09.19.07
R. Joseph Trojan, Trojan Law Offices
and
Olga Kay, Trojan Law Offices
In the last column (July/August ODT), we discussed how, in April, the US Supreme Court stirred up a storm in the patent world by changing the test for obviousness of new inventions. In the meantime, a much bigger storm was brewing in the background. Since April 18, a patent reform bill has been pending before US Congress. The bill (S 1145 in the Senate and HR 1908 in the House of Representatives) holds the most significant changes to the US Patent Law since 1952. Among the many changes, three are especially worth mentioning: (1) changing the “first-to-invent” system to “first-to-file”; (2) changing the way infringement damages are calculated; and (3) instituting post-grant review procedures. In some circles, reaction to the pending legislation is best illustrated by Homer Simpson’s yell, “Operator! Give me the number for 9-1-1!” So how threatening are the proposed changes?
First-to-File System: Rush to the Patent Office
Under existing law, each patent application gets a filing date granted by the US Patent and Trademark Office (USPTO) when all the necessary documents are received. Separate from this date is the “date of invention.” On that date, the invention becomes substantially complete—ie, conceived and reduced to practice. Reduction to practice does not mean a working prototype but, rather, a complete idea, ready to be put on paper as a patent application. In the United States, even if the invention becomes known to the public, an individual or company has one year to file an application. After one year, the invention no longer is considered new and may not be patented.
The advantage of the current system is the extra time given to the inventor to consider whether to file for patent. Before spending a substantial amount of money on the application, one may want to explore commercial potential of the invention. Without any commercial interest, a patent may not be a wise investment. Another plus of the current system is rewarding the first inventor. For example, Dr. Hare may have been the first to invent a new drug. However, his application got bogged down at the IP office of the Mega University, where the doctor works. Dr. Tortoise had the same idea many months later but was able to quickly file an application. Under the existing law, competing inventors would have resolved true priority under a procedure called “interference.” Under the proposed law, the first-to-file inventor automatically wins, unless of course, one inventor steals or “derives” the invention from the other one.
This dramatic change received little opposition. Perhaps not surprisingly: the rest of the world already has a “first-to-file” system. The proposed change merely will bring the United States in step with the rest of the world.
Calculating Damages: Invention’s True Value
The existing law gives little guidance on how to calculate infringement damages. The law states simply that the court should determine an adequate amount to compensate the patent owner. As a minimum, the court must award “reasonable royalty.” Over the years, the courts have come up with a strategy on how this should be done.
Currently, the royalty damages are based on the price of the entire item sold. For example, if the invention is an improved toaster switch, the damages are based on the price of the entire toaster. If the infringer sold 1,000 $10 toasters, the royalty base would be $10,000. Arguably, this is not fair if the switch is only 50 cents of the price of the toaster.
Proposed law sets guidelines on how to determine a fair royalty rate. The “entire market value” (such as $10 per toaster) no longer will be used unless the patent owner proves that the market demand for the product is due “predominantly” to the invention. Instead, the court must determine “the contribution of the patent to the prior art” and base the royalties on that contribution. Unfortunately, it is not clear how this “contribution” is to be measured.
In fact, the idea of linking damages to the value of the invention is not new. Under the existing case law, royalty is calculated using 15 factors (“Georgia-Pacific factors”). At least two of the factors look at how much the invention improved the product. An economics expert would weigh the factors, write a lengthy report and conclude, “In my opinion, the invention is valuable and royalty is 10% of $10,000.” The opposing party’s expert would counter, “In my opinion, the invention is not so valuable and royalty is 1% of $10,000.” The jury would evaluate whose expert is more credible (or has a nicer tie) and answer the question, “What is the proper royalty?” Under the new law, the jury would be asked, “What is the contribution of the new switch over the prior art switches?”
Critics contend that the concept of “contribution over prior art” is too amorphous for judges and juries. Inevitably, arbitrary and inconsistent results will follow. On June 19, a group of more than 200 organizations, including biotechnology and telecommunications companies, universities and business organizations sent a letter to Sen. Patrick Leahy (D-VT), chairman of the Judiciary Committee, urging that this provision be deleted from the law. The letter notes that the Chief Judge of the US Court of Appeals for the Federal Circuit (the court specializing in patent cases) and the experts at the USPTO warned that the proposed law is unworkable.
It is possible that the “contribution” method will be merely an option for determining royalty. The old options, such as entire market value and 15 Georgia-Pacific factors, still will be available.
Post-Grant Review: New Breed of Patent Bullies
Under existing law, there are several ways of attacking an existing patent. One way is to prove to a judge that the patent is invalid. This is a common defense used in patent infringement lawsuits. Another way is to file a third-party request for patent re-examination with the USPTO (“inter partes re-examination”). Re-examination does not review the patent as if it were a new application. Instead, the requester finds at least one prior art publication that the examiner missed the first time. The examiner must decide whether the invention is still patentable in view of this new reference. If not, the patent is cancelled and all infringement lawsuits immediately end.
The House version of the new law proposes an additional 12-month post-grant review window. During this time, any third party (including an infringer) may file a petition to cancel the patent. Compared to re-examination, the new procedure is much friendlier to the challenger. In re-examination, a patent can be attacked only with printed prior art. Under the new rule, one can use several other arguments, such as defective description or prohibited subject matter. In addition, the new procedure is meant to eliminate bias in favor of the patent. The post-grant review will be conducted by an independent judge. By comparison, re-examinations are conducted by patent examiners. ones Finally, the outcome of the post-grant review may be appealed by both sides. The outcome of a re-examination may be appealed only by the patent owner.
The Senate version of the bill repeals the existing inter partes re-examination procedure. Instead, the new post-grant review remains available for the life of the patent. Petitions may be filed. However, after 12 months, a challenger must show significant economic harm from the patent or a threat of infringement suit.
Not surprisingly, in the letter to Sen. Leahy, the post-grant review is referred to as “unending harassment of the patent owner.” The letter warns that the threat of challenges would discourage investments and have a “chilling effect on America’s innovation engine.”
* * *
This quick analysis shows that some portions of the dreaded new law already are part of the patent practice. Other parts of the new law indeed promise big changes and hard times for the patent owners. Fortunately, voting on the bill has not yet been scheduled. Perhaps Homer’s next call will be, “Operator, give me the number for my congressman!”