Do We Need Patent Reform | Supreme Court Patent Decisions

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American Idle?

June 21, 2011

We’ll know in a few days whether the US Congress will finally break from its long standing tradition of sending patent reform to the mothballs for another year as it adjourns for the summer. Although the bill (pompously called the America Invents Act) was approved by the senate in March, the house has yet to vote on it and fierce lobbying from -among others- the banking industry (when did Wall Street become interested in patent reform?) threatens another sequel to what looks like an endless summer rerun. Worst, after some serious efforts by the USPTO since 2009 to reverse its pendency crisis, the agency’s budget was just stripped by $100 million last month. This doesn’t bode well for trimming down the backlog of nearly 800 000 US patent application currently pending!

If the America Invents Act were to come to pass, the most important provision is the move towards the first-to-file patent system prevalent in Europe and elsewhere. The bill will actually institute a “first-inventor-to-file” system, making filing dates the effective dates for purposes of determining prior art, but leaving the one year grace period in place and giving inventors the option of a “derivation proceeding” if they feel that a patent filed derives from their work. The bill would also force judges to be more transparent in the awarding of damages by making them identify “methodologies and factors that are relevant to the determination of damages.” Another important provision of the bill is to raise the threshold for treble damages awards by making it harder to prove wilful infringement. Many Fortune 500 companies have a policy of not allowing their employees to even look at third party patents, for fear that in an infringement trial an e-mail or memo will surface that would show that the company was in some form aware of a given patent. This would not be as necessary if this bill were to be passed and it could finally let companies  be more comfortable looking at what others have been doing and then direct their R&D efforts in move useful directions, rather than reinvent the wheel once more.

The proposed bill also provides three avenues for third party intervention in issuing patents: pre-issuance submissions, requested post-grant review, and inter partes review proceedings. Pre-issuance would allow a third party to submit documents to the PTO during the examination process. Post-grant review allows a third party to submit virtually any legal claim for a nine-month period after the patent is issued. Inter partes review is similar to post-grant review, but is more limited with regards to what can be disputed and can be initiated after the nine-month period after the issuance of the patent. Other small provisions make it harder to sue patent holders, such as a false-marking provision that would allow only the government or direct competitors to file false marking lawsuits and a provision to remove a lack of ‘best mode’ as a way to invalidate a patent after it has been issued. Stay tuned!

Meanwhile, many players in the IP world have decided to take matters in their own hands, mostly through litigation; hoping that the courts will change the rules in their respective favors. But it now appears that the Supreme Court, after a flurry of defining patent cases in the past 5 years, is no longer willing to take the bait and seems content to maintain the status quo by shifting responsibility back for changing patent laws to Congress, as it should be.

In the highly publicized case of Microsoft v. i4i, issued a week ago, the Supremes hadto adjudicate on whether or not a “preponderance of evidence” should be the new standard in determining whether prior art is valid or not during a trial when such prior art was not considered by the patent examiner prior to granting the patent at stake. The current standard is “clear and convincing evidence”, in all cases, which gives patent holders more defense against infringement. Microsoft argued that “clear and convincing” was too restrictive a standard, and led to bad patents being issued in case of newly found prior art. A decision in favor of Microsoft would have changed the patents game significantly, with patent holders significantly weakened in their ability to mount a legal defense of the validity of their patents. The Supreme Court, however, ruled in favor of i4i and maintained the “clear and convincing” standard and clearly indicated that if Congress wanted a different standard, they should legislate accordingly… (I’m not sure if they wrote this tongue in cheek). In the meantime though, for those who like to keep score, Microsoft will have to pay close to 300M dollars to the small Canadian company.

A few weeks earlier, the highest tribunal also ruled in: Stanford vs. Roche. That case dealt with a more complicated scenario than simple infringement. In this case, the Court was of the view that a researcher who promised (in writing) to assign rights to his inventions to Stanford University (on a federally funded fellowship) actually assigned rights to the medical technology company when he signed a visitor’s confidentiality agreement (which included a general assignation of rights clause) to learn more about pioneering steps that that company (Cetus) was taking in the fields of HIV research. Stanford argued in court that the Bayh-Dole Act, which (simply put) established rules for federally funded research projects, displaces the rights of the inventor and automatically cedes it to the researching body, in this case, Stanford. Cetus, which was acquired by another company (Roche), argued the opposite: that the researcher, not the university, had first rights to his invention and had assigned them to Cetus.  In a 7-2 decision, the Supreme Court ruled in favor of Roche, saying: “since 1790, the patent law has operated on the premise that rights in an invention belong to the inventor. The question here is whether the University and Small Business Patent Procedures Act of 1980—commonly referred to as the Bayh-Dole Act—displaces that norm and automatically vests title to federally funded inventions in federal contractors. We hold that it does not.” 

Although the legal underpinnings appear right, it is quite striking that the court would make a simply routine visitors’ NDA supersede a valid employment agreement with an assignment of IP clause. For those in the industry, such Visitors NDA are considered the bottom feeders of the contractual landscape and, in many companies, anyone accessing certain premises (even the UPS guy) is required to sign them. These –usually short- forms are primarily meant to deter people who accidentally come across some confidential information during their visit to leak it out. The Supreme Court here could have easily reaffirmed the same legal principles without suddenly elevating routine NDAs signed at a reception desk without any legal review to such an important instrument. The decision has had –rightly so- a chilling effect- in academia and a reminder to all that employees should not sign any form of documents without first checking with legal counsel.

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