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Author’s note: The opinions expressed here are mine and do not necessarily reflect those of my firm or any of its clients.

The most major revision of U.S. patent law since 1952 continues to wend its way through Congress. Starting as identical bills in the House and Senate, the bills as now pending differ considerably. Intense lobbying from major industry groups and other stakeholders will likely lead to still more changes before a bill can be sent to President Bush’s desk. Given the timing and political considerations, that seems less likely than it did just a few weeks ago.

In the latest chapter, the administration, through letters from Nathaniel F. Wienecke, the administration’s assistant secretary for legislation and governmental affairs, advised Sen. Patrick Leahy, D-Vt., chairman of the Senate Judiciary Committee, and Sen. Arlen Specter, R-Pa., ranking Republican member of that committee, that the administration would oppose the Senate bill as presently proposed.

According to those letters, the most objectionable provision of that bill is that which would impose specific criteria for determining reasonable royalty damages for patent infringement. Damages for an alleged infringement would be determined with reference to the value contributed by what is new in the infringed claim subject matter and what is not new in the alleged infringement. Just how this would work is not clear.

What is more certain, in the opinion of Chief Judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit and many others, is that damage determinations would be more complicated and unpredictable. In any event, on the basis of its objection to this damages provision alone, the administration would oppose the bill. Whether because of this statement of the administration’s objections to the bill or in response to a chorus of other objections, it now appears that the full Senate will not consider its version of the patent reform bill until after the Senate’s spring recess in late March. Leahy’s office has indicated there would be further amendments to the bill before it is taken to the Senate floor.

One possibility is that the objectionable damages provision will be stricken. It is largely a response to laments from large information technology companies, like Microsoft and Intel, about very large damage awards based on patents to inventions that were only minor components of systems involving many inventions. According to those laments, the present case law, which gives discretion to the fact finder to consider a number of well-defined factors (some of which are quite similar to those proposed as mandatory in the pending bills), is often applied unfairly. Much of the remainder of industry – most notably including various biotech-based organizations and large pharmaceutical companies – contend the proposed damages provision would result in unfair limitation of realistic damage awards and would actually stifle innovators, who might see their prospective returns devalued.

If the objectionable damages provision is not stricken or modified substantially, determined opposition by the administration and by the substantial body of Republican senators who would side with the administration and/or with industry groups opposing the provision would likely defeat a cloture vote and kill the bill in its entirety.

An interesting aside is that much of the impetus for patent law revision came from major studies by the National Academy of Science and by a joint commission representing the Federal Trade Commission and the Department of Justice. Both of these studies concluded with specific recommendations for improving the U.S. patent system. None of their recommendations proposed anything like the damages provision now apparently standing in the way of other more generally agreed upon reforms of U.S. patent law.

An even greater epiphany for Leahy and the Senate Judiciary Committee may result, in fact, if other objectionable parts of the bill are reconsidered in light of the academy’s and the FTC-Justice Department’s studies.

Those studies were in substantial agreement, for example, on the need to improve the quality of patent examination – one aspect of which is to require patent applicants to be more forthcoming with respect to relevant background information. Like respect for one’s elders, this is hard to oppose. The problem is not with that requirement but with the inequitable conduct defense likely to be pleaded if and when a resultant patent is asserted to be infringed. It is this defense that seriously constrains what applicants will say or do during the examination process in anticipation of a later accusation of a misrepresentation or misleading omission. And merely changing the evidentiary proof required to sustain the inequitable conduct defense, as the currently pending bill does, will not as a practical matter limit use of the defense and the allegation of misrepresentation, which taints so many patent infringement cases.

In the previous Congress, Leahy had also sponsored a patent reform bill. One provision of that bill would have limited the inequitable conduct defense such that it could not even be pleaded until a patent had been found invalid. Then, if the alleged misrepresentation or omission forming the basis of the inequitable conduct defense was somehow related to the ground on which the patent had been found invalid, the defense would make sense. Unfortunately, Leahy has neglected to include such a provision in the currently pending bill.

Another worthwhile recommendation of at least one of those studies addressed a perceived problem flowing from a feature of the U.S. patent system not found in most other patent systems. This is the U.S. continuation application practice. One of the objections to that practice is that it permits applicants to modify their claim coverage over the course of a sequence of applications to cover new competitive products as they evolve. Thus, the developers of those later products are met with patent infringement challenges they could not have anticipated from the earlier filings. The fix recommended by the FTC-Justice Department commission was to grant intervening rights to those later developers, denying the patent owner the assertability of later claims enabled by the continuation application process against products that would not have infringed earlier claims. This fix seems entirely to have been ignored in the pending bills in both houses.

Interestingly, for a different reason entirely, the U.S. Patent and Trademark Office, the agency in which patent applications are examined, also objects strenuously to continuation application practice. The PTO objects specifically to the additional workload generated by multiple, sequential continuation applications. Because of this objection, the PTO has proposed new rules, which would significantly limit continuation filing, notwithstanding provisions of the U.S. Code, which permit such applications. The PTO has been preliminarily enjoined from implementing those rules and the outcome is uncertain. The irony is that if the pending patent reform legislation followed the FTC-Justice Commission recommendation, the incentive for continuation filing would likely have greatly decreased, as would the related PTO workload.

The pending patent reform bills also aim for, but miss, another important target. That target is the extraordinarily high rate of reversals by the U.S. Court of Appeals for the Federal Circuit of district court claim construction rulings. Among the problems this causes are the necessity, and in some cases great expense, to retry patent infringement cases because of a perceived error in an early claim construction ruling upon which the remainder of the litigation and trial was based. The source of this extraordinarily high rate of reversal is the Federal Circuit’s adherence to its case law, which holds that district court rulings on claim construction are entitled to no deference. Legislatively overruling that case law would probably solve the problem. The pending bills impose a different fix, a fix that may turn out to be worse than the original problem. That fix is to place the discretion to permit interlocutory appeals of claim construction rulings with the district court rather than with the appellate court. With this scenario, one can envision numerous trips to the appellate court and back in a single case, inevitably extending the litigation and increasing the commitment of time, resources and money to each such case.

Given the general consensus that many of the reforms and revisions in the proposed legislation both in the House and the Senate are desirable and the determination of the congressional leadership to pass a patent reform bill in this Congress, it still seems highly likely that a bill will be passed and sent to the president. It also appears likely that the final bill will look much like those presently pending in the House and in the Senate, which means the U.S. patent system will be converted from first-to-invent to first-to-file, will include a post-grant opposition system, will include several provisions that will make it more difficult to prove that patent infringement has been willful, and will include some increased obligations on patent applicants to provide relevant background information in the patent examination process. It will also mean there will be significant new limitations on venue for patent infringement litigation and, as a result, more filings in districts where parties are actually located or incorporated.

The big question that remains is whether and the extent to which the proposed patent damages provisions will remain intact or will be significantly modified or deleted. Chances are that provisions will be very significantly modified or deleted altogether, in view of the administration’s position as stated in Wienecke’s letter. All of this should make the Senate debate and the joint conference, which would follow, very interesting. Let the sausage making begin.

PAUL F. PRESTIA co-founded and presentlymanages the intellectual property law firm ofRatner Prestia. While his 40-plus years of experience include a variety of intellectual property litigation, his current practiceis 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 IntellectualProperty 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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