Patent Reform Legislation — Is the Third Time the Charm?

On March 3, 2009, the chairmen of the House and Senate Judiciary committees introduced companion bills that would reform the patent laws of the United States. H.R. 1260 was introduced in the House of Representatives by Chairman John Conyers, Jr. (D-Mich.), along with four cosponsors. Chairman Patrick Leahy (D-Vt.) and six cosponsors introduced S. 515 in the Senate. Chairmen Leahy and Conyers, Senator Orrin Hatch (R-Utah), and Representative Lamar Smith (R-Texas) also held a press conference to emphasize the importance of passing this legislation. These bills are part of the continuing effort to address perceived problems with the patent laws.

The legislation reflects negotiations, compromises, and drafting work done in earlier patent reform efforts. While the bills would affect many aspects of the patent laws, the most significant proposed changes — and the changes that are most likely to provoke controversy — concern reform of patent infringement litigation, post-grant review, and changing to a “first-to-file” system. These proposed changes are discussed in greater detail below.

Also notable are the patent reform proposals that are not addressed in these bills but were included in past proposals. Proposed changes in the law regarding inequitable conduct, to require “applicant quality submissions,” and to grant the United States Patent & Trademark Office (USPTO) substantive rule-making authority are not included in these bills.

Litigation Reform
Much of the impetus for patent reform comes from a perception of uncontrolled damage awards and the rise of so-called “patent trolls” seeking to enforce patents in jurisdictions with plaintiff-friendly reputations. The current reform effort attempts to give defendants additional tools to combat infringement allegations and limit damage awards.

Damages
Previous efforts to enact patent reform legislation have demonstrated that changes to the patent damages provisions are very controversial. This bill would impose stricter rules governing the award of damages based upon a “reasonable royalty.” The bill identifies three specific methods to be used in the calculation of reasonable royalty damages, and mandates that the trial court choose the method applicable to the case. Those three methods are:

“Entire market value,” which permits a royalty based on the entire value of an infringing product or process only when the patented invention is the predominant basis for demand
“Marketplace licensing,” which requires that royalty damages be based upon existing licenses for the claimed invention or noninfringing substitutes
“Value calculation,” which requires the court to “ensure that the reasonable royalty is applied only to the portion of the economic value … properly attributed to the claimed invention’s specific contribution over the prior art”

The proposal also would permit courts to consider “other relevant factors,” where appropriate. Furthermore, the bill requires the USPTO to perform a study of damages awarded since 1990 to determine if there is any pattern of “excessive or inequitable awards.” Any such trends would presumably be addressed by future legislation.

Venue
The bills attempt to limit “forum shopping” in infringement suits by creating stricter venue provisions. Plaintiffs would be prohibited from “manufacturing” venue by assigning patents to other entities or incorporating new entities in a state. In general, the bills would require infringement suits to be brought only in states where the defendant is incorporated, has a principal place of business, or has an “established physical facility” that constitutes a “substantial portion” of its operations. The bills would permit higher education institutions, their nonprofit licensing organizations, and certain individual inventors to bring suits in their home states.

Interlocutory Appeals of Claim Construction Decisions
The bills would allow parties to seek an immediate appeal of a trial court’s claim construction decision. The right of appeal would not be automatic, as the trial court would have discretion whether to approve the application for appeal. The Court of Appeals for the Federal Circuit, however, would not have the discretion to decline to hear any interlocutory appeal authorized by the district court.

Willful Infringement
The Federal Circuit’s January 2007 decision in In re Seagate Technology, LLC, 497 F.3d 1360 (Fed. Cir. 2007), substantially changed the standards for finding willful infringement. The bills essentially codify the Seagate decision. They create stricter rules for proving willful infringement by specifically enumerating elements for the claim. Under the bills, willful infringement may only be found if the patent owner presents clear and convincing evidence that the infringer acted with “objective recklessness” and:

The patentee gave the infringer written notice of the alleged acts of infringement in a manner sufficient to give the infringer an “objectively reasonable apprehension of suit,” including identifying each claim and accused product at issue and the relationship between them
“The infringer intentionally copied the patented invention with knowledge that it was patented”
The infringer was previously found to have infringed the patent and is engaging in conduct that is “not colorably different” from that prior act

The bills also codify a “good faith” defense, precluding a finding of willful infringement where the infringer had a good faith belief that the patent was invalid, unenforceable, or not infringed.

Post-Grant Review and Other USPTO Procedures
Because district court litigation is expensive, reformers are attempting to make post-grant procedures in the USPTO more readily available and cost-effective. The current proposal creates a new procedure for post-grant review of patents. Furthermore, the existing ex parte and inter partes reexamination procedures are modified to try to make them more attractive and effective ways to challenge patent validity.

Cancellation Proceedings
The bills create a new way to challenge patent validity. Under the proposals, any party would be able to challenge a patent’s validity within 12 months of issuance for prior art or failure to comply with § 112 (other than the best mode requirement). The USPTO is authorized to create discovery procedures for these proceedings. Any such procedures would necessarily be abbreviated, as the bill requires a decision on the cancellation petition in 12 months (where good cause is shown, a six-month extension is possible). If the USPTO affirms the validity of the patent’s claims, the party that sought cancellation is estopped from seeking reexamination or asserting invalidity as a defense in subsequent litigation.

Reexamination Proceedings
Reexamination is strengthened in several ways. Ex parte reexamination requests under § 302 can be based on either prior art or prior public use or sale, as can requests for inter partes reexamination. Inter partes reexaminations would be changed so that they would be conducted before an administrative patent judge at the Patent Trial and Appeal Board. At the end of an inter partes reexamination, the parties can request an oral hearing. The scope of the estoppel arising from an inter partes reexamination is narrowed.

The bill also makes changes that protect patentees from repeated patent challenges. In particular, once a district court enters judgment in an infringement case, the losing party cannot request inter partes reexamination.

Preissuance Citation of Prior Art
During pendency of a patent application, third parties would be allowed to submit prior art patents, printed publications, and an explanation of their relevance to examiners for their consideration. Such submissions could be made prior to the earlier of: (a) the earlier of notice of allowance or (b) the later of (i) six months of publication of the patent application or (ii) the first office action.

First-to-File
The bill also has the potential to profoundly change the U.S. patent system by converting to a first-to-file system. In the proposed system, the patent would be awarded to the earliest-filed application for a claimed invention. Interference proceedings would be replaced with a derivation proceeding to determine whether the applicant of an earlier-filed application was not the proper applicant for the claimed invention. The bills provide a one-year grace period for inventors to file an application after they publicly disclose the subject matter of the claimed invention. This grace period would not apply to public disclosures made by persons other than the inventor.

This change, however, is not effective immediately upon the legislation being signed into law. Under the House version of the bill, it would only become effective when Europe and Japan have adopted at least a one-year grace period for filing a patent application after an inventor discloses the claimed invention to the public. At this time, it is unclear when Japan and Europe would adopt grace-period provisions broad enough to trigger the change to a first-to-file system.

Legislative Outlook
The legislative outlook for the bills is unclear. The proposals were introduced by Senator Leahy and Representative Conyers, the chairmen of the Senate and House Judiciary committees. The bills’ principal Republican cosponsors are Senator Hatch (former chairman of the Senate Judiciary Committee) and Representative Smith (ranking Republican on the House Judiciary Committee). The presence of powerful sponsors suggests that the bills may move quickly through the legislative process. The new legislation is close in content to the bill reported out of the Senate Judiciary Committee during the last session of Congress, suggesting that the Senate version of the new bill may move forward first. The House version of the proposal will be considered by the full House Judiciary Committee with the elimination of the House IP Committee. Informed sources have suggested that the committees may hold hearings, and possibly a mark-up, within a month. However, some legislators, including Senator Specter (R-Pa.) and Representative Tauscher (D-Calif.) have expressed concern about whether a quick legislative process would be appropriate and have asked the chairmen to adopt a slower schedule. Thus, it is too early to say whether this legislation will be adopted quickly or will become the subject of longer-term negotiations, as has been the case with the last two Congresses.