Congress Trying Again on Patent Reform

By | February 3, 2011

Senior U.S. lawmakers are once again planning to reform the patent system to try to eliminate huge damage awards, an issue ripe for legislation after recent court decisions challenged calculation methods.

Patent reform, in one form or another, has been pushed in Congress for several years.

It has so far stalled, partly because it pits huge industry players against each other in battles to either protect themselves or benefit from huge patent damage awards.

This year, Microsoft Corp., the Pharmaceutical Research and Manufacturers of America and the Biotechnology Industry Organization support the reform legislation, while Dell Inc., Cisco Systems Inc. and others oppose it.

Democratic Senator Patrick Leahy introduced a new bill last week and plans to try to get it approved by the Judiciary Committee Thursday, and then push for a vote by the full Senate. The House Judiciary Committee plans hearings, but has not put forward a bill.

Although the legislation faces a tough time due to a divided Congress and fissures in the business community, it could answer key questions raised by the courts.

The most critical of the court rulings affects how damages for infringement are calculated.

For example, the U.S. Court of Appeals for the Federal Circuit found in 2009 that Microsoft infringed a patent owned by Alcatel — now owned by Lucent — to make its Outlook software, but that the jury erred in using Microsoft’s total Outlook sales in calculating damages.

Then in January of this year, the U.S. Court of Appeals for the Federal Circuit tossed out a commonly used method of calculating damages in another case involving Microsoft.

While finding that Microsoft infringed a patent to prevent software piracy, the appeals court said flat out it would no longer accept a ’25 percent rule” to determine the reasonable royalty rate a manufacturer will pay.

Uniloc, which owns the patent, was awarded $388 million in damages, but that will be recalculated.

‘Those court decisions didn’t tell us how to calculate damages. They told us how not to calculate damages,” said Mark Lemley, who teaches law at Stanford University.

Leahy’s bill, based on a compromise version that stalled last year, would address the calculation questions by setting up judges as gatekeepers to determine how to calculate damages.

This means that drug companies — which generally have one or very few patents on any given product — may ask for a larger share of revenues in the case of infringement.

Meanwhile, judges would be expected to determine that technology companies — whose devices may have hundreds of patents — would pay a smaller percentage of revenues for any infringement.

The consequences of infringing used to be devastating.

Courts had been allowed to order infringing technology stopped. In 2006, a district court judge in Virginia shook official Washington and the business world by considering enforcing an injunction on Research in Motion Ltd, which would have blacked out BlackBerry service nationwide.

The injunction threat has since waned, in large part because of a 2006 Supreme Court ruling, eBay v. MercExchange, which made it harder to get an injunction. It added tests, one of which was whether public interest would be harmed by a permanent injunction.

But the cost of litigation remains a huge threat that Leahy’s legislation would address.

‘The interesting take-away is that both Houses are coming out of the blocks really quickly,” said Q. Todd Dickinson, executive director of the American Intellectual Property Law Association. ‘It got a pretty good head of steam. But it’s stalled before so we’ll see.”

(Editing by Andre Grenon)

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