February 1, 2008 (Vol. 28, No. 3)

Economic Ramifications of Postgrant Review as Proposed by the Reform Act of 2007

For the third straight year, Congress has been considering patent reform in an attempt to legislate “high-quality patents.” There is, however, no consensus as to what a high-quality patent really is. The House passed legislation to overhaul U.S. patent law on September 7, 2007, but the vote was close (220 to 175). The Senate Judiciary Committee approved the Senate bill, S1145, 13 to 5 on July 19, 2007. The bill is now pending in the Senate.

Intense lobbying by software companies, and media pressure to crack down on bad or low-quality patents has created public interest in sweeping patent reform. This is spurred, at least in part, by the public’s misunderstanding of the Blackberry decision, which has given rise to the notion that even if one infringes someone’s patent, one should not have to be punished for it.

The alarm has been raised over patent trolls, which do not make anything, to such an extent that even the Supreme Court felt compelled to weigh in, despite the fact that U.S. patent law does not require that patented inventions be commercialized. The possibility that what constitutes a low-quality patent is less a result of the fact that the rules for writing patents are unclear rather than that the rules for interpreting them are dubious has been largely ignored.

The patent reform legislation’s proposed limitations on infringement damages have drawn the most fire. Provisions that would establish postgrant opposition review, however, also pose a serious threat to innovation and investment in the life science sector.

Existing patent law in the U.S. has successfully created standards that led to the evolution of the IT and biotechnology industries. For more than 20 years as U.S. patent rights became more consistent and certain, technology-based segments have developed and flourished.

“Intellectual property, for which the U.S. government provides broad protection through means such as copyrights, patents, and trademarks, plays a significant role in the U.S. economy, and the United States is an acknowledged leader in its creation,” remarked Loren Yager, director of international affairs and trade for the U.S. Government Accountability Office, in recent testimony before the House Judiciary Subcommittee.

“In 2006, industries that relied on IP protection were estimated to account for over half of all U.S. exports, represented 40 percent of U.S. economic growth, and employed about 18 million Americans.”

Innovation is facilitated by access to what has been done before. The availability of funds to support early-, middle- and late-stage development of a commercializable product is also important. Finally, a climate that economically rewards risk takers is a must. People invest to get a return on their investment. Anything that increases the perceived risk or clouds an investor’s ability to assess that risk increases the likelihood that they will place their dollars elsewhere.

Danger to Biotech

The current environment places investment in small, innovative biotech companies in grave jeopardy. Life science and biotechnological companies require long-term capital to turn basic research into marketable products. Patent protection, which has little negative impact on the practice of science, is seen as vital to protect this long-term investment.

Postgrant opposition review, as proposed, needs to be understood in the context of two administrative proceedings, ex parte reexamination and inter partes reexamination. These already exist under U.S. law to root out bad patents.

For the USPTO to grant a request for re-examination, a requester must establish that a substantial new question of patentability exists related to at least one patent claim. This request may be based only on prior art patents and publications. A final determination as to whether the claim(s) is/are unpatentable is made during a subsequent examination stage of the reexamination proceedings, conducted in the USPTO with special dispatch. After a request is filed, no abandonment, withdrawal, or striking of the request is possible.

Congress introduced ex parte reexamination in 1980 as a vehicle for a third party or a patent owner to obtain reexamination of an issued patent. An ex parte proceeding is so called, because while a third party can request reexamination, only the patent owner can participate in the proceedings.

Any person may file a request for ex parte reexamination at any time during the period of enforceability of a patent. This is the length of the term of the patent plus the six years under the statute of limitation for bringing an infringement action. It must take into account the term of the patent, disclaimers, patent-term extensions, or adjustments.

If litigation is instituted within the period of enforceability, requests for reexamination may be filed after the statute of limitations has expired as long as the patent is still enforceable. Only the patent owner may appeal an examiner’s decision to the Board of Patent Appeals and Interferences or seek judicial review. The third-party requester has no right to appeal.

Subsequent congressional review indicated infrequent use of ex parte reexamination, because of the limitations on third-party participation. To provide such an opportunity, as part of the American Inventor Protection Act of 1999, Congress enacted the Optional Inter Partes Reexamination Procedure Act. Unlike an ex parte request, a request for inter partes examination must include the identity of the real party in interest and may only be filed for patents issued from an original application filed in the U.S. on or after November 29, 1999, the date of enactment of the Act.

An inter partes reexamination proceeding provides third-party requesters with a greater opportunity to participate in proceedings, i.e., a third-party requester may file written comments each time the patent owner files a response to a USPTO action. Moreover, both the patent owner and third-party requester have the right to appeal or seek court review of an inter partes decision. Although long touted as expedited, low-cost alternatives to litigation, ex parte and inter partes reexaminations are rarely filed.

Congressional Changes

The estoppel provision, which prohibits a third-party requester from asserting at a later time the invalidity of any claim finally determined to be valid and patentable on any ground that the third-party requester raised or could have raised during inter partes reexamination, unless the art is newly discovered, has made inter partes reexamination an unpopular alternative.

Congress certainly could address flaws in the U.S. patent system without completely eviscerating it, beginning with the estoppel rules. The House patent reform bill amends the inter partes reexamination procedures to prompt an increase in patent challenges. It would increase the number of patents that could be challenged by reexamination, lessen the limitations on future challenges (although it is unclear how), and require that inter partes proceedings be conducted by an administrative patent judge and not, as the present law provides, by an examiner.

Sec. 321 and 322 of the Senate and House bills authorize the USPTO to initiate a third procedure to review the validity of issued patents at the request of third parties. As proposed, these provisions will allow anyone to file a petition for cancellation on invalidity grounds, which would initiate a review of a patent during the first year after a patent is issued. It also reaches back to allow postgrant review of patents issued before the effective date of the legislation.

As reported, the substitute Senate bill accepted by the Senate Judiciary Committee on July 19, 2007, which incorporated a July 12, 2007, Manager’s amendment, raises the standard to allow a postgrant review to a substantial new question of patentability as to at least one claim.

It requires pleading with particularity, establishes a presumption of validity, requires a postgrant review petition within 12 months of when the petitioning party receives notice of infringement, and narrows the second window such that petitions may only be filed for patents that issue on or after the effective date of the postgrant review or patents that issue before the effective date of the postgrant review based on an application filed before that date but after November 29, 1999.

The Down Side

The net effect of the proposed legislation is that competitors and/or infringers will have nothing to lose in instituting a cancellation proceeding. The legislation also leaves patent owners vulnerable to additional reexamination, derivation, and postgrant review proceedings brought on by nonpetitioning challengers even after a favorable final decision on the patentability of any original or new claim of a challenged patent.

Moreover, Sec. 326(b) of the House and Senate bills provides, in part, that USPTO regulations ensure that any information submitted by the patent owner in support of any amendment entered under Sec. 328 is made available to the public as part of the prosecution history of the patent. Thus, a patent owner will create a written record that will have estoppel effect in subsequent litigation.

In deciding whether to make an investment, backers generally weigh the risks associated with a company’s IP position and whether its scope protects the planned products. Uncertainty about whether IP can be patented and whether granted patents will survive a challenge will likely increase investor perception of risk. This will lead either to a decrease in funding or to an increase in the cost of funding. Neither of these concepts bode well for small companies and the large firms that depend on them.

In this patent-hostile environment, small, innovative biotech companies may choose to go ahead with a sure thing rather than trying to innovate. Alternatively, they may choose to maintain innovative technology as trade secrets instead of applying for patents. This absence of public disclosure would likely curtail identification of R&D opportunities and scientific progress as well as cause R&D, jobs, and other cross-industry opportunities that accompany biotech innovation to go elsewhere. Such a scenario would affect American competitiveness in various economic sectors including pharmaceuticals, energy, advanced materials, and agriculture.

The existing U.S. system of patent laws may not be perfect but it serves the country’s economic interest. As Lori M. Wallach, director of Public Citizen’s Global Trade Watch, has said, “In some instances, a requirement to harmonize our domestic standards to international standards is often to the detriment of domestic policies that work very well.” Frankly, it would be far simpler for Congress to give the USPTO the funds it needs to hire qualified examiners to do its job.

Beverly Lubit, Ph.D., is a partner in WolfBlock’s Intellectual Property/ Information Technology Practice Group. Web: www.wolfblock.com. Phone: (212) 883-4930. E-mail: [email protected].

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