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Punitive Damages for Willful Infringement

BSA supports the approach taken in the Committee print to address the issue of willful infringement, and suggest that further changes be made in the language to avoid perpetuating the need to have dueling opinions from counsel.

The current law allows the courts to impose punitive increased damages (up to three times actual damages) in cases involving willful infringement. However, the standard on which they may be awarded under current jurisprudence is far less than what is required for punitive damages in other areas of law.4 In fact, merely knowing that the patent exists is often the basis for an allegation of “willfulness" and a claim for triple damages, shifting to the defendant the burden of showing the exercise of due care.

Trying to satisfy this duty of care, patent defendants will often seek the opinion of counsel. But reliance on that opinion in defense of a charge of willfulness requires pre-trial disclosure of that opinion to the other side, waiver of the attorney-client privilege and often waiver of privileged materials relating to the subject matter of the opinion generally. In some cases, this threatens even the integrity of trial preparations. Thus, the existence of an opinion presents defendants with a dilemma of whether to waive privilege in order to defend against the charge of willfulness or, alternatively, preserve the privilege. This choice can be especially unfair when plaintiffs are allowed to use discovery obtained pursuant to the waiver to help establish or color underlying liability for patent infringement.

The uncertainty about willfulness has also led to the undermining of one of the fundamental points of the patent system: that is, disclosing to the public the inven. tion. To avoid “knowledge” and charges of willfulness, too many companies now instruct their employees to avoid reading patents. This too can lead to reduced patent quality.

BSA believes that Congress should change the statute to make clear that punitive increased damages should be imposed only when there is evidence of reprehensible conduct, such as copying the patent or violating a prior court order. The provision included in the Committee print includes these concepts, and we support these changes. But it also includes countervailing provisions that we fear would perpetuate the current inefficient and costly practice. We fear the draft provision would perpetuate the current gamesmanship by permitting a well-drafted notice letter from the patentee to give rise to a charge of willfulness. It would also continue the practice of having to obtain counsel's opinions by making an “informed good faith belief” the touchstone of liability. We fear, based on experience, that this standard may be manipulated and does not reflect the sort of reprehensible conduct by the infringer that should warrant punitive damages. Principles of Equity in Granting Injunctive Relief

BSA strongly supports the approach taken by the Committee print directing courts to do what the law says: balance equities before issuing an injunction. Section 283 of the current patent statute provides that the courts "may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent.

The Federal Circuit has in recent times interpreted very narrowly the ability of a district court to consider equitable factors (largely limited to health emergencies) when deciding whether or not to grant an injunction. Only weeks ago, the Court overturned a district court's judgment, based on the specific facts of the case, that a permanent injunction was not warranted because of the patentee's demonstrated willingness to license the patent.6 Only in cases of public health emergencies or well-being has the Court readily considered non-issuance of an injunction. Thus, the courts seldom engage in a balance of the equities, and the granting of an injunction has become nearly automatic. Moreover, there is no automatic stay of an injunction pending appeal.

Combined, these factors mean that an accused infringer must go into a patent infringement trial prepared for the possibility of an immediate injunction at the end of trial. This leverage point is recognized and exploited by patentees who do not actually desire injunctive relief, but use its threat to extract disproportionately high payments from defendants. This problem is especially burdensome for vendors of

4 See Knorr-Bremse Systeme Fuer Nutzfahrzeuge Gmbh v. Dana et al., 383 F.3d 1337 (Fed Cir. 2004) (Dyk, Circuit Judge, concurring-in-part, dissenting-in-part).

5 See generally Mark A. Lemley and Ragesh K. Tangri, Ending Patent's Willfulness Game, 18 Berkeley Technology Law Journal 1085 (2003), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=472901 6 MercExchange v. eBay, Inc. et al, 401 F.3d 1323, 2005 U.S. App. LEXIS 4308, *41 (Fed. Cir.

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“system products” that, as explained above, may have thousands of patented or patentable features contained within them. A trial on any of those patents threatens to shut down the entire product.

BSA applauds the Subcommittee's inclusion of a provision reestablishing an incrementally broader consideration of equitable principles than is currently being practiced by the courts. We believe this provision, while certainly not applicable in most cases, will be meaningful in a small, but economically significant, set of the most abusive patent assertions. Burden of Proving Invalidity

An area not included in the Committee print, but which BSA thinks requires attention, is the burden of proving invalidity. Under current law, an issued patent is presumed valid and any party challenging validity must overcome this presumption with “clear and convincing evidence.” This is true even when it is clear that the patent examiner did not have an opportunity to consider all of the prior art that forms the basis for a later validity challenge. To address this issue, we recommend that the evidentiary burden for challenging the validity of a patent based in whole or in part on information or references not considered during examination should be lowered to “preponderance of the evidence,” to reflect the fact that the validity of the patent was not in fact fully vetted relative to those prior art references. Disincentives to Domestic R&D

The Committee print correctly recognizes that Section 271(f), as interpreted by the Courts, presents potentially serious problems for developers of software, and indeed for developers of any information-based products. BSA supports the changes proposed in the Committee print on this issue. Given marketplace developments since the enactment of section 271(f), the Committee may want to consider repealing this provision.

In 1984, Congress added Section 271(f) to prevent companies from manufacturing components of an infringing product in the United States, and exporting those parts for assembly abroad to avoid the claim of infringement. Today, the provision has been interpreted by the courts in ways that deter domestic development of software. Under recent court holdings, a copy of a computer program made outside the United States may in some cases nonetheless be included as part of United States damages if the software is made from a “master disk” developed in the United States. If the software had been developed outside the US, this rule would not apply. The same issue may exist with respect to development of other information-based products that are made wholly outside the United States based on information developed in the United States. We believe this application of the law creates an unintended incentive to move valuable development activity outside the US, and should be clarified or removed from the law. Harmonization

The Committee print includes a number of provisions harmonizing United States patent law with a worldwide first-to-file patent system. BSA fully supports this goal: BSA member companies derive a substantial portion of their revenues from overseas and hold numerous patents in all major jurisdictions.

We fear, however, that the provisions in the Committee print could have unintended consequences by making changes that go beyond what is needed to normalize our laws with those of other countries. Specifically, by reformulating the current law on the conditions for patentability, these changes would call in to question decades of established case law on prior art. This change could spur unnecessary litigation to reformulate standards of prior art.

Specifically, by shifting away from the current categories of prior art—especially subject matter that was used or offered for sale—the provision included in the print risks the possibility that subject matter already being used and commercialized within the United States will nonetheless be patentable by a third party. The injection of an inquiry whether subject matter was “readily and effectively accessible” contemplates that subject matter that is harder to access, even if widely deployed, will be unavailable as prior art. This could result in an unintended new gamesmanship of patenting concepts already in deployment commercially and may significantly increase the number of patent filings for all manner of inventions. We question whether this is a step that should be taken.

Instead, BSA encourages Congress to take an approach towards harmonization that brings the United States into alignment with other countries' laws without unnecessarily also diminishing the scope of prior art by excluding materials that may have been difficult to access, but were nonetheless publicly available.

Duty of Candor

The Committee print includes a provision significantly reducing the effect of a patent applicant's violating her duty of candor in front of the Patent and Trademark Office. We question whether this provision is appropriate, particularly in this era of increased emphasis on candor and full disclosure in dealing with governmental agencies and public institutions.

The purpose of the duty of candor is to compel a patent applicant to provide the Patent and Trademark Office with as much information known to the applicant as may be helpful to the examiner. The related litigation defense of inequitable conduct asks whether the patentee effectively commit fraud on the Patent and Trademark Office by intentionally withholding such key information that the PTO's ability to examine the patent was compromised. This current structure provides a powerful incentive for applicants to act with utmost candor in front of the Patent and Trade mark Office.

The changes included in the Committee print risk undermining this incentive in a number of ways. First, by moving to a “but for” test for inequitable conduct, the proposed law would lower the incentive for an applicant to err on the side of overinclusion in disclosure, thus potentially depriving the patent examiner of information that could be material to examination. In addition, the changes to existing law on who can be held liable for inequitable conduct seem to create the risk that parties could participate in a fraud on the Patent and Trademark Office, but avoid any adverse consequences of such behavior by transferring the patent to a third party. Finally, by removing the issue of breach of duty of candor from the court and placing it with the Patent and Trademark Office, the proposal risks further overloading the PTO.

We do believe, however, that it could be efficient and useful to bifurcate the issue of inequitable conduct in litigation and present that issue solely to a court after li. ability has been adjudicated.

CONCLUSION Thank you again for the opportunity to provide input on the critical topic of patent quality and improvement. BSA strongly supports your efforts and commends you for the excellent Committee print. We look forward to working with you in your efforts to improve the United States patent system and ensure that it continues to serve this country's great interest in promoting innovation and providing the public with the benefit of that innovation.

Mr. SMITH. Mr. Kushan?

TESTIMONY OF JEFFREY P. KUSHAN, SIDLEY, AUSTIN BROWN

AND WOOD, LLP, ON BEHALF OF GENENTECH Mr. KUSHAN. Thank you, Mr. Chairman. I'm appearing today on behalf of Genentech, a biotech company based in south San Francisco, California.

Genentech appreciates the opportunity to provide its views to you on the issue of patent law reform.

We commend you, Mr. Chairman, along with Mr. Berman and Ms. Lofgren, and Mr. Boucher and your colleagues for starting this important legislative discussion. We also want to thank the Committee leadership, in particular Representatives Sensenbrenner and Conyers for their significant efforts to curb the diversion of patent fees.

Patent reform is a timely and important issue. Like many other companies, the health of the patent system is a critically important issue for Genentech.

To appreciate Genentech's perspective on the patent system, you have to understand the challenges of developing a new biotech drug.

Biotech drug development is an extremely risky, expensive, and long process. Genentech scientists must not only discover a new

iable drug candidate, but must spend many years testing the drug o prove it's safe and effective.

It must also figure out how to produce the drug in large volumes, vhile preserving the safety and effectiveness of that drug. The time t takes from discovery to market entry routinely exceeds a decade r more.

A good recent example is Genentech's Avastin product. This product was—the product development effort for this product startd in 1989. Avastin was approved in 2004. That's 15 years of effort ind hundreds of millions of dollars of cost to getting this product o market. And it wasn't until the FDA approved this product was t clear that this product would be a commercial success.

The length of and the unpredictable nature of the drug developnent process raises important patent implications for Genentech.

First, the effective patent life for a biotech drug is, as a consequence of this long development process, very short.

Second, it is very challenging to ensure that the patents filed in vear one of the drug development process are going to protect the Urug product when it finally reaches the market 10 or 15 years ater.

The patent system plays a critically important role for the AmerVican public as well. Patients are the direct beneficiaries of the pat

ent system. It is the patent system that makes it commercially feasible for companies like Genentech to discover, develop, and bring

to market new drugs to treat unmet medical needs. It should not dobe surprising that Genentech is a frequent user of the patent sysowitem. They file hundreds of applications every year, and have been categranted nearly a thousand U.S. patents.

Genentech also has its fair share of patent litigation, both offensive and defensive. Genentech, thus, has a perspective of a company that has to protect its innovations and a company that must

frequently resolve conflicts over patents owned by others. - BRO! In general terms, Genentech sees three significant challenges to 1 the health of the patent system.

toda First, the overall health of the patent system depends on the San PTO issuing valid patents in a timely fashion. If a mistake is made

by the PTO, it cost a company accused of an infringement millions ws to, of dollars to fix that mistake.

Second invalid patents are not the only problem. Delays in patman , ents issuing is a significant problem, and is very disruptive in the ting t market. And it's disruptive to the process of planning for developnbrene The PTO's ability to improve its examination process is hindered ersion by the ongoing problem of fee diversion. It's also hindered by the

structure of the current fee schedule and by certain PTO practices, ny oth such as the restriction.

In the absence of an effective—the second major problem we see

challenging the health of the patent system is the absence of an efem, y fective administrative procedure to review the validity of a patent. biote The only practical option today for challenging the validity of a

patent is litigation in the Federal courts. That, as I said, can cost ve, ao several million dollars. The other members of the panel have also a ner observed this.

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An effective administrative procedure for reviewing patent valid ity is long overdue. Genentech believes the system proposed in the committee print is a good start. However, several changes are needed to make this a more balanced and effective procedure, and we invite the Subcommittee to review our written testimony which sets out a number of the improvements we think are appropriate. I'll just briefly note two significant ones.

First, the way that post-grant oppositions would be started and conducted as set forth in the committee print must be changed.

The proposed system would permit an opposer to start a proceeding simply by paying a fee. The patent owner would then have to convince the Patent Office to not to conduct the proceeding because it's meritless. This approach will induce far too many unjustified opposition proceedings. It also unfairly puts the burden on the patent owner to stop the proceeding instead of putting the burden on the opposer to justify starting the proceeding.

The second concern concerns the authority the PTO should have to regulate the conduct of parties in the proceeding.

We believe the PTO should regulate the conduct of parties using the same authority that courts use to regulate the conduct of parties in litigation. Events that occurred during the opposition proceeding should not be capable of rendering a patent unenforceable, but if warranted should be addressed by conventional sanctions.

The third factor adversely affecting the health of the patent system is the inefficient and unpredictable process of resolving patent disputes through litigation in the Federal courts. We acknowledge that the Federal Circuit has improved much in the area of patent standards and clarity, but there's a lot left to be done.

As a result, it's very difficult to predict if a patent will be held valid, infringed, or enforceable. It's also impossible to predict what the damage liability would be when you are found to infringe a patent.

The uncertainty in today's litigation environment unfortunately is being exploited by many to distort the value of patents. In this respect, we'd strongly support reforms to three areas. Willful infringement. We strongly support reforms to that topic. We believe more must be done to regulate how that type of pleading can be raised in litigation, because there are litigation abuses possible.

Second, we think that reforms are need to the inequitable conduct doctrine to adopt a much more objective standard.

The last point I'd like to make if you would give me 15 to 20 seconds is to address the issue of injunctive relief. And I apologize for my inefficiencies compared to the first two sectors.

Mr. SMITH. That's okay. We'll grant you that extra 30 seconds.

Mr. KUSHAN. Thank you. The specific issue raised in the committee print is who bears the burden of justifying the grant of an injunction when a patent has been proven valid and infringed. Genentech sees no reason why the burden should not be placed on the shoulders of a proven infringer of a valid U.S. patent to prove why an injunction should not issue. That change that's being proposed would undo more than a century of precedent and a very sound public policy reason, which puts the burden on the infringer to justify why there is not going to be an injunction. We're talking, as has been mentioned before, about permanent injunctions. We

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