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House OKs revamp of patent system

Congress takes major step toward changes long sought by big tech companies. But there's no guarantee that proposal will become law.

WASHINGTON--In a move long sought by large technology companies like Microsoft, Oracle and Cisco Systems, the U.S. House of Representatives on Friday approved the most significant changes to the U.S. patent system in more than 50 years.

By a 220-to-175 vote, the House endorsed an amended version of the Patent Reform Act, which has been in the works in various forms for several years but previously was stalled amid lingering disagreements among disparate companies.

The vote and the tenor of the preceding debate were not strictly partisan, reflecting the issue's complexity: 60 Republicans joined the 160 Democrats who approved the bill, while 58 Democrats joined the 117 Republicans rejecting it.

The House action, however, is no surefire indicator that the bill will become law this year. The Senate still has to act on its own related but not-identical version, and it wasn't immediately clear when that vote would happen. (The Senate has been known to pass by bills that the House has already approved, as with last year's that stalled, in part over Net neutrality divisions.) And with lingering Bush administration objections to the bill, protracted negotiations may have to occur before any changes become the law of the land.

Supporters of the bill--including a number of large high-tech companies, the financial-services industry and leading consumer public-interest groups--view it as a critical step in fixing what they believe is a "broken" U.S. patent system. They claim that the current system invites rampant litigation and abuse, encourages excessive damage awards in infringement cases, produces questionable patents and is not in line, procedurally, with foreign systems.

"(The bill) is not intended to favor the interests of one group over another. It does correct glaring inequities that encourage individuals to be less innovative and more litigious."
--Rep. Lamar Smith, R-Texas

"The legislation does what is best for America, and our spirit of inventiveness and innovation," said Rep. Howard Berman (D-Calif.), chairman of a House intellectual-property panel and the bill's chief sponsor.

The vote prompted an avalanche of laudatory statements from major Washington-based technology trade associations--including the Software & Information Industry Association, the Business Software Alliance, the Computer & Communications Industry Association and the Computing Technology Industry Association--which said the move would make their member companies more competitive.

The measure's passage was not without controversy. It followed about three hours of debate, in which a handful of politicians from both parties railed against both the bill itself and the procedure for its consideration.

Opponents criticized the bill's sponsors for allowing too little time for discussion and too few amendments to the bill on the House floor. They alternately referred to process as a "nightmare," a "horror story" and a "power play" by wealthy technology companies. Rep. Dana Rohrabacher (R-Calif.), who led much of the floor rhetoric opposing the bill, dubbed it the "Steal American Technologies Act."

Rep. Marcy Kaptur (D-Ohio) said: "I'm opposed to this bill because it gives too much power to the big technology transnational companies." She claimed that the major pro-patent bill lobbying coalition--backed by the likes of Adobe Systems, Microsoft, Cisco Systems, Intel, eBay, Lenovo, Dell and Oracle--seeks an easy fix to the billions of patent damage awards they've been ordered to pay in recent years without changing "their obviously unfair and illegal business practices."

Reservations also linger from the Bush administration and from groups like the Innovation Alliance, which represents Qualcomm and a number of smaller companies that depend on licensing technology, as well as from The Coalition for 21st Century Patent Reform, composed of about 40 large companies, including 3M, Bristol-Myers Squibb, Caterpillar, Eli Lilly, Johnson & Johnson, Motorola, Procter & Gamble, PepsiCo, Pfizer and Texas Instruments.

Rep. Lamar Smith (R-Texas), one of the bill's primary sponsors, said the effort "is not intended to favor the interests of one group over another. It does correct glaring inequities that encourage individuals to be less innovative and more litigious."

Arguably the biggest remaining sticking point concerns how damages are awarded to patent holders who win infringement cases. Right now, the bill says courts must generally consider only the value the patent in question brought to the product when calculating damages--unless the patent holder can show that the particular patent was the "predominant" reason for the product's market demand.

Opponents, which tend to offer products that depend on one major patent, contend that those changes take away the flexibility that courts currently enjoy in awarding damages in a way that unduly favors patent infringers. Allowing such a legal change to take hold would water down the fundamental rights of patent holders and harm their business models, they argue.

Large high-tech companies, whose products often depend on hundreds or even thousands of separate patents, have argued that the current system enables winners of patent infringement suits to obtain disproportionate damage awards--in turn, fueling inflated settlements and royalty agreements out of court. As Google public-policy wonks put it in a blog entry earlier this week, "A windshield wiper found to an infringe a patent should not spur a damage award based on the value of the entire car."

"I'm opposed to this bill because it gives too much power to the big technology transnational companies."
--Rep. Marcy Kaptur, D-Ohio

Berman acknowledged that issue was not fully addressed by any of the amendments adopted Friday. "It is my commitment...to work with people who are concerned about that language to reach an appropriate middle ground that reforms the way damages are calculated between now and conference committee, and when this comes back," he said. (A separate and slightly different bill still has to go before the full Senate, and if it passes, then those two bills must be reconciled by what is known as a conference committee.)

Besides the damages provision, some of the major changes contained in the approved bill include:

• A "first to file" patent system: Critics argue that the existing "first to invent" standard is problematic because the identity of an inventor can be hard to prove. The bill would change the process to a "first to file" system, bringing it in line with all other foreign patent systems, while laying out a process for contesting an applicant's entitlement to that protection.

• A new way to challenge patents out of court: The bill would create a "postgrant opposition" board within the U.S. Patent and Trademark Office, which is designed to replace what can be costly, time-consuming court challenges of newly issued patents. Under the bill, such challenges could occur up to a year after a patent is granted.

• Limits on findings of "willful" infringement: If a jury decides that an accused patent infringer did so willfully, damages can be tripled. This provision would require the patent holder to show that the infringers were aware that they had copied the patent. One way of doing that would be through showing that the patent holder had notified the infringer in writing of the alleged infringement before filing a lawsuit.

• Limits on courts where patent cases could be filed: Certain court districts, such as the Eastern District of Texas, have earned a reputation for being more favorable to patent holders, so a disproportionate number of suits have been brought there in recent years.

In an attempt to prevent such "forum shopping," the bill would require cases to be lodged in court districts where the defendant has a "principal place of business" or has committed most of its infringement. It would also be unlawful to "manufacture" a place of business, just to gain access to a certain court. Nonprofit organizations, universities and independent inventors, however, would be permitted to file their cases in courts where their own operations are located, which is what existing law allows.

• A ban on "tax planning" patents: Since a 1998 court ruling that allowed patents on business methods, the U.S. Patent and Trademark Office has awarded some 50 such patents that relate to tax strategies, including how to minimize or defer one's tax liability. A narrow provision in this bill attempts to prohibit such inventions from gaining protection.

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