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Patent Reform Inches Ahead

Drugmakers fear the proposed changes will reduce incentives for costly R&D

by Glenn Hess
July 23, 2007 | A version of this story appeared in Volume 85, Issue 30

Patent Challenges
Credit: PTO
Legislative proposals would have the U.S. Patent & Trademark Office in Alexandria, Va., resolve most patent disputes, not the courts.
Credit: PTO
Legislative proposals would have the U.S. Patent & Trademark Office in Alexandria, Va., resolve most patent disputes, not the courts.

THE LATEST CHAPTER in a long-running battle pitting many large high-tech firms against the biotechnology and pharmaceutical industries has Congress considering the most sweeping overhaul of U.S. patent law in decades. Attempts by lawmakers to update a system that still follows the basic framework of the Patent Act of 1952 have started out strong but disintegrated several times over the past decade.

But Capitol Hill observers say the legislation's chance of success has improved because Democrats now control both chambers of Congress. The drug industry, which has been blamed by reform advocates for blocking progress on previous proposals, has fallen out of political favor. Meanwhile, Democratic leaders, who are more sympathetic to Silicon Valley, view patent reform as part of their agenda to stimulate the technology economy.

"Over the years, our patent laws have served our inventors and our economy well, but they were crafted for a different time when smokestacks, rather than microchips, were the emblems of industry," says Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.). "It is far past time to update our laws for the 21st century and the future of American innovation."

In April, Leahy and Sen. Orrin G. Hatch of Utah, the top Republican on the Judiciary Committee, introduced the Patent Reform Act of 2007 (S. 1145). An identical measure (H.R. 1908) is sponsored by Rep. Howard L. Berman (D-Calif.), chairman of the House Judiciary Subcommittee on Courts, the Internet & Intellectual Property, and Rep. Lamar Smith of Texas, the ranking Republican on the full committee.

The nation's patent system has not kept pace with the evolution of the modern global economy. Since Congress last updated the law, monumental changes in information technology (IT), materials science, and other areas have resulted in a surge of patent grants. In 2006, the U.S. Patent & Trademark Office (PTO) received 443,652 applications, more than twice the number in 1996. The office granted 183,187 of these, up from 116,875 awarded 10 years earlier. The backlog of pending patents is expected to reach a record 800,000 by year-end, and the average approval time has stretched to 31 months.

In a 2004 analysis, the National Academy of Sciences observed that the U.S. patent system shows "areas of strain, inefficiency, excessive cost on one hand, and inadequate resources on the other hand that need to be addressed now." Congress, however, has been unable to come up with a solution that bridges the gap between key stakeholders with starkly different business dynamics.

Patent-reliant drugmakers, for example, claim that it costs an average of nearly $1 billion and takes 10 to 15 years to develop a new medicine. Earning a return on an investment of that magnitude, they say, requires the strongest and longest patent protection possible, and any weakening of that protection would discourage expensive research into next-generation therapies.

"We recognize that reforms to the current system may be needed to address the concerns of some business sectors, but we believe that those reforms should also maintain the incentives and protections that allow for, and encourage, the development of new medicines to treat a wide range of chronic and life-threatening diseases," says Ken Johnson, senior vice president of the Pharmaceutical Research & Manufacturers of America, the trade group representing the brand-name drug industry.

But the IT sector points out that the existing regime for protecting intellectual property, which was put in place long before the dawn of the computer age, was designed for a bygone era. While only a single patent may be filed for a blockbuster drug, complex electronics can include thousands of patentable technologies and ideas, making technology companies much more vulnerable to costly patent-infringement lawsuits, high-tech business groups argue.

Credit: Courtesy of Sen. Leahy's Office
Reform advocates announced the introduction of their legislation at an April 18 press conference in the U.S. Capitol. Leahy, at podium, was joined by Smith (from left), Rep. Rick Boucher (D-Va.), and Hatch.
Credit: Courtesy of Sen. Leahy's Office
Reform advocates announced the introduction of their legislation at an April 18 press conference in the U.S. Capitol. Leahy, at podium, was joined by Smith (from left), Rep. Rick Boucher (D-Va.), and Hatch.

THE PROPOSED legislation would make some fundamental changes. Among other things, it would harmonize the U.S. system with those of other major patent-granting nations, put limits on the monetary damages patent holders can collect in infringement lawsuits, and give PTO greater resources to evaluate a growing number of complex patent applications. The bill represents "the most significant, complete upgrade of patent law in the last 50 years," Rep. Smith says.

The goal, Rep. Berman explains, is to address "the inability of current patent law to accommodate different business models," rather than to favor one industry over another. "High patent quality is essential to continued innovation," he remarks. "Litigation abuses, especially ones committed by those who thrive on low-quality patents, impede the promotion of the progress of science and the useful arts."

The legislation is strongly supported by the Business Software Alliance (BSA), which represents more than two dozen software and computer giants, including Microsoft, Apple, Dell, Intel, and Cisco Systems. The organization says its members have faced a growing number of patent-infringement lawsuits in recent years. "Enactment of this long-overdue reform will modernize our patent laws, improve patent quality, and mitigate needless litigation," BSA President and Chief Executive Officer Robert W. Holleyman II says. "This bill will ensure that our patent system fosters innovation, remains fair and balanced, and promotes investment in technological progress."

BSA maintains that changes are necessary because it is too easy for patent holders to file lawsuits and collect huge damages when one small piece of a product allegedly infringes a patent. Software programs and computers are made up of thousands of component parts, involving thousands of patents. Any single patent accounts for only a tiny fraction of the intellectual property value of the entire system. Yet when a patent disagreement involves only a small part of a multicomponent product, lawyers typically base their damage claims on the value of the entire product, rather than on the value of the infringing feature or function.

"Plaintiffs are exploiting litigation rules and seeking artificially high damages," Dell patent counsel Anthony Peterman told the House Judiciary panel on intellectual property at a recent hearing. "It's litigation as a business." The fear of "irrational" patent infringement awards compels companies to settle cases that have little or no merit, he said, costing firms millions of dollars that would have otherwise gone into developing new products. "Patent reform legislation is needed, and needed now, to help sustain America's growth and vitality," Peterman testified.

Technology companies say a decision in February by the U.S. District Court in San Diego ordering Microsoft to pay Alcatel-Lucent $1.52 billion for infringing two MP3 technology patents is the latest example of how their industry has been victimized by exorbitant damage awards. If upheld on appeal, the patent judgment would be the largest on record. Thomas W. Burt, Microsoft's deputy general counsel, says the award is "particularly outrageous" because the jury was instructed to calculate damages "not on the value to Microsoft of one of the 10,000 features in Windows, but on the value of the entire computer. We think this is just plain wrong."

The legislation being considered would limit the damages a patent holder can collect when an infringing technology is part of a larger product. Under this so-called apportionment provision, damages would be based on the patent's "specific contribution over the prior art"—that is, the extent to which the patent at issue improves on previous inventions. In another change, awarding triple damages for "willful" patent infringement would be reserved only for cases of the most egregious conduct.

In a bid to limit frivolous claims, the bill would create a "first-to-file" system, in which the patent would go to the first entity or person to file the claim with PTO. Unlike Europe and Japan, the U.S. currently uses a "first-to-invent" system, which relies on the government to sort out and determine who was first to invent a technology. Critics say this has spurred an enormous amount of patent litigation.

OPPOSITION to the proposed changes is coming from biotechnology and pharmaceutical companies, as well as industrial manufacturers, venture capital firms, and some academic institutions. Drugmakers, in particular, worry that the reform effort will weaken a system they rely on to zealously guard their valuable patents against infringement. "Patents are the key force behind biomedical innovation," says James C. Greenwood, president of the Biotechnology Industry Organization (BIO), an international trade association representing 1,100 large and small companies. He notes that the majority of biotech firms are small businesses with no products on the market, and thus their R&D activities are funded mainly through large amounts of private-sector investment.

Hoping for a big payoff down the road, venture capitalists look to the strength of a company's patents as an indicator of just how significant that reward might be. "Without strong and predictable protections for validly patented materials, investors will shy away from investing in U.S. biotech innovation, potentially depriving the world of the next great breakthrough and jeopardizing U.S. leadership in biotechnology," Greenwood asserts.

BIO supports some reforms to modernize intellectual property rights, such as bringing U.S. law in line with the rest of the developed world by adopting the first-to-file standard for the awarding of patents. But the group is troubled by proposals to change how damages against patent infringers are calculated and to create a new procedure for challenging the validity of patents after they are granted.

"Biotechnology innovation has the potential to provide cures and treatments for some of the world's most intractable diseases, such as cancer, Alzheimer's, Parkinson's, and HIV/AIDS, and to address some of the most pressing agricultural and environmental challenges facing our society today," Kathryn L. Biberstein, senior vice president and general counsel for Cambridge, Mass.-based Alkermes, testified before the Senate Judiciary Committee last month.

She said all of this innovation is made possible by the certainty and predictability provided by the U.S. patent system, and she urged the committee "to consider carefully the cautionary language embraced by the Hippocratic oath-first, do no harm."

While reform advocates argue that changes are needed to limit disproportionately high damage awards and out-of-court settlements that impede innovation, BIO and other opponents argue that the proposed remedies would allow competitors to infringe patents without meaningful penalties. The legislation's apportionment provision would change how damages against patent infringers are calculated in a way that would devalue the contribution of many biotechnology patents, according to Greenwood. "The right to fair compensation for infringement and the right to fairly stop infringers from future infringing acts are of paramount importance to the biotechnology industry and must be part of any legislation," he says.

CURRENTLY, a new patent is presumed valid if it goes unchallenged for one year. The legislation would create a new "post-grant review" system, under which a patent is given no presumption of validity and could be broadly challenged through a new administrative procedure at PTO throughout its term. Supporters in the high-tech and financial industries say the goal is to reduce legal costs by avoiding court. But opponents say the proposed process would create an essentially limitless opportunity to challenge patents.

"If a patent can be easily challenged at any time under a low standard of proof, even years after the patentee and the public have come to rely on it, and years after biotech companies have invested hundreds of millions of dollars to bring a patented invention through clinical trials and regulatory approval, patents will have much less value, and investment predicated upon them will inevitably be diminished," Biberstein noted in her testimony. "This, in turn, will likely result in fewer cures for diseases and other breakthrough biotechnology products."

Despite the lingering disagreements, the legislation won approval in May from the intellectual property panel of the House Judiciary Committee, setting the stage for a vote in the full committee later this summer and ultimately in the House. The Senate Judiciary Committee began deliberations on the bill in late June, with Sen. Leahy predicting that the divisive issues "can be resolved in ways that should make everyone happy."

But Sen. Tom Coburn (R-Okla.), a committee member, asserted that the controversial measure would produce "winners and losers," and isn't the answer. An overhaul of the patent system, he cautioned, needs to protect intellectual property without hampering the nation's ability to innovate. "I don't think we've struck that balance," he said.


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