Was It A Bang Or A Whimper?

The year of 2005 was thought by many to be the year that U.S. patent law would have its most significant and critical development since the early 19th century. The patent reform movement finally caught Congress's attention after the publication of two studies, one by the National Academy of Sciences and the other by the Federal Trade Commission, both of which outlined certain shortcomings of the current patent system in the U.S. The reform movement shifted into high gear in early June when the Patent Reform Act of 2005 (H.R. 2795) was introduced. In the following months, a draft amendment was submitted by Congressman Lamar Smith, the sponsor of the bill, and another by a coalition of major U.S. companies. A hearing was then held by the House Subcommittee on Courts, the Internet, and Intellectual Property during which experts and legal scholars representing various industries offered their support and opposition to the key provisions of the bill. Every slight development concerning the bill was reported in the trade papers and scrutinized closely by many in the patent law community.

As the months passed and the new year approached, however, the much anticipated patent reform of 2005 cooled off and failed to materialize. One of the factors possibly contributing to the stalemate in patent reform in 2005 was the polarizing effect that certain proposed changes purportedly had on the software/IT industry as well as the life science/pharmaceutical industry, two very significant economic personalities in the U.S. Perhaps competing interests resulted in major lobbying groups promoting positions against each other which eventually prevented any workable compromises from being formulated. On one side of the debate is the software/IT industry which often finds itself as a defendant in patent infringement suits because its complex technologies give rise to products which often allegedly comprise numerous features, one or more of which correspond to a claim of a third party patent yet is arguably also in the public domain. In this regard, the software/IT industry views the Patent Reform Act as a vehicle for improving patent quality and thereby curbing excessive litigation. The original draft of the bill very much favored this view by including a new balancing test for granting an injunctive remedy in lieu of the current rule which almost always grants an injunction automatically upon a finding of infringement, and a "second window" provision in the form of post-grant patent opposition procedures. Again, according to the software/IT industry, the key benefit of such provisions is improved patent quality which results in less likelihood of litigation. In effect, these provisions shift the burden from the alleged infringers to the patentees in infringement cases.

On the other side of this issue is the biotechnology and pharmaceutical industry. Its member companies argue that their survival depends, to a large extent, on their ability to rely on their portfolio of granted patents and the ability to assert permanently their exclusive rights in those patents against potential infringers. Thus it was no surprise that this industry strongly opposed the original text of the Patent Reform Act, specifically the injunction provision and the "second window" provision. They argued that these two provisions would only diminish the value of legitimate patents and, thus, would be detrimental to the whole patent system. Their lobbying efforts apparently did not go in vain since both the injunction provision and the "second window" provisions were left out of Congressman Smith's draft amendment circulated in late July 2005. In addition, the Congressman's draft amendment completely eliminated another provision in the original bill which grants authority to the Director to place limits on the filing of continuation patent applications. The practice of continuation applications is another feature of the current U.S. patent system relied upon heavily by the biotechnology/pharmaceutical industry. It is of interest to note, however, that the U.S. Patent Office recently published proposed rule changes within the U.S. Patent Office that would, if implemented, significantly curtail use of and reliance upon continuation application practice.

The above-described draft amendment is definitely the preferred version of the biotechnology/pharmaceutical industry, as was apparent from the testimony of its representatives in the House subcommittee hearing held on September 15. As a possible compromise to accommodate both industries, a new venue provision was added to the amendment requiring patent infringement suits to be brought either in the jurisdiction where the defendant resides or where the defendant has committed infringement and has a regular place of business. By forcing patentees to bring their cases to defendants' home field, the draft amendment seeks to please the software/IT industry and regain sufficient support from both sides to move the amended bill forward.

Although Congressman Smith's draft amendment appeared to be a step in the direction of enactment in 2005, there have been no significant developments since the September hearing. Is this a sign that more compromise and/or additional industry support is required? Given the ever growing concern about large damage settlements in patent infringement litigations, both sides are pushing hard to have the current patent law amended to best serve their respective industry. It is likely to be difficult to move the bill forward any time soon simply because a reform bill satisfactory to both industries will likely require more cooperation and concession.

While the House version of the Patent Reform Act of 2005 has stalled, Senator Ensign and fifteen other co-sponsors introduced a bill in the Senate entitled the "National Innovation Act of 2005" (S. 2109) just before the year ended. Given that the Senate Subcommittee on Intellectual Property held two oversight hearings on the subject of patent reform early in 2005, many anticipated - and appropriately so - that the Senate would join the reform movement and publish its own version of the bill soon after the House bill was introduced. To the disappointment of many, the Senate remained quiet on this issue for most of 2005 perhaps, as has been suggested by some, because members of the Subcommittee also serve on the Judicial Committee which is caught up in the high-profile debates on judicial appointments.

The version of the "National Innovation Act" which was published December 15, 2005 by the Senate does not parallel the House's Patent Reform Act of 2005. Although the bill includes a very brief last section (Section 503, comprising about 30 lines of text) entitled "Sense of Congress on Patent Reform," Section 503 is silent as to the substance of the Patent Reform Act and essentially steers clear of addressing directly any of the earlier-described controversial issues central to the Patent Reform Act. In fact, the Senate's innovation bill is directed almost exclusively to federal (and private-sector) initiatives in education, tax, defense and other policy areas aimed at promoting innovation in the U.S.

On the patent reform front, Section 503 (30 lines of text out of a total of about 1400 lines in the entire bill) only offers broad policy authorizations for enhancing the quality of patents, but takes no appreciable stand - explicit or implicit - on hot issues such as injunction and post-grant opposition proceedings. Section 503 does state that ". . . it is the sense of Congress that . . . the patent system should be reformed to enhance the quality of patents, . . . create incentives for improved search and disclosure of prior art; . . . [and] establish a fair and balanced post-grant patent review procedure . . . ." Thus, it appears that the Senate has given the nod in a direction of reform but not yet provided guidance as to how such reform would best be accomplished.

Elsewhere in the Senate bill, there is text which may inform the apparent policy debate currently occupying the Senate. For example, Section 2 states that "[t]raditional measurements of innovation capacity focused solely on inputs, such as . . . number of patents . . . . are necessary but are not sufficient metrics for innovation in the 21st century's knowledge economy." Section 2 further states that the "purposes of this Act are to . . . create the most fertile policy environment for innovation to occur; . . . [and] examine both the incentives for, and barriers to, innovation to better understand what additional policy changes are warranted." Sounds like more hearings await us in 2006.

Despite this policy debate (and stalemates) in the Congress, the Supreme Court has promised to assume an active role in attempting to settle perhaps one of the ongoing debates on patent reform in 2006. By granting certiorari to the case MercExchange LLC v. eBay Inc., one of the more important and highly anticipated patent cases in recent history, the Supreme Court is poised to decide whether to uphold the long established standard for granting permanent injunctions after infringement is established. This could be the second battleground where the software/IT industry and the biotechnology/pharmaceutical industry face off on this contentious issue, which in the view of many is probably the most controversial item in the Patent Reform Act.

In spite of the mixed messages sent by Congress in 2005, we should expect that patent law reform is only a matter of time. Is 2006 the year? Maybe, maybe not. As Senator Hatch, the Chairman of the Senate Subcommittee on Intellectual Property, has stated: "[P]atent reform still has a fair distance to go before a sufficient consensus forms in Congress around a particular set of reforms. . . . [T]his is not uncommon for patent reform legislation, which often takes several years from conception to enactment."

One thing is certain - there will be no shortage of debates and proposals on patent reform in 2006.

Published February 1, 2006.