Yesterday, the U.S. Senate passed the House’s version of the latest patent reform bill, H.R. 1249, the America Invents Act, by a vote of 89 to 9. During a speech to Congress yesterday, Pres. Obama praised the Senate for that action, and vowed to sign the bill. When he does, America’s patent system will shift to a standard used by much of the rest of the world: a “first-to-file” system intended to ease some of the burden on inventors to prove originality.
Also remaining in the final bill is a vastly expanded post-grant review system designed to move the process of challenging a patent’s legitimacy from litigation to administration – from the courtroom to a larger, more funded U.S. Patent Office that will include a new agency called the Patent Trial and Appeal Board. But missing from the bill is the thing that launched it in the first place: an initiative to replace the system of determining damages and, in so doing, reduce the amount of huge jury awards.
The system that the current bill has completely abandoned would have removed litigation as the factor determining the perceived value of patents. Specifically, it would have reworked the damages formula for patent infringement cases around expert estimates of the revenue amounts those patent would have generated in a healthy market. The original language looked like this:
The court shall conduct an analysis to ensure that a reasonable royalty… is applied only to that economic value properly attributable to the patentee’s specific improvement over the prior art. In a reasonable royalty analysis, the court shall identify all factors relevant to the determination of a reasonable royalty under this subsection, and the court or jury, as the case may be, shall consider only those factors in making the determination.
The extent of that change would have been enormous, with the brunt of the impact felt most keenly by technology portfolio holding companies. These are the companies that license intellectual property to other firms and (besides sue companies) do nothing else. If a party had no intention to produce or manufacturer actual products based on its technology portfolio, a complainant would have to demonstrate that it would have licensed that technology for a reasonable sum to someone else who would have. If that expert analysis prevailed upon the jury, then the most the portfolio company would have been able to reap in damages would be damages equal to lost licensing fees – unless the defendant was judged to have infringed upon that portfolio willingly, in which case the amount could be tripled.
Still, triple the market value would probably never have (in our lifetimes, at least) merited the use of the letter “B.” And that would have changed not just the patent system, but our lives.
Follow: The perceived value of a patent portfolio today is judged not by what legitimate licensing fees it would reap from a healthy market, but by what those patents might fetch in court. Corporations use infringement litigation as sources of alternate revenue, in technology industries where consumer purchases will never hope to repay for the enormous outlays that companies have invested in infrastructure. Had patent reform legislation turned this system completely upside down, mandating that the value of litigation is no more than the value of the market, entire multi-billion-dollar portfolios would have suddenly been perceived as worthless. It would have been as if someone had spray-painted all the poker chips on the table white.
Just yesterday, as Bloomberg News reported, HTC filed a new patent suit against Apple claiming infringement upon patents that Google had just purchased from Motorola Mobility, in the first stage of its takeover deal of that manufacturer. It would appear that Google sold HTC those same patents in order to launch a countersuit to protect Android’s stake in the game. If the value of patents were perceived as a function of the marketplace rather than of their possible jury award value, this deal might never have been made. And quite possibly, the whole Motorola buyout offer might never have happened.
And quite possibly, the whole establishment of this Android intellectual cartel against iOS might never have happened. Or the buyout of Nortel’s portfolio. Or Qualcomm promoting standards that rely on some of the technology in Nortel’s portfolio. The whole house of cards would have tumbled from there.
Which makes the passage of this particular bill a lost opportunity. Now that a patent reform bill has been passed, and the European Union effectively appeased, Congress will consider that the act of reform is effectively done for their lifetimes. In fairness, though, some of what the original bill intended has come to fruition anyway, by way of the U.S. Supreme Court. In 2007, the high court ruled that source code itself is not a patentable thing (to infringe upon software, you have to copy the idea behind it); and separately that any marketed device that is found to be an improvement upon a patented concept cannot be said to infringe upon that concept. These were huge victories for open source developers who, as a result, could be allowed to see up close how commercial software is structured and create better software that supersedes the commercial concept. Rendering something obsolete is not copyright infringement.
And also in fairness, U.S. district court judges are invoking their own rights and privileges anyway, by utilizing the fair-market-value formula in limiting the damages juries may award. But that assumes that cases end up being tried by judges likely to use those formulas, rather than mysteriously in one particular district in Marshall, Texas. The current patent reform act’s language does state that cases will be tried in the district associated with the parties involved. It no longer states that parties cannot move to relocate the venue to anyplace of their choice, which means Marshall, Texas will probably remain the Las Vegas of patent trials.