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U.S. patent law may be facing its biggest overhaul in 50 years. The ever increasing importance of patents, the every more uncertainty associated with patents and the cost and complexity of intellectual property litigation has created a perfect storm.

Widespread media reports reflect a consensus view that the U.S. patent system is broke and badly in need of repair. The response has been several proposals in recent Congresses that have served as a gestation process for a newly introduced bipartisan bill with a reasonably good chance of passage in the current Congress, albeit with some modifications.

Introduced in identical bills in the Senate and House on April 18 by Sen. Patrick Leahy, D-Vt., and Representative Howard Berman, D-Calif., with co-sponsorship by key Republicans Sen. Orrin Hatch, Utah, and Representative Lamar Smith, Texas, the “Patent Reform Act of 2007″ has something for everybody.

The Senate version of that act, also referred to as the Leahy-Berman Bill, may be seen at http://ipo.informz.net/ipo/data/images/courtcases/s1145.pdf.

The information technology industry immediately endorsed the newly proposed legislation without reservation. The bio/pharma industry supports many of the changes proposed, but quickly made known its opposition to two significant aspects of the proposed changes.

Statements by each of the bill’s co-sponsors appear on Leahy’s Web site, http://leahy.senate.gov/press/200704/041807a.html.

Each summarized the importance of the bill. Smith noted, “Few issues are as important to the economic strength of the United States as our ability to create and protect intellectual property. American IP industries account for more than half of all U.S. exports, represent 40 percent of our economic growth and employ 18 million Americans.

Strengthening intellectual property leads to economic growth, job creation and the type of creativity that has made America the envy of the world.”

The proposed changes include:

Patent priority will be based on first to file rather than first to invent and patent interferences are eliminated; Validity of granted patents may be challenged in a patent office proceeding with no presumption of validity; Claim construction subject to interlocutory appeal; Patent infringement damages are limited to the relative importance of the patented invention in the overall product; Willfulness in patent infringement may not be alleged or tried until after liability as been determined; Willfulness in patent infringement will involve a higher burden of proof and require new elements of proof; Venue for patent infringement cases will be more limited.

One particular reform previously proposed and generally favored by essentially all interested parties was not included in the Leahy-Berman Bill.

As in the Leahy-Berman proposed deferral of willfulness allegations until after liability has been established, the most recent predecessor of the Leahy-Berman Bill (the Leahy-Smith Bill introduced very late in the last Congress) also proposed deferring allegations of inequitable conduct or fraud of the patent office.

Recent informal information had been that the U.S. Patent and Trademark Office (PTO) itself now saw merit in this provision as a means of securing more meaningful participation of patent applicants in the patent examination process.

Nevertheless that provision is omitted in the new bill. In the statement on Leahy’s Web site, this is explained on the basis that “Candor and truthfulness are the backbone of the patent application system, and are protected by the inequitable conduct doctrine. [The earlier proposal] would have weakened that doctrine.”

The statement on Leahy’s Web site also refers to he fact that the newly introduced bill, does not, as the previous Leahy-Smith Bill had done, propose repealing 35 USC Section 271(f) pertaining to extraterritorial patent infringement. As Leahy’s statement indicates, extraterritorial patent infringement is now on the Supreme Court’s agenda.

Another major issue not resolved by the proposed bill is the chronic underfunding and understaffing of the PTO.

Other legislation may address this widely recognized problem. But failure to address it could seriously undermine the effectiveness of the currently proposed reforms.

Still another controversial area left essentially untouched in the Leahy-Berman Bill is that of the definition of “prior art,” the body of information to be considered in determining patentability in the PTO or patent validity in court.

While information “known or used by others” would be removed from the present definition of prior art, what is described in a “printed publication” or “in public use” or “on sale” would remain as the essential definition of prior art.

The Internet, electronic publishing and other new forms of communications leave much in doubt as to the extent to which information in those media would be considered prior art.

With respect to the major changes proposed in the Patent Reform Act of 2007, one generally endorsed provision is that which would give priority to competing patent applications on the basis of which application was filed first. This is in contrast to the present U.S. system. Presently, the United States is essentially the only country in the world which determines priority on the basis of who invented first.

Among the objections to this system is the uncertainty of who really did “invent” first. When contested, this is resolved in a patent interference, a patent office proceeding infamous for its complexity, uncertainty, cost and the relatively few times it results in overturning the presumption that the first to file was in fact also the first to invent.

Pragmatically, most U.S. patent applicants seek international coverage, which means they must file first to secure priority for their corresponding foreign applications anyway. Perhaps the most surprising thing about this change is that it has been so long in coming.

Another major change proposed in the Leahy-Berman Bill is the establishment of a system by which the validity of a patent granted by the PTO could be challenged in an administrative proceeding in the PTO. Such proceedings, known as post grant oppositions, are expected to provide an opportunity for those who wish to challenge the validity of a patent to so do without going to court.

Such challengers often possess information not available when the PTO examined the patent initially and the opposition system is seen as a way to better determine patent validity in view of this additional information.

As proposed, the patent being challenged would not enjoy the presumption of validity provided by statute when validity is contested in court and the challenger’s burden of proof therefore is only that of a preponderance of the evidence.

The post grant opposition system may also be used as an adjunct to litigation in which patent validity is at issue.

All of the major industry groups and intellectual property-oriented professional organizations agree on the necessity for a post grant opposition system, but the information technology industry and the bio-pharma industry part company on one significant aspect of the system, as proposed.

Because of the relatively short product development and life cycles of products in the information technology industry and the number of patents of potential relevance to a new information technology product, Apple, IBM, Hewlett Packard, Intel, Microsoft and many other companies in that industry strongly contend that a granted patent should remain open to an opposition challenge until it expires.

The Leahy-Berman Bill bows to that wisdom, allowing a patent to be opposed not only just after it is granted (a first window of opportunity), but also whenever a party becomes threatened by the patent (a second window of opportunity).

The bio-pharma industry has equally strongly contended that its incentive to develop new and important pharmaceutical products would be greatly impaired by the uncertainty of its patent position imposed by this second window of opportunity.

Bio-pharma’s objection to a post grant opposition system, which leaves a patent open to challenge throughout the life of the patent, is based on the fact that bio-pharma products typically involve much longer product development and life cycles, much more significant investment for a given product, and much greater dependency on individual patents for protection throughout their life cycle. Notwithstanding the bipartisan support the Leahy-Berman Bill enjoys, this is likely to be the greatest stumbling block to passage of the bill.

In some respects, the Leahy-Berman Bill lacks details on to how the post grant opposition system would be implemented, instead authorizing the PTO to design the procedure.

That an opposer would be estopped from other proceedings and would have the ability to appeal from an adverse decision in the PTO is clear, as is the availability of discovery.

What remains for the PTO to decide is how and to what extent an opposer may initiate or participate in, or be required to participate in, discovery and in PTO interviews, hearings, motions, briefing, etc.

The other major changes proposed in the Leahy-Berman Bill all address patent infringement litigation.

Industry groups and professional associations having an interest in patent litigation may be expected to generally endorse several of these changes.

Allowing interlocutory appeals of claim construction orders, and requiring that willfulness allegations and determinations be deferred until liability has been established are seen as ways to simplify patent litigation and significantly reduce the investment of time and money in aspects of that litigation which often turn out to have been unnecessary.

Previous proposals to also defer inequitable conduct issues until liability had been established were endorsed for this same reason.

Opposition to these proposals may come from the judiciary, however, which may perceive such changes as legislative meddling in the judicial process, with an attendant adverse impact on judicial efficiency.

Similarly likely to be endorsed, but less likely to draw opposition from the judiciary, are provisions which establish certain prerequisites to a finding of willful patent infringement, and the enhanced damages which may accompany such findings.

Among these proposed statutory prerequisites, a finding of willfulness would require clear and convincing proof, and notifications of possible infringement would have to be in writing and of sufficient detail to give the accused infringer “objectively reason apprehension of suit” with respect to specific activity and specific patent claims.

This effort to limit damage awards for patent infringement, which have become increasingly large and are often alleged to be excessive, extends to other, and more controversial, provisions in the Leahy-Berman Bill.

These are sections titled “Relationship of Damages to Contributions Over the Prior Art” and “Entire Market Value.” These provisions require consideration of the relative economic value of the contribution, to the economic value of the infringing product or process, of the infringed patent and of other features of that product or process.

The entire market value of the infringing product or process may not be considered in the damage award “unless the patent’s specific contribution over the prior art is the predominant basis for market demand for the infringing product or process.”

Here again the information technology industry and the bio-pharma industry part company, largely for the same reasons expressed in their different views of the second window of opportunity for a post grant patent opposition. And here again, the Leahy-Berman Bill appears to favor the information technology industry view.

A final major change the Leahy-Berman Bill would make is that affecting venue for patent infringement litigation. Historically, 28 USC Section 1400(b) governed patent venue and required that a complaint for patent infringement be filed only in a jurisdiction where the defendant “resided” or had performed acts of infringement and had a regular and established place of business. Over the last several years.

Section 1400(b) has been effectively pre-empted by the broadened venue provision of 28 USC Section 1391(c). This enabled filing suit wherever personal jurisdiction over the party could be established.

One result of that has been the plethora of patent litigation in the Eastern District of Texas and forum shopping generally. The Leahy-Berman Bill broadens Section 1400(b) and explicitly limits the application of Section 1391(c). Under the proposed revision of Section 1400(b) a charge of patent infringement may be brought in a jurisdiction where either party resides or where the defendant has committed acts of infringement and has a regular and established place of business.

A new subsection (c) would be added to Section 1400, however, limiting corporate residence, for purposes of venue in the case of patent infringement, to a judicial district in which the corporation has its principal place of business or to a state in which it is incorporated.

Sen. Leahy, in introducing the bill, indicated he anticipated “immediate and intense debate … that will allow us to further refine our legislation” before it reaches the Senate floor. Considering the many press releases immediately following introduction of the bill, Leahy’s expectation of intense debate appears well justified.

Paul F. Prestia co-founded and presently manages the intellectual property law firm of RatnerPrestia.

While his forty-plus years of experience includes a variety of intellectual property litigation, his current practice is focused largely on IP counseling for risk management, due diligence, strategic IP protection and IP value realization.

He is a past president of the Philadelphia Intellectual Property Law Association, a founder and first president of the Benjamin Franklin American Inn of Court, and a Fellow and former Director of the American Intellectual Property Association
.

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