Introduction

In January 2009, President Barack Obama was sworn in as the 44th President of the United States. Whenever there is a change in administrations (especially when the new administration is controlled by a different political party), there will be an increase in legislative activity as the administration attempts to fulfill the promises the President made while running for office. While President Obama's domestic agenda is dominated by reforming health care, there has been substantial activity recently concerning patent-law reform as well. This activity not only involves new laws being proposed in Congress, but involves actions taken by the U.S. Patent and Trademark Office and new decisions issued by the Court of Appeals for the Federal Circuit as well. This article summarizes some of the most important developments in patent-law reform in 2009.

Damages Reform

By far, the most controversial of these reforms involves damages. Many companies, most notably computer software and technology companies like Microsoft, Apple, and Intel, believe that jury awards in patent infringement cases are too high, which has the effect of hindering innovation. Other companies opposed to damages reform have responded that claims of widespread out-of-control jury verdicts are unfounded and that the existing laws are adequate to address any individual jury verdict that is unjustifiably high. Today, it looks as if those opposed to damages reform have the upper hand, since it appears as if all three branches of the U.S. Federal Government are leaning towards strengthening existing patent-damages laws rather than creating new ones.

The existing patent laws (passed by Congress and signed into law more than 55 years ago) say very little about how damages are to be calculated. As might be expected where the statute says so little on a subject, the Courts have been the primary source for establishing how damages should be assessed after a finding of infringement liability has been made. As noted above, however, there are many who are dissatisfied with the current state of the law, and so there is a movement in the U.S. asking both the Court and Congress to reform the patent damages laws.

In the Courts, the case many people were watching is a case involving Lucent on one side and Microsoft and Dell on the other. The case is captioned Lucent v. Gateway et al. (Because of a procedural quirk, the case does not mention Microsoft as the first defendant even though it is by far the defendant with the greatest potential for loss—in fact, the first-named defendant, Gateway, was dropped from the lawsuit after it reached a settlement with Lucent). This case was on appeal from a district court in California and involved a patent that, according to Lucent, was infringed by the "date-picker" function in Microsoft's popular Outlook e-mail and calendaring software. The date-picker function allows a user to pick a date (e.g., for an appointment to be kept in the calendar program) from a "drop down" calendar instead of requiring the user to manually enter the date with the keyboard. The California district court case ended with a jury verdict finding that the Lucent patent is valid and is infringed by Outlook. The jury also awarded about $500 million in damages to Lucent.

Microsoft appealed the jury's infringement and validity determinations and also appealed the amount of damages, which Microsoft claimed was excessive. Twelve companies filed "amici" briefs1 in support of Microsoft's appeal of the damages award. The companies consisted mostly of computer software and technology companies, including Apple, Oracle, Palm, Yahoo, SAP, Micron, and Intel. These companies told the Federal Circuit that juries are routinely awarding excessive damages and district courts are not doing enough to control them. Microsoft's allies proposed that the Federal Circuit adopt specific reforms, including requiring district courts to play a more aggressive "gatekeeper" role to ensure that the jury does not hear testimony or see evidence that might mislead them into awarding an excessive amount of damages. The twelve amici supporting Microsoft also asked the Federal Circuit to forbid a jury from using the total cost of the product as its basis for damages and requiring juries instead to base their damages awards solely on the value of the feature in question. In particular, Microsoft and its amici all argued that it was improper for the jury in that case to consider the total cost of the Outlook software rather than the cost of the date-picker feature. This concept is referred to as "apportionment."

In response to the amici briefs supporting Microsoft, companies from a variety of industries filed a brief opposing the reforms the amici proposed. The brief, which was filed by thirteen companies including 3M, Wyeth, General Electric, Procter & Gamble, ExxonMobil, and Johnson & Johnson, argued that existing case law was "up to the task" of ensuring that excessive damages are not awarded in patent cases:

Rewriting patent damages laws in the radical ways urged by the amici supporting Microsoft would reduce the inherent value of patents and their ability to protect investments in research and development. And that, in turn, would undermine the willingness to invest in costly and speculative research and development efforts.

In particular, the companies supporting Lucent argued that, while they agree that there is a proper "gate keeping" role for district courts, the reform proposals of the companies supporting Microsoft go much further than clarifying that role and would remove necessary flexibility from the calculation of damages:

The inflexible new damages rules that the amici supporting Microsoft propose threaten to upset the careful balance developed over 150 years of patent-damages law. While Microsoft limits its arguments to this case, the amici justify their radical departure from Supreme Court and Federal Circuit precedent on the dubious and wholly unsupported premise that juries are running amok and district courts are doing nothing to prevent it.

The reality, though, is that damages awards have been largely consistent for more than a decade. Moreover, no one disputes that Microsoft and its amici are correct when they say that district courts need to be gatekeepers and damages theories must be grounded in economic reality. The purpose of this amicus brief, in fact, is to show that existing damages law is fully up to the task, and there is no need to abandon a body of law that has evolved—and that has undeniably advanced the "Progress of Science and Useful Arts" in this country—over nearly two centuries in favor of rigid rules with dubious justifications and unknown ramifications.

With regard to the issue of "apportionment," Lucent's allies argued that there were numerous instances where parties in a "real world" negotiation would base a licensing fee on the total price of the product rather than just one feature. One example might be where the value of a feature is difficult to measure, so basing a royalty on the total sales price would be a convenient, rational metric. The companies supporting Lucent argued that the law of damages should reflect that reality.

In September, the Federal Circuit issued its decision in the Lucent-Microsoft appeal. In its decision, the Court agreed with Lucent that the patent was both valid and infringed, but sided with Microsoft on damages, finding that the jury's damages award was too large. In reaching this latter decision, however, the Court rejected the reforms proposed by the amici supporting Microsoft, finding instead that existing damages laws were sufficient to the resolve the dispute.

A debate similar to the one in the Lucent case has been joined in Congress. As with the Lucent-Microsoft case, the most contentious debate in Congress involves the issue of apportionment in patent damages. The original Senate bill proposed by Senators Leahy (D-Vt) and Hatch (R-Utah), contained a provision on apportionment very similar to the one Microsoft's allies proposed to the Federal Circuit, requiring a district "court [to] conduct an analysis to ensure that a reasonable royalty is applied only to the portion of the economic value of the infringing product or process properly attributable to the claimed invention's specific contribution over the prior art." Opponents of this language (which included many of the same companies supporting Lucent), lobbied hard against this provision, and they seem to have succeeded. A compromise bill was adopted by the Senate Committee in charge of patent reform in April 2009 that does not contain any apportionment language. The next step is consideration of the bill by the Senate as a whole. Likewise, the House of Representatives also has to pass its own bill on patent reform, which as of this writing continues to include the controversial apportionment language. Since the Senate and the House bills ultimately must agree, it is not yet certain how the proposed laws coming out of Congress will finally address the issue of damages. The Obama administration, however, has expressed support for the damages approach adopted by the Senate's compromise bill. As a result, it now appears that any new patent-law reforms coming out of Congress will not contain any radical changes to the calculation of damages, but that, of course, can change at virtually any moment.

Post-Grant Opposition

Another controversial provision in the bills being considered by Congress involves the issue of how and when issued patents can be challenged in the Patent Office. The debate generally centers around three issues: (1) will the PTO presume the patent is valid; (2) what kind of prior activities can be the basis for a challenge (e.g., will post-grant opposition be limited to challenges based on written prior-art materials or can the challenge be based on prior-sale or prior-use activity as well), and (3) what the effect of a post-grant opposition proceeding will have on later challenges to the patent in either the PTO or the courts. As with damages, the computer software and technology companies favor a robust system of post-grant opposition in which multiple challenges may be brought against a patent based on a wide variety of prior-art activities, while manufacturing and pharmaceutical companies generally want limits on the ease with which a challenge can be brought.

As it stands today, the Senate compromise bill makes it easier to challenge a patent numerous times in post-grant opposition proceedings, while in the House bill, the opportunities are more limited. The Obama administration appears to be favoring the Senate compromise, recently stating that it "would improve the quality of patents and lead to significant savings by avoiding unnecessary litigation."

Less Controversial Provisions

There are a number of other proposed reforms that appear to be much less controversial than damages or post-grant opposition. For example, both the House and Senate bills contain provisions changing the U.S. patent laws to a "first-to-file" system that would harmonize the U.S. with most of the rest of the world in this regard. Both bills also contain provisions formally writing into laws recent decisions from the Federal Circuit that made it more difficult to sue for willful infringement or to sue in a district court (like the Eastern District of Texas) that has little practical connection to the lawsuit or the parties involved. There are a number of other provisions in the bills that address issues such as PTO funding, patent application publication, and whether a party can appeal after an unfavorable claim construction (currently, all issues in a case generally must be resolved before a case can be appealed to the Federal Circuit). While all of these issues are important (at least to some extent), most of the attention will be directed to the damages and post-grant opposition provisions of the different bills.

Conclusion

Even with all of the other issues facing the Obama administration and Congress this year, patent reform appears to be moving forward. It is very possible, therefore, that numerous long-standing aspects of U.S. patent-law will change substantially in the near future. Accordingly, any company with significant interests in the U.S. should pay close attention to the issues currently being debated in Congress and the Courts to ensure that they can fully understand and adapt to the ways in which the U.S. law may change.

Endnote

1 The term used for a brief filed by third parties who want to provide to the court their perspective on the right outcome in a case is "amici curiae," Latin for "friends of the court."

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