June Lipton, the General Counsel of Interact, a public software company with a fifty million dollar market cap, faces another decision about whether to settle a patent lawsuit or litigate. Her company is fighting several patent litigation suits at the sum of a few millions dollars a year (attorney costs only) and has recently joined an industry group to support their efforts to lobby Congress and persuade the Supreme Court that wholesale changes in the patent system are critical to its survival. Jason Schmidt, the CEO of Stemtech, a privately held biotech company, believes that the patent system fairly rewards the costs of innovation. His companyââ?¬â?¢s management is concerned that significant changes to the law and the system will reduce shareholdersââ?¬â?¢ investment in the business. Although his company hasnââ?¬â?¢t formally joined any lobbying group, he favors a cautious approach to changes in the patent system. Jim Diamond is an investor in Patentvalue, a patent holding company, which emerged out of the dust of the dot com bust by purchasing patents at auctions for pennies on the dollar. Most wonââ?¬â?¢t be worth very much but Patentvalue has been very successful with one of its patents. After winning a jury verdict finding infringement and the judge refusing to stay the proceedings (the patent in question was in the middle of a reexamination proceeding at the PTO), the defendant agreed to a settlement of thirty million dollars. Considering the six hundred million dollar settlement by RIM (maker of BlackBerry devices), Jim thought the defendant should feel lucky. Finally, Ellen Smithers, a user of DishNetwork satellite cable service, is one of 3 million users who could lose her DVR service because of a ruling on a patent infringement case in the Eastern District of Texas in August. The judge ruled in favor of a permanent injunction but the decision has been stayed pending appeal to the Federal Circuit. Although the companies described above are fictitious (excluding DishNetwork), there are many Silicon Valley ââ?¬Å?high techââ?¬Â? companies, particularly in the software and internet field, who believe they are victims of the patent system. They are innovative; their success depends upon it, but for a variety of reasons their engineers and their management have not focused on the patent system as a basis for promoting innovation or maintaining their competitiveness in their market. The more mature semi-conductor industry has relied on cross-licensing and formal gentlemenââ?¬â?¢s agreements not to sue, rather than asserting patents to generate a royalty stream. In the 90ââ?¬â?¢s, companies like Lucent asserted their patents and were viewed with disdain. Typically, small companies would negotiate a license agreement with companies like Lucent because they did not have the financial or staff resources necessary to engage in a protracted battle over the validity and value of the patents asserted. However, larger companies did have the resources and did engage in long protracted battles with companies like Lucent usually resulting in a settlement after millions of dollars had been spent. After the dotcom bust, a new actor has become more prominent on the Silicon Valley patent scene. Referred to by some as patent speculators or more pejoratively as ââ?¬Ë?trollsââ?¬â?¢, these entities are in the business solely of acquiring and asserting patents. The companies who find themselves on the defensive side of these actions also find that they canââ?¬â?¢t pursue the same kind of cross-licensing discussions that they could with another company who is practicing the patented technology. These entities are only interested in asserting patents to generate license fees, a situation often referred to by their ââ?¬Ë?targetsââ?¬â?¢ as hold-ups. Many of these companies who find themselves constantly on the defensive side of patent litigation banded together to form a group called ââ?¬Å?Coalition for Patent Fairness.ââ?¬Â? They believe that the system is unbalanced. When a non-manufacturing patent holder asserts its patent, regardless of its strength, against them, the company, or ââ?¬Ë?targetââ?¬â?¢, may not have the time or resources to take a chance with the system. In the ââ?¬Ë?targetsââ?¬â?¢ view, these patent holders are the victors of the current system, and are ââ?¬Ë?gaming the system.ââ?¬â?¢ These ââ?¬Ë?targetsââ?¬â?¢ are attempting to influence Congress and the Supreme Court to make changes in the law to correct, in their view, the severe imbalances in the system. In simple terms, this group believes that patents have become: too easy to obtain, too easy to assert, and crippling injunctions and enhanced damages are too easily awarded. All of these issues threaten their business and ultimately, in their view, threaten the best interests of the consumer and citizen. Typically in the biotech and pharma industries, there is a long start-up between initial trials of a drug or other product and its approval by the FDA. Especially where human beings are the ultimate user, the path is long and uncertain. These industries invest millions (or billions in some cases) of dollars and wait years to determine whether the aforementioned investment will pay off. Protection against free riders of the patent system is extremely important to their business model and ability to attract investment. Software and internet companies on the other hand, have generally developed their technology by building on earlier technology that is often freely shared among developers. Thus, many of these companies are able to get to market quickly. This striking difference raises a question asked by many commentators; does a unified, one size fits all patent system work in the current world? The voices calling for reform have reached the halls of Congress and likely the Supreme Court as well. On August 3, 2006, Senators Orrin Hatch and Patrick Leahy introduced bi-partisan legislation (ââ?¬Å?Hatch-Leahy billââ?¬Â?) to address the issue of patent reform. The bill takes strong positions on many of the controversial proposals, including: a ââ?¬Ë?second windowââ?¬â?¢ for opposition to a granted patent, the circumstances permitting such a review, and proportional damages for products found to have infringed a patent. When the House bill (Patent Reform Act of 2005) was proposed AIPLA, a specialty bar for intellectual property attorneys, and industry groups, particularly pharma, resisted any second window, or second bite at the apple. They argued that it reduced the value of the patent and the certainty of investment. They also argued for less reform on the apportionment of damages language than the IT sector desired. The bills took similar approaches to the harmonization measures aimed at shifting the U.S. patent system closer to the rest of the world, namely EU and Japan. Both bills also have proposals that take the sting out of willfulness and reduce the likelihood of forum shopping, which are two of the ââ?¬Ë?tacticsââ?¬â?¢ used by many plaintiffs to raise settlement amounts. The Hatch-Leahy bill will not be passed in any form during this legislative session but it is likely to be a starting point for discussion in the next session following mid-term elections. The Supreme Court has recently taken a greater interest in patent cases than at any other time in the past twenty-five years. Several cases are either before the Court or could come before the Court during its upcoming session. eBay v. MercExchange, decided on May 16, 2006, was a closely watched decision and generally hailed by the IT sector as the right decision. The two concurring opinions written by Justice Roberts and Justice Kennedy had something for everyone. Since the decision, the District Court cases involving injunctions are being closely followed to see what the effect of the Courtââ?¬â?¢s decision will be. In addition, the eBay case reflected the industry split seen in the patent reform debate: pharma and IT. Pharma supported MercExchange and the Federal Circuit absolute rule supporting injunctions whereas IT argued for a more flexible standard where the trial court could exercise discretion based on facts of the case. Two upcoming cases for the fall session are KSR v. Teleflex, which will potentially affect the standard of non-obviousness, and Medimmune v. Genentech, which asks whether a licensee in good standing may challenge the validity of the underlying patent. The Courtââ?¬â?¢s decision to dismiss the Labcorp case as improvidently granted was greeted with relief by some and disappointment by others. For the latter, there is some hope for future direction in the dissenting opinion written by Justice Breyer. The Patent and Trademark Office, has responded to the cry for reform with many rulemaking proposals including reducing the number of continuations, reducing the number of references in disclosure statements and new rules for accelerated examinations, among others. Tech LawForum is dedicated to furthering the dialogue, discussion and debate in the virtual community on critical legal issues affecting the high tech field. The inaugural edition of TLF is dedicated to the topic of patent law and policy. TLF will air several events where experts in this field will discuss the Supreme Court decisions on patent law, the PTO rule-making proposals, and patent reform by Congress.

Sources for this article:

Further reading:

  • Janice M. Mueller, An Introduction to Patent Law, (Aspen Publishers 2d. ed 2006)
  • Promote the Progress

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