April 24

Protect Your Patent Portfolio

By Sheldon E. Steinbach and Bruce T. Wieder

Higher education recognizes patents as indicators of advanced research and innovation and as sources of significant revenue. Today, patents are facing a serious threat from lawmakers on Capitol Hill. The Patent Reform Act of 2007, passed by the U.S. House of Representatives last September and currently under consideration in the U.S. Senate, would raise the costs to obtain a patent, create new uncertainty as to the validity of patents, and place new limits on the damages that may be awarded to patent owners when their patents are infringed. These provisions could have significant adverse consequences for current and future patents and patent applications from higher education institutions.

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Why should anyone but lawyers and technology transfer managers care about a seemingly obscure patent bill? Because raising the costs to obtain a patent will force institutions to either increase their cash outlays for patent prosecution or reduce the number of patent applications they file. More research that might have led to revenue streams for universities and inventors will be left unpatented — simply given away by publication of the research. Reduced revenue inevitably leads to reduced funds available for future research. Fewer startup companies based on such research will exist because it is more difficult to obtain venture capital funding when the underlying research is not protected by patents. Repercussions will be felt by both inventors and administrators.

The bill as currently drafted has provisions that would ultimately improve patent quality by creating a new post-grant opposition period, reduce litigations brought in locations far from the homes of either party, and facilitate research collaborations, all of which are supported by a number of higher education associations, including the Association of American Universities, the American Council on Education, the National Association of State Universities and Land-Grant Colleges, the Association of American Medical Colleges and the Council on Governmental Relations. Despite the potential positive effect of parts of the bill, the overall impact of the legislation, as currently drafted, would be detrimental to colleges and universities.

The five associations noted above — all representing university interests in patent reform — have expressed their views to Congress via both formal testimony and numerous other communications. However, a non-university group, the Coalition for Patent Fairness, has circulated documents purporting to present the views of universities while seriously misrepresenting those views. To help maintain the patent system as a successful engine for innovation, college administrators and researchers need to make their own views on the bill clear to their Congressional representatives.

Higher education institutions should be particularly worried by four provisions of the legislation as currently drafted: those with respect to the determination of damages, mandatory prior art searches, a post-grant “second window” in which to challenge a patent, and the diversion of fees away from the patent office. These provisions will reduce the certainty and value of existing and future patents and will cast doubt on the ability of patent holders to receive proper protection for their inventions. This will undermine the ability of universities to bring their innovations to market and into public use.

Damages. The damages language in the current bill would restrict the ability of courts to apply all of the relevant factors and methods to calculate a proper damages award. Under current law, courts can consider almost any relevant factor under a variety of methods to determine the value of the invention and what damages should be paid to the patentee for infringement. The proposed bill would tell courts what factors to consider under particular circumstances. Despite the occasional headline-making award, courts are quite good at looking at the relevant factors and arriving at a proper damage award. If Congress mandates what factors to consider and what not to consider, courts will be forced to try to categorize inventions and make whatever shape peg is the invention fit into the particular-shaped hole created by the bill. This will result in years of uncertainty and unjustified damage awards as the new law evolves. The cost of such a new law will not only be in unjustified damage awards, but also in increased litigation costs as plaintiffs and defendants demand longer trials to argue about damages and also more appeals on damages issues. This provision will make it difficult for universities to get appropriate compensation when an infringement occurs and will also create tremendous uncertainty as to the value of a patent, thus making patents less valuable overall. Simply stated, the more uncertainty there is as to the value of a patent, the more difficult it is to license the patent and the less revenue a university or inventor will receive for a patent license.

To best represent the interests of colleges and universities nationwide, the damages portion of the Act should be changed so that damages are determined through a case-by-case analysis using appropriate economic factors and valuation methods rather than the restrictive valuation process the bill would impose. Such a change would go a long way toward preserving the economic interests of universities and encouraging further innovation by deterring infringement.

Mandatory search reports. The second problematic provision mandates that patent applicants undertake the expense of prior art searches and submit a search report and relevancy analysis to the patent office (so-called “applicant quality submissions”). While patent applicants are already required to submit prior art known to them, this provision will require an extensive and expensive search by applicants and a report explaining the submitted prior art, thus shifting the costs of such a search from the federal government to the applicants. This burdensome and costly exercise will likely lead to increased charges of inequitable conduct for failure to conduct sufficiently thorough prior art searches and for mischaracterizing the prior art in the relevancy analysis. This will further increase the length and cost of patent trials. By mandating such a search, the Act will make the patent application process even more complicated, more expensive and cause particular harm to non-profit and academic inventors.

Second window oppositions. The third troubling section of the Act relates to the open-ended post-grant review “second window.” The Act calls for a “first window” for post-grant review that allows patent challenges at the patent office within the first 12 months after the patent issues. (This is similar to the European system that provides for such challenges, but during a 9 month window.) However, the Act would also create a “second window” in which to challenge issued patents. This second window will have a detrimental effect on the certainty and value of patents. The second window makes patents susceptible to such challenges throughout the life of the patent, allowing different challengers to file serial challenges that could keep a patent under challenge for many years of its life, thus creating a disincentive for partner companies to license university technologies. It is in the best interest of universities that inter partes reexamination, allowed by the House bill but not by the Senate bill, be available instead of the more costly second window.

Fee diversion. Finally, one of the more troubling aspects of the House bill is the lack of a provision to prevent the diversion of fees collected by the patent office. (The Senate bill includes an anti-fee diversion provision.) Perhaps the single most important factor in improving patent quality is to improve the quality of patent application examination. For many years, the fees collected by the patent office have been diverted to the general treasury. For the past few years, Congress has chosen not to divert fees. However, to build and maintain a sufficiently large and highly qualified pool of experienced examiners, the patent office needs to be assured of consistent funding and not be at the whim of other federal budget requirements from year to year. Anti-fee diversion language should be included in any patent reform bill.

Currently, the full Senate is poised to consider the bill and over a dozen amendments that were proposed last month. But neither the bill nor the amendments remedy the fundamental flaws discussed above.

Lobbying is intense on both sides of the bill and a vote will likely come in the next few weeks. College officials should work to be sure the bill represents the interests of higher education.

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