By Kevin E. Noonan —

Until now, the major bones of contention over the
Senate's patent "reform" bill (S. 515) have centered around two
provisions:  putting in place
statutory language governing how damages are to be assessed, and instituting
a post-grant review system modeled on the European opposition, and that will be more
extensive than current re-examinations.  These provisions have been the motivating force for a variety of "high-tech"
companies (predominantly information technology companies like Cisco and Intel)
and their lobbying arms (such as the Coalition for Patent Fairness (sic)), aimed at addressing
"unconscionable" damages verdicts (typically but not always by juries) and the
purportedly "low quality" of patents being granted by the U.S. Patent
and Trademark Office.  A
major breakthrough in passing the bill from the Senate Judiciary Committee was
a "compromise" worked out by Chairman Leahy (D-VT), Senator Feinstein
(D-CA), and then ranking Republican member Specter (R-PA) (see "Senate 'Patent Reform' Bill (S. 515) Voted out of Judiciary Committee").  In that compromise, the judge in a
patent infringement case would assume a "gatekeeper" role,
purportedly to stem the worst excesses of easily-swayed juries.

The resulting bill enjoyed bipartisan but not
universal support, with notable dissenting views voiced by Senators Hatch
(R-UT) and Kyl (R-AZ); indeed,
Senator Hatch stormed from the hearing room oblivious to Senator Leahy's
entreaties not to go.  Senator Kyl, as he has with regard to prior versions of the bill,
objected that Patent Office representatives had not been consulted regarding
whether the post-grant review provisions were realistic in terms of personnel
and the Office's budget.

Missing from the fray has been any objection to
some of the other aspects of the bill, specifically the change from a "first-to-invent"
to a "first-to-file" (FTF) system, which reflects a major change in
U.S. law.  Another provision (not
contained in S. 515 but contained in other versions) is the grant of substantive
rulemaking authority to the Patent Office.  Such
provisions are a major goal of the new Commerce Secretary Gary Locke and
(presumably) new USPTO Director David Kappos.

This situation changed this week, with the delivery
of a letter and supporting materials to Karen G. Mills, administrator of the
Small Business Administration, by the Small Business Coalition on Patent
Legislation, a coalition of "early-stage start-up companies, small
businesses, individuals, academic inventors, researchers and new innovative
market entrants" (including
the National Small Business Association,
the National Association of Patent Practitioners,
the Professional Inventors Alliance,
the United Inventors Association,
CONNECT, and IP Advocate.  In their letter (copied to Penny
Pickett and Susan Walthall of the SBA, as well as Secretary Locke, Director
Kappos, and Rep. Nydia M. Velazquez (D-NY), Chairwoman of the House Small Business
Committee, and Senator Mary L. Landrieu (D-LA), Chair of the Senate Committee on
Small Business and Entrepreneurship), the group expresses their "concerns"
about the bill, focusing primarily on the first-to-file and post-grant review provisions
(although they also express reservations about the PTO rulemaking portions of
the bill in supporting materials appended to the letter).  The letter references Secretary Locke's
earlier letter to the Judiciary Committee, where the Secretary expressed the
support of the Obama Administration for these provisions, which this group's
letter contends "will inflict unprecedented harm on small firms that rely on
patented innovations," the "very segment of the economy that is
responsible for most of America's new jobs."  The group
characterizes the Secretary's position as a departure from "a
decades-long, bipartisan foreign intellectual property policy position,"
something that is accomplished, according to the group, not by addressing the "very
small number of priority contests" (interferences), but that "rewrite[s]
Section 102 in its entirety, redefining the prior art . . . and weakening the
grace period."  These changes
have been proposed, they allege, without any study or evaluation of the
expected effects of the change on U.S. patent practice, nor the effects
(adverse, they claim) on patent quality of increased PTO workload.  They cite a study from McGill
University (Lo and Sutthiphisal, "Does It Matter Who Has the Right to Patent: First-to-Invent or
First-to-File? Lessons from Canada," NBER Working Papers, No. W14926 (April 2009))
showing "adverse" effects on small businesses in Canada and "generally
negative effects on patent quality" as a consequence of Canada's adoption
of a first-to-file system in 1989.

The letter also refers to comments made by Director
Kappos at the Independent Inventors' Conference (on November 5, 2009)
purporting to base the Office's support for the change on the burden of
interference practice.  The group
contests whether the "miniscule number of interference proceedings"
have much to do with the harm they contend would follow from the change, from
both harm to small businesses and decline in patent quality.  They catalog these adverse consequences
as follows (emphasis in original):

Focusing on applications that reach
the USPTO misses the point.  The harmful effects of FTF for small
startups and early-stage patenting firms will be in losing patent protection on
inventions for which applications will not, or could not,
reach the USPTO.  Harm will arise due to the "race to the patent office"
whether or not an interference occurs with a competing application.  Harm will
be inflicted when inventors race to the patent office with the wrong application,
for the wrong invention, and for the wrong reasons, exhausting precious
resources in the process.

The letter also contests the argument
that a first-to-file system would provide administrative convenience and
increased certainty, contending instead that such a system would shift
uncertainty onto small business to the advantage of "large patenting
firms."  The letter cites the
lack of in-house patent prosecution resources, less or more inconsistent
funding and the need to disclose technology to investors as putting small
businesses at a disadvantage to such "large patenting firms."  The letter references its supporting
materials, particularly an "actual profile of a five-year R&D and
invention effort of one startup member of [the] Coalition" in support of its contentions of differential harm to small businesses (slide 12):

The letter characterizes this slide as showing fifty
important inventive ideas "conceived, evaluated and tested" over
months or years, and that the majority of these inventions turned out to be "useless."  Accordingly, during this time, the
letter says that only six patent applications were filed.  Under a first-to-file system, the
letter contends that this company would have faced the "painful dilemma as
to which of these inventions should be written up and filed," presumably
without the benefit of the time to establish which of the fifty inventions were
appropriate for filing.  These "premature guesses" would in
the main have been wrong, i.e., directed to inventions later shown to be "useless," resulting in
patent protection being obtained (or at least applied for) for such inventions and other, ultimately more
appropriate inventions failing to obtain patent protection.

The consequence of changing to a
first-to-file system would be "great risks, costs, dilemmas and increased
patent prosecution uncertainties" for small businesses, the letter
contends.  This will "undermine
early-stage startups' ability to attract investment capital, an assertion
supported by additional information in the supporting materials (see Slide 6).  The letter makes the following
argument regarding whether anyone has considered the consequences of the FTF
change (emphasis in original):

A related practical problem with FTF is
shown in Slide 23 [of the supporting materials], which shows that prior art
published less than one year before the filing date is the most frequent source
for invalidating patent applications in the European Patent Office (EPO), which
operates under FTF law.  This category of prior art currently cannot be used to
block or invalidate patents, because the U.S. has a one-year "grace
period."  Yet, no one had studied the number of U.S. patents that will be
invalidated by such prior art published after the invention date if
FTF were adopted, or the chilling effect that this loss of U.S. patent
protection would have on innovation.  Initial detailed legal analysis of the
proposed change in S. 515 reveals several of its flaws.  The analysis shows that
it creates strong incentives for making early nonenabling "springing public
disclosures" in order to pre-empt later filed patent applications that are
enabling from being granted as patents.  Such "springing public disclosures"
will also allow second inventors who file second to
obtain the patent (citing B. Pedersen and J. Woo, "The 'Matrix' for
First-Inventor-To-File: An Experimental Investigation into Proposed Changes in
U.S. Patent Law", (December 4, 2009).

The letter characterizes as "a
troubling aspect" of the Patent Office's "advocacy of the transition
to FTF" the "apparent lack of data and models within its field of
expertise" with regard to the "inevitable increase" of patent
application filings that would result.  The letter cites statistics from the European Patent
Office that almost 60% of the applications filed in the EPO are abandoned prior
to examination, in contrast to a 16% abandonment rate of U.S. patent
applications prior to examination.  The letter attributes this difference to the pressures accompanying the
first-to-file regime, and concludes that under such a system "it takes more
than two times the number of applications . . . in order to obtain one
surviving application worthy of examination for patent protection" (emphasis
in original).  The
USPTO has "totally ignored these costly inefficiencies," the letter
contends.

The letter also predicts "dire
financial collateral consequences" of a change to a first-to-file
system.  In contrast to the
European system, where a search report is generated prior to examination on the
merits (after which about one third of the applications are abandoned), in
the U.S. a search is provided only after a first action on the merits.  Thus, in the U.S., the PTO would be
expending "search and examination resources on applications that would
otherwise" never be examined.  This would result in a "substantial increase" in the Office's
upfront expenses without a concomitant increase in grant and maintenance fees,
requiring "inevitable" increases in filing fees to account for these
increased costs.  The letter contrasts the percentage of
total patent fees garnered at the initial phases of the patenting process in the U.S. (27%) and Canada (60%), contending that this increase in
initial fees would disproportionally impact small businesses and startups which
would otherwise be able to defer these costs until later in the commercial
development cycle.

This portion of the letter concludes by
disputing the assertions in Secretary Locke's letter suggesting that changing
to a first-to-file system would "'simplify the patent system, reduce legal
costs [and] improve fairness,'" and that the "'complex,
time-consuming and resource intensive' costs of global patent procurement are
the supposed target of this 'reform.'"  There is simply no evidence for any of this, the letter
asserts, and in fact there is "ample evidence" to the contrary.  The letter also notes that this change
merely "give[s] away one of the few 'negotiating chips' the U.S. retains
to encourage foreign patenting authorities to move in directions helpful for
U.S. small business."

With regard to post-grant review, the
letter voices agreement with the concerns raised in the letter sent to
Secretary Locke by 56 companies on September 14, 2009 (see "Tech Companies Send Letter on Patent Reform to Secretary Locke").  The letter particularly mentions the
risks to small business of "infringers who make repeated challenges to
patents after they issue," particularly with provisions that permit "serial"
challenges by providing an "extremely low threshold" for obtaining
post-grant review, citing Scott Shane, "Problems To Be Expected From
Expanded Administrative Challenges To U.S. Patents," (July 20, 2009).

Patent reform has generally taken a
back-burner to health care reform and follow-on biologics legislation since the
bill was voted out of committee in the spring.  In addition to these concerns, Congress has financial reform
and global warming bills to contend with in its next session.  But there is a real risk that this bill
will eventually come to the floor for a vote, and in view of the political constitution
of the Congress, it is also likely that the bill, or something very like it, will
land on the President's desk before the 111th Congress ends.  Insofar as the concerns voiced by the
small business coalition resonate, it is once again incumbent that our representatives
be made aware of the many flaws of S. 515.