David A. Gay, PhD

The proposed Patent Reform Act of 2005 (the "Act")¹ is perhaps the most extensive set of legislative reforms to the US patent system since the Patent Act of 1836.² It stems from reports by the Federal Trade Commission (FTC) and the National Academies of Sciences (NAS), which address a need to improve the efficiency and quality of the system. Recommended changes include simplifying the US patent system, harmonizing it with international standards, and reducing litigation costs.³

The Act proposes increasing quality by instituting postgrant oppositions, reducing litigation costs by restricting the use of inequitable conduct as a defense to infringement, eliminating subjective standards, and providing relief from excessive damages. The proposed reforms appear to have bipartisan support. The reforms also have support of the Bar and prominent industry organizations.⁴ If the reforms are enacted, intellectual property (IP) stakeholders should focus on both patent procurement and enforcement strategies, to maintain harmony between IP assets and company business strategy. The Act includes reforms impacting:

• apportionment of damages infringement
• elimination of best mode
• restrictions to inequitable conduct
• postgrant oppositions
• inter partes reexamination
• first-inventor-to-file and assignee filing system
• narrowing of prior art.

PROVISIONS REDUCING LITIGATION COSTS

In determining a reasonable royalty for infringement of combination patents, the Act will codify the Doctrine of Apportionment by directing courts to distinguish the "inventive contribution" from other features of the combination.⁵ A draft submitted by a coalition of US corporations (the "Coalition Text") suggests amending the language to specify that damages relate to contributions arising from the "claimed invention."⁶ The Coalition Text seeks to avoid an interpretation requiring an element-by-element approach to the calculation of realizable value rather than a calculation based on the proportional value of a patented invention within a larger product.⁷

The proposed apportionment provision attempts to reduce damage awards and bring greater uniformity by codifying Georgia Pacific's damage factor no. 13.⁸ Mandatory apportionment of damage calculations will nullify an already limited entire market value rule, which requires the patented feature of a combination to be the "basis for customer demand."⁹

Codification will necessarily result in limiting damage theories to choose between apportionment and lost profits, and removing any possibility of lucrative awards based on entire market value. It also has the possibility of increasing litigation costs by encouraging broader discovery to include information on all product features. If an element-by-element approach is adopted, this provision may trivialize reasonable royalty damages because the realizable value attributable to less than all of the patented elements may be used in damage calculations.

Limitation to Willful Infringement

Section 6 of the Act will limit the availability of treble damages to where (1) the defendant receives written notice that alleges specific acts sufficient to raise a reasonable apprehension of suit, or the invention is copied, and (2) the defendant did not have a basis for a good faith belief that the patent was invalid, unenforceable, or not infringed. Willfulness could only be pleaded after a finding of infringement.¹⁰ In a July 26, 2005, substitute version of the Section 6 (the "Substitute"), willfulness would be an issue tried by the court.¹¹

A higher willfulness threshold will promote certainty as to the timing of liability exposure. The potential infringer will be able to maintain commercial activities without the risk of treble damages until receipt of written notice. This certainty will diminish a company's need for opinion of counsel and also enable liberal competitive intelligence and review of patents without risking exposure to treble damages.