By Thomas P. O’Donnell and Bryan P. Collins - 10/03/07 07:24 PM EDT
Practically every provision in the pending Patent Reform Act of 2007 is provoking an outcry from stakeholders, with dueling proclamations that the proposed changes either support or undermine innovation. But three benchmark issues stand out as the most controversial.
First, how will damages be calculated? Courts have broad discretion to determine damages for patent infringement, with awards often proportional to the entire value of a product. The proposed legislation would emphasize the contribution of the individual patent in question to the product’s overall value and would apportion damages accordingly. Supporters assert that patent infringement awards have spiraled out of control and must be reeled in for fairness’s sake; critics worry that apportioned damages will be impossible to calculate and will dramatically reduce their patents’ value.
Second, how will patents be awarded? The United States stands alone among industrialized nations in granting patents to the “first to invent” rather than the “first to file.” The new legislation adopts a “first to file” system, with some grace periods. Supporters assert that global harmonization is crucial to American competitiveness; critics fear that the “first to file” system will subject American inventors to intellectual property theft risks, especially university researchers who often publish before they patent.
Third, how can patents be challenged? Competitors currently have two options: (1) contest the validity of a patent in expensive and time-consuming litigation or (2) request the Patent Office to conduct a reexamination of the patent. The pending legislation would expand the ability to challenge patents both during the application process and after issuance. Supporters maintain that the nature and deficiency of patents often do not become clear for years, and poor quality patents should be weeded out whenever possible. Critics counter that giving competitors a second bite at the apple would expose legitimate patents to constant and meritless challenges.
The House version of the legislation (which passed by a vote of 220–175 on Sept. 7) and the Senate version (which may see floor action this fall) take slightly different approaches to these issues. If the legislation survives a Senate vote, a House-Senate conference and a presidential veto (the White House says apportioned damages would threaten incentives for innovation), the legislation’s final content will have undergone significant substantive changes driven by business realities and political compromise.
However, we can describe the debate and interests in play by boiling down the legislation’s intent. Congress either will maintain the status quo or modify the system by making it difficult to obtain high damages awards in infringement cases and subject patents to more expanded validity challenges. The latter change theoretically would decrease financial incentives for litigation (whether frivolous or justified) by lowering damages awards and making it easier and more cost-effective for defendants to challenge patents.
This dichotomy most obviously pits pharmaceutical companies against high-technology firms, as the media have observed. Drug manufacturers often rely on products consisting entirely of a single patented breakthrough, the culmination of millions of dollars spent on research. They argue for vigorous patent protection on the grounds that they need to earn enough to recoup research costs and to fund future projects. They believe the current patent regime supports this business strategy. By contrast, technology enterprises typically assemble hundreds of individual components into a unified, valuable product, leaving the companies open to legal challenges on each of the components. These companies would prefer a patent system that limits their financial exposure.
While this basic divide seems straightforward, ultimately it is not the end of the story. Many smaller technology firms — such as Qualcomm — build their business on licensing discrete inventions rather than assembling components, and so their business models and patent preferences align more closely with Eli Lilly than with Apple or Cisco. Similarly, while many large manufacturers — such as 3M and Caterpillar — are in the business of assembling patented components, they are also patent-holders who fear that expanding post-grant challenges will weaken the value of their intellectual property.
Meanwhile, though financial services firms — like Goldman Sachs and Visa — may have equal stakes in pharmaceutical and technology holdings and clients, they also own patented business methods themselves. For similar reasons, and for their close reliance on technology, media companies like Time Warner round out the pro-legislation coalition along with a handful of consumer groups that hope the legislation will lead to lower prices for consumers through reduced litigation costs.
Identifying idiosyncratic business models within industries and understanding the indirect impacts of legislation are important components of a successful public policy campaign. Taking into account today’s political environment, attorneys in our firm counsel clients to pursue a multi-disciplinary approach to legislative advocacy that combines substantive legal and legislative expertise and real-time political analysis with insights into business models and the global marketplace. “Strange bedfellows” often are effective bedfellows.
O’Donnell is a partner in Pillsbury Winthrop Shaw Pittman LLP’s public policy practice and served as special assistant to the president and chief of staff of the White House National Economic Council from 1995 to 1997 and chief of staff and general counsel of the President’s Council of Economic Advisers from 1993 to 1995. He can be reached at firstname.lastname@example.org.
Collins is a partner in Pillsbury’s intellectual property practice, where he helps clients strengthen their patent position in competitive markets by developing patent portfolios, preparing and filing patent applications and reviewing new products/processes to assess patent infringement. He can be reached at email@example.com.