Mark A. Lemley June 14, 2005 Senate testimony on patent reform Section 5: Inequitable Conduct Summary: Eliminating inequitable conduct from litigation is a major change that should not be entered into lightly because it will encourage deceit by unscrupulous patent applicants. This section should be included in patent reform legislation only if counterbalanced by significant limitations on abuse of the patent system. Even if it is, some textual changes could improve the operation of H.R. 2795. The doctrine of inequitable conduct discourages deception by patent applicants during the ex parte patent examination process. It is very important to discourage that deception, because the patent examiner can't independently verify what the applicant tells him. At the same time, the doctrine of inequitable conduct is often abused by litigation defendants, who assert bogus claims of inequitable conduct. H.R. 2795 as currently drafted essentially abolishes the litigation defense of inequitable conduct, replacing it with an administrative system within the patent office. Courts could not consider inequitable conduct unless and until a patent claim had already been invalidated. This tightens up the inequitable conduct standard, requiring that a deception of the patent office actually have led to a patent that would not otherwise issue. Even then, they could not render the patent unenforceable unless a business person within the company, rather than just an in-house or outside lawyer, participated in the fraud. This tightening of the standard may be appropriate as a means of preventing abuse of the defense in litigation. But as the statute is currently drafted, it raises the prospect that an unscrupulous patent owner could get away with filing fraudulent patent applications in certain circumstances. This is a particular risk if the bill does not contain adequate provisions deterring patent "trolls," who have particular incentives to mislead the PTO. Limiting abuse of the patent system is an important element of the reform package. Eliminating inequitable conduct could actually make the problem worse, not better. So, while there are reasons to do so, Congress should take such a drastic step only if there are other provisions in the legislation that effectively limit abuse, such as appropriate restrictions on injunctive relief, excessive damages, and continuation applications. Even if Congress decides to go forward with the effective elimination of the inequitable conduct defense, the specific provisions of H.R. 2795 could be improved in several ways, detailed below. Problem 1: Patent owners could avoid rulings of inequitable conduct by strategically deciding not to litigate particular claims in the patent. They may assert claims, then drop them when it becomes apparent that their claim will be invalidated or their misconduct discovered. Because H.R. 2795 as currently written requires that the validity of a claim be an issue in the litigation, and actually be adjudged invalid, a patentee who strategically drops claims will avoid ever being called to account for its conduct. Solution: Section 136(d)(2) in H.R. 2795 should be modified by adding at the end of subsection (A): ". If a claim is asserted by the patentee in the action, the court shall have jurisdiction to determine its validity even if the patentee later withdraws that claim;" Mark A. Lemley June 14, 2005 Senate testimony on patent reform Problem 2: The newly created administrative bureaucracy will work well only if people take it seriously. The administrative sanction is relatively small, and patent applicants with a lot of money at stake may decide to "roll the dice" and lie to the PTO because even if they are caught, they will receive only a relative slap on the wrist. Solution: The penalties need to be increased. Section 136(e)(6)(B) in H.R. 2795 should be modified by striking "$1,000,000" and replacing it with "$10,000,000" and by striking "$5,000,000" and replacing it with "$50,000,000." Further, section 136(d)(2)(B) should be modified by adding at the end", or the Director has made a nonappealable adjudication of misconduct under this section;" Problem 3: The language of H.R. 2795 regarding preemption of other actions is selfcontradictory. Section 136(g) provides that other proceedings can be brought based on a final determination of misconduct, but then says "except that nothing in this subsection shall authorize any investigation or determination of misconduct that is otherwise preempted under this section." But section 136(c)(1) preempts all such other proceedings, rendering section 136(g) of no effect. Solution: The language "except that nothing in this subsection shall authorize any investigation or determination of misconduct that is otherwise preempted under this section." should be deleted from section 136(g) of H.R. 2795. Problem 4: Finally, one apparently unintended consequence of H.R. 2795 would be to prevent the government from asserting inequitable conduct as a party to litigation, whether when defending itself in a patent suit or engaging in an antitrust investigation. This flows from the language of section 136(c)(1), which forbids not just courts but any "federal department or agency" and any "other Federal or State governmental entity” from investigating claims of inequitable conduct. Read literally, this would prevent the federal government or any state from asserting the defense even when private defendants could do so. It would also prevent the Antitrust Division or the Federal Trade Commission from investigating or charging antitrust violations based on fraud on the patent office (so-called "Walker Process fraud”). Solution: These problems could be solved by changing the language "may investigate or make a determination or an adjudication" in section 136(c)(1) of H.R. 2795 to read "may adjudicate", and to add at the end of that subsection "or in the antitrust laws." Mark A. Lemley June 14, 2005 Senate testimony on patent reform Section 6: Damages Summary: The change to the entire market value rule in reasonable royalty damages and the limitation of willfulness claims are both extremely important. The reasonable royalty portion of H.R. 2795 does not need any modification. The willfulness provision of that bill improves the current law in certain respects, but could be made better still. The reasonable royalty provisions in the existing law create significant problems in those industries in which patented inventions relate not to an entire product, but to a small component of a larger product. Because courts have interpreted the reasonable royalty provision to require the award of royalties based on the "entire market value," juries tend to award royalty rates that don't take into account all of the other, unpatented components of the defendant's product. This in turn encourages patent trolls, who can obtain damages or settlements that far exceed the actual contribution of the patent. There are numerous cases of just this problem occurring. I am currently conducting an empirical study to determine the extent of the problem, but there is no doubt that it exists. The bill solves this problem by encouraging the courts to consider the contribution of other elements of the invention. The doctrine of willfulness is a mess. Over 90% of all patent plaintiffs assert willful infringement, even though most of the defendants in those cases developed their products independently and had never heard of the plaintiff or its patent. They are not "willful" in any ordinary meaning of the term. Rather, the way the courts have interpreted patent law has created a bizarre game. By sending a carefully crafted letter, patent owners can cause companies to have to obtain written opinion letters and waive the attorney-client privilege, and if they don't can declare them willful infringers for continuing to sell products they designed in good faith. It is important to clean up the willfulness doctrine. [While some have proposed eliminating it altogether, I think that goes too far. Enhanced damages for willfulness serve as an important deterrent in those cases where the defendant really does steal the technology from the patent owner.] H.R. 2795 makes two important changes that reduce the abuse of willfulness. First, it requires a letter that puts the defendant on notice of a patent to be sufficiently specific that a defendant can file a declaratory judgment action asserting its innocence. This should reduce the casual, off-hand sending of such letters. Second, by requiring the pleading and litigation of willfulness only after a defendant has been found to infringe, H.R. 2795 eliminates many of the harms associated with the court's reliance on advice of counsel, because the defendant will not have to decide whether to waive the privilege until after the primary trial has ended. Further, by requiring bifurcation of willfulness, the bill simplifies the patent litigation process by separating out discovery as to willfulness and eliminating the need for that discovery in the cases where the patent is ultimately held invalid or not infringed. However, H.R. 2795 as currently written leaves intact the opinion letter "game" for many patent lawsuits. Because a defendant's only defense to willfulness under the statute is the existence of "an informed good faith belief” in invalidity or noninfringement, defendants are as a practical matter extremely likely to decide they have to obtain an opinion, rely on the advice of counsel, and therefore waive the attorney-client privilege. This waiver distorts legal advice in Mark A. Lemley June 14, 2005 Senate testimony on patent reform difficult ways, making settlement more difficult. See Mark A. Lemley & Ragesh K. Tangri, Ending Patent Law's Willfulness Game, Berkeley Tech. L.J. (2003). This problem could largely be solved if defendants could rely on strong (though ultimately unsuccessful) arguments to avoid a finding of willfulness. To do this, section 284(b)(3) of H.R. 2795 should be modified by adding after "under paragraph (2)" the following: "if the infringer offered an objectively reasonable defense in court or". This would make either an objectively reasonable argument or a subjectively good faith belief grounds for avoiding willfulness. It makes little sense to conclude that defendants are acting willfully if the case was a close one. Adding an objective reasonableness defense would permit defendants who think they have a strong argument to rely on that argument, rather than having to waive privilege. Mark A. Lemley June 14, 2005 Senate testimony on patent reform Section 7: Injunctive Relief Summary: Injunctive relief is an important part of the patent right, but it is subject to abuse by patent trolls. It is important to preserve the right of injunctive relief in the case of legitimate patent claims, while preventing those who abuse the system from using the threat of injunctive relief to extort money from legitimate innovators. H.R. 2795 takes a small step in the right direction by giving courts the power to stay injunctive relief pending appeal where doing so wouldn't harm the patentee. It takes a more significant step by explicitly introducing fairness concerns, but doing so may have unintended consequences. Limiting injunctions based on patents that cover only a small part of a product would be a significant improvement, and need not raise any of the concerns that have been expressed about compulsory licensing. The goal of any revision to the injunctive relief sections of the patent law should be to ensure that people who actually need injunctive relief to protect their markets or ensure a return on their investment can get it, but that people can't use the threat of an injunction against a complex product based on one infringing piece to hold up the defendant and extract a greater share of the value of that product than their patent warrants. Some have suggested that any restriction on the right to injunctive relief amounts to compelling patent owners to license their competitors. That's not true. The presumptive right to injunctive relief is an important part of the patent law, and in most cases there will be no question as to the patentee's entitlement to such relief. To begin, an injunction is warranted if the patentee practices the patent. Even if they don't, if the patentee sells a competing product in the marketplace, they should be entitled to an injunction to prevent their own invention (in the hands of an infringer) from competing with themselves. Similarly, if they assign or exclusively license the patent to someone who competes in the marketplace, they should also be entitled to injunctive relief. And even if the patentee hasn't done these things in the past, if they begin to do so in the future they should have a right to injunctive relief. Patentees also ought to be entitled to an injunction in cases of willful infringement, even if they are not participating in the market and have no plans to do so. Infringers shouldn't be able to intentionally take the patented technology knowing they will only have to pay a royalty. Even if none of these things are true, some injunctions won't lead to a risk of holdup, and so even patentees who don't meet any of the criteria listed above should be entitled to an injunction in ordinary circumstances. That said, an absolute entitlement to injunctive relief can and does permit patent trolls to "hold up" defendants by threatening to enjoin products that are predominantly noninfringing. In numerous cases, the parties settle for an amount of money that significantly exceeds what the plaintiff could have made in damages and ongoing royalties had they won. In these cases it is not the value of the patent, but the costs to the defendant of switching technologies midstream, that are driving the high price being paid. For example, on patent owner charges a 0.75% royalty for patents that don't cover industry standards, and 3.75% for patents that do cover industry standards. The technology isn't any better, but they can demand five times as much money once the industry has made irreversible investments. This is of particular concern when the patent itself covers only a small piece of the product. An Intel microprocessor may include 5,000 different inventions, some made at Intel and some licensed from outside. If Intel unknowingly infringes a patent on one of those inventions, the patent owner can threaten to stop the sale of the |