Patent Reform Legislation Introduced; Damages, Inequitable Conduct In Flux

Senate language from the patent reform debate in the last Congress will be the starting point this year for negotiations on how to calculate a reasonable royalty for patent infringement.

That language, which provides courts with three options for determining royalties and is opposed by brand pharmaceutical firms, was among the key reasons patent reform stalled in the Senate in 2008 (¹ , p. 14).

This year, the language is part of companion bills (S. 515 and H.R. 1260) introduced in the Senate and House March 3 by Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., Sen. Orrin Hatch, R-Utah, House Judiciary Committee Chairman John Conyers, D-Mich., and committee Ranking Republican Lamar Smith, Texas.

Another issue that thwarted action last year - revisions to the inequitable conduct standard - is absent from the legislation. Generics firms are thrilled by the exclusion, but the issue is likely to return as Leahy said he and Hatch are working on addressing the subject.

Leahy Seeking "Best Language" On Damages

Retaining the previous Senate damages provision allows the legislators "to start off where we left off," Leahy explained during a press conference, insisting that he is "prepared to continue the conversation and debate ... to find the best language we can."

Brand drug companies are anxious to continue the discussion as they fight against language that would base damage awards only on an invention's contribution over prior art.

Big pharma may have an easier time this year because Rep. Howard Berman, D-Calif., is now chairman of the House Foreign Relations Committee and no longer leads the debate in the House as chairman of the Judiciary Subcommittee on Courts, the Internet and Intellectual Property (² (Also see "Full House Judiciary Panel Getting Into The Patent Act: IP Issues Will No Longer Go Through Subcmte." - Pink Sheet, 17 Nov, 2008.)).

Berman's district has many IT companies, whose products encompass multiple components and who favor the contribution over prior art, or apportionment of damages approach to royalties.

Commenting on the bills' damages provision, Pharmaceutical Research and Manufacturers of America Senior Vice President Ken Johnson warned, "By lowering the penalties for those found by a court to have infringed another's patent, the bill would reduce the value of the patents that are the lifeblood of America's innovative business sectors."

The damages provision "heavily favors infringers over inventors," the Coalition for 21 Century Patent Reform protested in its comments. In particular, the group cited "prior art subtraction" as a provision "intentionally designed to reduce damages." Coalition members come from 18 industry sectors and include Johnson & Johnson and Eli Lilly.

Inventor Must Justify Market Value Damages

The bills' damages provision states that, based on the facts in each case, the court is to select one of three options for assessing royalties: entire market value, the value of existing nonexclusive licenses, or the value attributable to the patented invention's specific contribution over the prior art.

While a royalty based on entire market value is possible, it will be allowed only if the inventor shows that "the claimed invention's specific contribution over the prior art is the predominant basis for market demand for an infringing product or process."

The burden of proof also lies with the inventor to show that the value of a nonexclusive license for the invention can be determined through the marketplace value of nonexclusive licenses for the same invention or noninfringing substitutes.

Absent a showing in the first two cases, the reasonable royalty would be based on that portion of the economic value of the infringing product that is attributable to the claimed invention's "specific contribution over the prior art."

The legislation would also instruct the Patent and Trademark Office to review patent damage awards since 1990 to assess whether courts have broadened the scope of the entire market value rule and whether juries have routinely misapplied the rule.

Recent Court Decisions To Be Part Of Debate

Patent reform legislation was introduced in the previous two congresses and the sponsors expressed optimism that the third time will be a charm.

Leahy noted that this year there is an urgency to get something passed and he has scheduled hearings for March 10 to discuss the legislation and court decisions during the past two years that impact the patent reform debate.

Leahy did not indicate how quickly his panel will move on the legislation. But committee Ranking Republican Arlen Specter, Pa., urged Leahy in a March 3 letter that committee markup should not occur before late May so expected judicial proceedings can be considered.

The Court of Appeals for the Federal Circuit is scheduled to hear Lucent Technologies, Inc., v. Gateway, Inc., a case in which the court may consider "the scope of the 'entire market value' rule when assessing damages," Specter pointed out.

Oral argument in the case could "facilitate a compromise or clarify the applicability of damages theories in various contexts," he suggested.

The appeals court discussion will "weigh in on the legislation," Conyers noted during the press conference. He is leading the debate in the House as jurisdiction over patent reform now resides in the full committee.

No hearings have been scheduled there as yet, although Conyers indicated he expects to have a full public discussion of the issues.

Previous Bills Differed On Inequitable Conduct

Absence of the provision to reform the inequitable conduct doctrine is a concern for brand firms, who want it altered. At present, it is a significant, although potentially temporary, win for generic firms.

The patent legislation passed by the House in 2007 would have limited a defense against infringement that is based on a claim that the patentee engaged in inequitable conduct by submitting insufficient or misleading information in its patent application (³ (Also see "Patent Reform Bill In House Limits “Inequitable Conduct” Defense" - Pink Sheet, 30 Jul, 2007.), p. 24).

The bill approved by the Senate Judiciary Committee, on the other hand, had codified the existing inequitable conduct doctrine.

In commenting on the reintroduced bills, Generic Pharmaceutical Association CEO Kathleen Jaeger insisted that "the fundamental principle of providing truthful and complete patent applications" must be maintained and "that today's penalty for such inequitable conduct is not diluted."

Other Provisions of the Legislation

The section on willful infringement, which allows imposition of treble damages, would codify the recent federal circuit decision In re Seagate. As a result of that ruling, to show willful infringement, plaintiffs must demonstrate with clear and convincing evidence that the infringer acted in a manner that is objectively reckless.

The Senate bill specifies that a ruling of willful infringement is to be made without a jury.

The House approach to post-grant review is included in the bills. Instead of allowing patents to be challenged any time during their life, as had been proposed in legislation introduced in 2007, a petition to PTO to revoke a patent must be submitted within 12 months of the patent's issuance.

A challenge can be based on "public use or sale in the United States."

The federal circuit court is given jurisdiction over interlocutory orders and must accept all interlocutory appeals of claim construction orders when certified by the district court.

To limit forum shopping, the bills set the requirements for where civil actions for patent infringement, including declaratory judgment actions, may be filed.

They specify that "a party shall not manufacture venue by assignment, incorporation, or otherwise to invoke the venue of a specific district court."

Leahy dropped from his bill a provision that would allow PTO to accept late filings. The Congressional Budget Office concluded that this would have affected only The Medicines Company's Angiomax and cost hospitals $1 billion over seven years (⁴ (Also see "Patent Reform Provision Extending Angiomax Patent Would Cost $1 Bil. – CBO" - Pink Sheet, 25 Feb, 2008.), p. 19).

- Cathy Dombrowski ([email protected])