Draft Report on Senate Patent Reform Bill: Damages

    By Donald Zuhn --

As we reported two weeks ago, a draft of the Senate Judiciary Committee's report on the Patent Reform Act of 2007 (S. 1145) has been circulated on the internet.  The 106-page draft report contains sections on the background and purpose of the bill, the legislative history of the bill, a section-by-section summary of the bill, a placeholder for a cost estimate, a regulatory impact evaluation, and a list of the changes to Titles 15, 28, and 35 that would result if the Senate bill were passed into law.  The circulation of the draft report suggests that Senator Patrick Leahy, Chairman of the Senate Judiciary Committee, intends to keep his mid-December patent reform bill pledge to seek "favorable Senate action as early as the floor schedule permits" (see "Patent Reform Discussed on Senate Floor").  In view of the length of the draft report, Patent Docs has been providing a discussion of selected sections of the bill since the draft report began to circulate.  Today, we address section 4 of the bill.

Before addressing section 4, however, there are two recent developments concerning the Senate's patent reform bill that are worth noting.  First, the Senate Judiciary Committee reported the bill last Friday.  Patent Docs has not had a chance to review the final report on the patent reform bill, but according to the Intellectual Property Owners Association (IPO), the report "includes minority and additional views."  Second, Gene Quinn of the PLI Patent Blog informs us that Robert Clarke, the Director of Legal Administration at the USPTO, announced during a webcast today that the Patent Office does not support the Senate's patent reform bill.  At this time, the Office's specific objections to the bill are unclear (we will leave it to our readers to speculate as to which provisions most disturb the Patent Office).

But back to the damages provisions of S. 1145.  Section 4, entitled "Right of the inventor to obtain damages," addresses perceived deficiencies in the current damages statute, particularly the reasonable royalty standard, the willfulness statute, prior user rights, and marking requirements.  The draft report states that because the Senate Judiciary Committee "has heard no concerns expressed with current determinations of lost profits," the Senate bill introduces no changes with respect to lost profits.

Reasonable Royalty

With respect to the calculation of a reasonable royalty, the draft report states that the S. 1145 seeks "to bring clarity and guidance to the application of the law of damages" by codifying the analysis the judge and jury should perform in determining an appropriate reasonable royalty.  Under the provisions of the section 4, the judge would determine whether the case falls within the "entire market value" rule, the "marketplace licensing" rule, or neither rule, and then identify for the jury only those factors that are relevant in determining a reasonable royalty.

According to new § 284(c)(1)(A), the entire market value rule may be applied if the patented invention's contribution over the prior art is the predominant basis for the market demand of the infringing product or process.  According to new § 284(c)(1)(B), a reasonable royalty may be based on other comparable, nonexclusive licenses of the patented invention (the marketplace licensing rule) when there have been a sufficient number of licenses to indicate a general marketplace recognition of the reasonableness of the licensing terms.  According to new § 284(c)(1)(C), if neither of the above sections applies, the reasonable royalty calculation is to be 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."  This section, however, does not set forth a specific methodology for use in making this calculation.  The draft report explains that "specific contribution over the prior art" means "the reason the patent was allowed in view of the existing information at the time of the invention."  The draft report further explains that none of these provisions precludes a court from considering, or directing a jury to consider, other relevant factors in calculating the reasonable royalty, including, for example, the fifteen Georgia-Pacific factors.

The draft report suggests that the provisions described above were designed to address an increasing number of reasonable royalty cases brought on by an increase in the number of patent holders who do not produce products.  According to the report, this situation arises because:

the patent holder is focused on research and development rather than production (which is the case for many small inventors and universities), or because the patent at issue had been purchased, not for the purpose of manufacture, but for the purpose of licensing (or litigation), or because the infringed patent is so new to the marketplace that there has yet to be any real competition to it.

The report notes that several "alarming" cases "have captured the attention of the public and the Congress, [and] not surprisingly, involve out-sized damages awards."  The draft report contends that because modern patents often claim combinations, and the typical invention is no longer a "sui generis creation," juries may improperly award damages based on the value of the entire product, resulting in a damages award that is disproportionate to the infringing harm.

Willfulness

Under the Senate patent reform bill, willfulness is to be decided by the judge (rather than jury) and only after there is a finding of validity and infringement (as opposed to being plead at the outset of the action).  The draft report argues that the provisions of section 4 "should greatly reduce unwarranted allegations of willfulness, as well as unnecessary costly discovery."

To raise the notice threshold, the Senate bill requires that the patent holder present the accused infringer with more than mere "conclusory allegations" that the accused infringer is infringing one or more of the patent holder's patents. According to new § 284(e)(2)(A), the patent holder must instead "allege acts of infringement sufficient to give the alleged infringer an objectively reasonable apprehension of suit, and the patent holder must also plead with particularity which products or processes allegedly infringe which claims of the patent, as well as the basis for such a belief."

In addition, the draft report notes that § 284(e)(3) provides a "meaningful" good faith defense to willfulness when an infringer can show "reasonable reliance on the advice of counsel; evidence that the infringer sought to modify its conduct to avoid infringement once it had discovered the patent; or other evidence a court may find sufficient."  The report explains that such a defense is needed because "[t]he question of whether a patent is valid or infringed can often be a close question with colorable arguments on both sides," and because the pleading of willfulness gives the patent holder "significant litigation advantages, including breaching the attorney client privilege, necessitating different trial counsel, and resulting in costly additional discovery."  The draft report also explains that the threat of willfulness often leads to imbalanced settlement negotiations that are "not reflective of the compensation owed the patentee due to the alleged infringement."

The draft report contends that the changes to the willfulness statute were necessitated by the statute's lack of guidance regarding what activities constitute willful infringement.  The changes to the willfulness statute are intended to reduce excessive pleading, inappropriate findings of willfulness, and inflated litigation and transaction costs and damage awards.

Prior User Rights

The draft report notes that the Senate patent reform bill, as introduced, would have extended the prior user rights statute from encompassing just business methods to covering all types of subject matter.  However, as a result of the "persuasive outcry from the university and tech transfer communities," the bill only modifies § 273(b)(6) to clarify that "affiliates" of the prior user may also assert the defense.  The draft report also notes that the bill would require the Director of the USPTO to provide Congress with recommendations on prior user rights within two years of the Act's enactment.

Notice and Marking

The draft report notes that "neither marking nor actual notice is required to begin the accrual of damages if the patented invention is not made or sold by the patentee or someone acting under its authority," and further, that certain types of subject matter (e.g., business methods) are exempt from notice and marking requirements.  The draft report then states that the Senate Judiciary Committee considered "extreme recommendations" to improve the disparity in notice and marking requirements between different types of subject matter and different types of patent holders, but instead chose "a more modest approach."  That approach:  reducing the maximum period for which damages can be recovered for infringing patents not covered by the marking requirements from 6 years to 2 years from the date of actual notice.

For additional information on the draft report, please see:

• "Applicant Quality Submissions & Micro-Entities," Section 11, January 25, 2008
• "Post-Grant Procedures," Section 5, January 22, 2008
• "Inequitable Conduct Provisions," Section 12, January 21, 2008
• "First Inventor to File Provisions," Section 2, January 17, 2008
• "Assignee Filings, Mandatory Publication, and Third Party Submissions," Sections 3 and 7, January 16, 2008
• "Late Patent Filings," Section 13 January 15, 2008
• "Draft Report on Senate Patent Reform Bill Circulated," Sections 9 and 15, January 14, 2008

For additional information regarding this topic, please see:

• "U.S. Senate Mailbox Filling with Letters against Passage of Patent 'Reform' Bill: An Update," January 23, 2008
• "U.S. Senate Mailbox Filling with Letters against Passage of Patent 'Reform' Bill," January 18, 2008
• "Patent Reform Discussed on Senate Floor," December 21, 2007
• "Enjoined New Rules and Patent Reform Finally Appearing on Biotech Industry's Radar," December 20, 2007
• "Chinese IP Judge Discusses Implications of U.S. Patent Reform Bill and Two Congressmen Heed Warning," December 17, 2007
• "IPO President Seeks Deletion of Patent Reform Provision," December 12, 2007
• "Senate May Act on Patent 'Reform' Bill in the New Year," December 2, 2007
• "The Wall Street Journal Gets It Half Right," November 5, 2007
• "BIO CEO Provides Briefing on Follow-On Biologics and Patent Reform," September 18, 2007
• "Patent 'Reform' Bill Passes House of Representatives," September 9, 2007
• "Reversal in Microsoft Case Weakens Patent Reform Argument," August 7, 2007
• "San Francisco Chronicle Opines on Patent Reform," August 6, 2007
• "Patent Reform Bill to Be Delayed?" June 12, 2007
• "Senate Judiciary Committee Holds Hearing on Patent Reform," June 10, 2007
• "Could Creating a U.S. 'Utility Model' Patent Fulfill the 'Need' for Patent Law Reform?" May 21, 2007

Comments

[hack_188]

Thanks for a good review of damages in the upcoming bill.

In the prior user rights section you reference a change that was made to
§ 273(b)(6).

I looked through the bills found at the following link
http://thomas.loc.gov/cgi-bin/query/z?c110:S.1145:

And, I couldn't find the changes to 273(b)(6) that you referenced.

Please help me understand where these changes are shown. Thanks.

[Donald Zuhn]

hack_188: While that change was set forth and discussed in the Senate Judiciary Committee's draft report on S. 1145, it does not look like it made it to the reported bill. The Committee may comment on the removal of this provision in the final report on S. 1145, which we have not yet seen.