Patent Reform: Another Hurdle Cleared

There has been plenty of nay-saying regarding the Patent Reform Act of 2007. Given that patent reform has been an issue for the past several Congresses and has never been passed, perhaps the pessimism is warranted. However, the current iteration of patent reform legislation keeps chugging along and just got out of the House Judiciary Committee and has made it to the floor of the House to be voted upon. The bill has been modified from its original form in several aspects. Many of the changes are favorable to the Coalition for Patent Fairness, much to the chagrin of the Innovation Alliance and many biotech companies. The Coalition was so happy, that in a press release (courtesy of IPBiz), they pledged their support of the current iteration of the bill and professed their hopes that it would be passed soon. The most notable changes to the Act include the removal of the ‘second window’ re-examination procedure, and giving the Director of the PTO the power to set the PTO’s fee structure (with some qualifications). Readers may read the latest changes made by the Committee here.

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POPA Does Some Self-Examination

There has been much talk by experts and politicians about the Patent Reform Act of 2007. Much of the discussion and criticism of the proposed legislation has centered upon examiner retention and the possible strain placed upon the USPTO’s resources by some of the proposed changes. Given all of the discussion, it seems logical to see what the examiners themselves would like to see improved in the PTO. Recently, the results from the Commerce Departmentââ?¬â?¢s 2006 Federal Human Capital Survey were made available to the Patent Office Professional Association (POPA). The Commerce Department surveyed 1105 PTO employees and contains good insight into how examiners view the system in which they work. There were 73 questions in the survey where the answer choices were: ââ?¬Ë?positiveââ?¬â?¢, ââ?¬Ë?negativeââ?¬â?¢, ââ?¬Ë?neutralââ?¬â?¢, or ââ?¬Ë?do not know/no basis to judgeââ?¬â?¢. There were a few that were of particular interest. When asked if they have enough information to do their job well, 69.3% responded ââ?¬Ë?positiveââ?¬â?¢ while 13.2% responded ââ?¬Ë?negativeââ?¬â?¢, and 17.5% were neutral. When asked if they would recommend the PTO as a good place to work, there were 58.7% positive responses, with 21.6% neutral and 19.7% negative. While those two questions indicate that there are perhaps some problems, the question asking if the PTO is able to recruit people with the right skills, the positive responses dropped to only 50 %. Furthermore, there was only a 50% positive response rate as to whether the skill level in existing employees improved in the last year. Perhaps most telling is that the percentage dropped to 40% when those surveyed were asked if their workload was reasonable. Now, statistics can always be misleading, but the survey does not inspire confidence in the PTOââ?¬â?¢s ability to handle the increased workload that could result from the new Act. Readers may read the full survey here (PDF).

Senate Hears Patent Reform Suggestions: Biberstein

This is the third installment on the Senate Committee for the Judiciary�s hearing on the new Patent Reform Act. This post will discuss the testimony of Ms. Kathryn L. Biberstein, Senior Vice President, General Counsel and Secretary, and Chief Compliance Officer of Alkermes, Inc. Readers can find the first four installments of this series here. Kathy Biberstein testified before the committee as a member of the Biotechnology Industry Organization (BIO), and spoke for that organization as well as Alkermes. She began by stating that many of the members of BIO are smaller companies that do cutting edge research requiring a tremendous amount of private funding. These companies rely on the patent system to ensure a return on the investment made by their benefactors. Post-Grant Review Biberstein came out against the proposed addition of the new re-examination procedure contained in the new Act. She stated that such a system

would create an essentially limitless opportunity to broadly challenge a patent administratively at any time during the life of the patent. This post-grant review provision would be a dramatic departure from domestic and international norms, casting a cloud of uncertainty over issued patents.

Biberstein voiced concern over there being no presumption of validity in the second-window, and wished for any post-grant review to include incentives to bring validity challenges closer to when the patent was granted. She also wants to repeal the inequitable conduct doctrine and ‘best mode’ requirement, in addition to having a first-to-file system and have the presumption of injunctive relief return. Apportionment of Damages Biberstein disagrees with the codification of a method to apportion damages, and wishes to retain use of the Georgia-Pacific factors. Her criticism of the “specific contribution [of a patent] over prior art” language was that it inaccurately limits the calculation of a patent’s value.

Such an approach ignores the fundamental facts that virtually all inventions are, to some degree, premised on prior art, and that many patented components are essential to the intended functionality of the overall infringing product ââ?¬â?? two facts that are particularly applicable to biotech patents.

PTO Rulemaking Authority Biberstein is not in favor of expanding the PTO’s authority to create substantive rules interpreting the patent laws. She believes that granting the PTO such power will upset the balance of the current system where Congress creates the law, the CAFC interprets it, and the PTO implements the laws. With the proposed changes, she stated that inconsistencies would abound and consequently stifle innovation. Interlocutory Appeals Biberstein finished her testimony by stating her and BIO’s concerns that the addition of an interlocutory appeal from a Markman ruling would overly burden the CAFC. She felt that adding such appeals to the CAFC’s docket could “bog down the appellate process, and hold up the underlying infringement suits for years.” She also mentioned that it would complicate litigation by littering the courts with “piecemeal appeals.” She then admitted that there was a problem with the high number of district court claims rulings being overturned, but that there must be further discussion to figure out a solution to the problem.

Senate Hears Patent Reform Suggestions: Squires

This is the third installment on the Senate Committee for the Judiciary�s hearing on the new Patent Reform Act. This post will discuss the testimony of Mr. John A. Squires, Chief Intellectual Property Counsel for Goldman, Sachs and Co. Readers can find the first three installments of this series here. Squires not only spoke on behalf of Goldman Sachs, but also as chairman of the Securities Industry and Financial Markets Association IP Subcommittee, the American Bankers Association, and the Financial Services Roundtable. Squires quoted a Harvard study that found financial patents to be 27 times more likely to be asserted and litigated than their tech and bio counterparts. Given that statistic and the financial background of the groups that he represented, Squires often focused on the effect of the proposed bill upon business method patents. Post-Grant Review Squires came out in favor of the additional post-grant review contained in the Patent Reform Act, saying:

The second window is essential to a meaningful, efficient and broadly available reevaluation of suspect patent claims before a firm is forced into prolonged and expensive litigation.

Squires sees the second window as a way to solve the PTO’s (self-admitted) lack of a suitable prior art database for business methods. He also echoed Mary Doyle’s testimony in stating that reviewing all patents through the existing system leaves companies in the untenable position of predicting how patentees may interpret and apply their patents (especially expansive business method patents). Interlocutory Appeals Squires next came out in favor of the language allowing interlocutory appeals to the CAFC from Markman rulings. He cited the high rate of District Court decisions being overturned (35%), and this uncertainty undermines the purpose of claim construction proceedings. He also addressed the concerns of those who are not in favor of interlocutory appeals: a flood of appeals will descend upon the CAFC, cases will become longer, and that litigants will get “two bites at the apple.” Squires responded:

The CAFC heard a total of 834 cases in 2006 of which 453 were patent cases.4 Of those, 259 were adjudicated (57%). A 50% increase would mean an additional 109 cases a year could be attributable to interlocutory appeal. The CAFC�s current workload plus those cases is an increase of roughly 12%, and with four three-judge panels hearing cases, the net is an increase of 2 or 3 cases per month, per panel in addition to the roughly 17 cases per month the CAFC currently hears. These numbers do not account for any decrease in caseload resulting from cases that would no longer need an appeal at the end of trial due to IA resolving the issue earlier.

In addressing the last two concerns, he believes that the interlocutory appeal will facilitate out of court settlements and thusly shorten disputes. Finally, Squires wants to see language in the new Act that will prevent any ‘second bites at the apple.’ Venue Squires looks favorably upon the Reform Act’s change to the venue requirement in order to eliminate forum shopping. However, he wants to strengthen the provision:

to ensure that financial institutions are not subject to litigation in venues where they have no significant business presence and that the incentive is removed for patent holders to ‘create’ a principle place of business to sue in a favorable district.

Prior Use Squires agrees with the prior use rights defense to remove methods, buts also wants the bill changed to ensure that holding companies can confer the defense to their affiliates. He suggests the following language:

The defense under this section may be asserted by a person who performed or caused the performance on its behalf of the acts necessary to establish the defense. Such person may license such defense only to (i) an entity that controls, is controlled by, or is under common control with that person so long as such entity became affiliated with such person in good faith for reasons other than receiving such license, or (ii) an entity providing services to such person or licensed affiliate, solely to the extent such services are provided on behalf of such person or licensed affiliate.

Willfulness and Apportionment of Damages Squires was in favor of the Act’s raising the standard for finding willfulness because infringers will still be punished. However, the new legislation will “encourage good faith due diligence and investigation” as opposed to the current system which encourages companies to remain ignorant of other’s patents for fear of treble damages. Squires also expressed a desire to see damages reduced to a level “based overwhelmingly on the patent’s specific contribution over prior art.” Effective Date of the Act and Secret Prior Art Squires wants Sections 5, 10, and 13(a) of the Act to take effect immediately. The present language states that the bill will not take effect for 12 months. Also, he believes that “the laws should apply to all non-expired patents and patent applications, not just those filed after the law is enacted.” Finally, Squires wants the novelty provision of Section 102(1) (a) to:

replace “public use or on sale” with “otherwise publicly known” or “otherwise available to the public.” The above change to the H.R. 1908/S.1145 will allow organizations to contractually protect against unintentional invalidity of patents by executing a binding non-disclosure agreement with collaborating organizations.

Senate Hears Patent Reform Suggestions: Doyle

This is the third installment on the Senate Committee for the Judiciary’s hearing on the new Patent Reform Act. This post will discuss the testimony of Mary E. Doyle, Senior Vice President and General Counsel for Palm, Inc. Readers can find the first two installments of this series here. Mary Doyle spoke not only of Palm Inc.’s position on the new bill, but also provided a window into the views of the Coalition for Patent Fairness. This is important to note, because the Coalition is one of the most powerful tech lobbying groups in Washington and represents many of the largest companies in the Silicon Valley. Additionally, it provides a counterpoint to the Innovation Alliance, a newly formed lobbying group that illustrates some of the different goals of tech companies here in the Valley. Readers may be interested to listen to the podcast with two of the IA’s members, Taraneh Maghame of Tessera, Inc. and Derek Minihane of Intermolecular, as they discussed many of the same issues addressed in Mary Doyle’s testimony. Doyle’s testimony began with a description of Palm’s experience with the patent system as it stands. Palm Inc. is a $1.6 billion company that utilizes a vast number of patents (some of which they own, many others which they license) in creating its products and services in the telecommunications industry. As such, Doyle voiced concerns over the escalating costs of litigation and the growing frequency of lawsuits for patent infringement. Doyle also has a problem with the increasing number of demand letters, though it would seem her concerns should have been allayed by MedImmune. Thus, she and the Coalition for Patent Fairness support: interlocutory appeals to the CAFC for Markman hearings, revised venue laws, new post-grant review procedures, codification of a method for apportionment of damages, and a more rigorous standard for finding willful infringement.

Interlocutory Appeals

Doyle came out in favor of allowing interlocutory appeals from claim construction hearings for several reasons. She cites a wide range among courts in scheduling Markman hearings which can cause a delay of up to two years from the start of a trial for a court to finally interpret a claim. Additionally, Doyle points to the high number of District Court decisions being reversed by the Federal Circuit as a further obstacle to finalizing claim construction. Given the importance of claim construction in most patent cases, Doyle sees interlocutory appeals as a way to reduce both the time and cost of litigation.

Venue

Next Doyle railed against the forum shopping that currently abounds in patent cases.

Liberalization of the venue statute imposes a costly burden on businesses like ours that must collect evidence and witnesses and travel to remote jurisdictions to try complex patent cases over a period of weeks or months. It is also apparent to us that this change in the statute worked a perverse mischief, encouraging forum shopping.

Thus, she and the Coalition want to see the proposed Act limit the available forums to those with a “tangible nexus” to the defendants headquarters or significant place of business.

Post-Grant Review

Doyle came out in favor of the proposed second window post-grant review, stating that it will lead to better patent quality. She went on to say that:

Allowing third parties to institute an administrative proceeding early in the process should also solidify the breadth and applicability of these patents, thereby leading to fewer later challenges.

She sees the current process of ex-parte or inter partes re-examination procedures as insufficient. The cost of reviewing the patents that go into complex products, such as Palm’s, is far too high. Also, companies cannot anticipate all of the potential uses for a patent when the patent is granted. In Doyle’s view, allowing a second window re-exam in response to a threat of suit provides a low cost solution.

Apportionment of Damages

Next, Doyle came out in favor of limiting excessive royalty awards and codifying the “Market Value Rule.” She emphasized the fact that court-ordered reasonable royalties should reflect those reached through real-life negotiations. She went on to say that the awards for infringement that exceed the profit on the entire product “fly in the face of the bedrock principle that the purpose of patent damages is to compensate, not to punish.”

Willfulness

Doyle then pointed out the problems with the current standard used to find willful infringement. Doyle stated that though courts have likened willfulness damages to punitives:

the standard applied to determine whether the defendant acted “willfully” is far lower than what is required to impose punitive damages in other contexts ââ?¬â?? proof of bad faith or egregious conduct is not required and a patent holder may prevail simply by showing that “a potential infringer ha[d] actual notice of another’s patent rights” and failed to satisfy his “affirmative duty to exercise due care to determine whether or not he is infringing.

She finished up by stating that the effect of the lower standard is to incentivize companies to remain ignorant of other patents and patent applications for fear of increased damages. This activity runs counter to the purpose of the patent system which encourages evolutionary inventions as well as new ones. The new Reform Act will create a heightened standard for willfulness, of which both Palm Inc. and the Coalition for Patent Fairness are quite fond.

Red Alert! WARF’s Patent Claims Rejected

Previously, this blog has discussed the Wisconsin Alumni Research Foundation’s (WARF) several human embryonic stem cell patents that were being re-examined by the USPTO pursuant to a request made by the Foundation for Taxpayer and Consumer Rights (FTCR) and the Public Patent Foundation (PUBPAT). The emphasis on ‘were’ being due to the recent rejection of all the patent claims resulting from the re-exam. As a result of this development, Daniel Ravicher (PUBPAT’s President and Executive Director) has stated his belief that WARF should simply drop its claims to the patents altogether. According to the press release on PUBPAT’s website the outcome was likely to happen, as

Third party requests for patent re-examination, like the ones filed by FTCR and PUBPAT, are ultimately successful in having the subject patent either changed or completely revoked roughly 70% of the time

In light of this ruling, WARF has two months to make an official response to either attempt to prove that its claims are novel or take Dan’s advice and let the patents go. Option number one seems most likely given WARF’s position articulated by WARF Managing Director Carl E. Gulbrandsen, who stated that “WARF has absolute confidence in the appropriateness and legitimacy of these patents.” The press release from WARF went on to detail the myriad avenues available to defend the patents:

This first rejection, for example, gives WARF the opportunity to respond directly to the examiner, a response in which WARF will vigorously defend its patent claims. That response could persuade the examiner to sustain the patents and terminate the reexaminations. If the examiner maintains the rejection, WARF could, and most probably would, appeal the examiner’s decision to the PTO Board of Patent Appeals. And, if that body fails to sustain the patents, WARF can then appeal to the courts.

So, while PUBPAT and the FTCR have won the battle, the war is far from over.

(Not so) SWEET, Vonage!

Due to a recent district court ruling in the ongoing Verizon v. Vonage battle, it is possible that we shan’t be seeing many Vonage commercials in the near future. Our readers may be asking, “But why? Those Vonage commercials are so sweet!” Well, as a response, TLF would like to notify our readers of district court Judge Claude Hilton’s most recent holding that prohibits Vonage from acquiring any more customers. The order came down this past Friday, and was a huge blow to Vonage, especially given that the company was hit with a $58 million penalty for infringing three of Verizon’s patents just a few weeks earlier. The freeze on customer additions is particularly harmful to Vonage because of the general attrition of telecommunications customers (basically, because people switch phone companies, Vonage will be losing customers while losing the ability to replace them). Given the business reality of such a ruling (read: Vonage would be out of business), Vonage was quick to ask for a stay so that they could appeal the injunction. The emergency stay was granted by the CAFC pending a response by Verizon by this Friday. So, it looks like we’ll be getting to watch those sweet commercials a little while longer, at least.

Plaintiffs Don’t Always Win in the E.D. of Texas

Last week, EchoStar pulled off what many would consider an upset; they won a case in the Eastern District of Texas as a defendant. Even more stunning is the fact that EchoStar was victorious over Austin, Texas based Forgent Technologies. As reported by the Denver Post

,

The Douglas County-based satellite-TV company, known for its bare-knuckles legal battles, took the case to trial and won. The jury returned a verdict in EchoStar’s favor on May 21, finding that Forgent’s patent related to digital-video recorders was invalid.

Forgent sued EchoStar and many other telecommunications companies (including DirecTV, Charter, and Comcast, among others), for infringing their patent for a “computer controlled video system allowing playback during recording patent #6285746). According to the summary of the invention on the patent application, the invention may be implemented into a teleconferencing system which receives and stores digital information representative of information from multiple media. Forgent was successful in getting several of those companies to settle, but EchoStar decided not to play follow the leader and the gamble paid off. According to the press release from Morrison and Foerster (counsel for EchoStar), Forgent’s patent was invalidated by a unanimous jury after only an hour of deliberation. So, while the E.D. of Texas is still a plaintiff’s paradise, it isn’t necessarily a death sentence for big corporate defendants.

Senate Hears Patent Reform Suggestions: Dudas

Last week, the Senate Committee on the Judiciary held a hearing on the new Patent Reform Act currently before Congress. The committee heard testimony from Jon Dudas (Director of the USPTO), Bruce Bernstein (Chief Intellectual Property and Licensing Officer for InterDigital Communications Corporation), Mary Doyle (Senior Vice President, General Counsel and Secretary for Palm, Inc.), John Squires (Chief Intellectual Property Counsel for Goldman, Sachs and Co.), Kathryn Biberstein (Senior Vice President General Counsel and Secretary, and Chief Compliance Officer for Alkermes, Inc.), and committee member Senator Patrick Leahy. The next several posts on the ‘In the News’ blog will break down the testimony of each member of the panel. Today’s post will analyze Director Dudas’ statements the committee. Director Jon Dudas covered many aspects of the proposed legislation, and opened his statement by emphasizing the importance of “full disclosure” in the patent system. He then talked about the goal of increasing patent and patent application quality through Applicant Quality Submissions (AQSs) and championed the virtues of the Accelerated Examination Program that will “lower pendency, raise productivity and increase quality.” Dudas went on to say that to reach the goal of full disclosure:

Applicants should be given every opportunity and the responsibility to provide more and better information to examiners about their inventions. For such a program to be successful, the USPTO will ensure that requirements for more and better information do not become overly burdensome in general and in particular to independent inventors and small entities.

One of the obstacles to full disclosure is the lack of an incentive to disclose, and in fact, due to the current doctrine of inequitable conduct, the applicant has a perverse incentive NOT to disclose relevant information. As a solution, Dudas proposed using a relevance standard (requiring the withheld information to be relevant for the application to be denied) and bifurcating the issues of intent and the materiality of the withholding of information. Also, given the increased burden placed upon applicants of the expanded informational requirements, Dudas proposed a “micro-entity” status.

The definition of ââ?¬Å?micro-entityââ?¬Â? could be based on a number of factors including: income level; number of patent applications filed; lack of representation by a registered practitioner; and lack of assignment activity. The status would exempt an applicant from some or all of the requirements of an AQSs program.

Dudas went on to state that the USPTO is in favor of letting the courts continue to determine the apportionment of damages through use of the Georgia-Pacific factors as opposed to the method proposed in the Reform Act. Next Dudas came out strongly in favor of retaining treble damages for willful infringement. He also disagreed with expanding the prior use defense and was not in favor of allowing interlocutory appeals to the CAFC after Markman hearings. The Director is in favor of a second window post grant review process, but was unsatisfied with the retroactive nature of the window’s application and voiced his concerns with the increase in workload that it would create for the USPTO. Lastly, Dudas discussed international implications of the Act in the context of a shift to a first-to-file system and application publication requirements. Dudas paid lip service to the importance of global harmonization as a reason to shift to first-to-file, but did not support an immediate conversion to such a system. Instead, the USPTO wants such a shift to be “contingent on significant progress and international agreement” and that they want “a standardized one-year international grace period” to protect inventors who disclose their inventions before filing. Although receptive to the idea of a first-to-file system, Dudas did not agree with the new Act’s removal of the opt-out provision to the publication requirement. Dudas’ testimony can be found in full here.

Senate Hears Patent Reform Suggestions: Bernstein

This is the second installment of the Senate Committee for the Judiciary hearing on the new Patent Reform Act. This post will discuss the testimony of Bruce G. Bernstein, the Chief Intellectual Property and Licensing Officer for InterDigital Communications Corporation. Readers can find the post on the testimony of USPTO Director Jon Dudas here. Mr. Bernstein’s company, Interdigital, is a relatively small company that develops “advanced wireless technologies and products that drive voice and data communications.” Interdigital’s business model is one that relies on research and development of new technologies and then licensing the resulting patents. Interdigital has been quite successful in their business and has made over $1 billion utilizing this model. Given the way that Interdigital does business, it is unsurprising that Bernstein voiced concerns with the apportionment of damages and post-grant opposition clauses in the proposed legislation. Bernstein’s critique of the codification of a test for apportionment of damages centers upon the argument that such language will remove the “only leverage that a small patentee possesses to secure a licensing agreement with a corporate giant.” The relevant language of the Act states that a reasonable royalty:

is applied only to that economic value properly attributable to the patent�s specific contribution over the prior art except where a patent has been shown to be the predominant basis for market demand for an infringing product or process

Bernstein stated that this language will remove market-based damages awards and replace the market with expert testimony and the courts. This change will not only reduce the damages for infringement, but will also “undermine market-based licensing negotiations.” As a result, Bernstein argues that there will be an incentive to litigate (and try to invalidate the patent) instead of acquire a license to the patent(s) in question. Bernstein also cited eBay (and the resulting difficulties in getting permanent injunctions) as another reason to maintain the market-based damages as a remedy to patent holders. As a result, Bernstein, like Director Dudas, wishes to keep the Georgia-Pacific factors as the test for the apportionment of damages. Bernstein’s second problem with the Patent Reform Act of 2007 is the creation of new post-grant opposition proceedings. He believes that:

adding an expansive and duplicative new post-grant opposition process, while maintaining and expanding the existing inter-partes reexamination process, would subject patents to an unfair and unreasonable number of duplicative attacks on validity

Bernstein went on to say that the system would favor invalidation because it would significantly lower the evidentiary burden required to invalidate a patent, and remove the presumption of validity present in a full-fledged trial. Additionally, he believes that the post-grant review would invalidate many patents that should merely be reduced in scope. Lastly, he expressed displeasure with the increased costs of adding these proceedings, both upon the PTO and patent holders. Bernstein also came out against the increased rule making authority given to the USPTO and he was against interlocutory appeals to the CAFC after Markman hearings. Bernstein stated that the USPTO “lacks meaningful exposure to the commercial and economic complexities of patent post-issuance” to have the rule making authority granted by the new bill. Additionally, he said the addition of interlocutory claims appeals would only strain an already busy CAFC. Bernstein finished up by stating that Interdigital wants to see: a permanent end to fee diversion, enhanced third party prior art submissions, universal publication of patent applications, enhanced judicial training, elimination of the best mode requirement, and statutory clarification of the inequitable conduct defense as a part of the Act.