The Big Fix How Proposed Changes to the Patent Process Would Impact the Strategy and Value of Patent Portfolios

In an effort to bring certainty to managing an intellectual property portfolio, Congress may soon consider overhauling certain aspects of the patent statutes that may bring only more uncertainty in the short term. Prompted by the perception that many questionable patents have issued recently, the Federal Trade Commission (FTC) promulgated several proposals to change the patent system. Below is a synopsis of the FTC's efforts and resulting proposals, in addition to some thoughts regarding how those proposals may implicate intellectual property portfolios.

The FTC's Recommendations

In an effort to understand the current balance of competition and patent law and policy, the FTC held extensive hearings and received numerous written submissions examining how patent law and policy effects competition and innovation. Generally, the FTC found that competition policy and patent policy are not inherently in conflict. However, the balance between the two is tenuous and a failure to balance them can harm innovation.

The FTC then looked more critically at the U.S. patent system to examine how specific aspects of the present system impact competition and innovation. The FTC concluded the patent system, for the most part, achieves the proper balance. However, the FTC also found that many “questionable/poor quality patents” have issued in the recent past and that the patent system required minor modification to maintain the proper balance.

The FTC's analysis culminated in its issuing ten recommendations to change the patent system. The five most intriguing recommendations are as follows:

' Creation of a new administrative procedure to allow post-grant review of and opposition to newly issued patents;

' Enacting legislation to specify that challenges to the validity of a patent are to be determined based on a “preponderance of the evidence” standard;

' Tighten certain legal standards used to evaluate whether a patent is “obvious” under the patent statutes;

' Enacting legislation to require publication of all patent applications 18 months after filing; and

' Enacting legislation to require either actual written notice of infringement or deliberate copying as a predicate for liability for willful infringement and, hence, the possibility of treble damages.

Due to the widespread importance of intellectual property, these proposals have generated substantial interest from both industry and bar associations. In addition to the ABA and the American Intellectual Property Law Association (AIPLA), companies such as Cisco Systems, Inc., Intel Corp. and eBay, Inc. have published comments concerning the recommendations. While most of the commentary agrees that some fundamental changes must be made to the patent system, there is no clear-cut agreement among practitioners, industry and academics. For example, many industry participants agree with the recommendation that a new post-grant opposition procedure should be put in place similar to such a procedure in use in Europe. However, many patent lawyers wonder whether it is feasible for the U.S. Patent and Trademark Office (USPTO) to adequately support such a system when, by the admission of the FTC's own report, it cannot satisfactorily handle the present crush of patent applications and related work. These issues will likely be the subject of debate as Congress begins to address the recommendations – likely beginning next year after the presidential elections.

Impact of the FTC's Recommendations

The impact on a patent portfolio stemming from any or all of these recommendations can potentially be enormous. The two recommendations that would make the most immediate impact would be the post-grant opposition procedure and legislation specifying that challenges to patent validity be examined under a “preponderance of the evidence” standard (while there is some academic debate over this point, it is generally understood that in order to invalidate a patent, the patent challenger must establish invalidity through the higher standard of “clear and convincing evidence”). Such changes could put certain patents in a portfolio at greater risk of invalidity due to a specialized administrative procedure created for the sole purpose of investigating these issues. Accordingly, the administrative judges should understand and analyze these issues better than regular trial judges. Moreover, if the reviewing judge analyzes these issues under the lesser “preponderance of the evidence” standard, certain patent would likely not survive the challenge. Patent challengers may be more willing to proceed with such challenges if they are less costly, more predictable and take less time. On the whole, these challenges could reduce the value of a patent portfolio or at least bring some uncertainty as to its viability (which may implicate credit and funding transactions secured by the patents).

While it seems obvious that the recommendations could reduce patent values, the proposed changes could likewise produce more robust, strong patents that are worth more under a new patent system than they would be under the present system. For example, a patent that issues from the USPTO, survives a post-grant opposition proceeding under the reduced evidentiary brought by the patent owner's closest rival using the best available prior art not considered by the USPTO, arguably emerges as a strong patent that has withstood each attack unscathed. The value of such a patent would clearly exceed the same patent under the present system that was not subject to such rigorous review by the USPTO, its competitors and highly trained administrative judges.

The other recommendations promulgated by the FTC also seek to bring greater clarity to the patent review and enforcement process. For example, under the present system, a patent applicant can decide whether or not to publish the application 18 months after filing (a decision against publication requires certification that the applicant will not seek patent protection for the invention in any foreign country). The proposed change seeks to increase the information available to competitors and innovators in reviewing their own technologies and patent positions. In this manner, the practice of obtaining so-called “submarine” patents – those applications that lurk under the veiled operations of the USPTO allowing the applicant to assess the market and technological changes and then make amendments to the application such that the patent issues covering a wide range of existing products – should be curtailed. Even the proposed changes to the predicate for a finding of willful infringement intend to bring certainty to nebulous world of treble

damages in an arena in which such

trebling could mean hundreds of

millions of dollars.

What Happens Next?

Since issuing the recommendations, the FTC has aggressively sought industries' views on the recommendations. It co-sponsored a conference at Boalt Hall (Berkeley) in which it discussed the recommendations and sought guidance from the companies mentioned above in addition to many others. In the interim, the National Academy of Sciences has also published a similar report analyzing the U.S. patent system and suggesting other changes as well. The FTC continues to build consensus regarding its recommendations as it appears that Congress will take up at least some of these issues after the 2004 presidential election.

The best advice at this juncture is to simply keep abreast of any proposed legislation. As Congress begins tackling these issues, commentary, discussion and analysis will emerge from many corners. In this way, any lawyer – whether in private practice or in-house – can prepare for what assuredly will be interesting times ahead for companies owning substantial intellectual property portfolios.

In an effort to bring certainty to managing an intellectual property portfolio, Congress may soon consider overhauling certain aspects of the patent statutes that may bring only more uncertainty in the short term. Prompted by the perception that many questionable patents have issued recently, the Federal Trade Commission (FTC) promulgated several proposals to change the patent system. Below is a synopsis of the FTC's efforts and resulting proposals, in addition to some thoughts regarding how those proposals may implicate intellectual property portfolios.

The FTC's Recommendations

In an effort to understand the current balance of competition and patent law and policy, the FTC held extensive hearings and received numerous written submissions examining how patent law and policy effects competition and innovation. Generally, the FTC found that competition policy and patent policy are not inherently in conflict. However, the balance between the two is tenuous and a failure to balance them can harm innovation.

The FTC then looked more critically at the U.S. patent system to examine how specific aspects of the present system impact competition and innovation. The FTC concluded the patent system, for the most part, achieves the proper balance. However, the FTC also found that many “questionable/poor quality patents” have issued in the recent past and that the patent system required minor modification to maintain the proper balance.

The FTC's analysis culminated in its issuing ten recommendations to change the patent system. The five most intriguing recommendations are as follows:

' Creation of a new administrative procedure to allow post-grant review of and opposition to newly issued patents;

' Enacting legislation to specify that challenges to the validity of a patent are to be determined based on a “preponderance of the evidence” standard;

' Tighten certain legal standards used to evaluate whether a patent is “obvious” under the patent statutes;

' Enacting legislation to require publication of all patent applications 18 months after filing; and

' Enacting legislation to require either actual written notice of infringement or deliberate copying as a predicate for liability for willful infringement and, hence, the possibility of treble damages.

Due to the widespread importance of intellectual property, these proposals have generated substantial interest from both industry and bar associations. In addition to the ABA and the American Intellectual Property Law Association (AIPLA), companies such as Cisco Systems, Inc., Intel Corp. and eBay, Inc. have published comments concerning the recommendations. While most of the commentary agrees that some fundamental changes must be made to the patent system, there is no clear-cut agreement among practitioners, industry and academics. For example, many industry participants agree with the recommendation that a new post-grant opposition procedure should be put in place similar to such a procedure in use in Europe. However, many patent lawyers wonder whether it is feasible for the U.S. Patent and Trademark Office (USPTO) to adequately support such a system when, by the admission of the FTC's own report, it cannot satisfactorily handle the present crush of patent applications and related work. These issues will likely be the subject of debate as Congress begins to address the recommendations – likely beginning next year after the presidential elections.

Impact of the FTC's Recommendations

The impact on a patent portfolio stemming from any or all of these recommendations can potentially be enormous. The two recommendations that would make the most immediate impact would be the post-grant opposition procedure and legislation specifying that challenges to patent validity be examined under a “preponderance of the evidence” standard (while there is some academic debate over this point, it is generally understood that in order to invalidate a patent, the patent challenger must establish invalidity through the higher standard of “clear and convincing evidence”). Such changes could put certain patents in a portfolio at greater risk of invalidity due to a specialized administrative procedure created for the sole purpose of investigating these issues. Accordingly, the administrative judges should understand and analyze these issues better than regular trial judges. Moreover, if the reviewing judge analyzes these issues under the lesser “preponderance of the evidence” standard, certain patent would likely not survive the challenge. Patent challengers may be more willing to proceed with such challenges if they are less costly, more predictable and take less time. On the whole, these challenges could reduce the value of a patent portfolio or at least bring some uncertainty as to its viability (which may implicate credit and funding transactions secured by the patents).

While it seems obvious that the recommendations could reduce patent values, the proposed changes could likewise produce more robust, strong patents that are worth more under a new patent system than they would be under the present system. For example, a patent that issues from the USPTO, survives a post-grant opposition proceeding under the reduced evidentiary brought by the patent owner's closest rival using the best available prior art not considered by the USPTO, arguably emerges as a strong patent that has withstood each attack unscathed. The value of such a patent would clearly exceed the same patent under the present system that was not subject to such rigorous review by the USPTO, its competitors and highly trained administrative judges.

The other recommendations promulgated by the FTC also seek to bring greater clarity to the patent review and enforcement process. For example, under the present system, a patent applicant can decide whether or not to publish the application 18 months after filing (a decision against publication requires certification that the applicant will not seek patent protection for the invention in any foreign country). The proposed change seeks to increase the information available to competitors and innovators in reviewing their own technologies and patent positions. In this manner, the practice of obtaining so-called “submarine” patents – those applications that lurk under the veiled operations of the USPTO allowing the applicant to assess the market and technological changes and then make amendments to the application such that the patent issues covering a wide range of existing products – should be curtailed. Even the proposed changes to the predicate for a finding of willful infringement intend to bring certainty to nebulous world of treble

damages in an arena in which such

trebling could mean hundreds of

millions of dollars.

What Happens Next?

Since issuing the recommendations, the FTC has aggressively sought industries' views on the recommendations. It co-sponsored a conference at Boalt Hall (Berkeley) in which it discussed the recommendations and sought guidance from the companies mentioned above in addition to many others. In the interim, the National Academy of Sciences has also published a similar report analyzing the U.S. patent system and suggesting other changes as well. The FTC continues to build consensus regarding its recommendations as it appears that Congress will take up at least some of these issues after the 2004 presidential election.

The best advice at this juncture is to simply keep abreast of any proposed legislation. As Congress begins tackling these issues, commentary, discussion and analysis will emerge from many corners. In this way, any lawyer – whether in private practice or in-house – can prepare for what assuredly will be interesting times ahead for companies owning substantial intellectual property portfolios.