Patent Redux
Thomas C. Novelli
In the January/February 2008 issue of Medical Product Outsourcing, I wrote an article concerning the patent reform debate. At that time, the Senate was considering patent legislation that would dramatically alter the landscape of intellectual property rights for a variety of industries, including medical devices. While strong and well-organized opposition to that legislation forced lawmakers to put their efforts to rest, a new Congress and administration have sparked new life into the debate. There are new players and different dynamics in the fray. However, the primary concerns about the protection of intellectual property, especially in the device industry, remain the same.
The Patent Reform Act of 2007 (PRA 07) intended to bring significant reform to existing patent law and the United States Patent and Trade Office (USPTO).Proponents of the legislation argued that existing patent laws had not been modified in nearly 50 years and that reform was long overdue. This was, and remains, an accurate assessment; no significant reforms had been made to the patent system or USPTO since the 1950s. However, the proposed changes in the PRA 07 went far beyond what many expected as reasonable reform to update and modify an outdated patent system. The PRA 2007 contained provisions that dramatically altered the dynamics in patent infringement cases.
The most controversial part of the PRA 07 legislation sought to modify how damages were awarded in patent infringement cases. In this proposed scheme, damages would be assessed based on only the incremental value of the patent and not the total economic value that an innovator’s patent could bring to an existing patent and/or product.
This rationale to drastically modify how damages are awarded in infringement cases is based on a faulty assumption that the current methodology for damages calculations allows for disproportionate and frivolous awards. These highly publicized awards in favor of companies that are not even commercializing technology are not the norm, but are cited by those in support of the modifications. In reality, the median patent award is about $3.9 million, for those that result in a verdict for the plaintiff. This is less than the median cost to litigate a patent suit. In addition, more than 97 percent of patent cases settle before trial, presumably at values that are lower still.
In the fall of 2007, the House of Representatives passed the PRA 07. While many of the bill’s supporters saw the House vote as a validation of their efforts, the events that unfolded in the Senate shortly thereafter changed the dynamics of the debate. In the Senate, the PRA passed through the Senate Judiciary Committee. When the bill moved to the full Senate, however, it became evident that the once solid support for the measure had faltered.
Proponents of the PRA had attempted to portray the debate as pharmaceutical companies against the high-technology industry. The advantage of this portrayal were the connotations and perceptions associated with the pharmaceutical industry on Capitol Hill, whereas there tends to be a higher regard for companies that are considered “high-tech.”
Fortunately, a well-organized and diverse coalition representing the medical technology industry, green technology, universities, labor unions and others mounted a fierce campaign to dispel the myth that the patent reform debate was simply “high-tech” versus “pharma.” Instead of the bill rolling smoothly along its expected trajectory, senators with key industries in their states were forced to either reconsider their position on the bill or at least demonstrate a willingness to hear all sides of the debate.The Patent Reform Act of 2008 ultimately failed to come to the Senate floor for a vote.
The push for patent reform in 2007 (and into 2008) was unique on several fronts. First, it was the first time, in a long time, that any legitimate attempt to overhaul the patent system actually gained significant momentum, despite proposals to reform the patent system that have been attempted over the last few Congresses. Second, the push represented a collaboration of diverse stakeholders, who would normally not be working in agreement on an issue.
For example, it is not a regular occurrence that predominantly pro-business interest groups work with labor unions like the AFL-CIO.Third, despite all momentum the legislation had on the heels of approval by the House of Representatives and the Senate Judiciary Committee, the debate simply faltered due to the efforts of a well-organized coalition of interests.
A New Patent Bill
After the push for patent reform faltered last year, no one expected that a new version would not be proposed. In fact, it was highly anticipated that the bill’s proponents would remain as motivated and determined as ever. And, as expected, in March, Senate Judiciary Committee Chairman Patrick Leahey (D-Vt.) and Sen. Orrin Hatch (R-Utah), introduced the Patent Reform Act of 2009 (PRA 09).With few modifications, the PRA 09 contained the same problematic provisions as the PRA of 2007. Again, the most controversial language in the bill dealt with the apportionment of damages in patent infringement cases. This problematic provision has drawn the same ire of innovative medical technology companies as it has in years past. The bill also contains problematic language on post-grant review and fails to adequately address inequitable conduct.
The initial damages language in the PRA 2009 would be problematic for many industries, especially the medical device industry. Like the former bill, it attempts to base damage awards in infringement cases on the incremental value of the affected patent and not the entire economic value or impact of the invention itself. The mandatory apportionment provision will likely make it easier and cheaper to infringe upon existing patents leading to an artificial calculation of damage awards.
The initial language in the PRA also does not adequately address the issue of post-grant review in the patent process. In short, the post-grant review provisions create an open-ended process to unjustifiably challenge patent validity.
It becomes a vehicle for large, well-financed competitors to quash competition by subjecting smaller companies, many with disruptive technologies, to a continuous challenge to the validity of a patent after it has been granted. Large competitors possess enough resources to sustain a legal challenge without end. In such cases, a smaller patent holder usually does stand a chance to sustain such a challenge.
While most groups engaged in this issue agree that reform of the patent system is needed generally, concerns over damages, post-grant review and inequitable conduct have caused the most divide.
The Senate Judiciary Committee has moved quickly to address some of these issues in the Patent Reform Act in 2009.One positive development from the legislation has been a modification of the damages language. After hearing from numerous stakeholder groups, including the Medical Device Manufacturers Association, members of the Senate Judiciary Committee realized that a compromise ought to be found on at least the damages problem. Chairman Leahy, Ranking Member Arlen Specter (D-Pa.), and Sen. Dianne Feinstein (D-Calif.) came to an agreement on the issue, allowing for a “gatekeeper” role for a judge in the calculation of damages by identifying the appropriate legal standards and relevant factual contentions for the jury in patent infringement cases. The committee recently passed the bill, with the new damages language, by a vote of 15-4.
The gatekeeper language on damages is an encouraging development. Although the Patent Reform Act legislation is not yet where it should be as a whole, it is apparent that the voices of innovative industries are being heard. The Senate bill still needs to move to the Senate floor for full debate and a final vote. The debate in the House of Representatives, however, has just recently begun. It will be interesting to see whether the Patent Reform Act moves as easily through the House as it did in 2007. If the device industry sustains its efforts on the patent bill, the House may follow the Senate’s lead toward compromise.