Judiciary Committee Votes on Patent Reform Bill

By Kevin E. Noonan --

The Senate Judiciary Committee met today and passed S. 23, the Patent Reform Act of 2011, sending it to the Senate floor for consideration.  The vote was 15 ayes, no nays, and on abstention (by Senator John Cornyn, R-TX).  But prior to the vote, there were several (but fewer than expected) amendments presented and adopted, and several Senators who voiced their intention to bring amendments to the Senate floor and, if they were not included in the final bill, these Senators could not pledge their support.

Senator Jon Kyl (R-AZ) spoke extensively on changes in this bill from the Managers' Amendment to S. 515 passed by the committee in the last Congress.  These changes, specifically to the post-grant review provisions of the bill, made it possible for him to support the measure, as he proposed it be amended.  He voiced his "deep misgivings" about previous versions of the bill, and praised Committee Chairman Patrick Leahy (D-VT) for taking his suggestion and meeting with senior U.S. Patent and Trademark Office officials to address concerns that post-grant review would be difficult to implement and increase the backlog and patent application pendency.  The bill as amended would have two differences from earlier versions that the Senator believes will be important:  first, inter partes post-grant review would be conducted by the USPTO as an adjudicated proceeding, unlike the present system which is substantially similar to ex parte prosecution (albeit with third party requestor commentary).  Senator Kyl called these proceedings "cumbersome" and "slow" and said that the system proposed in the bill would address these concerns by having each party present their evidence (and, presumably, rebuttal by patentee) to the Patent Office, which would then render a decision on whether the requestor had shown one or more claims to be invalid.  The evidence would be limited to prior art printed publications and patents, and there would be no discovery (and, presumably, no evidence of on-sale activity or § 112 deficiencies).  In addition, the threshold for granting review would be heightened from the present "substantial question of patentability" standard to a "reasonable likelihood of invalidity" standard, which the Senator hailed as being fair to patentees (by reducing or eliminating spurious or non-meritorious requests) and challengers (since there should be little justification for complaint if a requestor did not have sufficient evidence to satisfy a reasonable likelihood standard).  The Senator contrasted this expected outcome with the present ex parte and inter partes re-examination regimes, where 95% of requests are granted, "many clearly unnecessary and some sought to gain advantage in litigation," which he characterized as a "gross waste of PTO resources."  The Senator also noted that these provisions would provide incentives for challengers to "front-load" their evidence, enable the Patent Office to meet the one-year deadline for deciding post-grant review challenges, and to protect patentees from harassment by requests of dubious merit.  Senator Kyl's amendment was unanimously approved by the committee by voice vote.

Several Senators voiced concerns over business method patents, but while an amendment by Senators Charles Schumer (D-NY) and Kyl was not put to a vote, the sentiments of several of the committee members were strongly expressed.  Senator Kyl called the Federal Circuit's State Street decision allowing business method patents a "serious error," something not permitted by other patent systems, and that has resulted in "thousands of invalid business method patents [that] remain on the books and [are] used to extract large sums of money from defendants."  He supports the establishment of a temporary procedure for the PTO to invalidate these patents, to remove a "blight on the economy" more cheaply than by litigation.  Senator Schumer said he would offer a business method patents provision on the Senate floor, calling business method patents a "plagu[e on] the financial sector," "anathema" to a patent system intended to protect technological innovation, and that business methods permit protection of "abstract and common concepts" because the nature of the financial services industry prevents the Patent Office from recognizing prior art (presumably because most businesses have traditionally kept such methods as trade secrets).  He said that business method patents are litigated thirty times more frequently than all other patents, and that his amendment would let companies "targeted" by business method holders to go before the PTO and demonstrate the patent invalid over prior art, using an undescribed "efficient administrative proceeding."  Senator Schumer also stated that he would not be able to support passage of the bill by the Senate if it did not contain some provisions for addressing business method patents.  Senator Feinstein (D-CA) would go even further in her remarks, suggesting that the bill should simply ban business method patents altogether.

Senator Grassley (R-IA) proposed an amendment that passed on voice vote to ban methods for tax (avoidance) strategies.  He noted that this problem came to his attention when several Certified Public Accountants were sued by a tax strategy patentee, and that his amendment was intended to protect taxpayer rights (i.e., the inalienable right to pay as little in taxes as possible legally).  He said that such patents "encumber the use of the tax laws" by taxpayers, and can result in taxpayers having to pay a fee to a patentee for merely complying with the tax code, citing protection that would give private parties the "exclusive use" of loopholes in the tax code.  "All taxpayers" should have equal access to tax strategies, in the absence of which the fairness of the system could be threatened, according to Senator Grassley.  He specifically pointed out that his amendment would not ban software tools for preparing tax returns.

The committee also approved by voice vote "technical" amendments, and Senator Feinstein's "compromise" on willfulness, but did not vote on amendments to the "first-inventor-to-file" provisions or Senator Schumer's "generic drug" amendment.  The committee also did not vote on Senator Tom Coburn's (R-OK) fee diversion amendment, which he will introduce during debate on the Senate floor.  Senator Leahy gave Senator Coburn the floor for a (relatively) long discussion of his proposed amendment, which was supported by several other committee members.  Senator Coburn asserted that there was a "contract with America" that patent fees were collected to pay for patent examination, and that "if an American pays a fee he should get what he pays for" and not for funding other aspects or parts of the government.  He called intellectual property protection something that needs to be done in an expeditious and timely manner and produce "quality" patents, and that excess monies collected by the Patent Office should be used to provide additional services by the Office to examine and grant additional patents, rather than being diverted for other uses.  He said he believed this was part of a bigger effort to adjust spending, debt, and the economy.

Senator Durbin (D-IL) raised a question that shed light not only on why Senator Coburn did not offer his amendment for consideration by the committee but also how legislators think about questions involving revenue.  He asked who should be responsible for oversight on how PTO monies are spent, in view of the interests of the Appropriations Committee in federal revenue.  Senator Coburn indicated that he believed the Judiciary Committee had that authority, although he backtracked slightly when Senator Durbin mentioned the Appropriations Committee staff dedicated to monitoring how monies were spent by various agencies.  Senator Coburn countered that there is "not enough" oversight by Congress, although comments by other Senators indicated that this was not merely a "turf war" but a more fundamental question of how appropriation decisions are made (and perhaps the consequences of having other committees exert influence on these issues).  Senator Coburn's comments on fee diversion were supported by Senators Grassley and Christopher Coons (D-DE) (the latter saying there is a "delicate relationship" between how the different Congressional committees could exercise oversight), and Senator Orrin Hatch (R-UT) called fee diversion "despicable" in supporting this amendment, also saying fee diversion was a "tax on innovation."  Senator Cornyn called these provisions "central to the bill" which he predicted would have a "big impact on the country, on intellectual property rights and the economy."

The bill now moves to the Senate floor for eventual consideration.  There has not yet been a patent reform bill introduced in the House of Representatives.

Comments

[staff]

"because the nature of the financial services industry prevents the Patent Office from recognizing prior art (presumably because most businesses have traditionally kept such methods as trade secrets)."

If so, they should have evidence to support. Otherwise, they did not and the invention was patentable.

“Patent reform”

Just because they call it “reform” doesn’t mean it is. Patent reform is a fraud on America.

Please see http://truereform.piausa.org/ for a different/opposing view on patent reform.

[staff]

"Senator Kyl called the Federal Circuit's State Street decision allowing business method patents a "serious error," something not permitted by other patent systems, and that has resulted in "thousands of invalid business method patents remain on the books and used to extract large sums of money from defendants."

Nonsense. These firms have been beaten by small entities and now as a last resort are attempting to buy legislation to "get out of jail". It sounds like they have Kyl's currency.

[anonymous]

"Senator Grassley (R-IA) proposed an amendment that passed on voice vote to ban methods for tax (avoidance) strategies. ... He specifically pointed out that his amendment would not ban software tools for preparing tax returns."

What about software tools that implement those tax avoidance strategies?

[6]

My Senate working for me? Wait? Am I in America? I'm confused. How did this happen? Did the boys in the backroom finally get their hats on straight? Have they been reading PO?

"Senator Feinstein (D-CA) would go even further in her remarks, suggesting that the bill should simply ban business method patents altogether"

You know I usually dislike that girl in the extreme she's really coming through for me here.

"Senator Orrin Hatch (R-UT) called fee diversion "despicable" in supporting this amendment, "

Thems fightin' words right there.

"Senator Schumer said he would offer a business method patents provision on the floor, calling business method patents a "plagu[e on] the financial sector," "anathema" to a patent system intended to protect technological innovation, and that business methods permit protection of "abstract and common concepts" because the nature of the financial services industry prevents the Patent Office from recognizing prior art (presumably because most businesses have traditionally kept such methods as trade secrets). "

Deeeeeeelicious fightin' words.

Kev, btw, were you there for this or did you see it on TV etc?

Btw, does anyone know if you can go to the senate and sit through an entire session listening if it isn't really busy at that time?

[Skeptical]

"kept such methods as trade secrets"

Isn't the entire point of the patent system so that information is NOT kept secret?

Schumer misses the point by a mile.

[6]

"Isn't the entire point of the patent system so that information is NOT kept secret?

Schumer misses the point by a mile."

Nope, it is to promote the Useful Arts. Notably, disclosing financial institutions business methods does not do that what so ever.

Actually you missed the "point" of what he was saying by a mile.

[m]

Very nice summary Kevin, Thanks for posting this!

[Skeptical]

6,

I am not going to argue with you about what "Useful Arts" means. I do understand that you think it excludes business methods.

Congress, notwithstanding Schumer, and the courts (including the Supreme Court) have addressed this, and your position is not the correct position.

[Dan Feigelson]

Skeptical, Schumer's point is that for many years, prior to State Street, patent protection wasn't available for business methods or tax avoidance strategies. Hence the only way for companies to protect such methods or strategies was to maintain them as trade secrets. When the State Street decision opened the floodgates to patents on such methods/strategies, the PTO was left without published prior art to rely on to assess the novelty and non-obviousness of claims to such methods/strategies.

Seems to me that if the CAFC wanted to do away with tax avoidance strategy patents, they could just say that all such patents are inherently anticipated or inherently obvious (following the court's recent inherent anticipation jurisprudence in the pharmaceutical arena): such patents are born from the tax code - the second the code is enacted, it also inherently contains the ways one can avoid paying taxes. The fact that it took an accountant or attorney some effort to *appreciate* that a particular tax avoidance strategy was present in the code is immaterial.

[Skeptical]

Dan,

Your idea of "they could just say that all such patents are inherently anticipated or inherently obvious" is a path of grave danger, for the logical end of that path is that in any problem, all solutions are thus "inherent."

You are basically abolishing all patents. For all solutions to any problem are merely to be "appreciated." The very philosophy of having patents is the liberal encouragement of sharing the appreciation.

Also your "left without published prior art" concept has already been dealt with by Congress (the law has an explicit defense for that). As well, you ignore the very point I make that the patent system is intended to make the publication a desired path - to drive away from the trade secret route.

Schumer is attempting to resurrect the very plank in Bilski that failed - that business method patents are not covered by law. Granted, the legislative avenue is the correct way to make that change, but to make an attack as he has is to create a sensationalistic propaganda wave and is "anathema" to a rational discussion. I find it highly offensive. Even more offensive than "who owns you" gene propaganda wave.

[MaxDrei]

The number of the winning lottery ticket is not "obvious". In patent law, one can control what claims get issued with a properly functioning obviousness test. The EPO test avoids ex post facto analysis, but works only in a First to File environment. Can we look forward to its being adopted, to sweep away tax strategy patents, while letting many business method claims through to issue, when FItF comes in?

[Davis]

"Nope, it is to promote the Useful Arts. Notably, disclosing financial institutions business methods does not do that what so ever."

And to add to that, patents are supposed to promote the Useful Arts by creating a financial incentive to innovate (and to commercialize those innovations). Let's assume for the moment that business methods do indeed achieve this purpose; then there are still a couple of arguments against patenting them.

First, business methods are by their nature self-incentivizing. They allow for more efficient or otherwise profitable operation of business, meaning that business "innovators" do not need the protection of the patent system as a motivator. If a business method is new and useful, then it's profitable to devise and commercialize it regardless of whether patent protection is available. E.g., Henry Ford developed and implemented his assembly line procedure because it was good for his auto business, not because he thought he could license the idea to other people.

Second, business methods tend to become obsolete quickly (usually because of developments in technology in the ordinary sense). This means two things: (1) little or no benefit accrues to the public from disclosure, since in 20 years the method will probably be worthless; (2) first mover advantages are probably even more of an incentive in this realm than in others.

[Today's Lesson]

Davis,

You have a few notions that need to be disabused.

"(and to commercialize those innovations)"

The patent right is not a right to "do" anything of the sort. The patent right is a right to exclude. Extra duties/rights/requirements as you indicate here are simply not a part of the patetn right.

"First, business methods are by their nature self-incentivizing"

This is a non-sequitur. Every possible invention contains with it the inherent nature of self-incentivizing. You are reading into the patent law a "but for" requirement that is not there.

You also skip over the reason for the patent system - divulging of the item. Once shared, and after the limited exclusivity period, that method belongs to everyone.

It is the same logic that applies to all areas under the patent law. Business methods are no different in this regard.

For some reason you also seem to have a distaste for the maximization of property. My guess is that you practice in the software arts.

Lastly, if your point about methods becoming obsolete quickly, then there is actually little harm in patenting, as the patent itself will not have a nexus with the new methods. In such a likelihood, the patent holder would be inclined to not pay the maintenance fee, and the patent reverts to society at large much much sooner. So you are crying over something that is not even there. This plank of your argument actually weakens your position. The little harm then is offset by the benefit of capturing, and dedicating to the public methods, which may in themselves be outdated, nonetheless enrich the body of public knowledge - just what the patent system was intended to do.

[6]

Skeptical, there is no "rational discussion" to be had regarding non-useful arts being included within the useful arts. Likewise, there is no "rational discussion" to be had regarding non-inventions being inventions just because some [REDACTED] decided to expand the use of the word. Thus, his being sensationalistic is just fine. Indeed, it is to be encouraged.

Notably, the only reason the courts felt that business methods might fall within the useful arts and be eligible is because they felt like congress told them to allow them to be. They didn't. They made an exception to help people hurt by the courts making a prior blunder. And it is time for them to make themselves clear on the matter.

[Skeptical]

6,

It is easier to make oneself clear by NOT resorting to the methods of sensationalistic grandstanding, as that only invites those with an opposing view to add fuel to the fire and no one ends up listening to no one else. Have you ever heard the phrase "cooler heads will prevail"?

If you have already decided that there is no sense in "rational discussion", then you have already lost. The fact that you encourage such behavior is a klaxon in the library - and says more than you might want it to say.

[6]

"It is easier to make oneself clear by NOT resorting to the methods of sensationalistic grandstanding,"

Yes, but how much support do you garner on an issue that few in congress care anything about sans grandstanding? He's a politician, let him politic.

"Have you ever heard the phrase "cooler heads will prevail"?"

I have, but here, cooler heads in congress are just like "meh, I don't really care about this issue and likely don't know enough about it to be of assistance anyway". They need some fire. A call to action.

"If you have already decided that there is no sense in "rational discussion", then you have already lost."

Right. Mhmm. The "rational discussion" was settled some centuries ago and was only recently stirred up again by some no-good pranksters who didn't gaurd their words carefully. The issue is still settled but for those no-goods and the ramifications of their mistake. Note that even the no-goods themselves admitted to having made a mistake. But now the damage is done. Take them, and the ramifications of their mistake out of the picture and the cooler heads will do just fine seeing that there is practically no discussion, much less reasonable discussion, needed to make the correct call. Adding a little drama just rouses the cooler heads into action. The status quo is a dangerous foe.

Note also that I do not consider these no-good pranksters no good for everything, simply on the 101 issue, as I'm quite fond of them overall.

Besides, all this discussion about him simply stating a blatant fact? I mean, if he'd have said something that was controversial then I can see you going on about it, but just because a fact is sensational doesn't mean that he should shy away from stating it.

In any event good day sir, this has been reasonable enough of a discussion on an issue long settled. I am just glad to see my senators taking some small steps towards action.