PATENT REFORM 2009: AN ANALYSIS OF H.R. 1260 AND S. 515 INTRODUCED - PDF document

PATENT REFORM 2009: AN ANALYSIS OF H.R. 1260 AND S. 515 INTRODUCED MARCH 3, 2009

I. Litigation Reform and Damages Keiko Takagi, Ryan Corbett, Chandran Iyer A. The Proposed Legislation The proposed House and Senate Bills regarding changes to 35 U.S.C. § 284 (Damages) are nearly identical in language and proposes a standard for calculating a “reasonable royalty”. The three standards proposed for calculating a reasonable royalty are (1) entire market value; (2) established royalty based on marketplace licensing; and (3) valuation calculation. Under the entire market value standard, the claimed invention’s specific contribution over the prior art is looked at to determine damages. Under the established royalty standard, the focus is on whether the claimed invention has been the subject of a nonexclusive license for the use by the infringer or whether the claimed invention has sufficiently similar noninfringing substitutes in the relevant market that have been the subject of nonexclusive licenses to determine damages. Under the valuation calculation, the reasonable royalty is applied only to the portion of the economic value of the infringing product/process properly attributable to the claimed invention’s specific contribution over the prior art. Presently, the patent statute only provides that "the court shall award the claimant damages adequate to compensate for the infringement but in no event less than a reasonable royalty for the use made of the invention by the infringer." 35 U.S.C. §284. Although the statute does not specify how a reasonable royalty should be calculated, judicial interpretation has provided guidance to litigants seeking royalties as damages. Currently, reasonable royalties may be based upon an established royalty, or if an established royalty does not exist, a reasonable royalty may be determined based upon a hypothetical negotiation between a willing licensor and willing licensee. An established royalty may be a strong indicator of the amount of a reasonable royalty, and may be the best measure of what parties would have agreed to on the eve of infringement. Absent an established royalty for the infringing conduct, a reasonable royalty may be determined after infringement based upon a hypothetical negotiation. The Georgia-Pacific case listed 15 factors relevant to a determination of a reasonable royalty based upon a hypothetical negotiation following a finding of patent infringement in that case. Most courts follow some, many or all of the Georgia- Pacific factors in calculating reasonable royalty damages for patent infringement. B. Previous Reform Proposals The reasonable royalty portion of the damages provision currently proposed in the House and Senate are identical to the corresponding portion of the latest version of S. 1145 of 2007. S. 1145 was introduced on April 18, 2007. Several amendments were made to the damages provision in committee. The 2007 House bill, H.R. 1908, was also introduced on April 18, 2007. The damages provisions were amended by the time the bill was placed on the Senate calendar on September 11, 2

2007. The latest version of the 2007 bill is not identical to the version introduced in the House in 2009. For example, in the latest 2007 version, a third nonexclusive marketplace license method was not to be used to assess damages unless the first two methods were deemed not to be appropriate ( i.e. , the third method was part of an “other factors” to consider provision). The first of H.R. 1908’s methods, which required a showing that “a reasonable royalty should be based on a portion of the value of the infringing product or process,” required the court to conduct an analysis to ensure royalties are applied to a patent’s specific contribution over the prior art. The second of H.R. 1908’s methods involved entire market value, very much like the 2009 method. Several committee members expressed concerns about the phrase “specific contribution over the prior art.” Senators Specter, Kyl, Grassly, Coburn, and Brownback are of the view that this language is vague, and note that even proponents of the language differ over its meaning. In addition, this language affects the entire market value portion of the provision because in order to use this royalty calculation, the demand for the infringing product must be driven by the “specific contribution over the prior art.” The Senators also note that using this standard would effectively result in re-litigation of claim construction and validity issues during the damages portion of a bifurcated trial, in which these issues would have already been resolved in the liability phase of the trial. This would result in basically overlaying a new validity standard on top of an already existing standard set by 35 U.S.C. §§ 102 and 103. These are just some of the concerns raised with respect to the 2007 Senate version of the present bill that will undoubtedly need to be resolved if the reasonable royalty provision of S. 515 is to survive. The damages provisions in the new bills are among the most controversial of the proposals. It appears that the provisions are more favorable to the “high-tech” industry and less favorable to the “biotech” (in particular, pharma) industry. This correlates with which players are expected to push for or oppose the new damages provisions in their current form, and how the bills may be amended. We are investigating what each side is arguing and why so that we may better understand the likely future trajectory of the bills. II. Venue Kim Choate and Tyler Johnson A. Introduction The proposed new venue provisions seek to amend 28 U.S.C. §1400 by prohibiting the “manufacture” of venue by assignment, incorporation, or otherwise. Patent infringement or Declaratory judgment actions are limited to jurisdictions: (1) where the defendant incorporated, was formed, or has its principal place of business; (2) where a foreign corporation defendant’s primary United States subsidiary was incorporated, formed, or has its principal place of business; (3) where the defendant has committed substantial acts of infringement and has a regular and established physical facility that the defendant controls and that constitutes a substantial portion of the operations of the defendant; or 3

(4) where the primary plaintiff resides, if the primary plaintiff is: a. a college or university; b. a non-profit organization (as defined in the proposed section); or c. an individual inventor who is a natural person and who qualifies as a micro- entity (as defined in 35 U.S.C 123). Defendants may request transfer of an action to another district or division where (1) any of the parties has substantial evidence or witnesses that otherwise would present considerable evidentiary burdens to the defendant if such transfer were not granted; (2) such transfer would not cause undue hardship to the plaintiff; and (3) venue would be otherwise appropriate under section 1391. B. Current Law Under 28 U.S.C. § 1400(b), venue is proper: (1) where the defendant resides or (2) where the defendant has committed acts of infringement and has a regular and established place of business. Section 1400(b) exclusively governs venue in patent infringement suits. In 1990, the Federal Circuit interpreted Congress’ expansion of the general venue statute set forth in 28 U.S.C. § 1391(c) (“For the purposes of venue under this chapter, a corporation that is a defendant shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction at the time the action is commenced”) to also apply to the patent venue statute. See VE Holding Corp. v. Johnson Gas Appliance Co. , 917 F.2d 1575 (Fed. Cir. 1990). In most instances, conditions (1) or (2) above are easily met. As a consequence, plaintiffs are permitted to engage in “forum shopping” tailored to meet the needs of their clients and the subject lawsuit. Under the new provisions, parties will not be permitted to “manufacture” venue. A company will not be able to establish venue in a state merely by forming or incorporating in a state for venue purposes alone. Section 1400 is amended such that venue will exist where the defendant has its principal place of business, or where it is incorporated or formed. Venue may also be established where the infringement occurs, only if the defendant also has a regular and established, substantial physical facility in that district. For foreign entities with US subsidiaries, actions can only be brought where the primary subsidiary is located or where its principal place of business in the US is incorporated or formed. The proposed section provides for limited requests for transfer of venue, where the court deems it appropriate. The new provision also has an exception to small inventors, non-profit organizations and universities, which would permit these parties to file their patent infringement or declaratory judgment actions in the district in which they reside. 4