Industry And Congress Seek Major Overhaul Of U.S. Patent SystemIndustry And Congress Seek Major Overhaul Of U.S. Patent System

The patent system, the source of great fortunes and great legal fees, may soon be reinvented. U.S. Rep. Lamar Smith, R-Texas, on Thursday introduced the Patent Reform Act of 2005, legislation to reform patent examination, issuance, and litigation.

Calling it "the most comprehensive change to U.S. patent law since Congress passed the 1952 Patent Act," Smith in a statement said, "The bill will eliminate legal gamesmanship from the current system that rewards lawsuit abuses over creativity. It will enhance the quality of patents and increase public confidence in their legal integrity."

Elsewhere in Washington last week, the Federal Trade Commission; the National Academies' Board on Science, Technology, and Economic Policy; and the American Intellectual Property Law Association held a conference on patent reform.

Testifying before the House Subcommittee on Courts, the Internet, and Intellectual Property, Harvard Business School professor Josh Lerner explained the problems companies face today. "In the past two decades, the United States has strengthened patent rights while weakening the standards for granting patents," he said. "While unpremeditated, these two policy changes have created a 'perfect storm': a complex and intensifying combination of factors that increasingly makes the patent system a hindrance rather than a spur to innovation."

It's a hindrance because it costs companies money. While Microsoft filed more than 3,000 patents last year, the fruit of an annual research budget in excess of $7 billion, it typically spends about $100 million a year defending itself against perhaps 40 concurrent lawsuits.

In 2003, Microsoft lost a patent dispute related to Internet Explorer with Eolas Technologies Inc. and was told to pay $521 million for infringement. In May, Microsoft's bid to have the damages reduced was rejected by a U.S. appeals court. The software maker may be able to avoid paying if it can prove in a separate trial that the patent is invalid.

And that may yet happen. David Kaefer, director of business development for Microsoft's intellectual property and licensing group, notes that almost half of patents are thrown out after they're litigated.

Critics of the patent process say the resource-starved U.S. Patent and Trademark Office--which, until recently, frequently saw its revenue diverted to other government agencies--has been churning out low-quality patents. They point to the number of patents filed annually as evidence that rising quantity has diminished patent quality. In 1984, according to the Patent Office, there were 117,985 patents filed in the United States. In 2004, there were 376,810.

Not surprisingly, the number of patent lawsuits filed annually has risen, too. And that's prompting increasingly vocal calls for reform. "A number of the major corporations, including IBM and Microsoft, have basically gotten on the patent reform bandwagon," Lerner says. "The reason is they're finding that they're targets in a lot of patent litigation. In a lot of cases, there seem to be quite dubious suits. Particularly in the case of Microsoft, they've had to pay out some enormous damages as a result."

But Microsoft isn't alone in the patent minefield. In 2003, a federal jury found eBay Inc. liable for patent infringement and ordered the company to pay $29.5 million in damages. In March, a U.S. appeals court upheld part of that ruling, reducing the damage award to $10.5 million. It also said the plaintiff, E-commerce technology company MercExchange LLC, could pursue additional damages related to one of the patent claims.

And last week, Research In Motion Ltd. said a settlement it had reached in a patent case might unravel, leading to more costly litigation. RIM, maker of the popular BlackBerry wireless E-mail device, had agreed to pay $450 million to NTP Inc., an intellectual-property holding company, to end a patent dispute that threatened its wireless business.

Patent reform has recently become a hot issue, says Brian Roche, a partner at law firm Sachnoff & Weaver Ltd. As lead trial counsel for Eastman Kodak Co. in its patent infringement lawsuit against Sun Microsystems last year, he helped win a $92 million settlement from Sun. He points to a lawsuit filed last year by Honeywell against 34 electronics companies, including Apple Computer, Dell, and Sony, claiming infringement of a LCD patent as one of the many reasons tech companies are eager to see reform. And he believes substantial changes in the system are inevitable.

In a speech given in March at the American Enterprise Institute in Washington, D.C., Microsoft general counsel Brad Smith outlined several areas where he'd like to see reform. One of them was patent quality, and that's something Rep. Smith's bill addresses with a new system to challenge patents after they've been granted and a more open submission process that should lead to the granting of fewer bad patents.

Microsoft's Smith also would like to see litigation reform. "We confront a patent system in the U.S. that is excessively litigious," he said in his speech. "It is too easy for a litigant to manipulate the U.S. system and look to a patent lawsuit as the ultimate lottery ticket, hoping to confuse jurors with technical jargon that will yield the payment of a lifetime. The availability of triple damages [when infringement is determined to be willful] and injunctive relief multiply this further."

One of the provisions in the patent reform bill changes the way injunctive relief works, and that, Roche says, is probably unconstitutional. The Constitution says inventors have the right to exclude others from using their inventions. "The way the right to exclude is effectuated in courts in America is through injunctions," he explains. "That provision is so controversial because it's essentially a way for large companies to take the club out of the hands of the smaller companies. ... It's the club of the injunction that big companies feel is being wielded with unfairness and undue force. So that reform will have the effect of putting into effect what some people call compulsory licensing."

Microsoft isn't looking for compulsory licensing, Kaefer says, noting that it should be the patent holder's right to choose how his or her patent gets used. But he says the company does favor easier licensing. "For us, patents basically play a role that enables us to trade innovations with other companies through licensing," he says, contrasting the way patents are used as currency among technology companies with the way they're used in the pharmaceutical industry to guarantee the exclusive right to sell patented drugs.

"The challenge in a nutshell," Kaefer says, "is the quality concerns, the concerns about the litigation lottery, and the lack of harmonized international laws make the system complex, less predictable, and ultimately riskier than it needs to be."

But Roche believes that Rep. Smith's patent reform bill, because of the way it alters the granting of injunctions, may end up increasing the risk of patent litigation rather than making it more manageable. "The risk of the injunction from the defendant's perspective is a great motivator to settle cases," he says. "Cases need to settle to keep the cost down. If cases don't settle, there is no more expensive kind of litigation than patent litigation."

The challenge will be to find a way to minimize the risk of infringement without simultaneously minimizing the rewards for genuine innovation.