Introduction to the U.S. Patent Reform Act of 2009

By Alex Y. Nie, Foley & Lardner LLP

This article is part of our Summer 2009 edition of Legal News: China Quarterly Newsletter, Eye on China.

A Senate bill, “Patent Reform Act of 2009,” Leahy S.515 (Bill), and a corresponding House bill, Conyers, H.R. 1260, were introduced in the U.S. Congress on March 3, 2009. Many of the provisions of the bills are the same or similar, with both bills calling for major reforms of the U.S. patent system. The Senate Judiciary Committee passed the Bill, which includes amendments, on April 2, 2009 and sent it to the floor. This article explores the proposed changes to the U.S. patent system based on the Bill as amended and passed by the Senate Judiciary Committee.

The Bill includes the following proposed changes:

Damages
Possibly the most contentious portion of the Bill, the damages provision is Congress’ attempt to reduce damages and create more consistency in calculating damages, while promoting innovation. For example, the information technology industry has allegedly been plagued by a high volume of infringement lawsuits filed by “patent trolls,” or non-practicing entities. Start-ups, universities, and biotechnology and pharmaceutical companies, on the other hand, need exclusionary patent rights to fund research and development.

Under the Bill as originally introduced, damages were based on the invention’s “specific contribution over the prior art.” Additionally, the established royalty rate could be determined based on the cost of licensing a similar, non-infringing substitute in the relevant market. Both of these two provisions, however, were removed and replaced by a damage-determination procedure in the amended Bill. Under the amended Bill, the court must identify methodologies and factors relevant to the damages determination. The court and jury are then bound by these methodologies and factors to calculate damages.

First-to-File
The move to a first-to-file system would synchronize the U.S. patent system with the rest of the world. Under the Bill, the one-year grace period will no longer be available for most cases. Moreover, “swearing behind” Section 102(e) prior art also will be eliminated.

However, compared to the patent systems in Europe or Asia, the Bill sets forth a stricter bar against the second-to-file. In Europe or Asia, the second-to-file party may obtain a patent if the claimed subject matter is different from what is disclosed by the first-to-file party. Under the Bill, the second-to-file party cannot obtain a patent unless the claimed subject matter is non-obvious versus what is disclosed by the first-to-file party.

Under current U.S. patent law, claim construction by the district court is reviewed de novo by the appellate court. This process often results in a high claim construction reversal rate. In order to address this concern, the Bill permits district courts to authorize interlocutory claim construction appeals. However, the appeal must be from a final claim construction order or decree. Also, the district court must find “that there is sufficient evidentiary record and an immediate appeal from the order (A) may materially advance the ultimate termination of the litigation, or (B) will likely control the outcome of the case.” (35 U.S.C. 271).

This provision would necessarily result in an increased backlog in the Federal Circuit. It has long been argued that claim construction is not always a purely legal exercise, so a de novo review may not be appropriate. Therefore, this provision may not be the right answer to existing problems. A better alternative would be to give district court’s decision deference under Federal Rules of Civil Procedure.

Foreign Public Knowledge, Trade Secret, and Prior User Right
Under current U.S. patent law, foreign public knowledge, if not published or patented, does not constitute prior art. The Bill makes inventions that are in public use, on sale, or otherwise available to the public unpatentable but imposes no restriction as to where the public knowledge exists.

Alternatively, this provision would effectively overrule the case law that “bars patenting commercially exploited trade secrets one year from first commercial use” because “[s]uch a secret use is neither a ‘public use’ nor is the secret invention ‘otherwise available to the public’ within the meaning of the proposed statutory wording.” (“Patenting Secretly Commercialized Technology: 111th Congress Patent Reform Bills,” Foley Partner Harold C. Wegner, May 1, 2009).

In some other industrial countries, patent owners may not obtain damages from persons who started practicing the patented invention prior to the filing of the application. In the United States, this “prior user right” only applies to business method patents. The Bill requires the director of the USPTO to conduct a search regarding prior user rights and to report findings and recommendations to the congressional committee. This is a step back from the patent reform legislation introduced in 2007, which attempted to establish the prior user right against all patents. The combination of the prior user right and the ability to obtain patents on commercially exploited trade secrets would give certain inventors much discretion over when and whether to file a patent application, therefore delaying knowledge-sharing and thwarting innovation.

Post-Grant Reexamination
The original Leahy Bill expanded the post-grant ground of invalidation to include public use or sale. This provisions, however, was eliminated in the amendment. Furthermore, inter partes reexamination would be handled by administrative patent judges. Finally, invalidity grounds that could have been raised during the reexamination would no longer create estoppel for subsequent proceedings.

Other Major Changes
The Bill also introduces other major changes to the current U.S. patent law. A derivation proceeding would substitute for patent interference. Federal circuit judges would no longer have to reside within the greater Washington, D.C. area. A setback is the elimination of a restriction on venue manipulation included in the original Bill.