Legislating patent reform is like finding a recipe to feed diverse cultures that long have hated each other’s foods.
But now that major patent reform bills have come out of the “oven” and onto the House and Senate floors, will those cultures find enough in the pot to appeal to their divergent tastes?
“This has all the earmarks [of success]; it’s very complicated, but it can be done. There is strong momentum,” says Jonathan Yarowsky, a partner in Washington, D.C.’s Patton Boggs and chief counsel to the high-tech Coalition for Patent Fairness.
“Progress has been made, especially in the House. It’s fair to say that even though we continue to oppose both bills, as we must,” says Hans Sauer, associate general counsel for intellectual property of the Biotechnology Industry Organization (BIO).
“In a nutshell, nothing is going to pass,” says Harold Wegner, an intellectual property law partner in the Washington office of Foley & Lardner, who has witnessed more patent reform efforts in more years than he cares to count.
Obviously, this recipe is unfinished.
Congress is attempting to complete the first major overhaul of the nation’s patent law in more than half a century. Since secure intellectual property law is now viewed by many as increasingly critical to future U.S. economic growth, the stakes are enormously high in any effort to alter the rules � substantively or procedurally � surrounding patents.
And, not surprisingly, because their business models are different, there is a wide gulf between the major stakeholders � large pharmaceuticals and biotechnology companies on one side, and big technology firms on the other.
Pharmaceuticals and biotech companies need exclusive rights to single patents, protecting, for example, a drug resulting from millions of dollars of research. Too many bad patents, infringement suits and skyrocketing damages bedevil big technology, whose products often contain hundreds and even thousands of patented parts.
In July, House and Senate bills, identical when introduced last April, emerged from their respective judiciary committees � a major step in this long-running effort. Following committee amendments, the bills are no longer identical, but there is some agreement among all parties that the House bill has made greater progress, even if “incremental,” to bridge the reform gulf, in the words of BIO’s Sauer.
It’s difficult to understand why the committees sent the bills to the floor when a significant gap still exists between the two major camps in the debate, says patent litigator J. Matthew Buchanan of the Oklahoma City intellectual property firm Dunlop, Codding & Rogers.
“It’s possible the lawmakers decided to push this forward and make them fight it out on the floor,” says Buchanan. “Whether they can advance the bills on the floor, I don’t know. It is going to force the debate to be taken up in a broader audience.”
Although there is little agreement on the patent reform legislation itself, there is consensus on what the major issues are.
Perhaps the greatest single obstacle to a patent reform compromise is how to calculate infringement damages, particularly, as in the high-tech world, when the infringing component is only part of a larger and more complex device.
U.S. district courts use a flexible 15-factor test from a 1971 decision by the 2nd U.S. Circuit Court of Appeals, Georgia Pacific Corp. v. U.S. Plywood-Champion Papers Inc.
“What happens empirically when you give juries 15 factors, you don’t know what’s going to happen,” says Yarowsky.
Depending on how one judge decides to instruct the jury, the outcome is so variable, he says, adding, “Look at the Alcatel case. Microsoft goes on the open market, buys a set of patents to help its MP3 technology. It touts this, uses it for three years and then suddenly they get slapped with an [infringement] case.
“A judge instructed the jury with 185 pages of instructions, and the jury came back with a verdict of over $1.5 billion based on the retail value of the total computer.”
Yarowsky’s coalition has argued that the standard for calculating damages should be based on the fair share of the patent’s contribution to the value of a product and not on the value of a whole product that has many other components.
But pharmaceuticals and biotech companies have argued that codifying that standard elevates it above all others and creates a major problem for their patent rights.
“I think if you got them off the record, pharma could sympathize,” says Codding’s Buchanan. “But their stance on this is when you alter the patent system as a whole, you affect everybody.”
The reform bills originally adopted tech’s damages position, but the House committee amended the damages provision to give judges discretion to decide, based on the facts of the case, whether damages should be apportioned, as technology companies would like, whether they should be based on the value of the entire invention, or by other means.
Yarowsky thinks that approach gives judges the same kind of management tools they use in other types of cases. “When you have a sense of how the damages framework works, you might settle a case, which is unlikely when you have 15 factors floating around,” he says.
But pharmaceutical and biotechnology companies don’t see the damages provisions in the same way.
On a basic level, BIO’s Sauer says, the damages provisions are designed to make patent damages awards smaller, and, in doing so, “We think it will make patent infringement overall cheaper and we don’t want that. If cheaper, infringement just becomes another business decision.”
His members are concerned that if infringement becomes cheaper, it will put the squeeze on their normal commercial licenses. It becomes economically unreasonable, he explains, to pay more for those licenses than it costs to infringe. This also could affect existing agreements on what a technology is worth, forcing renegotiations or encouraging breaches.
“Our members say, “Go and try to address these guys’ concerns, but don’t do it at the expense of jeopardizing our business model,’ ” he says. “ This is a very clear mandate.”
The second major issue dividing the stakeholders concerns how to challenge the validity of patents.
Given the reality of practice before the U.S. Patent and Trademark Office (PTO), “We have no way to challenge a patent we think is invalid, absent litigation,” says Michael T. Siekman, an intellectual property lawyer at Boston’s Wolf, Greenfield & Sacks.
Big technology and the financial services industry face many suits from people derogatorily called patent trolls, Siekman says. Companies are finding themselves in suits in areas in which they never dreamt they would face lawsuits and on patents that seem laughable on their face, he adds.
This country, unlike others, does not have a post-grant opposition procedure, Siekman says. Such a procedure “causes people to monitor competitors’ patents,” he says. “There’s great efficiency there and certainty.”
Both congressional bills provide for a post-grant review administrative proceeding for would-be patent challengers. The battle has been over how much time after a patent has issued should it be open to challenge. The bills originally allowed challenges within a set amount of time after the patent issued, but a second “window” for challenges would open when an infringer had reason to believe it had infringed the patent.
Technology companies wanted the second window, because they deal with thousands and thousands of patents and generally won’t become aware of an infringement issue within a year of issuance, says Codding’s Buchanan.
“They want an administrative way to challenge validity instead of going into federal court,” he says. “Biotech and pharma strongly oppose the concept. They think that puts a cloud on the title of the patent and strength of the patent for its entire life, and that is especially harmful when they seek venture funding.”
The House committee eliminated the “second window” and decided to expand an existing but limited procedure known as the inter-partes re-examination procedure, which allows third parties to challenge a patent on novelty grounds in the PTO. The Senate bill still has the second window and, according to some, a very low threshold for challenges.
By expanding the inter-partes procedure, “We know what we’re working with. It seems to us a fairly good idea,” says BIO’s Sauer.
Big technology’s Yarowsky says, “We would have preferred the second window approach, but we do recognize the House enhanced existing procedures. There were negotiations from all sides. Politically, lot of progress was made there.”
All parties seem to have accepted provisions in the reform bills that would bring the United States into harmony with the rest of the world by shifting this country away from awarding patents to those “first to invent” to those who are “first to file.”
Slightly controversial are new venue provisions on where a plaintiff can bring an infringement action. Under current law, an action can be brought in any district in which the defendant is subject to personal jurisdiction � in reality, wherever an infringing product is sold. The bills would limit venue to districts where either a party resides or where the defendant has committed the infringement and has a regular place of business.
The venue change is clearly directed at the allegedly plaintiff-patent-popular Eastern District of Texas, says patent litigator Kenneth Adamo of Jones Day. He adds that plaintiffs’ win rate in eastern Texas may be higher than in some districts, but it is not disproportionately higher than in others. [ See "VW Tries to Put the Brakes on Eastern District Product Liability Docket," Texas Lawyer , Aug. 6, 2007, page 1.]
“I think the cure is going to be worse than what the real problem is,” he says. “If you start forcing these cases into New York or Chicago, they are never going to go to trial because of criminal dockets and speedy-trial problems.”
Wolf Greenfield’s Siekman says the venue provisions “make sense,” but he adds that it’s “hard to predict” what will happen when cases go into districts where judges have little experience or interest in patent law.
Many difficult issues remain. For example, technology companies want the bills to scale back the availability of treble damages when courts find “willful” or knowing infringement. The current standard is too easily met, those companies contend.
And biotech and pharmaceuticals want the use of a patent holder’s “inequitable conduct” curtailed as a ground for holding a patent invalid. Alleged infringers can now argue that the patent is invalid because the holder did not disclose sufficient information about the invention during the patenting process.
“The momentum is there to get this done so long as it stays a top agenda item for both parties,” says Yarowsky.
But he adds, “Complex legislation is not an easy slide.”
Marcia Coyle is the Washington bureau chief for The National Law Journal , a Texas Lawyer affiliate in which this article originally appeared. Her e-mail address is email@example.com.