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When Rep. Lamar Smith, R-Texas, introduced the much-heralded Patent Act of 2005 on June 9, the chairman of the House Subcommittee on Courts, the Internet, and Intellectual Property boasted it made “the most comprehensive change to U.S. patent law since Congress passed the 1952 Patent Act.” In reality, however, while earlier drafts of the bill (H.R. 2795) contained a number of welcome changes with real teeth, the bill as introduced is mostly a paper tiger. If the subcommittee continues watering the bill down during mark-up, the Patent Act of 2005 will likely go down in history as yet another failed attempt to bring real reform to the U.S. patent law. For years, commentators have pointed out the need for fundamental changes to the U.S. patent system. Public perception is that the U.S. Patent and Trademark Office issues too many patents that are clearly invalid in that they cover subject matter that has been in use for years. These facially invalid patents are particularly problematic under current U.S. patent law, which gives patent owners powerful injunctive rights and stacks the deck against a party seeking to invalidate a patent. Even worse, the current system provides a disincentive for companies to even look at issued patents of their competitors, since knowledge of a patent can raise the specter of willful patent infringement and enhanced damages. It was against this backdrop that the 109th Congress took on the task of reworking the U.S. patent law. Early committee drafts contained decent solutions to address all three of these major issues. Unfortunately, however, over several months of deliberations the IP subcommittee has all but eliminated the advances in injunction reform and validity challenges. Let’s hope the subcommittee has the resolve to hold firm on the proposed advances in willful infringement. INJUNCTION REFORM Under current U.S. patent law, the burden on the patentee to obtain an injunction upon a finding of infringement is quite low. In fact, traditional patent law holds that irreparable harm to the patentee is presumed once a court finds infringement. This presumption has the curious effect of allowing a patentee who does not even practice a patent to completely shut down an industry that does. Early drafts of H.R. 2795 proposed a complete reversal of this injunction anomaly. Specifically, the early drafts provided that:
A court shall not grant an injunction under this section unless it finds that the patentee is likely to suffer irreparable harm that cannot be remedied by the payment of money damages. In making such a finding, the court shall not presume the existence of irreparable harm, but shall consider and weigh the evidence that establishes or negates any equitable factor relevant to a determination of the existence of irreparable harm, including the extent to which the patentee makes use of the invention.

Unfortunately, H.R. 2795 as introduced contains none of this bold language. Instead, the bill meekly seeks to remedy the injunction issue by offering the obvious tautological notion that “In determining equity, the court shall consider the fairness of the remedy in light of all the facts and the relevant interests of the parties associated with the invention.” CHALLENGING PATENT VALIDITY Under the current patent system there are few good options for challenging facially invalid patents. Once the USPTO issues a patent, the patent carries a strong presumption of validity. A defendant who wishes to overcome this presumption in court must meet the heightened clear and convincing evidentiary standard. This standard is especially hard to meet since many jurors, when confronted with the official USPTO red ribbon and government gold seal, simply find it hard to imagine that an agency of the U.S. government made a mistake. The other current option for challenging validity, a USPTO re-examination proceeding, is equally unattractive. In a re-examination proceeding, a challenger is severely limited in the type of evidence it can present and the amount of involvement it can have in the proceeding. Re-examinations can take years to complete and, perhaps most troubling, conventional wisdom suggests that the USPTO, having issued the invalid patent in the first place, will simply repeat its mistake. The early drafts of H.R. 2795 provided an effective mechanism for challenging invalid patents by way of an opposition system. Under the proposal, anyone could file an opposition to an issued patent within nine months of patent issuance. The challenge would be decided by a panel of three Administrative Patent Judges (the “Panel”). The challenger and the patent owner could: submit declarations to the Panel, conduct depositions of declarants, submit pre-hearing briefs and even cross-examine declarants live at a hearing before the Panel. The burden on the challenger would be a mere preponderance of the evidence, not the clear and convincing evidence standard applied in court. Finally, the proposal mandated a quick resolution of opposition proceedings. The Panel would have to issue a decision within eighteen months of the date the opposition is filed. Unfortunately, H.R. 2795 as introduced includes a poison pill that will discourage most companies from making use of the new opposition proceeding. Under proposed Section 325 (d):

If the owner of a patent files suit alleging infringement of the patent before the 9-month � period for filing an opposition � , the Director, if requested by the patent owner, shall stay the opposition proceeding until judgment in the suit and all appeals thereof, have become final.

This automatic stay provision essentially encourages patentees who are facing tough validity challenges in an opposition to sue the opposer and move the validity battle to district court. Reasonable companies, who may have filed oppositions to troubling patents will not do so if this makes them a more likely infringement target. WILLFUL INFRINGEMENT As every in-house IP counsel knows, the issue of willful patent infringement presents a frustrating Catch-22. On the one hand, diligent in-house counsel would like to review patents of competitors to guard against infringement. On the other hand, once in-house counsel gains knowledge of a specific patent that might be relevant, he or she puts their entire company at risk of accusations of willful patent infringement potentially leading to treble damages. In order to cleanse the sin of knowledge, the in-house counsel must go through a careful process of documenting why the company believes that it does not infringe. In many cases this cleansing involves the hiring of outside counsel to prepare voluminous and costly written opinions of non-infringement and invalidity. All this can occur without even the slightest accusation of infringement on the part of the patent holder. H.R. 2795 addresses some of these issues. Under the bill as proposed, a court may not find that an infringer has willfully infringed a patent until after the patent holder has provided written notice of an infringement allegation, unless the patent holder can show that the alleged infringer directly copied the patent. In either case, the alleged infringer can avoid willful infringement liability by forming “an informed good faith belief that the patent was invalid, unenforceable or would not be infringed.” An alleged infringer can conclusively establish a good faith belief by “reasonable reliance on advice of counsel.” Unfortunately, H.R. 2795 as introduced does not go as far as it could to make life easier for in-house counsel. Under the earlier draft version, courts were instructed that “increased damages may not be awarded based merely upon the knowledge of a patent or its contents by the defendant prior to suit.” The bill as introduced no longer includes this language, leaving conservative in-house counsel wondering whether they should continue to adopt the “see no evil” approach. Although Congress initially intended the Patent Act of 2005 to make sweeping reform to the U.S. patent system, recent deletions have vitiated much of the bill’s effectiveness. Even in its diminished form, however, the bill does contain some necessary changes, especially to the standards for judging willful infringement. One can only hope that these remaining changes will survive mark-up. Mark Scarsi is a partner in O’Melveny & Myers’ Los Angeles office. Prior to entering the legal profession, Scarsi worked for seven years as a software engineer focusing on the development of computer hardware/software solutions for strategic naval defense objectives.

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