Friday, September 23, 2005

Orrin Hatch: Patent reform not a front burner issue for 109th Congress

Likely, you can kiss the present H.R. 2795 good-bye -->

PharmaLive posted remarks of Senator Orrin G. Hatch before the Generic Pharmaceutical Association on Sept. 20, 2005:

I know you are deeply interested in the patent reform legislation and generic biologicals and I intend to devote most of my remarks to those two issues.

However, there are other issues which I want to mention to you that will help explain why these two important matters are not front burner issues as the first session of the 109th Congress comes to an end this fall.

You all know that the Judiciary Committee and full Senate are working on the nomination of Judge John Roberts to be the next Chief Justice of the United States. And once we complete work on that, we will work on another Supreme Court vacancy that may take until December.

Patent Reform

As I am sure you all are aware, patent reform is one of the most significant intellectual property issues currently in Congress. In working on this issue, I have tried to come up with a few principles and goals that I hope will guide some of the debate in the Senate and any eventual legislation.

Goal 1: Increasing patent quality.

Many of the current complaints about the patent system that I have heard deal with the number of suspect and over-broad patents that are issued. Thus, in considering patent reform, it appears to me that Congress and the PTO must cooperate to find ways to increase patent quality. Increased resources for the PTO will have some beneficial effect on patent quality, but I am convinced that more money will solve only part of problem.

Human errors in the application and examination processes, efforts of applicants to obtain broad claims to maximize the scope of their exclusive rights, and occasional malfeasance by applicants result in a significant number of suspect or bad patents. Although the PTO does a reasonably good job, enough bad patents still issue to cause some real problems. For obvious reasons, this leads to inefficient litigation, as well as significant economic dislocation and business risk. Suspect patents also appear to enable abusive litigation. Because bad patents are generally of little value to productive companies, in many cases their value is maximized by using them as a basis for infringement suits against deep-pocket defendants.

I am convinced that part of the current problem with suspect patents – and the resulting increase in litigation – stems from the lack of an effective administrative mechanism for reconsidering or modifying suspect and over-broad patents. This forces legitimate disputes into court and increases the potential for abusive litigation in illegitimate disputes. The current administrative process of reexamination is fundamentally flawed and, as a result, goes virtually unused. Although there is little consensus regarding the details, there is some consensus for addressing this problem either by fixing the existing re-examination process or by creating a post-grant review process so that third parties can challenge suspect patents in an administrative process. Similarly, many support allowing third parties to submit prior art that is relevant to an applicant’s patent claims before the patent is issued.

I believe that any patent reform legislation that is to have a long-term impact will necessarily include one or more of these proposals.

Goal 2: Increasing international harmonization.

Over the past several decades, various experts, including academics, presidential commissions, and blue-ribbon panels have advocated increased harmonization between the U.S. patent system and those of other countries. Advocates of harmonization often cite three different types of anticipated benefits from increased harmonization. First – faster, more predictable patentability determinations; Second – decreased litigation costs in the long term; and, Third – reduced redundancy in patent examination and associated decreases in costs to patent holders in obtaining global patent protection. However, there are those who question the need for increased harmonization or who oppose it outright. Some argue that harmonization would disadvantage specific interests or groups, including independent inventors, small businesses, non-profit entities, and educational institutions. Others argue that the potential efficiencies of harmonization simply do not outweigh the perceived benefits of some of the unique aspects of U.S. patent law.

In the context of patent reform legislation, we are working through the arguments regarding moving from our traditional first-to-invent regime to the internationally adopted first-to-file system; eliminating the best-mode requirement; requiring publication of all patent applications after 18 months; and, moving toward a more uniform definition of prior art that is closer to what is used internationally.

It seems clear that some of the harmonization proposals have significant support both in Congress and in the patent community. I would anticipate that aspects of international harmonization will be included in patent reform legislation this Congress.

Goal 3 – Decreasing unwarranted or abusive patent litigation.

By all accounts, patent litigation has become a significant problem in some industries and for some types of litigants. There are a number of factors in patent law that drive up the cost and uncertainty of litigation in ways that appear to be unjustified. However, some of the principal problems and costs associated with patent litigation are not uniform across industrial sectors. This has led to substantial and sometimes vociferous disagreements about the nature of the underlying problems and, thus, what the appropriate solutions might be.

A variety of industries and companies argue that a certain class of patent holders – who some less-than-affectionately characterize as “patent trolls” – attempt to secure disproportionately high settlements from defendants that cannot afford to take an intolerably high-risk of treble damage awards or massive lost profits if an injunction keeps their product off the market during and after litigation.

Two approaches to dealing with the current problem of patent litigation have emerged in the patent reform debate.

One focuses on eliminating subjective elements and fact-intensive inquiries from patent litigation.
The other, and much more controversial, approach involves altering the remedies available to patent holders in litigation.

Subjective and unduly fact-intensive elements inherently lead to higher litigation costs and increased certainty in virtually all areas of litigation. They increase costs at most stages of litigation, but the impact on pre-trial discovery costs is the most significant. Because they open the door to extensive discovery, they are also susceptible to abuse when used for strategic purposes, such as uncovering competitive information from competitors or threatening costly discovery to force settlements of unmeritorious suits. Nevertheless, the pertinent question is not simply whether the subjective elements of patent law increase cost and decrease certainty, but whether there is some purpose served by retaining such elements despite the costs. There are at least three such elements that appear to have little or no justification given the associated litigation costs.

Many possible approaches have been suggested in this area, but the most serious discussion revolves around eliminating or altering three subjective elements: the doctrine of willfulness, the best mode requirement, and the doctrine of inequitable conduct. We in Congress are committed to finding ways to simplify litigation, curb unproductive discovery, limit opportunities for abuse, and decrease litigation uncertainty, but we have not yet reached consensus on what approach best accomplishes this goal with respect to these subjective elements.

The second – and much more contentious – approach to addressing the patent litigation problem involves altering the remedies available to a patent holder.[LBE note: modifying the law on injunctions] This approach is based on the assertion that current law imposes disproportionate liability and business risk on legitimate enterprises.

As I have mentioned, the costs of allegedly-abusive litigation tactics do not seem to be evenly spread across industries or parties, and any legislative effort in this area means wrestling with many devilish details to balance the interests of numerous different industries. Two challenges we face revolve around the advisability of altering the standard for obtaining injunctions; and codifying a rule for the apportionment of damages.

Altering the standard for determining whether injunctive relief should be granted in a patent infringement case has emerged as perhaps the most contentious issue in the patent reform debate. Large high-tech companies, many of which have products covered by thousands of patents, believe that some change in current law is necessary to prevent what they consider as something akin to legalized extortion by plaintiffs who use the threat of an injunction to obtain settlements that are allegedly disproportionate to the value of the patent that is infringed.

Because the profitable life of many high-tech products is relatively short, an injunction that keeps these products off the market for a year or two can threaten the profitability or even the viability of a small or mid-sized tech company, which arguably forces these companies to settle cases for much more than the claims are actually worth.

To add to the difficulty, some believe there appear to be quite a few over-broad patents in these areas, resulting in a situation where an infringement suit might be successful even though it would have failed if the patent claims were written properly. The tech industry has dealt with this problem in part through cross-licensing to avoid the mutually assured destruction that would accompany aggressive enforcement of all relevant patent rights.

Cross-licensing only works as a solution if the other potential litigants face a comparable threat from the available remedies. Many tech companies argue that the main threat is not from other legitimate companies, it is from overly-aggressive patent holders [hmm, the University of Rochester?] and their attorneys who use the disproportionate threat of an injunction to extort large settlements based on nearly worthless patents. It is alleged that these types of patent holders, commonly referred to as patent trolls or licensing shops have no interest in cross-licensing because – in the most extreme examples – they don’t make or sell anything and therefore have no business risk from an injunction. They allegedly exist predominantly for the purpose of threatening litigation to obtain settlements.

Interestingly, among the most vocal critics of the high tech sector’s desire to amend the injunctive relief provisions in current law are the pharmaceutical and biotech industries, independent inventors, and some small business interests. Generally, the products patented by the drug companies and small inventors are discrete inventions covered by relatively few patents. They rely on the absolute exclusivity of their patent rights, often enforced by injunctions, to ensure that they are able to commercialize their inventions and enjoy the fruits of their innovation. Similarly, small inventors rely on injunctive relief to equalize the playing field when competing against larger, better-funded enterprises.

This same type of debate is playing out with respect to the provisions authorizing damages in patent litigation.

I understand that this issue is most important to the software industry. It claims that under current law a patent holder who successfully sues a software company for infringement may be rewarded well beyond the actual value that the invention contributes to a product.

The argument is that, under some damages theories, a plaintiff can receive damages based on the value of the market for an entire product when the patented invention is only a small part of the actual product.

For example, suppose damages were based on the market value for an entire car when the patent only covered the windshield wiper motor or some other component out of hundreds. Crafting language that satisfactorily codifies a proportional contribution measure of damages is just one of the many challenges that Congress faces in the process of drafting patent reform legislation.

As you may have guessed from my remarks, my sense is that patent reform still has a fair distance to go before a sufficient consensus forms in Congress around a particular set of reforms. In my experience, this is not uncommon for patent reform legislation, which often takes several years from conception to enactment.

Turning to another topic that is near and dear to most everyone here, including me, I would like to spend a few minutes on the issue of follow-on biologics.

Follow-on Biologics

As most of you know, I have for some time been deeply interested in the issue of devising an appropriate path for the approval of off-patent follow-on biologic medicine.



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