SENATE PASSES PATENT REFORM BILL

SENATE PASSES PATENT REFORM BILL CLIENT MEMORANDUM On Tuesday, March 8, the United States Senate voted 95-to-5 to adopt legislation aimed at reforming the country s patent laws. The America Invents Act (the Act ) contains measures implementing first-to-file priority and expanding opportunities for post-grant review. 1 It also includes measures directed to more recent developments in areas such as false-marking claims and tax strategy patents. This memorandum highlights significant changes that the Act would make to the patent laws relating to first-to-file priority, review of patents and applications, tax strategy patents, and patent litigation. Provisions that were considered but not adopted by the Senate are also briefly discussed. The next focal point for the legislation will be the House of Representatives, which has yet to take up the issue in this Congress. A. Priority For First Filers I. Major Provisions Of The America Invents Act Under current U.S. law, the first inventor seeking to obtain a patent may be given priority over a later inventor regardless of which inventor was the first to file a patent application. 2 In contrast, most nations employ a first-to-file rule giving priority to the first applicant for a patent on an invention, even if a later applicant was actually first to arrive at the invention. One perceived benefit of a first-to-file system is that it is relatively simple to administer, as priority can usually be determined objectively with little factual inquiry needed. The Act would introduce first-to-file priority in the U.S. In general, an applicant would be entitled to a patent unless the invention were the subject of an earlier application by another or previously available to the public. The scope of the prior art would include references up to the date of the application, as well as foreign public uses or sales, that may not constitute prior art under current law. However, direct or indirect disclosures by the applicant within a year before the date of the application would not constitute prior art. 3 Current procedures for resolving priority contests, or interferences, would be replaced with narrower derivation proceedings. These proceedings would be limited to priority challenges on grounds that an earlier applicant derived the invention from a later applicant without 1 2 3 America Invents Act, S. 23, 112th Cong. (as passed by Senate, March 8, 2011), available at http://www.gpo.gov/fdsys/pkg/bills-112s23es/pdf/bills-112s23es.pdf. See 35 U.S.C. 102(a), (e), and (g). Act at 2 (amending 35 U.S.C. 100, 102 103). NEW YORK WASHINGTON PARIS LONDON MILAN ROME FRANKFURT BRUSSELS in alliance with Dickson Minto W.S., London and Edinburgh

authorization. 4 In contrast, current interference practice allows a party to challenge priority on the basis of simply having been the first to invent. Critics note that the lack of discovery in a derivation proceeding would make it difficult for an inventor to establish that another s invention was improperly derived. 5 The new first-to-file provisions would apply only to patents and applications with an effective filing date that is at least 18 months after enactment. 6 B. Review Of Patents And Patent Applications By The Patent Office The Act includes three procedures for third parties to challenge a patent or application: submission of prior art or statements while an application is pending, post-grant review within nine months after a patent issues, and inter-partes review after the nine-month window closes. A fourth, temporary procedure for post-grant review of business-method patents would also be established. 1. Third-Party Submission Before a patent application is approved and issued, third parties could submit prior art (including patents, patent applications, and printed publications) to the Patent Office for consideration in connection with the pending application. 7 In addition, at any time, a party may cite to the Patent Office prior art bearing on patentability, or written statements of the patent owner as to the scope of a claim, although written statements would be considered only in construing claims during reexamination or post-grant review. If the pertinence of the prior art or written statement is explained, the cited art or statement and the explanation would become part of the patent s official file. 8 2. Post-Grant Review Within nine months after the grant or reissue of a patent, a party other than the patent holder could petition the Patent Office to review the claims for failure to meet any of the conditions or requirements for patentability or reissue. To initiate review, the challenger must provide information that, if not rebutted, demonstrates that at least one challenged claim is more likely unpatentable than patentable. The challenger may participate in the review, and bears the ultimate burden of proving unpatentability by a preponderance of the evidence. The Patent Office may not proceed if the challenger also has instituted a civil court case to invalidate the 4 5 6 7 8 Act at 2 (amending 35 U.S.C. 134 135, 146, & 291). See 157 Cong. Rec. S1095 (daily ed., Mar. 2, 2011) (remarks of Sen. Feinstein). See Act at 2(o). Act at 14. The application is published or a notice of allowance is mailed, whichever is earlier. Act at 5 (amending 35 U.S.C. 301). - 2 -

patent. 9 The challenger also may not later assert invalidity in another Patent Office proceeding, a civil action, or a proceeding before the International Trade Commission on any ground that the petitioner raised during a review that results in a final written decision. 10 New rules for post-grant review would apply only to patents subject to the new first-to-file provisions i.e., patents with an effective application filing date that is at least 18 months after enactment. 11 3. Inter-Partes Review After the nine-month window for post-grant review has closed, a party could challenge a patent by a petition for inter-partes review. This proceeding replaces current procedures for inter-partes reexamination, and is similarly limited to novelty or obviousness challenges based on prior-art patents and printed publications. 12 However, the showing required to initiate review (a reasonable likelihood that the petition would prevail with respect to at least one claim) would be less stringent than the current standard for reexamination (which requires proof of a substantial new question of patentability). 13 Similar to post-grant review, the challenger bears the burden of proof by a preponderance of the evidence, must not have already initiated a civil action challenging validity, and is estopped from later asserting invalidity on any ground that the challenger raised, or reasonably could have raised, during the review. Additionally, a party sued for infringement may not wait more than six months from the date of the complaint before petitioning for inter-partes review. 14 Due to these timing restrictions, a party sued for infringement of a patent within the first three months after the patent issues may seek post-grant review of the patent, but may not seek interpartes review. A broader range of arguments may be made during post-grant review than in inter-partes review e.g., the challenger may assert invalidity based on a prior public use, or insufficient enablement or description under Section 112. However, due to estoppel provisions, a challenger would be largely foreclosed from also arguing invalidity as a defense in the litigation on the same bases asserted in the post-grant review. The new rules for inter-partes review would take effect one year after enactment and apply to patents issued prior to enactment as well as after. 15 9 10 11 12 13 14 15 Id. (adding 35 U.S.C., Chapter 32). Id. (adding new 35 U.S.C. 325(e)). See Act at 5(f). Act at 5 (amending 35 U.S.C., Chapter 31). The deadline for petitioning for inter-partes review is extended to the termination of any post-grant review. Compare Act at 5 (adding new 35 U.S.C. 314) with 35 U.S.C. 313. Act at 5 (adding new 35 U.S.C. 315). Act at 5(c). - 3 -

4. Transitional Review Of Business-Method Patents The Act calls for the Patent Office to establish proceedings for hearing challenges to businessmethod patents by accused infringers. These proceedings would be transitional in that once established, they would be available for only four years. Transitional proceedings would allow parties accused of infringing a business-method patent to challenge the patent on grounds of lack of novelty or obviousness based on prior public availability or prior-art patents or publications. The Act defines a business-method patent as a patent, other than for a technological innovation, that claims a method or apparatus for performing data processing utilized in the practice, administration, or management of a financial product. Unlike the post-grant review process, the process for review of business-method patents could be initiated more than nine months after issuance, and the petitioner would not be estopped from raising the same grounds for invalidity in a later civil action or International Trade Commission proceeding. 16 Transitional proceedings are not intended to supplant other mechanisms for review by the Patent Office or the courts. Patents that are subject to any of the new post-grant review procedures would be exempt from transitional proceedings. 17 In the case of concurrent court proceedings, the Act specifies that a court that is considering staying a motion for preliminary injunction must consider whether the stay would promote efficiency or prejudice the nonmoving party. 18 C. Tax Strategies Strategies for reducing, avoiding, or deferring tax liability under any federal, state, local, or foreign law would be deemed indistinguishable from the prior art, and thus not patentable. However, the exclusion would not apply to aspects of an invention that relate solely to the preparation of tax returns or other tax filings. 19 Provisions of the Act regarding tax strategies would apply only to applications pending on the date of enactment or filed thereafter. The Act states explicitly that it should not be construed to imply that other types of business methods may be patented. 20 16 17 18 19 20 Act at 18(b). Act at 18(b)(1). Id. at 18(c) (codifying the four-factor analysis of Broad. Innovation, L.L.C. v. Charter Commc ns, Inc., No. 03-cv-2223, 2006 U.S. Dist. LEXIS 46623, at *10 11 (D. Colo. July 11, 2006)). Act at 14. Id. - 4 -

D. Patent Litigation 1. Preliminary Injunction If a patent infringement suit is filed within three months of the grant of a patent, a court could not stay consideration of a motion for preliminary injunction on grounds that post-grant review is being sought. 21 2. False-Marking Suits To satisfy the notice requirement for recovering damages for infringement, a patent owner or licensee may identify the relevant patents on either the patented article itself or its packaging. 22 Improper marking for example, listing an expired, invalid, or inapposite patent may give rise to a claim of false marking. The Federal Circuit s 2009 holding in Forest Group, Inc. v. Bon Tool Co. that false marking is punishable by a fine of up to $500 per article, 23 coupled with a statutory right of every person to bring a false-marking claim, 24 has led to an explosion in falsemarking litigation. The Act would limit the cause of action to (a) the United States for recovery of the fine, and (b) parties who have suffered a competitive injury for recovery of only their actual damages due to the false marking. This provision would take effect immediately upon enactment and apply in all cases pending on or after that date. 25 In addition, the Act would permit virtual marking by posting a list of patents on the Internet and referencing the web address on the patented article or its packaging. 26 This provision would benefit companies with large numbers of products and patents. 3. Best Mode Although the Act would retain the requirement that an application must set forth the best mode for practicing the invention, any failure to disclose a best mode would no longer be a defense to infringement. 27 21 22 23 24 25 26 27 Act at 5 (adding new 35 U.S.C. 325). See 35 U.S.C. 287(a). Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009). See 35 U.S.C. 292. Act at 2(k) (amending 35 U.S.C. 292). Act at 4 (amending 35 U.S.C. 273). Act at 15 (amending 35 U.S.C. 282). See generally 35 U.S.C. 112, 1. - 5 -

II. Provisions Not Adopted Several provisions considered by the Judiciary Committee and the full Senate were ultimately not adopted. Most notably, the Senate defeated an amendment introduced by Senator Feinstein (D-Calif.) that would have eliminated first-to-file provisions from the Act and retained the current first-to-invent priority laws. 28 The Act s sponsor, Senator Leahy (D-Vt.), has referred to the first-to-file provisions as the heart of the America Invents Act. 29 Earlier versions of the Act would have required trial judges to play a greater role in evaluating patent damages methodologies before submitting the issue to the jury. 30 It is unclear that an additional statutory framework for damages is needed in view of the heightened court scrutiny of damages awards reflected in recent decisions. 31 Other unadopted provisions would largely have codified recent case law on willfulness and change of venue. 32 Under the Federal Circuit s Seagate decision, willfulness must be proved by clear and convincing evidence that the accused acted despite an objectively high likelihood that its acts constituted infringement. In addition, a party charging willfulness may not rely solely on the infringer s knowledge of the patent or on a failure to obtain advice of counsel. 33 Under T.S. Tech., a motion to transfer a case from one district to another should be granted if the transferee venue is more clearly convenient than the plaintiff s chosen forum. 34 The Senate also rejected a provision that would have allowed the Patent Office to continue its current reexamination procedures, for a period of up to four years, in place of inter-partes review and any post-grant review on the basis of prior-art patents and printed publications. 35 28 29 30 31 32 33 34 35 S. Amdt. 133, 112th Cong. (2011). Press Release, Senate Comm. on the Judiciary Chairman Patrick Leahy, Leahy: First-Inventor-To-File Transition Support In Every Corner Of Patent Community (Mar. 3, 2011), http://leahy.senate.gov/press/press_releases/release/?id=74e2e0a6-c9ef-4804-995d-0109d3c205de. See Patent Reform Act of 2011, S.23, 112th Cong. 4 (2011) (as reported by S. Comm. on the Judiciary, Feb. 3, 2011), available at http://www.gpo.gov/fdsys/pkg/bills-112s23rs/pdf/bills-112s23rs.pdf. See, e.g., Uniloc USA, Inc. v. Microsoft, Inc., Nos. 2010-1035, -1055, 2011 U.S. App. LEXIS (Fed. Cir. Jan. 4, 2011) (reversing royalty damages award based on a 25% rule of thumb as unsupported by evidence, and rejecting a calculation based on the entire market value of the infringing product where sales were not shown to have been driven by patented features). See id. at 4 & 8. See In re Seagate, 497 F.3d 1360, 1371 (Fed. Cir. 2007). See In re TS Tech U.S. Corp., 551 F.3d 1315, 1319 (Fed. Cir. 2008). See 157 Cong. Rec. S1071 (daily ed., Mar. 1, 2011). - 6 -

III. Conclusion Having cleared the Senate, the Act must proceed through the House of Representatives, where a version of the bill is expected to be introduced in the next few weeks. 36 Assuming that the bill passes in the House, any differences between the House and Senate versions will have to be resolved before a final bill is adopted by Congress. Senate passage is an auspicious start for the Act. Efforts at similar patent legislation in 2007 and 2008 met with success in the House but became bogged down in the Senate. If adopted, the America Invents Act will represent the most substantial change to the U.S. patent code in almost 60 years. * * * * * * * * * * * * * * * For further information regarding this memorandum or intellectual property issues generally, please contact Kelsey I. Nix (212-728-8256, knix@willkie.com), Robert G. Kofsky (212-728- 8644, rkofsky@willkie.com), or the Willkie attorney with whom you regularly work. Willkie Farr & Gallagher LLP is headquartered at 787 Seventh Avenue, New York, NY 10019-6099. Our telephone number is (212) 728-8000 and our facsimile number is (212) 728-8111. Our website is located at www.willkie.com. March 10, 2011 Copyright 2011 by Willkie Farr & Gallagher LLP. All Rights Reserved. This memorandum may not be reproduced or disseminated in any form without the express permission of Willkie Farr & Gallagher LLP. This memorandum is provided for news and information purposes only and does not constitute legal advice or an invitation to an attorney-client relationship. While every effort has been made to ensure the accuracy of the information contained herein, Willkie Farr & Gallagher LLP does not guarantee such accuracy and cannot be held liable for any errors in or any reliance upon this information. Under New York s Code of Professional Responsibility, this material may constitute attorney advertising. Prior results do not guarantee a similar outcome. 36 Press Release, House Comm. on the Judiciary Chairman Lamar Smith, Chairman Smith Praises Senate Passage of Patent Reform; House to Introduce Similar Legislation This Month (Mar. 8, 2011), http://lamarsmith.house.gov/news/documentsingle.aspx?documentid=228316. - 7 -