United States: Stakeholders in the Patent Reform Process Discuss an Overhaul of the Patent System

On June 8, 2005, Congressman Lamar Smith (R-TX) introduced the Patent Reform Act of 2005. If the legislation is signed into law, it would be the most sweeping reform made to U.S. patent law since Congress passed the 1952 Patent Act. The self-stated goals of the bill are to improve patent quality and to eliminate legal gamesmanship from the current system. The bill modifies how patent owners are identified; how patents are awarded, disclosed, and disputed; and what damages patent holders are entitled to from infringement. It will affect nearly all areas of patent practice from prosecution to litigation to counseling.

While the bill appears to be a mixture of "best practices" and recommendations made in preceding reports and position papers, some of the proposed reforms are quite controversial. Just a day after the bill was introduced, the Federal Trade Commission, the National Academies’ Board on Science, Technology, and Economic Policy (NAS-STEP), and the American Intellectual Property Law Association (AIPLA) co-sponsored a conference on patent reform in Washington, D.C. to address the proposed legislation. A diverse range of stakeholders in the patent reform process attended the conference. It brought together judges, government officials, patent practitioners, representatives of small and large businesses, academics, economists, and university officials to discuss the Patent Reform Act of 2005.

The bill’s major provisions are as follows:

• Limits the patentee’s ability to get injunctions;

• Makes it easier to challenge bad patents by creating a post-grant opposition system;

• Changes the U.S. patent system to a "First Inventor to File" system;

• Eliminates the "best mode" requirement;

• Imposes a duty of candor on all associated with patent proceedings;

• Limits scope of willful infringement;

• Regulates continuation applications;

• Creates a universal 18-month publication rule;

• Allows third parties to submit prior art.

The following provisions were the most hotly debated and will certainly undergo some modification as the stakeholders compromise on the specific terms of the legislation:

The current patent statute allows courts to grant injunctions to prevent violation of patent rights, but provides little guidance, specifying only that injunctions be" in accordance with the principles of equity." The terms of the injunctions need only be "as the court deems reasonable."

This proposal would keep the current language intact, but would add another section spelling out the grounds for granting such injunctions. Under the new language," a court shall not grant an injunction unless it finds that the patentee is likely to suffer irreparable harm that cannot be remedied by the payment of money damages." In making this finding, the court is not to presume the existence of irreparable harm, but is instead required to "consider and weigh evidence" relating to equitable factors. These factors include "the extent to which the patentee makes use of the invention" as well as the balance of hardships. This provision significantly raises the bar for when a court will impose an injunction.

At the conference, this was by far the most controversial element of the bill. The high-tech industries favored the proposal as a means of thwarting the efforts of "patent trolls" who they claim never commercialize their patents, but rather sue companies with similar inventions for infringement. Pharmaceutical companies, university representatives, and independent inventors, on the other hand, were vehemently against a watering down of the rights afforded to them by their patents. They believed that removing the option of injunction moves intellectual property rights away from classic property rights where the right to exclude is fundamental.

Most stakeholders felt that while there is some abuse by so-called "trolls," the proposed legislation goes too far in limiting the use of injunctions. Judge Ellis of the United States District Court for the Eastern District of Virginia called it a "flawed attempt to remedy a relatively narrow problem."

This proposal brought out a lot of commentary on whether the patent system could handle different industries. Representatives of the software industry pointed out that their industry creates huge patent portfolios, often with claims of narrow scope. In contrast, Robert A. Armitage, Senior Vice President and General Counsel, Eli Lilly and Co. commented on the great importance pharmaceutical companies place on relatively small numbers of patents. He noted how gorillas and fire ants both have attack modes but their strategies are different. Robert Merges, Professor of IP Law, UC, Berkeley delved further into this analogy posing the question "Can the patent system handle different industries?" He responded by saying, "Yes, gorillas and fire ants can both find a place in the patent zoo."

The bill proposes a post-grant opposition procedure. The procedure will allow third parties to challenge the validity of an issued patent, within nine months after the patent has issued, through a proceeding in the United States Patent & Trademark Office ("Patent Office") before an administrative law judge. This limited opposition window (referred to as the "first window") would give competitors the opportunity to present prior art and argue that a patent is not novel, is obvious, lacks utility, or is not properly disclosed. The scope of discovery during the proceeding is substantially limited. Under this proposal, either party wishing to oppose the administrative law judge’s decision retains full rights of appeal to the United States Court of Appeals for the Federal Circuit.

Overall, there was broad support in the business and patent communities for creation of the "first window." However, some small entities and independent inventors feared this proposal on the ground that post-grant review would require aggressive opposition review and vigilance on the part of the patentee. Their concern was that going through this process for each and every patent may become burdensome and expensive.

Another opposition window (referred to as the "second window") has also been proposed under this provision. This "second window" permits an individual to file an opposition not later than six months after receiving notice from a patent holder alleging infringement.

At the conference, the semiconductor and software industries gave the strongest support for the "second window." They argued that in their industries it is impossible to monitor every newly issued patent. Their support also came from the fact that many businesses in their industry hold defensive patents making it hard to tell what patents a patentee will assert.

Led by the pharmaceutical and biotechnology industries, the majority of stakeholders opposed the "second window" on the ground that it leaves a cloud of uncertainty hanging over a patent beyond the initial opposition period. Additionally, opponents argued that the second window, where the burden of proof is a "preponderance of the evidence" instead of "clear and convincing evidence," will increase the risks faced by patent holders and dampen their enthusiasm for investing in the development and commercialization of their patented technologies. They believed the second window would also increase litigation in the courts since patent holders, to ensure that their patents will not be tested by the lower presumption of validity, will file suit instead of approaching suspected infringers about possible license arrangements or ways of avoiding any infringement.

The bill proposes changing the U.S. patent system from a "first to invent" system to a "first inventor to file" system.

Very few stakeholders at the conference opposed this proposal. It was said that the proposal would obviate the need for time-consuming patent interference proceedings where the identity of the senior inventor is in dispute and most saw this proposal as creating a more predictable, economical and efficient patent system.

Smaller entities, however, were concerned that they would be disadvantaged by this proposal as they do not have the resources to file patent applications with the same speed as their larger competitors. The university community was also concerned with this proposal because they tend to have a slower process when filing patents involving peer review. However, economists presented empirical data to show that the proposed first inventor to file system would not significantly disadvantage smaller entities.

There was more consensus and broader support among stakeholders regarding the following provisions:

Under the existing law, in order to obtain a patent the inventor must disclose enough detail to enable competitors to practice his invention. The bill proposes eliminating the "best mode" requirement. It revises 35 U.S.C. § 112 by removing the clause "and shall set forth the best mode contemplated by the inventor of carrying out his invention."

Proponents of this change stated that this will have the effect of eliminating a subjective element in patent litigation, thereby reducing litigation costs, and increasing the predictability of litigation. No one at the conference argued against this provision.

The bill proposes that the Patent Office establish appropriate regulations imposing a duty of candor and good faith on all parties involved with patent proceedings, including both patent applicants as well as opponents. When a court suspects that there may be an inequitable conduct violation, the court is required to refer the matter to the Patent Office. The Patent Office in turn is required to investigate the charge. Under the bill, the only time a court is permitted to consider inequitable conduct is after one or more claims have been invalidated.

A defendant in a case where claims have been invalidated, may petition the court to amend its defenses to include the defense of inequitable conduct. This can only be done in situations where the invalidated claims would not have been allowed by the patent examiner if the examiner had known about the invalidating prior art, which the defendant alleges the applicant intentionally kept from the examiner, or if the patentee made misrepresentations that directly led to the allowance of the claims by the examiner.

No one at the conference argued against this provision. However, the stakeholders agreed that the Patent Office did not have the requisite funding to establish a unit to conduct investigations of inequitable conduct charges.

Under the bill, willful infringement is limited to specific situations where a defendant is provided with a cease and desist letter that charges infringement of a specific patent by specific products. If a company continues to infringe a patent after being so warned, without developing a good faith belief in the legality of its conduct, willful infringement may be sustainable.

Additionally, the bill does not allow a patentee to plead, and a court to determine, that an infringer has willfully infringed a patent before a determination has been made that the patent in suit is not invalid, is enforceable, and has been infringed by the infringer.

Very little was said about this proposal. Judge Ellis was in favor of getting rid of willfulness. However, he felt the bill’s proposal was "tinkering" with the problem and not fixing the problem.

No discussions were held concerning the following provisions:

The bill authorizes the Director of the Patent Office to regulate the circumstances under which continuations may be filed and entitled to the priority date of the parent application.

Under the bill, all applications must be published 18 months after the earliest filing date.

The bill proposes giving the public a chance to submit prior art references to the Patent Office. The submitter is required to explain the relevance of the reference and pay a fee (to be determined by the Director of the Patent Office). The fee is meant to defray Patent Office expenses and discourage frivolous submissions. This provision is aimed at improving the quality of patents by giving examiners greater access to prior art when deciding the non-obviousness of the patent.

At the conference on patent reform, the greatest agreement was found in the need for increased funding to the Patent Office. All the stakeholders agreed that the proposed reforms will only be as effective as the Patent Office’s ability to execute them. Specifically, many of the stakeholders argued that greater resources would correct patent quality problems and cause other perceived flaws in the system to wash out. The Patent Reform Act of 2005 does not address any increase in funding for the Patent Office despite the fact that several of the proposed reforms will be adding to the existing workload of the Patent Office (e.g. post-grant review). However, on June 16, 2005, the House of Representatives passed a bill which would provide funding for the Patent Office in fiscal year 2006. The bill calls for $159 million above the current year funding, and equals the amount requested by the Patent Office. The passage of that bill will help the Patent Office execute the proposals outlined in the proposed Patent Reform Act of 2005.

The conference ended with virtually all parties agreeing that the current patent system has been a tremendous asset to the U.S. economy. That said, everyone agreed that improvements were needed. However, it was recommended that reform should proceed with caution and with the full participation of relevant stakeholders.

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