High-Tech Firms Press Congress to Limit Patent Damages

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High-tech companies facing pricey litigation to defend their patents are pressing Congress for patent reform, even though they have already won some important elements of that reform in court.

These rulings, little noticed outside the patent world, have made it less likely that the U.S. Patent and Trademark Office would issue a bad patent, or one that was nothing more than an obvious improvement on existing technology.

The court rulings also make it harder to take a bad patent to a friendly court and use it to shut down an entire company, or to use that bad patent to win a huge settlement.

“Has there been significant patent reform in the past five years? Yes. Are there still areas that need reform? Yes,” said John Whealan, who teaches at George Washington University Law School and who worked on patent reform as a former Capitol Hill staffer.

Proposed patent reform bills are opposed by big pharmaceutical companies and some smaller tech companies, among others.

A 2007 Supreme Court ruling, KSR International v. Teleflex, reduced the likelihood that a bad patent would get granted by raising the bar on “obviousness.” Patents are not supposed to be granted for small improvements on existing technology.

“Obviousness isn’t in patent reform bills, but some of the driver is that there are too many bad patents out there,” said Mark Lemley, who teaches at Stanford Law School.

By improving patent quality, the KSR ruling may have made moot a call for patents to be subject to outside review — one of the elements of the proposed bills. “This takes a little pressure off the need for post-grant review,” said Chad Landmon, with law firm Axinn, Veltrop and Harkrider LLP.

Major tech companies, which have seen their litigation costs soar because of patent lawsuits, have also pushed for a bill that would cut damages from potentially a product’s entire market value to “a reasonable royalty,” according to bills pending in the U.S. Senate and House of Representatives.

In a nod to the bills’ critics, especially pharmaceuticals companies, the measures would allow damages to be based on the “entire market value” if the invention were “the predominant basis for market demand for an infringing product.”

Some patent experts point to a pending appeal of a case involving Alcatel-Lucent and Microsoft Corp. that could address the damages issue. A lower court ordered Microsoft to pay $367 million for infringing technology in its Outlook software that consumers use to find a particular date.

Currently, damages could be tripled if the infringement were found to be willful. But the U.S. Court of Appeals for the Federal Circuit’s 2007 Seagate decision changed the burden of proof from the accused company to the patent holder — as would the patent legislation.

The price of infringing used to be even more devastating.

Courts had been allowed to order infringing technology stopped, bringing entire industries to a halt. This nearly ended in 2006 with the U.S. Supreme Court ruling in eBay v. MercExchange, which made it harder to get an injunction. It added tests, one of which was whether public interest would be harmed by a permanent injunction.

Copyright protections, in contrast, still include injunctions. Late last year, all Bratz dolls were ordered recalled because Mattel Inc. owned the copyright to them and because the creator was working for Mattel when he designed them. That injunction, however, has been stayed pending appeals.

Forum Shopping
Patent reform legislation also attacks “forum shopping,” where plaintiffs file suit in courts likely to favor them.

But in Medimmune v. Genentech in 2007, the U.S. Supreme Court made it harder for companies to pick a friendly forum.

The Federal Circuit made it even tougher with a 2008 ruling. It ordered a case involving headrest assemblies in Honda Motor Co. Ltd. vehicles transferred from a plaintiff-friendly Texas court to an Ohio court.

In patent fights, defendants often accuse a patent holder of making errors or worse in the patent application, a practice known as “inequitable conduct.” The price of inequitable conduct is loss of the patent. It has not been addressed in this year’s patent legislation, although Republican Sen. Orrin Hatch, a co-sponsor, says it will be added.

International Business Machines Corp.’s intellectual property chief, David Kappos, said reformers want to ensure that there are “strong consequences to behave with a high level of candor.”

But a decision by the Federal Circuit in Star Scientific v. R.J. Reynolds has already made inequitable conduct harder to prove by requiring evidence that a patent holder intended to deceive the patent office. A simple error is no longer enough.

Despite these court rulings, patent experts say reform in Congress is still needed. “The patent reform goes further,” said Axinn, Veltrop’s Landmon. “And maybe more importantly, it’s done by statute so the courts can’t undo it later.”

(Reporting by Diane Bartz, editing by Gerald E. McCormick)

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