Congress Divided On Patent Reform

AFTER SEVERAL YEARS of stalemate, a Senate panel has endorsed a compromise plan to overhaul the nation's patent system that appears to have support across industry sectors. But key House lawmakers are signaling that the battle over the contentious issue is far from over, saying they will not simply "rubber-stamp" the Senate measure.

At an April 30 hearing on the Patent Reform Act of 2009, House Judiciary Committee Chairman John Conyers Jr. (D-Mich.) said he did not think the bill (S. 515, approved by the Senate Judiciary Committee last month) was necessarily the best approach to patent reform, particularly on the thorny matter of how to calculate damage awards in successful patent infringement lawsuits.

"I shouldn't have to tell you that we will not blindly accept or reject their work, but we will work to ensure that we arrive at a damages provision that is right for everyone," Conyers stated in his opening remarks. "This body is no more a rubber stamp for the Senate than the Senate is a rubber stamp for the House."

Rep. Lamar Smith (R-Texas), the committee's ranking minority member, also expressed concern about how the Senate bill would reform patent infringement litigation, as well as provisions in the bill that would create a new system for challenging the validity of patents after they are granted.

"Frankly, our bill (H.R. 1260) promotes these goals better than the Senate version," Smith said. "It's not going to be helpful if the Senate takes a 'take it or leave it attitude' " and insists that the House accept its version of the bill.

In the last Congress, the House passed a patent reform bill (H.R. 1908) in September 2007. But a companion measure—S.1145—did not come up for a vote on the Senate floor before the 110th Congress ended last year (C&EN, Nov. 24, 2008, page 33).

The push to overhaul U.S. patent law for the first time in more than a half century is being driven by technology giants such as Intel and Cisco Systems, which argue that changes are needed to cut down on frivolous patent infringement lawsuits and curtail huge damage awards.

"The threat of a jackpot award is real," said Mark Chandler, senior vice president and general counsel for Cisco, in his testimony at the House Judiciary Committee hearing last month. "Reform is urgently needed because the very real costs that unjustified lawsuits impose upon companies such as Cisco are hurting the economy," he declared.

Chandler, who testified on behalf of a coalition of high-tech companies, said the total amount of patent litigation costs paid by the technology sector during the past four years has doubled to about $4.6 billion. In the past seven years, he noted, damages greater than $100 million were awarded in 15 cases, and at least five of those judgments topped $500 million. Until 1990, Chandler added, only one patent damage award exceeded $100 million.

Under the current system, damage awards are based on the market value of the entire product that contains an infringing component, rather than on the value of the infringing component alone.

That's a problem for computer and electronics firms that make devices often containing hundreds if not thousands of linked patented components. "Patent litigation can present disproportionately high damage awards against technology companies for the use of seemingly insignificant portions of complex products," says Heidi L. Keefe, intellectual property partner at the Palo Alto, Calif., office of the law firm White & Case.

"The most common analogy is paying royalties based on the overall price of a car for the use of nothing more than an improved windshield wiper," Keefe remarks. "That cannot be the measure."

CONSEQUENTLY, technology firms are asking Congress to adopt an apportionment scheme in which damages are based only on the fraction of a product's worth that an infringed patent represents. They argue that patent infringement damages should be proportionate to the value of the component in question, not the value of the entire product.

Such an approach was included in both the House and Senate patent reform legislation when they were introduced in March. However, most members of the biotechnology, pharmaceutical, academic, and small-business communities strongly object to apportionment.

"This approach makes infringement cheaper because it would assess royalties on something less than the full invention, thus devaluing patents, encouraging infringement and, more importantly, ultimately discouraging investment in the underlying technology," the Biotechnology Industry Organization (BIO) stated in testimony submitted to the House Judiciary Committee.

The chemical enterprise, particularly the pharmaceutical industry, relies heavily on single patents, or a few related patents on a particular invention. "By lowering the penalties for those found by a court to have infringed another's patent, the bill would reduce the value of the patents that are the lifeblood of America's innovative business sectors, which depend on intellectual property protection," says Ken Johnson, senior vice president of the Pharmaceutical Research & Manufacturers of America, a trade group representing brand-name drugmakers.

IN AN ATTEMPT to bridge differences, Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.) announced at the end of March that he had struck a deal with then-ranking Republican Arlen Specter of Pennsylvania and California Democrat Dianne Feinstein on how to resolve the disagreement over damage awards as well as several other contentious provisions in the legislation.

The three senators agreed to rewrite the damages section of S. 515 so that judges in infringement cases would act as "gatekeepers" and provide juries with guidance on how to properly assess damage awards. Among other things, the judge would help determine whether or not the infringed patent is essential to the product.

"Patent reform is urgently needed," Leahy remarked on April 2, shortly before the Judiciary panel voted 15-4 to approve the revised measure and send it to the Senate floor (C&EN, April 13, page 9). Leahy pointed out that the bill is a product of months of "arduous negotiation" and is a "delicate compromise."

"Not one of the sides got 100% of what they wanted, but we are about 90% there, and it's about as good as can be done to reconcile the different business models," Feinstein said. "I believe I have gone as far as I can to resolve these differences," she added.

The compromise legislation was endorsed by BIO, which said the amended legislation "breaks the logjam on the major issues that have held up patent reform for the past several years." A coalition representing a diverse group of global corporations, including Dow Chemical, DuPont, Eli Lilly & Co., and Pfizer, also expressed support, calling the measure "an important and meaningful step toward needed reform." And Microsoft Deputy General Counsel Horacio E. Gutierrez said the Senate committee's action "reflects real progress toward a consensus solution that does not favor any particular industry to the detriment of others."

However, at the House Judiciary Committee hearing, Cisco's Chandler urged lawmakers to back the apportionment method and reject the gatekeeper concept in the Senate compromise. Rather than providing juries with "vague and uncertain" guidelines for calculating infringement damages, Chandler said the reforms contained in H.R. 1260 "would ensure that patent litigation neither overcompensates nor undercompensates plaintiffs, and the governing rules discourage, rather than encourage, the filing of abusive lawsuits."

Both Conyers and Smith also raised doubts about the approach to damages taken by the Senate and spoke in favor of the House legislation, which retains the original language limiting damages. "The Senate's gatekeeper treatment needs more review," Smith said. "I'm concerned that it may result in confusion for jurors when called upon to apportion value fairly when calculating damages."

Stan Fendley, director of legislative and regulatory policy for Corning, says manufacturing companies are troubled by the position adhered to by the leaders of the House panel. "It's disappointing that a number of members of the House Judiciary Committee explicitly rejected a carefully crafted agreement that can pass the Senate. We hope the committee will craft a consensus bill similar to the compromise that was reached in the Senate," he remarks.

Marc A. McKithen, chair of the ACS Division of Chemistry & the Law, says the society is hopeful that lawmakers can reach an agreement and update U.S. patent law to reflect scientific advances and changes in the global economic climate. Although ACS prefers the existing rules for calculating damage awards in infringement suits, he says, the gatekeeper concept is an acceptable compromise.

"I think the chemical and pharmaceutical industries in general would be willing to make that compromise in order to get the legislation to move forward because there are other things in the bill they want, such as changing from a first-to-invent to a first-to-file system," says McKithen, who is an associate in the intellectual property practice group of New York City-based law firm Milbank, Tweed, Hadley & McCloy.

As McKithen points out, the Patent Reform Act would, for the first time, institute a first-to-file rule for granting patents, bringing the U.S. into line with the rest of the world. Currently, the U.S. Patent & Trademark Office grants the patent to the first person to have developed the invention claimed in the patent, even if that person wasn't the first to file an application. When there is a dispute over who was the first to invent, PTO conducts an "interference" proceeding, which is lengthy, costly, and usually favors the first inventor to file.

"Advocates of the first-to-file system believe that such a standard in the U.S. would benefit science and lead to more comprehensively documented patent applications," according to an ACS policy statement.

First-to-file changes under the House bill would become effective only if Europe and Japan adopt at least a one-year grace period for filing a patent application after an inventor discloses the claimed invention to the public. Europe and Japan would not be required to reciprocate with a grace period under the Senate version of the provision.

"With everything else going on in the political landscape, I'm surprised this is still being fought as vigorously as it is," McKithen says. "I think there is still a way to go before legislation gets enacted."