is construed, it is impossible to establish whether infringement occurred and whether the patent is invalid. This process also serves to narrow discovery and motion practice and related expenses.

Proponents assert that an interlocutory appeal would help to mitigate the judicial inefficiency that occurs when a full trial is conducted based on an incorrect interpretation of the patent, only to be reversed on appeal and sent back for a second trial. More than a third of all Markman rulings are overturned on appeal, meaning that many litigants end up paying the attorney fees and expenses for two trials.

Proponents include: Large technology companies and the financial services industry.

Arguments against: Opponents say interlocutory appeals from Markman hearings would increase litigation and court congestion and offer "another bite at the apple" because the reversal rate for claim construction is fairly high. The net result, they say, will be to significantly delay final judgments from the lower court, significantly delay potential settlements, and significantly increase litigations costs.

Opponents argue that the Federal Circuit would not be able to handle expeditiously the large numbers of Markman appeals, meaning that resolution of the underlying district court cases would be delayed for years.

If this provision is enacted, opponents say, it would result in an interlocutory appeal in virtually every patent infringement case as soon as a Markman order is issued. One study estimates this would double the number of appeals each year.

Opponents include: The USPTO, Federal Circuit Chief Judge Michel, the biotechnology industry, smaller technology companies, and smaller patent-holding companies.

POST-GRANT REVIEW

What it would do: The bill would expand the ability of third parties to challenge a patent after its issuance. In particular, it would allow any person to oppose a patent within 12 months after it is granted. More controversially, it would allow a challenge at any time if the petitioner "establishes a substantial reason to believe that the continued existence of the challenged claim in the petition causes or is likely to cause the petitioner significant economic harm."

A newly designated Patent Trial and Appeal Board would be responsible for conducting the post-grant reviews. The presumption of validity that applies to patents during litigation would not apply to these post-grant review proceedings. Instead, a "preponderance of the evidence" standard would apply.

Arguments for: Proponents say these post-grant review procedures would be an improvement over existing reexamination procedures because they would allow consideration of evidence gleaned through depositions and interrogatories as well as from patents and other documents. Also, proceedings would be overseen by an administrative law judge rather than a patent examiner. These changes would allow for more meaningful review and that, in turn, would lead to better patent quality overall.

The so-called second window – the ability to challenge at any time – is necessary, proponents say, to allow for a meaningful and broadly available reevaluation of suspect patent claims before a firm is forced into prolonged and expensive litigation.

Proponents include: Large technology companies and the financial services industry.

Arguments against: While reexamination is an important component of the patent system, it must be structured in a manner that preserves the value and enforceability of the majority of patents, opponents say. This change would create an essentially limitless opportunity to challenge a patent at any time during its life. This would be a dramatic departure from the norm and cast a cloud of uncertainty over issued patents. If a patent can easily be challenged at any time under a low standard of proof, patents will have much less value and investment predicated upon them will inevitably be diminished. This, in turn, will likely result in less innovation.

Additionally, the resulting surge in complex, post-grant review proceedings would further strain an already overburdened and under-funded USPTO, thereby jeopardizing the agency’s ability to improve pre-grant patent quality.

Opponents include: The USPTO, the biotechnology industry, smaller technology companies, patent-holding companies, medical device manufacturers, university technology managers, the NanoBusiness Alliance and the Professional Inventors Alliance.

PRIOR USER DEFENSE

What it would do: Section 5(b) of the bill expands the prior-use defense, which presently applies only to business-methods patents, to cover all patents.

Arguments for: Proponents argue that this expansion is reasonable in a competitive economy and strikes a balance between trade secret and patent protection. They also say it goes hand-in-hand with U.S. adoption of a first-to-file rule. Prior-user rights benefit smaller businesses, which often lack the resources or know-how to pursue patent protection, proponents say. This measure would allow them to commercialize their inventions when they used the subject matter of the invention prior to the patent's filing date, even when they did not pursue patent rights.

Some foreign countries presently allow prior-user rights, including Germany and Japan. This measure would help level the playing field for U.S. companies by putting them in the same competitive position as their overseas counterparts.

Proponents include: The financial services industry and the biotechnology industry.

Arguments against: Opponents contend that prior-user rights undermine the purpose of a patent system by creating a strong incentive to protect innovations as trade secrets. Under a prior-use defense regime, if inventors are able to protect their innovations as trade secrets, they are able to use them indefinitely, even if someone else obtains a patent on the invention.

Opponents also argue that this change would benefit larger corporations at the expense of smaller ones. They also contend that prior-user rights would reduce the value of patents and therefore make innovation less desirable.

Opponents include: The USPTO, the Professional Inventors Alliance.

VENUE

What it would do: Section 10(a) of the bill limits the places where corporations may be sued in patent cases by amending 28 U.S.C. § 1400(b) to provide that a corporation "resides" only where it has its principal place of business or in the state in which the corporation is incorporated. Current law presumes a corporation to reside wherever it is subject to personal jurisdiction. This change would not apply to declaratory judgment actions brought by alleged infringers.

Arguments for: Proponents argue that this change would discourage forum shopping. As the law now stands, any company whose products are sold nationwide is subject to patent litigation in any jurisdiction in the country. As a result, certain jurisdictions have become magnets for patent cases because of the disproportionately high number of cases they decide in favor of patentees.

This forum shopping imposes a costly burden on businesses which must collect evidence and witnesses and travel to remote jurisdictions to try complex patent cases over a period of weeks or months.

Proponents include: Large technology companies, the financial services industry, and the biotechnology industry.

Arguments against: Opponents argue that this change would be a substantial departure from established practice and may not result in the most appropriate and convenient venue for litigation. Certain district courts attract patent cases not because of favoritism, they say, but because of their expertise and timeliness. They also argue that the impact of forum shopping is minimized by the existence of a single appellate court for patent cases, the Federal Circuit.

Opponents include: Smaller patent-holding companies, smaller technology companies.

USPTO REGULATORY AUTHORITY

What it would do: The bill would authorize the USPTO to promulgate substantive – as opposed to procedural – rules and regulations for the first time in its history.

Arguments for: Proponents argue that giving the USPTO substantive rulemaking authority would be beneficial to the patent system and would help ensure an efficient and quality-based patent examination process.

Proponents include: The USPTO.

Arguments against: Opponents note that the U.S. Constitution expressly gives Congress the power to protect intellectual property and that delegating that authority to an administrative agency would be an ill-considered abdication of that Constitutional authority. Further, this grant of authority would create instability in the patent system, because the USPTO could make multiple changes to the law during the life of a patent. The job of defining substantive patent law is better left to Congress and the courts.

Opponents include: The biotechnology industry, smaller technology companies, patent-holding companies, university technology managers, medical device manufacturers, and the NanoBusiness Alliance.

INVENTOR'S OATH

What it would do: The bill would change the current practice of requiring the inventor to sign an application. It would allow the assignee of an invention to file a patent application in its own name. It would also allow substitutes for the inventor's oath where the inventor is unable or unwilling to sign.

Arguments for: Proponents say this change would reduce unnecessary formalities in the patent application and simplify and streamline the process. They also say this change would go hand-in-hand with a U.S. shift to a first-to-file system.

Proponents include: The USPTO.

Arguments against: Opponents say that patent applications filed by assignees may lack the actual inventor's personal guarantee that the application was properly prepared. In addition, assignee filing might derogate the right of natural persons to their inventions.

Opponents include: The Professional Inventors Alliance.

© 2007 IMS ExpertServices all rights reserved.

Robert J. Ambrogi is a lawyer and media consultant in Rockport, Mass. He writes the blog LawSites, www.legaline.com/lawsites.html.