For at least the past few years, debate has ensued over the health of the U.S. patent system. Several issues in particular have been frequently cited as indicative of the need to modify the system, including the perceived granting by the U.S. Patent and Trademark Office (PTO) of patents directed to subject matter of dubious patentability and the expense associated with infringement suits based on such “low quality” patents. While the existence of these issues themselves can be debated, many have nonetheless called for patent reform. Congress responded in 2005 and 2006 with comprehensive legislative reform proposals, the Patent Reform Acts of 2005 and 2006, respectively. Neither of these measures was able to garner the support necessary for adoption. In April of this year, the Patent Reform Act of 2007 (the “2007 Act”) was introduced as substantially identical bills in the House and Senate. Since its introduction, the 2007 Act, like its predecessors, has met with significant opposition, and both the House and Senate versions have recently emerged from committee in variously amended forms.
Much of the disagreement over patent reform stems from the disparate manner in which patents are utilized in different industries. Representative of this discrepancy is the contrast between patent utilization in the electronics and software industries (commonly referred to as the “high tech” sector) and in the biotechnology and pharmaceutical industries (“bio/pharma”). The high tech sector tends to produce products for which hundreds to thousands of patents may apply. Consequently, the main concern expressed by high tech has been the ease with which patents are presently obtained and the expense associated with defending against claims of infringement. Alternatively, the bio/pharma industry often produces products that are based on subject matter covered by only one or a few patents, many of which are owned by the respective producers of the associated products.10 As such, this group has expressed a desire to maintain patent strength and has generally opposed reform measures that make patents easier to challenge and more difficult to enforce.
The interest groups discussed above have lobbied vigorously, and often competitively, over the various reform proposals, and to date most proposals have received only limited support. As a result, it is unclear whether any patent reform legislation will pass in 2007, and if so, what measures would be included in such legislation.1111 However, an examination of the evolution of patent reform proposals may offer insight as to what measures may ultimately be adopted. This advisory discusses the more significant reform measures that have been proposed over the past few years, highlighting for each its history and current status.
Proposed Reform Measures
Under existing law, two administrative procedures exist for challenging the validity of issued patents in the PTO, these being ex parte and inter partes reexamination. Ex parte reexamination can be initiated either by a patent holder or by a third party, but in either case only the patent holder continuously interacts with the PTO in assessing the validity of the challenged patent. Alternatively, inter partes reexamination requires the ongoing participation of a third-party challenger, who is then estopped from later asserting in litigation “any [invalidity] grounds which the third-party requester raised or could have raised during the inter partes reexamination proceedings.”12 For both types of reexamination proceedings, challenges can be based only on written prior art,1313 and in neither case does the patent at issue receive a presumption of validity.
For several reasons, reexaminations are considered to be of limited effectiveness for challenging patent validity.1414 First, by limiting the bases for reexaminations to written prior art, other possibly important grounds for patent invalidation are excluded from consideration, such as the inadequacy of a patent’s disclosure or patent barring public uses or prior sales. For inter partes reexamination, the estoppel provision precluding the assertion in litigation of issues that “could have been raised” in the reexamination is considered especially onerous, as it may not allow for later challenging a patent in light of references that were existing but not discovered at the time of the reexamination. In the case of ex parte reexamination, the lack of third-party participation is perceived by some to make the process unduly favorable to the patentee. Additionally, even though estoppel does not apply, once art has been considered by the PTO and a patent reaffirmed in light thereof, the art loses at least some of its practical appeal for invalidating the patent should the issue subsequently arise in a court proceeding. Both procedures are hindered by the sense among many that the procedures overall favor the patentee, such that many challengers would prefer to keep their defensive “powder dry” for ultimate use in court should that become necessary. Overall, the reexamination system has been highly underutilized, with parties interested in testing the validity of a patent relying primarily on litigation, which provides full discovery of the relevant facts, but for which the cost is typically increased and the patent is presumptively valid.15
The 2007 Act introduces a post-grant review system16 that allows the validity of issued patents to be challenged on any grounds for which invalidity could be found. Such challenges may be raised within a “first window” extending 12 months from the grant date of the patent, or within a “second window” of unspecified duration that begins when a party establishes that the continued existence of a claim is likely to cause the party significant economic harm or the party has been notified of an alleged infringement. Once a post-grant review proceeding has been successfully initiated, the petitioner participates fully in the proceeding, in which the patent receives no presumption of validity. Further, estoppel in subsequent litigation extends only to issues that were actually raised in the opposition proceeding. As such, the opposition proceedings provided by the 2007 Act appear to offer an option for challenging patent validity that is more rigorous than the existing reexamination procedures but, in theory, less involved than litigation.
The “second window” has proven to be the most controversial aspect of the proposed opposition system, with the bio/pharma sector arguing that it renders patent rights indefinite and can be used to harass. Over the course of the patent reform effort, the second-window provision has been added, removed, and altered repeatedly in terms of conditions for initiation, duration and estoppel effect. Most recently, the Senate version was changed to require the establishment of a likelihood of significant economic harm and a notification of an alleged infringement in order to invoke the second window, as well as to limit the extent of the second window to 12 months after receipt of notice of infringement and to prohibit a party’s use of both the first and second windows. Alternatively, the House version has removed the second window entirely, and instead enhances the existing inter partes reexamination process by allowing written statements by a patentee in court or in the PTO to be used as evidence, in addition to printed publications, and by removing the “could have been raised” estoppel provision.17
While the existing law simply states that damages should be “adequate to compensate for . . . infringement but in no event less than a reasonable royalty,”18 the 2007 Act clarifies that “a reasonable royalty . . . is applied only to that economic value properly attributable to the patent’s specific contribution over the prior art.” This language from the 2007 Act follows a series of varying proposals that respectively have instructed courts to consider, for example, the “inventive contribution”19 of a patent or the “novel and non-obvious features”20 in apportioning damages.
While the differences between the varying proposals may appear slight, each proposal may produce significantly different results when compared to the others. For example, consider a situation in which a patent is directed to a car incorporating an air bag constructed of a novel material. When assessing a royalty based on the “novel and non-obvious features” of a patent, a court may have to determine, for example, whether the royalty should be based on the reasonable cost of the air bag constructed of the novel material or the excess cost of the novel airbag with respect to a standard airbag (this latter amount almost certainly being less than the prior). However, for the same practical example, the “economic value properly attributable to the contribution over the prior art” standard appears to more definitively direct a court to assess a royalty of the difference in value between the novel air bag and the prior art air bags.
Not surprisingly, high tech has indicated support for the 2007 Act’s damages apportionment rule,21 and bio/pharma has publicly opposed the rule.22 Recently, the Senate version was amended to clarify that the apportionment rule applies only to reasonable royalty calculations and not to “lost profits,” but otherwise retained the apportionment rule as presented in the 2007 Act. Alternatively, the House version was amended to make the “contribution over the prior art” analysis optional, and further to indicate that the analysis should consider any enhancement in the value of a combination of prior art elements that may be offered by a patent.23 Overall, the continuing disagreement over this provision and the recent amendments in the House version indicate that damages apportionment is an unsettled area of reform. Indeed, in his remarks accompanying the most recent amendment to the House version, Rep. Howard Berman stated that the damages language is “[p]robably the most complex issue in the bill . . .”24
Interlocutory Appeals for Claim Construction
Presently, when patent claim language is construed by a district court, this “claim construction” may subsequently be reviewed de novo on appeal.25 Appeals of claim constructions result in a reversal rate of 30 to 50 percent, depending on the statistics being used,26 and because the parties typically argue for opposing and potentially dispositive claim constructions, these reversals can dramatically affect the underlying suit. However, claim construction is not considered a “final decision,” and is therefore not immediately appealable. And, while the Federal Circuit appears to possess the ability to address district court claim construction decisions on an interlocutory basis under 28 U.S.C. § 1292,27 it has consistently declined to do so under most circumstances.28 The 2007 Act would provide for interlocutory appeals of claim construction as a matter of right.
Provisions regarding interlocutory appeals for claim construction were not proposed until relatively recently, with the first proposal coming in 2006. The 2007 Act’s provision has been supported by both high tech and bio/pharma as improving efficiency, but has been opposed by individual/small inventors as adding time and expense to the litigation process.29 Further, Chief Judge Paul R. Michel of the Federal Circuit has opposed the measure, expressing concern that the Federal Circuit would be forced to construe ultimately non-dispositive claim terms and would not have the benefit of a full trial record when construing claims.30 Recently, both the House and Senate versions were amended to allow the Federal Circuit discretion in granting interlocutory appeals for claim constructions.
Under existing law, the standard for finding willful infringement is not codified, and the factors a court might consider in such an analysis are generally left to the discretion of the court. The 2007 Act enunciates specific “permitted grounds for willfulness,” including (1) infringement following specific written notice from the patentee, (2) intentional copying of the patented invention with knowledge that it was patented, or (3) after having been found by a court to have infringed that patent, engaging in conduct not colorably different from the previously infringing conduct. Both the House and Senate versions ultimately include this language, although it is noted that the Senate version removed and then added back the willfulness provisions. Further, both the House and Senate versions allow for the pleading and consideration of the willfulness of infringement only after the court has determined that the patent at issue is valid, enforceable and infringed.
The 2007 Act, with its explicit reference to specific grounds supporting a finding of willfulness, appears to limit the willfulness doctrine and decrease the opportunities to argue that infringement was willful. The treatment of willful infringement under the 2007 Act is substantially the same as its treatment under the prior reform proposals, all of which sought to constrain the scope of willful infringement. Further, this provision of the 2007 Act is supported by both high tech and bio/pharma. As such, it may be likely that any reform legislation that is adopted will include a provision consistent with that shown above.3131 However, it is worth noting that the Federal Circuit recently issued its opinion in In re Seagate Tech. LLC,32 in which the court redefined willfulness as it relates to patent infringement.3333 This holding and its progeny may influence the treatment of willfulness in whatever legislation is ultimately adopted.
Under existing law, when multiple patent applications are filed that claim coincident inventions, priority is given to the party that is first in time to invent the subject matter of the patent application, even though that party may not be the first to file a patent application (a so-called “first-to-invent” system). As such, disputes regarding patent ownership must be settled through interference proceedings, which involve often laborious efforts to prove the dates on which various inventive activities occurred. Further, because proof of inventive activity is rarely public knowledge, parties are often unable to determine the validity of their claim to ownership outside of an interference, adding an element of uncertainty.
The 2007 Act proposes a so-called “first-to-file” system, in which patent priority is given to those inventors that are the first in time to file a patent application with the PTO. This provision has gained wide support, including from both the high tech and bio/pharma sectors, for increasing certainty regarding patent ownership and resolving one of the major inconsistencies between U.S. law and the intellectual property laws of most other jurisdictions, where first-to-file systems are prevalent. First-to-file language has been present in all of the prior versions of patent reform legislation, in much the same form as in the 2007 Act, and remains in both the House and Senate bills.
The general support for first-to-file notwithstanding, small inventors have expressed concern that a first-to-file system will unfairly benefit wealthy inventors having the means to file patent applications quickly and indiscriminately. Also, the PTO and the current executive branch have opposed the conversion to a first-to-file system, indicating that “U.S. conversion to first-to-file is an overriding consideration in ongoing substantive patent law harmonization discussions with foreign patent offices . . . [and] that any U.S. commitment to convert to first-to-file should be contingent on significant progress and international agreement in those harmonization discussions. In particular, the United States seeks a standardized one-year international grace period34 to protect American inventors who might disclose their invention prior to filing for a patent.”35 Along these lines, the current House bill indicates that its first-to-file provision only becomes effective after a presidential certification to Congress that Europe and Japan have adopted grace periods similar to those available in the United States.
Under 28 U.S.C. § 1 1400(b), venue in a patent case is proper “where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” This provision, however, must be read in light of the later-enacted 28 U.S.C. § 131391, which states that “a defendant that is a corporation shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction at the time the action is commenced.” The Federal Circuit has held that § 131391 eviscerates the limitations of § 1400(b) and makes venue for patent infringement as broad as personal jurisdiction under the Constitution.36 The 2007 Act would limit the choice of venue for bringing patent-related suits to (1) the judicial district where either party resides, or (2) the judicial district where the defendant has committed acts of infringement and has a regular and established place of business, essentially reinstating the limitations of § 1400(b).37
Both the House and Senate versions have been recently amended to limit venue in patent cases to (1) where the defendant has a principal place of business; (2) where the defendant has committed acts of infringement and has a physical facility; and, (3) in limited circumstances, the plaintiff’s residence. The plaintiff’s residence may be a proper venue, for example, where the plaintiff is an institution of higher education, a “micro entity,” in places where the plaintiff operates a research, development or manufacturing facility,38 or where the plaintiff is a non-profit licensing organization.39
Provisions that limit the possible choices of venue and/or encourage the use of venues associated with the defendant in a patent case are supported by high tech, while bio/pharma has taken no position on the measure. Various other groups, including those representing individual/small inventors, have opposed such measures as favoring wealthy infringers over patent holders. However, venue provisions have been proposed in almost all prior versions of patent reform measures, and while the language of these provisions has varied, there does appear to be a trend toward limiting the ability of a plaintiff to choose a forum independent of the physical location of a defendant.
Inequitable Conduct and Pre-filing Patent Searches
The treatment of inequitable conduct in prior reform proposals has ranged from silence to propositions of significantly higher standards for making such a finding. This vacillation is reflected in the 2007 Act and its amendments. The 2007 Act, as proposed, did not address inequitable conduct, leaving the prevailing standards intact. However, the recently amended House and Senate versions have reintroduced inequitable conduct measures, including the codification of a standard of inequitable conduct. Both versions also impose a requirement to plead inequitable conduct with particularity and prohibit inferring an “intent to deceive” on the part of a patent applicant solely from a showing of the materiality of information that the applicant failed to disclose to the PTO. The House version further indicates that a patent may be found unenforceable due to inequitable conduct only after proving that the inequitable conduct occurred and that, in the absence of any deception on the part of the patent applicant, the PTO would have made a prima facie finding of unpatentability.40
Both the House and Senate versions appear to narrow the doctrine of inequitable conduct. Coupled with the apparent narrowing of inequitable conduct, both the House and Senate bills introduce a requirement for patent applicants to “submit a search report and other information and analysis relevant to patentability.” This requirement was not presented in any earlier patent reform proposal.
Third-Party Submission of Art
Presently, there are two scenarios in which a third party can send prior art to the PTO. The first is in the context of a “protest” under 37 C.F.R. 1.291 or a “public use proceeding” under 37 C.F.R. 1.292, in which a party obtaining knowledge of a pending application may cite any facts, including prior art, that would make the grant of a patent improper. Submissions under 37 C.F.R. 1.291 (often patents and printed publications) or 1.292 (typically in the form of affidavits documenting sales or public uses) must be filed before the earlier of the publication of the application or the notice of allowance, and because most patent applications are confidential until the time of publication, Rule 291/292 submissions are of limited use. The other alternative for a third party to cite prior art is under 37 C.F.R. 1.99, which permits third party submission of patents or printed publications (without any accompanying statements of relevance) to the PTO within two months of the publication of a patent application or before the mailing of a notice of allowance, whichever is earlier. The third party is also required to serve the art on the patent applicant. However, under Rule 99, the PTO then has the discretion (but is not required) to consider the submitted art, and if the art is not considered, it does not become part of the prosecution history. 4141 In any event, even if the art is considered by the PTO, the inability on the part of third parties to file statements regarding the pertinence of the submitted art significantly reduces the utility of this device.
The 2007 Act states that any person may submit for consideration and inclusion in the record of a patent application any patent, published patent application, or other publication of potential relevance to the examination of the application. Such submission should be made in writing and before the earlier of the date the notice of allowance is mailed or the later of six months after publication or the date of first rejection under 35 U.S.C. § 13132. Further, the 2007 Act requires that each submission “set forth a concise description of the asserted relevance of each submitted document.” As such, the 2007 Act provides for third party submission of prior art in the critical time between the publication of a patent application and the grant of a patent on that application, and requires PTO consideration of both the cited art and a statement by the submitting party as to its relevance. This language (or language substantially similar) has been in every prior version of patent reform legislation. Further, this language has been retained in both the House and Senate versions.
Various groups have characterized the requirement under 35 U.S.C. § 11112, first paragraph, that a patentee “shall set forth the best mode contemplated by the inventor of carrying out his invention,” as a subjective element that unnecessarily increases the cost of litigation, and many have called for an elimination of the “best mode” requirement.42 The Patent Reform Act of 2005 did remove the “best mode” requirement, but this requirement was reinstated in the Patent Reform Act of 2006 and remains in the 2007 Act. The House version was recently amended to eliminate as a defense to infringement a failure to disclose the best mode of practicing an invention, but still retained the affirmative requirement that such best mode be disclosed in the application.
The Patent Reform Act of 2006 had proposed a system in which the cost of attorneys’ fees in a patent suit would be borne by the losing party unless that party’s position was “substantially justified.” This highly controversial proposal did not appear in any measure presented prior to the Patent Reform Act of 2006, and no such provision appears in any version of the 2007 Act.
Prior User Defense to Infringement
Presently, under 35 U.S.C. § 273, it is a defense to infringement to have, in good faith, reduced claimed subject matter to practice at least one year before the effective filing date of the patent at issue and to have commercially used the subject matter before the effective filing date of such patent. The statute specifies that the above defense may only be asserted for a method,4343 and defines the term “method” as “a method of doing or conducting business.”4444
The House version would expand the prior user defense by allowing for its use with respect to all types of claims and subject matter. The House bill would also alter the requirement that the subject matter be reduced to practice at least one year before filing, instead making the defense available for those who had reduced the subject matter to practice at anytime before the effective filing date. On the other hand, the Senate version makes no modifications to the existing prior user defense.
Fee Retention at the PTO
The Senate bill on patent reform indicates that all fees collected by the PTO would be retained by the PTO for use in funding PTO activities. This is in contrast to the existing practice, in which fees collected by the PTO are often utilized by the government to subsidize activities outside the PTO and the patent field. The House version is silent on this issue.
The House and Senate versions of the 2007 Act continue to evolve in response to pressure from various interest groups. However, several provisions appear to be persistent through the various iterations of the 2007 Act, including the expansion of the ability to challenge the validity of issued patents, the limitation of damages awards, the encouragement of interlocutory appeals for claim construction, the restriction of venue for patent suits, the narrowing of willful infringement scenarios and the movement toward a first-to-file system. Still, the final contours of any patent reform measure that may ultimately be adopted into law are difficult to predict, and, apparently, still subject to influence.