Electronics industry homes in on specific patent-reform provisions

The Patent Reform Act of 2007 has broad bipartisan support. But there is conflict within the high tech industry on the proposed changes—some of it centering on a David versus Goliath storyline.

By Tam Harbert, Contributing Writer -- Electronic Business, 7/10/2007

Patent reform, a high priority for the technology industry for several years, was an uphill battle while the Republicans controlled the Congress. Bills were introduced in 2005 and 2006, but they went nowhere, primarily because of the close ties between big pharmaceutical companies—which have opposed changes in the patent laws—and the Republicans, according to sources.

Then things changed last fall when the Democrats won control of Congress. They vowed to make patent reform a priority as part of a broader agenda to stimulate innovation. Hopes are high that this Congress will pass a major patent reform bill.

But there's dissension in the high-tech ranks. The Coalition for Patent Fairness, a group that includes large companies such as Intel and Microsoft, has been among the chief proponents of patent reform. The group contends that the current system encourages litigation and large infringement awards, which in turn stifles innovation. Then last fall another high-tech group emerged with a different point of view. The Innovation Alliance, a group of about 20 companies including LSI Logic, Qualcomm and Tessera, is arguing against certain provisions of patent reform that it feels put smaller firms at a disadvantage.

"We needed to show that this isn't just a pharma versus tech issue. We needed to show that the tech industry is not united on this issue," says Taraneh Maghame, vice president of mergers and acquisitions and government relations for Tessera, a member of the Innovation Alliance. Tessera is concerned about the issue because its business model is based on Intellectual Property (IP) licensing.

The Patent Reform Act of 2007 has broad bipartisan support, with identical bills introduced in both houses of Congress. The Senate version was sponsored by Senator Patrick Leahy, a Democrat from Vermont, and Senator Orrin Hatch, a Republican from Utah. In the House, it was sponsored by Representative Howard Berman, a Democrat from California, and Representative Lamar Smith, a Republican from Texas. But as the bill works its way through Congress this summer, the two technology factions are lobbying legislators to shape the final legislation. Both the House and Senate versions are expected to go through the markup phase—during which various amendments can be proposed—during July.

The bill would make changes in the way that patents are issued and defended. It proposes a "first-to-file" patent system, which would harmonize the U.S. system (now based on first to invent) with most other countries in the world. It also would more narrowly define willful infringement, apportion infringement damages to the economic value of the patent, create a post-grant review to challenge issued patents, and grant broader rulemaking authority to the U.S. Patent and Trademark Office.

In June, the Innovation Alliance and 200 other organizations—including universities, small bio-tech companies and small business organizations—sent a letter to Congress outlining their concerns over several parts of the bill.

The Innovation Alliance believes the bill with its current provisions is mostly "a way to reduce litigation costs for infringers," says Maghame. The Alliance is not against reform, but wants to focus more on improving patent quality and the PTO's operations. The Coalition for Patent Fairness, on the other hand, contends that the bill will help enhance patent quality, provide alternatives to going to court to resolve disputes, and streamline the litigation process, according to Jonathan Yarowsky, policy counsel to the Coalition.

Two of the biggest areas of contention are the apportionment of damages and the post-grant review, according to Maghame.

Damage apportionment: The Innovation Alliance fears that this provision would dictate to courts how to apportion damages and would limit the ability of a patent holder to receive adequate monetary relief. "We think it's unworkable and will result in lower damage award," says Maghame. But the bill needs to set up some type of framework for setting damages, says Yarowsky, to provide guidance to judges and to also give the parties to a lawsuit a better idea of the range of likely damages. "It would lead to more reasonable expectations on both sides about the valuation of the patent and might lead to more out-of-court settlements," Yarowsky says.

Post-grant opposition procedure: The bill would create a new administrative process for challenging the validity of a patent. Maghame says there are already ways to do this and that any further ways to challenge "opens up a patent to multiple challenges over the life of the patent," which would discourage innovation and investment. But Yarowsky counters that current procedures allow only a short time—less than a year—to challenge a patent, plus they have other limitations. He contends that in many cases it's not a long enough time for a company to be able to gauge how a patent might impinge on its business.

Some observers speculate that if it stretches into the next election cycle, the bill could lose momentum. But Yarowsky says the bill has a good chance of passage by the end of the year.

"This is the year when significant progress needs to be made," he says.