Patent Reform Act Is Considered By U.S. Senate

        Patent reform is expected to reemerge as a major topic of debate in early April 2008, when the Senate debates amendments to S 1145, the Patent Reform Act.  The House of Representatives already passed HR 1908, their version of the Patent Reform Act, on September 7, 2007.   [2]  Both bills include several major changes to various aspects of the patent system, including how patents are awarded and challenged.   [3]  Legislators and interested parties consider the “big four” issues to be “damages, venue, post-grant review and inequitable conduct.”   [4]  Damages have been the central issue, drawing a diverse group of interested parties into the negotiations.

        Currently, the minimum damages that may be awarded is a “reasonable royalty,” which is calculated in one of three ways: “the entire market value of an invention, an established royalty based on marketplace licensing, or on the proportional contribution of a patented component.”   [5]  Judges and juries evaluate the infringed patent’s “specific contribution over prior art” to determine the actual harm of the infringement.   [6]  In many cases, the allegedly infringing product is merely one component of a larger, more complicated product.  In these cases, courts “generally consider the value of the entire product when a small piece of the product infringes a patent.”  [7]   

        The Senate Judiciary Committee’s current proposal on damages calculations will set damages based on “an invention’s specific contribution over prior art.”   [8]  Proponents of the reform bill propose basing damages on “the economic value of an infringing product attributable to the infringer’s use of the elements that were novel and non-obvious when the patent application was submitted.”  [9]   Proponents also want more guidance for juries that are awarding damages, as well as more information for judges on how to gauge reasonable royalties.   [10]  However, the bill’s opponents believe that the use of phrases such as “novel” and “non-obvious” in damage calculations is toxic, and are completely unacceptable in any compromise.  [11]   

        In general, pharmaceutical and other research-dependent industries favor strict protections for patents, while technology companies favor less stringent protections.  Technology companies constantly rush newer versions of products to market in order to generate a profit.  Because they naturally try to replace last year’s MP3 player or plasma television with newer versions, they can derive more profits from a first-movers advantage.  In contrast, pharmaceutical companies rely heavily on patent protections to shield their products from generic manufacturers.  Unlike technology firms, pharmaceutical companies can keep profiting from a successful drug, for the duration of the patents term.  But while the initial lobbying was done by a limited number of patent-reliant industries, it has greatly expanded to include a wide range of industries.

II.     Domestic supporters and opponents
        Patent reform has drawn the attention of a wide range of industries and interest groups, from technology firms and banks to unions and even foreign countries.  The patent system of the United States is internationally recognized as the world’s strongest form of intellectual property protection.  [12]   Both domestic and foreign interest groups have voiced concerns that, by making infringement litigation more difficult to win, the reform bill will effectively encourage patent infringement.   [13]  The bill’s proponents counter that many patent holders simply hoard patents while generating revenue from infringement lawsuits and settlements.  They further claim that the current system has tipped from encouraging innovation to stifling innovation by enabling rampant patent infringement lawsuits.

        The primary supporters of the bill are large technology companies such as Microsoft, Google, Cisco Systems, Adobe Systems, Apple and Amazon.com, who will benefit from more stringent guidelines for infringement damages calculations.   [14]  Advocates of the patent reform bill also include financial services firms such as Citigroup, who favor the bill’s provision that “shields banks from patent suits involving electronic check-clearing services.”   [15]  Despite the size and prominence of these supporters, they are quickly being drowned out by a rising chorus of opposition.

        Opponents include “some pharmaceutical companies, biotechnology companies, universities, small inventors, venture capitalists,” the Professional Inventors Alliance, and the Bush administration.  [16]   These groups worry that the bill will weaken patent protection and, as a result, dilute the incentives to innovate.  Their primary concern rests with the modified guidelines for calculating damages in an infringement case, which will likely reduce the size of damages even if a plaintiff wins.  They also worry that the post-grant review of patents will open the door to perpetual litigation, undercutting the certainty that a patent would typically afford its owner.

        Biomedical and pharmaceutical companies are particularly worried that overall patent rights will be weakened by the reforms, making it harder for patent holders to recover damages.   [17]  These medical companies spend “about $750 million over a decade to generate a single drug,” an investment they believe must be protected with vigorous patent rights.   [18]  In a more specific example, Joe Kiani cites his experience as the CEO of Masimo.   [19]  Kiani believes that Masimo would not have successfully raised the $100 million needed to develop and market their breakthrough product if they could not protect the investment from infringers.  Indeed, Masimo recovered $134 million in a patent infringement case against their dominant rivals, who had promptly infringed Masimo’s patent after the product’s introduction.  [20]   

        In late July 2007, these groups enlisted the help of labor unions, including the “AFL-CIO, the International Federation of Professional and Technical Engineers, and the United Steelworkers.”   The unions voiced concerns that diluted patent protection and lowered damages for infringement would make it easier for large companies to steal patents and outsource the manufacturing process.   The union’s opposition to the bill has drawn the attention of Democratic members of Congress, and represents a potential stumbling block for the legislation.   Similar opposition has arisen from a variety of foreign observers, all of whom express concern at the potential erosion of patent protections.

III.     International opposition and concern
Voices of concern and opposition are also arising from various nations overseas, including China, Germany and Israel, who are wary of the reform’s impact on their own innovation-based industries.  In November 2007, Chinese intellectual property judge Cheng Yongshun asserted that the bill will be “friendlier to the infringers than to the patentees in general, as it will make the patent less reliable, easier to be challenged and cheaper to be infringed.”   Cheng believes that the bill will largely benefit “developing countries with less technological development and relatively fewer patents,” to the detriment of others.   The Patent Office Professional Association, a union of professionals at the United States Patent and Trademark Office, echoed these concerns, arguing that the bill would aid foreign infringers.

        German patent expert Professor Gernot Pehnelt, believes that US patent reform will “undermine German innovation.”   Bernard Frieder argues that US patent reform will have a “profound effect” in Israel, opening patents to perpetual challenges.   This would empower “deep-pocket” patent challengers to sustain litigation and wear down smaller opponents.   Because of these widespread concerns among key trade partners and allies, many groups are urging the House to convene hearings on the international impact of the proposed reforms.

        Danish Parliament member Morten Messerschmidt expressed concerns that many of the proposed patent reforms would weaken the U.S. patent system and erode the U.S.’s “soft power.”   Nearly half of all patents issued by the PTO are granted to foreign inventors, many of whom are citizens of key U.S. allies.  While all of these countries have their own well-developed patent systems, they seek U.S. patents because of the various protections favoring inventors and patent-holders over infringers.  Messerschmidt warns that a weakening of patent protections will make U.S. patents less attractive to foreign inventors, which would economically injure both the U.S. and its allies.

IV.     Analysis
        Opponents of the bill raise a number of valid and troubling concerns, including the possibility that these changes will lead to more infringement and less innovation.  Supporters of the bill are often defendants in patent infringement suits.  Thus, they seek to make patent litigation more difficult to initiate while simultaneously lowering potential damages when courts do find infringement.  However, the potential savings in litigation costs may be dwarfed by lost revenue resulting from more brazen infringement.  This is especially true for the prominent, highly capitalized supporters of the bill, for whom litigation costs seem to be an annoyance.  Opponents point out that these proponents are being short-sighted, and will likely suffer financially as a result of weaker patent protections.

        Furthermore, in cases where litigation costs and damages were non-trivial, reform supporters fail to recognize the economic harm done by the infringement.  A reduction in litigation volume and damages is defensible only when the litigation itself is frivolous.  Proponents assert that they are often the target of infringement lawsuits filed by holding companies, whose derive their revenue entirely from such lawsuits.  In response, many of the corporations in opposition can cite specific examples of large damage awards resulting from cases of blatant infringement.

        The likely increase in patent infringement world-wide is an oft-cited concern of reform opponents.  But while opponents focus on changes to how damages are calculated, they should be more concerned with the perpetual challenges to patents.  As Youngshun asserted, this change will “make the patent less reliable,” introducing uncertainty into what is currently a well-defined property.  Such uncertainty is another reason for investors to shy away from investing in high-risk new technologies, since the value of a technological or commercial breakthrough may be quickly pirated by infringers.  Uncertainty within the business and investment communities increases costs, and should be avoided when possible.
But while many of these reform criticisms are valid, some are not well-founded.  For instance, opponents worry that a shift to the first-to-file system will result in hastily written applications, and lower the quality of applications in general.   But even the current patent system allows for applications that are initially incomplete and low quality, only to be amended with subsequent filings.

V.     Conclusion
        Reforms to the patent system are widely seen as a necessary update, and long overdue.  However, as the bills opponents have repeatedly highlighted, the U.S. patent system is currently the envy of the world.  While the system may still need adjustments and improvements, any changes should be carefully debated to avoid damaging the positive attributes of the system.  Some changes, such as a shift to Europe’s first-to-file system, should be highly scrutinized because of their shortcomings abroad.  Even though many commentators criticize Europe for back-loading patent litigation costs until after a patent issues, some proposed reforms would shift the U.S. in a similar direction.  While patent reforms are necessary and well-intentioned, such concerns suggest that the bill is not yet ready for a final vote.

[1]  William New, US Patent Reform Legislation On Bumpy Road to Completion, Feb. 6, 2008, http://www.ip-watch.org/weblog/index.php?p=912
[2]  Catherine Rampell, House Approves Comprehensive Patent Overhaul, Sept. 8, 2007, http://www.washingtonpost.com/wp-dyn/content/article/2007/09/07/AR2007090702558.html
[3]  Id.
[4]  Dugie Standeford, US Senate Moves Toward Vote On Reform To Patent Regime, Mar. 18, 2008, http://www.ip-watch.org/weblog/index.php?p=969
[5]  Id.
[6]  Id.
[7]  Grant Gross, Group: Patent Reform Bill Compromise Close, Mar. 14, 2008, http://www.washingtonpost.com/wp-dyn/content/article/2008/03/14/AR2008031401611.html
[8]    Standeford, supra note 4.
[9]  Id.
[10]  Id.
[11]  Id.
[12]  Shun-Kuo Su, Beware, Inventors Worldwide, Mar. 18, 2008, http://www.forbes.com/opinions/2008/03/14/patents-taiwan-reform-oped-cx_sks_0318patents.html?partner=whiteglove_google
[13]  Standeford, supra note 4.
[14]  Catherine Rampell, House Approves Comprehensive Patent Overhaul, Sept. 8, 2007, http://www.washingtonpost.com/wp-dyn/content/article/2007/09/07/AR2007090702558.html
[15]  Cigiroup Spent Almost $8.2M Lobbying, Mar. 19, 2008, http://www.forbes.com/feeds/ap/2008/03/19/ap4794038.html
[16]  Anne Broache, White House Opposes Tech-backed Patent Bill, Sept. 7, 2007, http://www.news.com/8301-10784_3-9773753-7.html
[17]  John M. Maraganore, Good for iPods, But Bad for Patients, Mar. 22, 2008, http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2008/03/22/good_for_ipods_but_bad_for_patients/
[18]  Id.
[19]  Joe Kiani, Are Patents Headed For Extinction?, Feb. 25, 2008, http://www.forbes.com/opinions/2008/02/22/patent-laws-kiani-oped-cx_jki_0225patent.html
[20]  Id.
[21]  Gross, supra note 7.
[22]  Grant Gross, Labor Unions Join Patent Reform Fight, Aug. 24, 2007, http://www.infoworld.com/article/07/08/24/Patent-reform-opponents-find-support_1.html
[23]  Gross, supra note 7.
[24]  Kiani, supra note 19.
[25]  Standeford, supra note 4.
[26]  New, supra note 1.
[27]  Standeford, supra note 4.
[28]  Id.
[29]  Id.
[30]  Morten Messerschmidt, Patent Reform Could Hurt Key U.S. Allies, Feb. 29, 2008, http://www.statesmanjournal.com/apps/pbcs.dll/article?AID=/20080229/OPINION/80228053/1049
[31]  Id.
[32]  Steve Farrell, Patent Reform Cheats Inventors!, Feb. 25, 2008, http://mensnewsdaily.com/2008/02/25/patent-reform-cheats-inventors/