Last month, the House and Senate Judiciary committees approved their respective versions of legislation intended to overhaul the U.S. patent system. The bi-partisan Patent Reform Act, sponsored by Senators Leahy (D-VT) and Hatch (R-UT) in the Senate and Representatives Berman (D-CA) and Smith (R-TX) in the House, is aimed at improving patent quality, expediting the patent-approval process, increasing judicial certainty and reducing the volume of patent litigation. The measure is in response to criticisms of the U.S. patent system concerning supposed poor patent quality, long wait times for approval, the mounting cost of patent litigation (the average enforcement case now costs $1.2 million), and the nearly-200% increase in the number of patent suits over the last 15 years.

Action by the House and Senate Judiciary committees on July 18 and 19, respectively, came after two years of prolonged debate on various issues that have divided the pharmaceutical and biotech companies on the one hand and the software, computer and "high tech" companies on the other. The Coalition for Patent Fairness, primarily representing tech companies, and the Coalition for 21st Century Patent Reform, primarily representing pharmaceutical companies, both agree on the need to expedite the patent approval process, lower the cost of patent enforcement and resolve other procedural issues, but substantially differ on mandatory apportionment for damages and the post-grant opposition procedures. The technology industry favors the legislation as approved by the House and Senate Judiciary committees while the pharmaceutical industry is staunchly opposed. This opposition could impede swift floor action on the legislation in both chambers.

Major Proposals of the Patent Reform Act of 2007

The Patent Reform Act of 2007 contains a number of provisions that would substantially alter the current patent practice. The following is a partial list of such changes:

Inventor's Oath. The proposed Act would allow the submission of a substitute statement in lieu of the now-required inventor's oath. The substitute statement may be offered by an employer or assignee, meaning that a patent application may be filed in the name of an assignee. This would allow employers and assignees to avoid the delays caused by obtaining signatures from each inventor.

Converting to a First-to-File System. The Act would bring the United States into harmony with international practice by converting from a first-to-invent system to a first-inventor-to-file system. This means that the inventor (or assignee) who files the application on a claimed subject matter first receives the patent without regard to whether a competitor or another inventor actually conceived of the invention first. While there are concerns that this system could cause a race to the Patent Office with incomplete and sketchy applications, this provision would eliminate the necessity for the PTO to conduct 'interference' proceedings and would provide greater certainty. The existing one-year 'grace period' provision for inventors who have yet to file will remain in force.

Third-Party Submissions. The Act would expand the ability of third parties to submit pertinent information to the PTO regarding pending patent applications. Submission of materials would be permitted within the later date of either (1) the date the PTO issues a notice of allowance to the patent applicant; or (2) either six months after the date of pre-grant publication of the application, or the date of the rejection of any claim by the PTO examiner. Such a submission must include "a concise description of the asserted relevance of each submitted document."

Prior User Rights. The prior user defense, currently available only to accused infringers of patents involving a "method of doing or conducting business," would be universal. To take advantage of the defense, an accused infringer must have commercially used (or made substantial preparations to commercially use) the subject matter prior to the patent's effective filing date. It is hoped that this will resolve current uncertainty over whether or not to patent trade secrets.

Tax Strategies. All patents on tax strategies would be prohibited by the Act. It is unclear how this will affect any of the approximately one hundred current or pending tax strategy patents.

Venue and Jurisdiction. More restrictive rules would be imposed to avoid "forum shopping." The proposed Act limits jurisdiction in patent cases to either the judicial district where either party has its principal place of business or the district where the defendant has infringed the patent in question "and has a regular and established place of business." Declaratory judgment actions brought by an alleged infringer are exempt from these restrictions and remain subject to the jurisdictional pre-requisites of the Declaratory Judgment Act.

Pending Applications. All applications would now be published. The proposed Act would remove all exceptions to the current 18-month date for publication of pending patents.

Willful Infringement. The proposed Act would limit willful infringement damages to situations where there was a showing of clear and convincing evidence of deliberate and intentional infringement. The current standard of willful failure to exercise due care in avoiding patent infringement appears to be too low to some.

Inequitable Conduct. The Act would drastically limit the inequitable conduct defense. It could only be raised in situations where there was a prima facie showing that there was deliberate and intentional misleading of the PTO and that the withholding of the material information caused the PTO to issue a patent it would not otherwise have (i.e. intent and materiality are now separate elements that must both be proven). The PTO would have to establish clear standards in regards to the type of information it wants an applicant to submit and would also set standards for attorney misconduct in withholding material information. Further, judges would have more discretion in punishing inequitable conduct.

Best Mode. The Act would remove as a defense to patent infringement an applicant's failure to fulfill the best mode requirement. However, applicants would still be required to submit the best mode when applying for a patent.

Post-Grant Review. The proposed Act would create a very limited procedure for third parties to challenge an issued patent.

Damages Apportionment. Royalties from an infringing product would be apportioned based on percentages attributed to the patented use of the invention. Judges will be required to identify the factors they considered in calculating damages and give more consideration to "combination patents" that combine elements of prior art in new, non-obvious invention (i.e. the Post-It note). The trial judge would have broad discretion in choosing how to award damages and may consider apportionment, entire fair-market value, or the 15 Georgia-Pacific factors in determining royalties.

Current Status and Outlook

Despite changes made by the House and Senate Judiciary committee that would scale-back the most controversial aspects of the Patent Reform Act – notably, those provisions for post-grant review and damages apportionment – opposition by the pharmaceutical and biotechnology industries may frustrate efforts to bring the legislation to the floor of either chamber. On August 3, a bi-partisan group of sixty-five House members wrote House floor leaders opposing efforts to bring the patent reform bill to the floor. They expressed "serious concerns" about the damages apportionment and new post-grant review, and PTO rulemaking authority provisions. Similar opposition is brewing in the Senate, where it takes 60 votes to cutoff debate and move to consideration of legislation on the floor. Senator Kit Bond (R-MO) wrote the Senate Judiciary Committee on August 2 critical of provisions that are opposed by biotechnology sector while the United Steelworkers, on behalf of unions prominent in the manufacturing sector, wrote the Senate Judiciary Committee also expressing concerns over the damages apportionment and post-grant review provisions.