Patent Reform Stalls In Senate

LEGISLATION that would make some major changes to the decades-old U.S. patent system has run aground in the Senate, largely because of an inability to reach agreement on how patent holders should be compensated in cases of infringement.

Senate Majority Leader Harry Reid (D-Nev.) has taken the Patent Reform Act (S. 1145) off the floor schedule, meaning the complex bill will not be considered by the full Senate anytime soon. The legislation could be dead for the remainder of the 110th Congress, as it will likely take a back seat to more pressing issues and to the election cycle.

But the Bush Administration is trying to breathe new life into the measure, which has deeply split the business community and been the subject of an intense lobbying battle on Capitol Hill. On one side are information technology (IT) titans, such as Cisco Systems, Apple, and Microsoft, and financial services firms, such as Bank of America and Goldman Sachs, that patent business methods. On the other side is an alliance of labor unions; biotech and pharmaceutical companies such as Genzyme, GlaxoSmithKline, and Pfizer; and industrial manufacturers such as Dow Chemical and Procter & Gamble.

The legislation, which proposes the most significant overhaul of U.S. patent law since the Patent Act of 1952, is viewed favorably by computer makers and software developers, who want to limit damage awards for patent infringement and reduce the number of costly legal battles. But it is opposed by drugmakers and other research-based businesses that fear the bill could diminish the value of their intellectual property.

Reform advocates appeared to have the upper hand when Reid set aside floor time in April for a debate on the patent legislation, a version of which (H.R. 1908) passed in the House of Representatives by a vote of 220-175 last September. But negotiations among key senators on a few unresolved issues reached an impasse, forcing Judiciary Committee Chairman Patrick J. Leahy (D-Vt.), the bill's chief Senate sponsor, to announce that it was being shelved, at least temporarily.

"I am disappointed that just a handful of words have stalled the Senate's debate on this important patent legislation," Leahy said in a mid-April statement. "Thousands of hours have been spent in negotiations to address the concerns of 100 Senators, hundreds of Representatives, and dozens of stakeholders. This was a missed opportunity. I have said repeatedly that the time for patent reform is now," Leahy added. "Unfortunately, some have yet to fully grasp this fact and have stalled meaningful reform."

Sen. Arlen Specter (R-Pa.), the committee's ranking minority member, responded that he and Leahy disagree on a number of issues, but the principal sticking point is how to assess damages in patent infringement lawsuits. "We thought we had reached an agreement on this matter, but the language continued to shift, so we do not yet have a deal on the package," he remarked in a statement. "I am hopeful that we can reach an agreement, but more work has to be done to get it right."

The dispute over damages is crucial as well as contentious because at stake is the level of compensation companies or individuals have to pay when a court determines that they have violated a patent. High-tech companies are vulnerable to lawsuits because their products typically include hundreds or even thousands of patented parts. They believe damage awards in infringement cases should be proportional to the actual worth of the component in question rather than to the total market value of the entire product as allowed under current law.

In one high-profile court case last year, a jury in San Francisco ordered Microsoft, the world's largest software maker, to pay Paris-based telecommunications company Alcatel-Lucent a record $1.52 billion in damages for infringing its intellectual property in MP3 technology, the digital music-encoding format. An appeals court later partially reversed the verdict and canceled the damages. But the new ruling did not address Microsoft's central complaint that U.S. patent law encouraged the jury to base the award on the hundreds of millions of personal computers sold worldwide with the Windows operating system, rather than on the value of the specific patented technology at issue in the case.

The computer and software industry has been victimized by "excessive and unjust" patent infringement awards, says Anthony Peterman, patent counsel for Dell Inc. "Plaintiffs are exploiting litigation rules and seeking artificially high damages," he remarks. The proposed changes would limit the scope of awards by allowing courts to calculate damages only on the "economic value properly attributable to the patent's specific contributions over the prior art."

ON THE OTHER HAND, drugmakers, whose products are often covered by only one or two patents, want a large deterrent to discourage anyone from infringing on their intellectual property. They worry that limiting the ability to obtain monetary compensation from infringers will diminish the value of their patents and reduce the incentive to invest the hundreds of millions of dollars it takes to research and develop new life-saving medicines.

"A wide range of industries, labor unions, and universities continue to have serious concerns about key provisions of the bill, including the apportionment of damages," says James C. Greenwood, president of the Biotechnology Industry Organization (Bio). "We think the Leahy bill is very bad for innovation. It's an 'infringer-friendly' bill that creates a one-size-fits-all regime for determining damages in infringement cases.

"We think that's irrational because a biologic is not a laptop computer or a tractor," he notes, referring to, for example, complex, protein-based drugs. "There should be different modalities for the courts to determine damages. If you want to attract capital investment into innovative sectors like biotechnology, you have to instill confidence that the patent portfolio is going to remain solid," he explains.

Greenwood says his group, which represents more than 1,200 biotechnology companies and related organizations, will continue to urge the Senate to make "needed changes to the legislation" before bringing it to the floor for a vote. "The potential negative impact of a poorly crafted bill on the U.S. economy and our global competitiveness is too great to proceed with a vote before ensuring that the legislation will truly enhance our nation's patent reform system across all industries," he says.

Mark Isakowitz, coordinator of the Coalition for Patent Fairness, which represents about 150 technology and financial services firms pushing the legislation, says his group is "disappointed that critics of the bill refuse to budge an inch when the bill's sponsors and supporters have made a tremendous number of compromises to address their concerns."

The legislation, Isakowitz argues, would update the patent system "to accommodate the vast changes that have taken place in the nation's economy over the past 50 years, while protecting intellectual property rights and correcting inequities in current law."

Although the Bush Administration has also expressed strong reservations about the legislation, it believes the existing patent system is in dire need of modernization. "I believe there is a way forward to pass legislation that improves our patent system and addresses many of the concerns raised by patent holders and industries," Commerce Secretary Carlos M. Gutierrez said on May 12.

In remarks before the Silicon Valley Chapter of Financial Executives International in Santa Clara, Calif., Gutierrez emphasized the importance of intellectual property protection to the U.S. economy. "U.S.-generated intellectual property is valued at $5.5 trillion—nearly 40% of our economy—and IP industries employ 18 million Americans in good, high-paying jobs," he observed.

Gutierrez urged lawmakers to craft a bill that focuses on the areas "where there is broad agreement on the need for reform. I believe we can achieve legislation that isn't perfect, but represents a significant step forward for our patent system." The challenge, he said, will be "mustering the will to forge a compromise and get it to the President's desk. The Administration stands ready to help move a good piece of legislation forward, and I urge the Senate to get this done."

While the patent reform debate has largely focused on how different business models win or lose under the current system, Gutierrez said the patent system must work to encourage innovation in all sectors of the economy, and it shouldn't tilt toward one industry or another.

"Most agree on reforms that would give judges additional authority to direct juries as to which factors they may consider in determining the compensation for infringement," he remarked. "Judicial guidance will help ensure more rational decisions while protecting judicial discretion."

The secretary also said there is widespread agreement that there should be cost-effective alternatives to litigation for settling disputes after a patent is granted. "One way to accomplish this is to provide a venue for patent holders and patent challengers to resolve their differences in front of experts at the U.S. Patent & Trademark Office (PTO). This should include protections to ensure that it does not become a vehicle to harass the patents of competitors," Gutierrez said.

THE BIOTECH INDUSTRY has argued, though, that a "post-grant review" system for challenging the validity of patents should not be open-ended. BIO says it opposes provisions in S. 1145 that would create "an essentially limitless opportunity to broadly challenge a patent administratively at any time during its life," which is usually 20 years.

Gutierrez also pointed out that the Senate bill requires higher quality patent applications at the front end of the process, which he called "a key reform that will help us process applications faster and reduce the backlog in our innovation pipeline." The number of patent applications —467,243 in fiscal 2007—has nearly doubled in the past 10 years and has more than tripled since 1987. With the average patent exam taking 31 months to complete, PTO is facing a growing backlog that now stands at around 760,000 applications.

Gutierrez said that the reform bill should also establish "appropriate penalties for misrepresenting information before the patent office." In several instances, the courts have voided patents after finding that companies engaged in "inequitable conduct," meaning they misrepresented or concealed information with an intent to deceive the patent office.

Brand-name drug companies are urging Congress to eliminate the penalty for inequitable conduct, or to at least curtail it as proposed under the House-passed bill. The pharmaceutical industry says that generic manufacturers routinely attack their patents by accusing them of inequitable conduct when they are blameless or guilty of no more than honest mistakes during the application process.

PTO HAS SUGGESTED that the doctrine should be modified to require proof that the applicant's misrepresentation was intentionally deceptive and not just an inadvertent mistake.

In testimony before the Senate Judiciary Committee last year, PTO Director Jon W. Dudas said the "all or nothing" result of an inequitable conduct finding has caused more than half of patent applications to be submitted with either no information disclosure statements or burdensome amounts of irrelevant information.

"We think that if we give people the right incentives, we will get more and better information," Dudas said. "Don't give us 28 boxes of material. Give us what's truly relevant so that you can have a higher quality patent." The inequitable conduct doctrine should be revised so that it "absolutely punishes fraud but absolutely promotes full disclosure," he testified.

Bio's Greenwood notes that the patent-reform movement stems from analyses of the current system by the National Academy of Sciences and the Federal Trade Commission, which resulted in a series of mostly noncontroversial recommendations for making the U.S. economy more innovative and competitive. "We think that agenda was hijacked by a small band of IT companies who see patents as roadblocks to innovation as opposed to the bedrock of innovation," he says.

The BIO chief says his industry could support a limited package of reforms. "If we can get a bill that allows the courts to have sufficient flexibility to assign damages in infringement cases so that it would work for biotech companies, some inequitable conduct reform, and maybe a one-year limitation on post-grant challenges at PTO, we could buy that deal," Greenwood remarks.

On the other hand, the industry official says he does not want to see a bill come to the Senate floor that forces lawmakers to choose between the high-tech- and biotech/pharma-led coalitions. "We think it's important that a deal does not consist of saying one side wins on certain issues, like inequitable conduct and post-grant review, but loses on damages," Greenwood states. "We don't think there should be trade-offs. Each of these issues should be resolved equitably so that the provisions in the legislation work for all sectors of the American economy."