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Senator Orrin G. Hatch
Senator Patrick Leahy
July 15, 2005
Page 3

That said, an absolute entitlement to injunctive relief can and docs 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 entire microprocessor until Intel can retool its entire fab to avoid infringement. Small wonder, then, that patentees regularly settle with companies in the information technology industries for far more money than their inventions are actually worth. The companies are paying holdup money to avoid the threat of infringement. That's not a legitimate part of the value of a patent; it is a windfall to the patent owner that comes at the expense not of unscrupulous copyists but of legitimate companies doing their own R&D.

The irreparable harm approach would help to distinguish these sets of cases. Patentces in the last category aren't legitimately entitled to the value of their holdup; their injury is merely the loss of a licensing fee, and can properly be compensated in damages. It isn't irreparable. By contrast, patentees who sold the patented product, or who sold other products in the market, would easily be able to show irreparable harm. Patentees who do not sell in the market, but wbose invention was copied by the defendant rather than independently developed, should also be entitled to an injunction. To achieve this, I think it would be reasonable to presume that infringement causes irreparable harm, and to put the burden on the defendant to rebut that presumption in an appropriate case.

One proposal that seems to have broad support is the idea of creating an effective post grant review procedure. This would allow a third party to challenge a patent's validity at the Patent and Trademark Office after a patent has issued. Do you favor some form of post grant review, and do you have any specific concerns?

I do favor the creation of post-grant opposition, and I do not have any real concerns with such a system. I have mentioned above my reasons for supporting two windows in such a scheme.

Senator Orrin G. Hatch
Senator Patrick Leahy
July 15, 2005
Page 4

The Federal Trade Commission and the National Academies have both noted the pitfalls associated with subjective" elements of patent litigation, and I mentioned in my statement the example of willful infringement: there is a disincentive for companies to engage in a comprehensive search of prior art because they may unwittingly expose themselves to higher damages. Is this a real problem? If so, should we eliminate these elements, or can their utility be preserved through modification?

Subjective elements increase the cost and uncertainty of patent litigation, both because they require detailed discovery and judicial credibility determinations and because it is difficult if not impossible to predict in advance what another party's mental state is. If we can get rid of these subjective doctrines, we should. Whether it makes sense to abolish the doctrine altogether depends on which doctrine we are talking about.

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Willfulness. The disincentive caused by the willfulness rules is a very real one. I have talked to a number of in-house patent counsel who strongly urge their engineers not to read patents. There are other problems with willfulness doctrine as well: it creates an opinion-writing game that distorts legal advice and makes settlement more difficult. I have detailed these problems in an article with Ragesh Tangri, Ending Patent Law's Willfulness Game, 18 Berkeley Tech. L.J. 1085 (2003).

But willfulness is a valuable doctrine because it discourages outright theft of ideas. Without some sanction for theft, unscrupulous companies might steal patented ideas and take their chances on getting caught. Rather than abolish willfulness, therefore, I think we should try to minimize the costs and problems with the doctrine. One way to do that is to give it an objective rather than a subjective basis, making an objectively reasonable defense sufficient to avoid a charge of willfulness. This is my preferred solution. Another way is to minimize the circumstances in which the doctrine is used; this is the approach H.R. 2795 takes in limiting the pleading of willfulness.

Inequitable conduct. 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

Senator Orrin G. Hatch
Senator Patrick Leahy
July 15, 2005
Page 5

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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.

There may be ways to solve the problems with incquitable conduct less drastic than the changes proposed in H.R. 2795. One way is simply to make it harder to prove inequitable conduct, focusing on the impact of the false statements more than the motivation for making them. Another way is to make it more difficult to plead inequitable conduct, just as HR 2795 does with willfulness.

Best mode. The best mode requirement invalidates patents when the inventor has not disclosed her preferred way of implementing the invention, even if she has given enough information to cnable scientists in the field to make and use the invention. The best mode requirement does serve a purpose - it prevents inventors from obtaining the benefits of a patent without giving the public the full benefit of disclosure. But on balance, the benefits of the doctrine aren't worth the costs. Because the best mode doctrine is based on the beliefs and intent of the actual inventor, the doctrine serves as a "gotcha” that can invalidate novel and nonobvious patents regardless of the good faith of the company that owns them. Indeed, the doctrine has been responsible for more than 10% of all the patents invalidated in court during the 1990s. John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185 (1998). The enablement and written description requirements, properly applied, can require sufficient disclosure to benefit the public.

Do any reforms obviate, or at least lessen, the need for any others? Would an effective post grant review system remove the need for changes to the standards for issuing injunctions? Would improved patent quality through reforms at PTO be more productive in reducing abusive litigation than some of the litigation reforms we discussed at the hearing?

I do not believe that reforms designed to improve the patent prosecution process are a substitute for reforms of litigation abuse. The patent office receives nearly 300,000 new applications a year. It is possible that, with enough expenditure of money, the PTO could make the right decision on each one of these applications. After all, additional resources would make it possible to hire more examiners, allocate more time to the evaluation of each patent application, and thus weed out bad patents more effectively.

Unfortunately, however, most of any additional resources would in the end be wasted. Most patents – between 90% and 95% -- don't matter to society. They claim technologies that

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ultimately failed in the marketplace. They protect a firm from competitors who for other reasons failed to materialize. They were acquired merely to signal investors that the relevant firm has intellectual assets. Or they were lottery tickets filed on the speculation that a given industry or invention would take off. These patents will never be licensed, never be asserted in negotiation or litigation, and thus spending additional resources to examine thema would yield few benefits.

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Some bad patents, however, are more pernicious. They award legal rights that are far broader than what their relevant inventors actually invented, and they do so with respect to technologies that then turn out to be economically significant.

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The lit tion reforms proposed in HR 2795 and elsewhere are desirable because they are targeted to the relatively small number of patents that do turn out to matter. Post-grant opposition is desirable for a similar reason – it harnesses the information competitors have about which patents they consider most important. But improving the PTO process more generallywhile a worthwhile goal - should not be seen as a substitute for reforms that curb abuse of patents in litigation.

i Congress were to enact changes to the standards for granting injunctive relief, what factors should shape any reform, and what should Congress seek to avoid?

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.

I have explained above the desirability of permitting defendants to rebut the presumption that patentees are always entitled to injunctive relief. In my view, the best way to accomplish this is to create a legal rule that is tailored to the problem. Thus, rather than grant general powers to consider faimess, I would specify a limited set of cases in which courts could not must, but could - deny injunctive relief. A logical way to proceed would be to take the language H.R. 2795 introduces to deal with a similar problem in the context of damages, modifying it slightly to further insure that the normal right to injunctive relief is protected both in cases where the patentee is in the market and where the infringer acts willfully.

Thus, I propose that section 283 should be modified by adding the following language in place of the first sentence of H.R. 2795: “In determining the right to injunctive relief of a patent owner who does not participate in the market for a patented invention against an infringer who did not act copy the invention from the patentee or otherwise act willfully, the court shall consider, where relevant and among other factors, the portion of the defendant's product that

Senator Orrin G. Hatch
Senator Patrick Leahy
July 15, 2005
Page 7

constitutes the inventive contribution as distinguished from other features of the product or improvements added by the infringer.” This would maintain the entitlement to injunctive relief except where (1) the patentec doesn't participate in the market, (2) the defendant didn't copy the idea from the patentee, and (3) an injunction would pose a risk of holdup by preventing the defendant from selling a product of which the patentee's invention is only one small component.

Some have suggested that quality concerns at PTO mean that the presumption that patents are valid is misplaced. I wonder if the proper approach would emphasize improving quality rather than changing the litigation standards. Would lowering the standard for challenging patents from clear and convincing" evidence to a preponderance of the evidence run the risk of negative consequences? Would investors be less likely to invest in nascent technologies if a patent did not carry with it a strong presumption of validity?

The problem is that, given the amount of time the PTO currently devotes to examining patents (only 18 hours on average per application), and the structural incentives they have to grant rather than reject patent applications, the presumption of validity simply isn't justified. There are two ways to solve this problem: to beef up examination in the PTO or to weaken the presumption of validity. In part because 99% of patents are never litigated, it seems more costeffective to weaken the presumption of validity. A preponderance of the evidence presumption shouldn't have significant negative consequences. It works fine in both copyright and trademark law, and doesn't seem to increase uncertainty or discourage investment there.

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If Congress were to reduce the strength of the presumption, it should provide a mechanism for patentees who do care about certainty to obtain a stronger presumption by going through a more rigorous evaluation process. One way to do so is detailed in an article I have coauthored with Professors Doug Lichtman at the University of Chicago and Bhaven Sampat at the University of Michigan. I quote our proposal in some detail here:

Our proposal therefore comes in three specific parts. First, we would weaken the
presumption of validity for issued patents. A presumption like that embraced by
the "clear and convincing standard must be earned; and, under current rules,
patent applicants do not earn it. Why not replace that high burdle with a more
appropriate level of deference such as the “preponderance of the evidence"
presumption currently given trademarks and copyrights? (And, while we are at it,
let's apply the presumption with some eye toward reality. The current
presumption is so wooden that courts today assume a patent is valid even as
against evidence that the patent examiner never saw, much less considered.
What's the logic there?)

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