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SIDLEY AUSTIN BROWN & WOOD

July 29, 2005
Page 4

infringer to base its settlement valuation process on the costs of a possible business disruption, rather than an objective measurement of the value of the patented invention (e.g., against a market-based assessment). Fourth, unlike other patent owners that seek to derive revenue from licensing their patents, the troll will refuse to engage in good faith negotiations during the pendency of the litigation.

Trolls can be distinguished from other non-manufacturing patent owners seeking to license their patents in several respects. For example, a university intent on licensing its patent will often present licensing terms that are based on previously granted licenses under the patent, or are justified by reference to market-based valuation of the patent or patents in question. While there usually is disagreement between such a patent owner and the target of a license over the amount of the license, that discussion tends to incorporate an assessment of the economic viability of the product or service being developed or marketed by the accused infringer (e.g., including the effect of the license on the profitability of the product). This is because the patent owner in that setting is dependent on the success of the product, and is not seeking to simply extract revenue without regard to the success or failure of the product in question.

Another distinction is that the non-troll patent owner tends to have a pre-existing commercialization plan for the patented technology. This might be a more comprehensive licensing program, or an existing plan for commercialization with one or a group of companies. Indeed, licensing terms often are based on experiences in licensing the patent to other entities, and can be evaluated in a relatively straightforward manner by the accused infringer.

A third distinction is that during the district court litigation, a non-patent troll patent owner remains open and accessible to a settlement of the litigation for an economically reasonable royalty. This often is not the case with the patent troll, who will refuse to engage in serious negotiations until after it has prevailed in some stage of the litigation. This is because the patent troll

seeks to leverage the uncertainty of an adverse outcome in litigation, and force the accused infringer to measure that value in terms of the cost of a business disruption, rather than a valuation based on the actual market value of the patent rights.

Your question specifically focuses on the effect of injunctions sought by patent trolls. Indeed, many have testified as to the prevalence of the patent troll problem. Despite this, there are very few examples where a true patent troll has actually prevailed in litigation and been awarded an injunction. It is my understanding that the primary reason for this is that many companies that are targeted by trolls come to the conclusion that they must settle the case before a final judgment is entered in the litigation. So, I cannot offer views on the actual impact of injunctions awarded to patent trolls. I note that the absence of instances of injunctions being granted does not suggest there is no problem. Rather, the problem is felt upstream in the process when the company is forced to accept a risk-based settlement, rather than pay a royalty that reflects an objective valuation of the patent.

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Question Three

Some of the parties to this debate declare that a presumption in favor of
granting an injunction to a patent owner who shows infringement is both a
sound public policy and an appropriate interpretation of equitable
principles. Let's assume that statement is correct. Please explain what
harm could come from asking courts simply to consider, and describe, the
irreparable harm to the patent holder, on a case-by-case basis?

The principle harm from amending the patent law to require a "case-by-case" consideration of the equities of awarding injunctive relief is in the uncertainty that such an amendment would create in the patent law. Uncertainty in the entitlement to an injunction based on a patent that has been proven through litigation to be valid and infringed will have severe repercussions in the life sciences sector, particularly with respect to early stage funding of biotechnology startups.

The type of change you describe also suffers from the prospect that, even after new jurisprudence is established, there will be no substantive distinction in the "case-by-case" application of the law of equity in patent injunctions relative to the law as it exists today. In numerous cases, courts have found – including in decisions preceding establishment of the Federal Circuit a compelling rationale for a presumption that a patent owner is irreparably harmed by the infringement of its valid patent. The rationale that compels this determination stems from the fact that the exclusive rights conferred by a patent – if not enforced through a court-ordered injunction - are ephemeral and lose their character as property rights. These decisions also reflect the understanding that the manner in which a patent owner chooses to exploit its rights - either by licensing or electing to not license the patent - often is critical to realization of the economic potential of the patent. Removing the discretion of patent owners to choose to whom they license or do not license their patent rights – which is the consequence of denying a patent injunction - thus often causes irreparable harm to the patent owner.

Question Four

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 believe a balanced, transparent and efficient post-grant review procedure will improve our patent system, and should be established by Congress. The existing administrative procedures for reviewing patent validity before the Patent and Trademark Office (PTO) are not viable alternatives to litigation, primarily because they provide numerous procedural and substantive advantages to the patent owner. These existing reexamination procedures also limit the nature of information that can be raised in the proceeding, and the types of issues of validity

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that can be evaluated. For these reasons, few third parties employ patent reexamination to evaluate validity of a patent.

A new procedure that permits a third party to request review of the validity of a patent on any objective patentability issue would be a significant improvement to our patent system. Such a system would permit parties to avoid expensive and complicated litigation in a court to review discrete questions of patentability. It would answer the call of many for a less complicated and less expensive way of challenging patents believed to be improperly granted.

The proposal for a post-grant review procedure found in H.R. 2795 is a sound basis for moving forward. The procedure proposed in the House bill is viable because it permits parties to commence oppositions only for a limited period after the grant of the patent, or if the patent owner consents to the opposition. The House proposal also seems viable because it provides limited amounts of discovery, permits an oral hearing, and imposes a strict schedule for completing the opposition.

An important part of any post-grant opposition system is a requirement that an opposer present an adequate initial showing that an opposition is justified. In particular, any post-grant system enacted by Congress should require the opposer to set forth a detailed explanation why one or more the claims in the patent are invalid, and to identify the evidence that the opposer believes establishes invalidity of the patent. The PTO should conduct an independent assessment of that showing, and should then commence oppositions only where the showing establish that a substantial question of patentability exists with respect to the patent claims. The PTO's independent determination on the showing is critical to ensure that unjustified and unnecessary oppositions are not commenced. The PTO's initial determination also should define the scope of the opposition. Thus, if an opposer identifies possible defects A, B and C, and the PTO believes only B is meritorious, the opposition should be limited to issue B. Having this type of procedural structure is essential to making the procedure fair and capable of being conducted in a confined period. I note that the provisions of H.R. 2795 that address this element of the postgrant system can and should be improved to make explicit this type structure.

A number of other improvements to the House proposal are warranted.

Provisions that would impose intervening rights on patents that survive an opposition seem ill-advised and should be deleted. Such provisions will provide an incentive for some opposers to challenge patents simply to induce an amendment to the patent claims. Those types of amendments will then be relied on by the opposer in later litigation to argue tħat intervening rights should shield their infringing activity. These measures will complicate litigation on patents that survive oppositions, and should be deleted for these reasons.

All parties to an opposition proceeding should be subject to the same standards for duty of disclosure and conduct before the opposition panel. Under the current House proposal, a patent owner could face not only disciplinary sanctions, but also

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the sanction that the patent be held unenforceable. There is no equivalent sanction
for an opposer. The proposed legislation should be amended to impose a uniform
standard for conduct of parties in an opposition proceeding, and should preclude
enforceability challenges based on events that occur only during the opposition.
The House bill imposes limits on the type of discovery that may be possible in an
opposition. In particular, it specifies that no discovery beyond deposition of
witnesses offered by a party is to be permitted unless such discovery is in the
interest of justice. To ensure that oppositions do not become duplicative of
litigation in the courts, the law should expressly prohibit certain types of discovery,
such as open-ended document production and calling of witnesses that a party has
not called to offer testimony. The language in the House bill could be amended in
this respect to more precisely limit the scope and nature of discovery that can be
authorized in an opposition proceeding.
The House bill permits an opposer to conceal its real party in interest in the
opposition proceeding in certain circumstances. A party that elects to conceal its
identity loses the ability to rely on testimony of expert witnesses and faces other
procedural impediments. Given the limited universe of opposers that will elect to
do so, and given the importance of avoiding abuses of the system, it would be
advisable to simply require disclosure of the real party in interest of an opposer
without condition.

The House bill appropriately directs the PTO to conduct opposition proceedings
using the evidentiary standard used in all other PTO procedures; namely, proof by a
preponderance of the evidence. I believe this is the appropriate standard to use in
opposition proceedings, given the expert nature of the adjudicator (the PTO), and
the familiarity the PTO has in conducting proceedings using this standard.

Finally, the legislation should make clear that the procedures and practices of the PTO Board of Patent Appeals and Interferences that are used in interference proceedings should not be used in opposition proceedings. The interference procedures and practices are unduly and unfairly restrictive, and often result in arbitrary outcomes designed to induce settlements, rather than produce just determinations. Use of those standards in oppositions will discourage use of the system and will produce arbitrary results.

Changes along these lines would improve the system proposed in H.R. 2795, and I encourage you to consider such changes.

Question Five

The Federal Trade Commission and the National Academies have both
noted the pitfalls associated with "subjective" elements of patent

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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?

The current standards that govem willful infringement have created unjustified and unwarranted risks for third parties that wish to review patent disclosures. These unwarranted risks stem in part from the law that governs willful infringement, and in part from the subjective elements of the patent law. Removing these subjective elements, and making the willful infringement standards more objective and clear, will address this "real" problem.

The social bargain of the patent system is the disclosure of technical information concerning an invention in exchange for the grant of exclusive rights. A system that creates enhanced risks for liability due to review of the technical information in a patent fundamentally undermines this social bargain.

I believe a complete elimination of the provisions that provide for enhanced damages in situations where a party has willfully infringed a patent is not advisable or practical. However, the standards that govern this doctrine must be reformed, as they create excessive risk from their uncertain nature.

The proposal in H.R. 2795 to reform the willful infringement standard is, in general, sound. One significant improvement made by the proposed legislation is that it explicitly defines the three types of conduct that can give rise to enhanced damages. The three scenarios set forth in the House bill appropriately define conduct that courts have found to be "willful" infringement. The bill also reserves the question of willful infringement to a judge, rather than a jury, and requires proof of infringement to precede adjudication of the claim of willful infringement in a court proceeding.

The legislation also defines what conduct cannot be found to constitute willful infringement. In particular, the House bill specifies that a court may not find conduct to be willful if the infringer had a good faith belief that the patent was not valid, was not enforceable or would not be infringed by its conduct. The bill then specifies that a party may establish that it had such a good faith belief by obtaining a reasonable opinion of counsel. I note that while this is appropriate, it is also appropriate for courts to find a good faith belief from the efforts of the infringer to avoid infringement. Thus, an accused infringer presents evidence that modified its product's characteristics, or changed its conduct in order to avoid infringement of a patent should not be found to have willfully infringed the patent. I believe this should be clarified in the legislation, either through amendments to the statutory language, or through clear legislative history.

Question Six

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