Senator Specter Leary About Patent Reform Bill

Patent reform will once again take center stage this week when Senators on the Judiciary Committee discuss the Leahy-Hatch patent bill in an Executive Business Meeting scheduled for Thursday, March 26, 2009, at 10:00 a.m., in the Dirksen Senate Office Building, Room 226. With patent reform in the air and seemingly rushing through the Congress, it was believed that the bill would be voted on by the Judiciary Committee last week and sent on to the full Senate this week, but a group of Senators led by Arlen Specter (R-PA) delayed the vote in Committee. Specter said: “We need to do more to improve the language on damages which we know has been very vexing.” Specter also said that unless the damages language is improved he does not anticipate that Senate Majority Leader Harry Reid (D-NV) would call the bill up for a vote.

If Arlen Specter is to be believed there is no rush to ram patent reform through the Judiciary and at least some Senators are hoping for an industry consensus to develop prior to moving forward. Senator Leahy, on the other hand, continues to believe that there have been sufficient hearings, meetings and letters received, so watch for him to try and force some sort of action. Many Senators will be reluctant to move forward without a consensus though because they fear whatever vote they cast will leave some within their districts and States unhappy. With the high-tech computer industry supporting the bill and virtually everyone else opposed to the bill many in Congress will have to make a difficult decision and are virtually guaranteed to disappoint at least some important donors should the bill get to a full vote.

The primary patent reform bill being considered in the Senate – the Leahy-Hatch bill – would make it extremely difficult for a patent owner who successfully proves infringement to receive meaningful compensation for the infringement found. While the bill would ostensibly allow for no “less than a reasonable royalty for the use of the invention by the infringer,” the sticking point is in what the invention would be considered to be. Essentially, the Leahy-Hatch bill wants to narrowly define the invention and award damages based only on that which is taken by the infringer. On its face that seems reasonable enough, but what if the innovation taken makes the product sold by the infringer much more desirable?

According to this bill the successful patent owner in litigation would be entitled to receive damages calculated on the entire market value of the infringing product if the “specific contribution over the prior art is the predominant basis for market demand for an infringing product or process…” Exactly what it means for the contribution to be “the predominant basis” is not really defined well, if at all, which leaves many patent owners wondering whether those who infringe will be able to basically take as they wish from patentees and argue that the innovations taken were only small contributions, or at least not the predominant reason for market success. Essentially, it is believed that this provision would encourage, rather than discourage infringement and thereby make patents less valuable to their owners.

In the event that the patent owner could not demonstrate that the copied innovation was the predominant basis for the market success an established royalty based on marketplace licensing would be the only recourse. For those who think that limiting the entire market value is bad, what Leahy and Hatch provide for in terms of figuring out the appropriate royalty is even worse. The specific provision in question explains:

Upon a showing to the satisfaction of the court that the claimed invention has been the subject of a nonexclusive license for the use made of the invention by the infringer, to a number of persons sufficient to indicate a general marketplace recognition of the reasonableness of the licensing terms, if the license was secured prior to the filing of the case before the court, and the court determines that the infringer’s use is of substantially the same scope, volume, and benefit of the rights granted under such license, damages may be determined on the basis of the terms of such license. Upon a showing to the satisfaction of the court that the claimed invention has sufficiently similar noninfringing substituted in the relevant market, which have themselves been the subject of such nonexclusive licenses, and the court determined that the infringer’s use is of substantially the same scope, volume and benefit of the rights granted under such licenses, damages may be determined on the basis of the terms of such licenses.

The district court would look to the licenses on the infringed innovation, or in the alternative the district court may look to industry licensing rate for noninfringing substitutes. This is truly alarming. In other words, the damages that would be awarded to a patent owner who has successfully demonstrated infringement could be limited to the royalty rate for noninfringing substitutes, which could presumably not be patented. How is it fair to look to other available technologies to determine what infringement damages should be awarded to a successful patent owner who has demonstrated the defendant took their innovation without permission?

The competing patent reform proposal working its way through the Senate is one submitted by Senator Kyl (R-AZ). The damages provisions of Senator Kyl’s patent bill do not discuss limiting damages available from the entire market value of the infringing product, but the provisions are not much better. Specifically, Senator Kyl’s bill would set the reasonable royalty at the rate that would have been negotiated by the parties prior to the institution of a lawsuit. This is nonsensical and a significant departure from current patent damages law. The Kyl bill states:

For purposes of this section, the term ‘reasonable royalty’ means the amount that the infringer would have agreed to pay and the claimant would have agreed to accept if the infringer and claimant had voluntarily negotiated a license for use of the invention at the time just prior to when the infringement began. The court or the jury, as the case may be, shall assume that the infringer and the claimant would have agreed that the patent is valid, enforceable, and infringed.

Why would anyone who wants your technology do anything other than steal the technology? If I know that the only damages you could potentially receive after a long and arduous patent litigation is the same amount you would have received based on an arms-length negotiation prior to the bringing of a lawsuit why would I be inclined to do anything other than infringe? The simple answer is that I would have no incentive to attempt to negotiate with you because there is always a possibility that you won’t sue me and I would have to pay nothing. If you do sue me then I just pay you what I would have paid you before you brought suit. So the Kyl damages proposal actually makes it more likely that infringement will occur and force the patent owner to spend large amounts of time and money to receive what they should have received by way of good-faith negotiations.

Why the Kyl “hypothetical negotiation” language crystallizes the incentive to infringe, the truth is that the Leahy-Hatch bill does the same thing. While the Kyl bill does not specifically include language that would apportion the damages in the event that the infringing technology is not predominantly responsible for market success, I am hard pressed to see the Kyl bill as any better than the Leahy-Hatch bill, at least on the damages issues. In fact the Kyl bill does away with well established principles in place to determine a reasonable royalty, such as recognizing that once infringement has been determined it is unfair to provide the patentee with what would have been fairly negotiated without litigation. Thus, I have to believe that under the Kyl version of patent damages patent owners who successfully prove infringement would likely receive less in patent damages than under the Leahy-Hatch proposal.

Obviously, much work still needs to be done on patent damages. In reality though, it seems virtually impossible that any industry consensus could develop given the relative needs of the parties on either side of the debate. There is simply no likelihood that there will be any reconciling of the desires of the high-tech computer industry with all of the other users of the patent system, including the pharmaceutical industry, the green technology industry, manufacturing, unions, start-ups and independent inventors. Therefore, if Senator Specter is correct and there are a group of Senators that are looking for consensus prior to a vote, which will likely mean that patent reform in 2009 will disappear into the night just as did reform efforts last year, and the year before that.

There are simply too many different desires on the critical patent damages issue, and as long as patent damages reform continues to be included in pending legislation patent reform seems unlikely, which is a shame because the patent system really needs help. Of course, virtually none of the provisions currently before Congress would fix the patent system, which is sad. I can only hope that eventually Senators Leahy and Hatch will realize that changes to patent damages law that will benefit only one segment of industry is not feasible. The sooner patent damages reform is dropped the sooner we can start talking about fixing the patent system, which is something our economy desperately needs.

We must issue patents, we must do it in a reasonable and relevant time frame, and we must endeavor to keep patents at least as valuable as they are now, or more valuable. Without significant and valuable patent rights new industries based on technology cannot and will not develop because there will be no funding. For those who crave a greener world, with energy efficiency, alternative fuels and energy, environmentally friendly and biodegradable products, you need a fully functional Patent Office and what you have is a dysfunctional Patent Office with low morale, a huge backlog of pending applications and enormous budget problems that will only get worse in the years to come. It is time to tell Congress to stop debating something that will never happen and start working on fixing the Patent Office.

About the Author

Eugene R. Quinn, Jr.
President & Founder of IPWatchdog, Inc.
US Patent Attorney (Reg. No. 44,294)

B.S. in Electrical Engineering, Rutgers University
J.D., Franklin Pierce Law Center
L.L.M. in Intellectual Property, Franklin Pierce Law Center
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Gene is a US Patent Attorney, Law Professor and the founder of He teaches patent bar review courses and is a member of the Board of Directors of the United Inventors Association. Gene has been quoted in the Wall Street Journal, the New York Times, the LA Times, CNN Money and various other newspapers and magazines worldwide


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2 comments so far.

  • [Avatar for paul principato]
    paul principato
    March 31, 2009 08:48 am

    It came as no surprise that Senate Minority Whip Jon Kyl (R-AZ) (and apparently with a straight face) has recently introduced HIS Patent Reform Act (S610), a copycat of the Bill he proposed last September (S3600) in the wake of the failure of the other patent reform bill then pending in the Senate and contrary to (S515) and (HR1260) currently pending in Congress.
    It again includes a “Check 21” exception (sec. 13,): “With respect to the use by a financial institution of a check collection system that constitutes an infringement under subsection (a) or (b) of section 271, the provisions of sections 281, 283, 284, and 285 shall not apply against the financial institution with respect to such a check collection system.” Although a small Technology Company named Data Treasury and its patents were NOT specifically mentioned, the intent of the exception is aimed directly at Data Treasury and its ongoing litigation against the banking industry for infringing upon its “Check Collection” remote image capture technology.
    Sen. Jeff Sessions originally sponsored this exception in the then pending reform bill, but he later withdrew his support expressing doubts about its legality. Kyl’s proposal has one key difference from the one Sessions offered: It attempts to keep the federal government from shouldering any financial liability for blocking DataTreasury’s pursuit of patent damages against the banks. Under Kyl’s bill, the bank-immunity provision would be voided if a federal court found that the legislation amounted to a government “taking” of DataTreasury’s patent rights. This exception, as written, pollutes a legitimate legislative effort with ex post facto and probably unconstitutional provisions having the lofty purpose of allowing banks infringing Data Treasury Patents to negate and or dramatically reduce the damages they face. So rather than face a jury, where they obviously fear losing, the banks decided to call on their friends in Congress for legal protection. So what was the purpose of his adding this exception with the Gov’t provision to the bill other than to protect the banking industry depicting a clear and crass example of who gets bought in Congress? Legislation should not be used to grant retroactive legal immunity to large corporations that willfully ignored the property rights of a small, innovative company. And no elected official who has pledged to maintain the integrity of our legal system should be a party to such a travesty. Senator Kyle by championing this exception should be made (with a clear answer devoid of spin) to explain why exactly, banks should be immune to patent law that applies to everybody else.
    This is the Industry that Sen. Kyl Champions:
    From: Chief executive (U.S.) 5/1/2002 –Author PRINCE, C.J.
    “It’s not every CEO who freely admits to swiping other people’s ideas—although, truth be told, the vast majority of successful chief executives have probably taken the liberty. But ask Richard Kovacevich, CEO OF WELLS FARGO, whether he prefers inventing ideas or stealing them and he’s quick with his response. “Oh I would much rather steal an idea,” the 57-year old CEO says matter-of-factly. “Quite frankly, it’s much easier mentally. I have no pride about that.” Such disclosure was for the purpose of marketing new technology and while his comments may have been in another context, they clearly set a tone and standard for his senior executive’s actions over the ensuing years.
    For years, DataTreasury Corp. tried to sell its technology to the banks, but instead of buying or licensing the technology, several big banks expropriated it and began using it to change the way they processed checks. DataTreasury’s technology created a windfall for the banks. According to the industry’s own experts, the banks save $20 to $40 billion annually because of the switch to digital processing. Of course, that switch would not have been possible without DataTreasury’s technology, which was covered by patents that the banks callously ignored. Understandably, the company has sued for damages. The banks initially responded by trying to get the patents invalidated with some legal jujitsu. But the U.S. Patent and Trademark Office upheld the validity of DataTreasury’s patents in their entirety. Since then, via ongoing litigation, the Data Treasury patents have withstood the best legal challenges the banks could buy, and that some of the more responsible banks have admitted the validity of the patents by licensing them. And every entity that has been sued almost surely had opportunity to negotiate a license before being sued. This exception has the backing of the Coalition for Patent Fairness, (Fairness by definition – freedom from dishonesty and injustice), a group of high-tech companies backed by (The Financial Round Table.) The Financial Round Table is an institution that represents the country’s’ one hundred largest banks. These banks have a serious financial problem. A finding of willful infringement, will subject them to treble damages. Are they trying to slide an, (unconstitutional) exception through in the name of (honesty and justice)?
    It is abundantly clear that the Banking industry motivated by their unbridled power and greed are prepared to do whatever they believe is necessary to achieve their goals to avoid having to pay a reasonable royalty on Data treasury’s validated Patents. We are on very dangerous grounds with congressional tampering with the constitutional right of intellectual property protection. These are high-quality patents; to not enforce patent rights would be a discredit to those who fairly and lawfully use these licenses.

  • [Avatar for moe]
    March 24, 2009 09:33 am

    Next thing Congress will be determining what salary each of us should be paid or the fees we should charge rather than relying on market forces. Socialism?? Better make sure you belong to the party in power.

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