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Insight & Intelligence™ : Apr 10, 2011

House Takes Different Stance from Senate on Two Key Factors in Patent Reform

While in number the amendments are small, their influence could be significant.
  • Alex Philippidis

The House of Representatives’ version of the patent reform bill contained only a few changes to the measure overwhelmingly approved by the Senate last month. Those few changes, however, jeopardize the bill’s chances of being enacted this year and pose significant challenges for life science companies. The America Invents Act was introduced in the House by House Judiciary Committee Chairman Rep. Lamar Smith (R-TX) on March 30.

Like the Senate version (S.23), the House measure (HR 1249) would shift the basis on which the U.S. issues patents, from first-to-invent to first-to-file. The House bill would also allow the USPTO to keep the fee revenues it generates from filers, rather than see it diverted to the nation’s general revenue coffers.

USPTO director David Kappos cited the House bill’s potential savings for patent holders in terms of legal fees for proceedings to determine who was first-to-invent under current patent law. He estimated savings would range between $400,000 to $500,000.

The 134-page House bill differs from the Senate bill in two key areas, however: the inter partes review and prior user rights. The arguments for and against lowering the standard for inter partes review and opening up prior user rights hinge on the challenge with balancing industry innovation and collaborations with academia.

Differences in Inter Partes Review

Like the Senate bill, the House would allow third parties to challenge patents after they have been granted through a new inter partes review. But the House would retain the current “substantial new question of patentability” threshold standard for initiating current inter parte exams and apply it to the new inter parte reviews.

The Senate, on the other hand, would bar the USPTO director from allowing an inter partes review unless he or she determined that there’s a “reasonable likelihood that the petitioner would prevail with respect to at least [one] of the claims challenged in the petition.” The Senate would also limit use of inter partes reviews to questions of anticipation and/or obviousness, as with current law, with only patents or printed publications permissible in challenging previously issued claims.

“The biopharma industry, it seems to me, is going to be disserved by keeping the standard where it is now because of the opportunity for lawsuits to come on board to meet that lower standard of substantial new question,” Thomas T. Moga, co-chair of the Life Sciences and Biotechnology Practice at the law firm Shook, Hardy & Bacon, told GEN.

Impact of Lower Standard

The USPTO grants 96% of inter partes re-examination requests, according to a 2008 study by BIO. The report also noted that up until December 2000, which was when the process was implemented, the USPTO had received just 308 inter partes requests but granted more than 1.4 million patents.

The change in threshold holds the potential for additional requests to be made. Some, including BIO president and CEO Jim Greenwood, argue that there will be frivolous requests, bumping up patent-related activities and costs.

Testifying a day earlier before the House Judiciary Subcommittee on Intellectual Property, Competition and the Internet, Kappos appeared to have an answer for that argument. He noted that under the House bill, he “may impose a limit on the number of inter partes reviews” as well as overall postgrant reviews during each of the first four years after the effective date. Just what those limits would be remains to be seen.

The new inter partes rules within HR 1249 are within the section of the law establishing a window for postgrant reviews of 12 months after the issue or re-issue of a patent, compared with nine months in S.23. Current law also allows postgrant examination petitions to be filed within 12 months.

Changes to Prior User Rights

Another key difference between the House and Senate is the definition of prior user rights. The Senate version maintains current law, which keeps prior user rights limited only to “business methods.”

But the House bill would expand the “prior user” defense to all patents including those covering pharmaceutical and biotech IP unless they were created through federal funds or funded solely by universities. Moga said the expansion “is at least going into the frying pan and maybe even going into the fire.” Smaller businesses in the life sciences and other fields, he said, will be even more inclined to keep trade secrets rather than risk obtaining a patent, lest they find themselves unable to fight against a potential infringer.

Consequences to Broader Scope

“Any change that is going to drive them to even more trade secrecy, I think, is a bad thing for them. And I think this House provision will succeed in doing just that,” he continued. Moga agreed with BIO’s Greenwood that expansion of prior user rights was one of two changes made by the House that, in addition to the inter partes review language, “could set back efforts to pass meaningful patent reform this year.”

The House bill could potentially affect patents being generated through technology transfer from universities to startup or more established businesses. The House language on prior user rights would set back those technology transfer efforts, according to John C. Vaughn, evp of the Association of American Universities.

“Such an expansion would degrade the patent system overall by substantially reducing patent certainty, and any reduction in patent certainty could seriously impair the process by which universities transfer their discoveries into the commercial sector for development,” Vaughn testified before the subcommittee.

Vaughn acknowledged that the prior user rights exemption for patents funded solely by universities “would certainly mitigate the harmful impact on university licensing of a broad expansion of prior user rights.” But problems would remain, he noted. Many companies that serve as licensees for university patents intermingle those patents with their own in developing new products.

“The commercial prospects for those products would be at risk with the expansion of prior user rights, even with a university carve-out, since it would increase the vulnerability of nonexempt patents to assertions of a prior use defense by a competitor,” Vaughn asserted.

Expanding prior user rights, he said, would also discourage universities from publishing potentially patentable results. The subcommittee hearing defended the House language, with Kappos quickly adding that his position does not reflect the Obama administration’s, which has yet to weigh in. “Expanding the prior user defense, I believe, is pro-manufacturer, pro-small business, and, on balance, good policy,” Kappos said, asserting the university exemption.

The Politics Behind America Inventing

Whether that happens will play out over the next few months. But at the very least, the House changes contrast with the consensus-building achieved in crafting S.23, which passed the Senate 95-5. It was a rare recent example of a bill concerning a long-contentious issue winning cross-partisan support.

It helped that once the bill reached the Senate floor last month, the America Invents Act’s three main Senate sponsors—senators Pat Leahy (D-VT), Charles Grassley (R-IA), and Jon Kyl (R-AZ)—introduced a “managers’ amendment” that addressed many objections to earlier versions of the bill. The amendment notably blocked diversion of money budgeted for the patent office and created three new USPTO satellite offices, addressing earlier concerns that the USPTO could not process its backlog of unexamined patents, which totaled 715,461 as of February.

Then again, creating consensus is more of a concern for the Senate since Democrats control that chamber narrowly, holding 51 of the 100 seats (47 are held by Republicans, two by independents). In the House, by contrast, Republicans hold a more solid majority over Democrats, 241–192.

Consensus will be required, however, should the House pass its version of America Invents. Unless the bill matches the Senate’s version, a conference committee of lawmakers from both chambers has to hash out differences, arriving at one bill for President Obama to sign or veto.

It’s hard to see how lawmakers might compromise on some differences in the bills, for example, the standard for inter partes review. “I don’t really see an intermediate version here. I think that they probably will have to choose one or the other as the standard,” Stephen B. Maebius, an intellectual property law partner with Foley & Lardner and chair of the law firm’s intellectual property department, told GEN.

“There are only so many ways you can set the bar as far as how to start an opposition or a re-examination proceeding,” added Maebius, who worked as a patent examiner in the Biotechnology Group of the USPTO before becoming a lawyer.

Kappos said HR 1249 can be effectively implemented and appropriately managed by the USPTO. He pointed to factors that include not only authority to limit inter partes and postgrant reviews but also a delay in effective date, the authority to impose and collect its own fees, and the allowance of multiyear budgets.

As Maebius noted, the Senate’s standard for inter partes reviews would appear to make that version of America Invents more favorable to the USPTO from an implementation viewpoint. “If you have a higher standard to trigger the process, there aren’t going to be as many inter parte reviews,” Maebius said.