INVENTIVE STEP

The Senate held its first hearing on the new patent reform bill yesterday.  As expected, the action took place mostly on the controversial damages apportionment provisions.  The Judiciary Committee provided a webcast of the hearing.  BNA (subscription service) provides a summary of the hearing.

It seems that on the issues of venue, post-grant review, and inequitable conduct there will probably be room for the sides to reach a compromise.  On the damages issue, agreement seems much more difficult.  Sen. Patrick Leahy (D-VT) seemed confident that compromise could be reached, but Sen. Arlen Specter (R-PA) referred to prior failures to reach agreement and Sen. Diane Feinstein (D-CA) expressed frustration over past failed attempts.  Sen. Specter asked the six witnesses to give the panel standards for determining damages that could be used to reach compromise on the issue.

Witnesses

Steven R. Appleton, chairman and CEO of Micron Technology, Inc., suggested that damage calculations be based on “value actually contributed” by the invention, while Philip S. Johnson, chief intellectual property counsel of Johnson & Johnson, suggested using the entirety of the invention, but looking at the contribution of the invention versus the closest non-infringing alternative.  Sen. Specter summarized this as “value added.”  When questioned by Sen. Orrin Hatch (R-UT), Johnson said the problem with valuation and an “essential features” inquiry is that the court needs to go beyond what the PTO determined when it issued the patent.  The judge and juries must do a “prior art subtraction” which will result in the value of the patent being something smaller than what the PTO issued.

Professor Mark Lemley of Stanford Law School argued that the entire market value provisions for reasonable royalty in the bill that are available “upon a showing to the satisfaction of the court that the claimed invention’s specific contribution over the prior art is the predominant basis for market demand” should be eliminated.  He argued that this type of provision would lead to abuses of the system by patent owners.

David J. Kappos, assistant general counsel for intellectual property law and strategy at IBM Corp., argued that the bill should include provisions related to the “essential features” of the invention to determine damages.  He cited the Supreme Court’s opinion in Quanta Mechanics v. LG Electronics, a case having nothing to do with damage apportionment, relating instead to patent exhaustion.  He and Johnson had strong disagreement on whether the “essential features” inquiry is an appropriate one with respect to damages calculation.

Herbert C. Wamsley, executive director of the Intellectual Property Owners Association which represents constituents on both sides of the issue, could not come up with a good standard when pressed by Sen. Specter.  He argued that “there is no magic phrase” and that to get a standard requires an inquiry as to what the invention actually is.  He admitted that there does not seem to be a way to reach compromise on the damages issue.

Sen. Feinstein expressed further frustration over trying to reach a compromise.  She suggested that perhaps the judge needs to play more of a gatekeeper role when determining which of the Georgia Pacific factors used to calculate a reasonable royalty are presented to the jury for determination.  While there was general agreement on this principle, several of the witnesses were cautious.

Johnson wanted to be certain that the court could only instruct the jury on factors for which there was “substantial evidence,” a standard that is generally applied for issues to be determined by juries.  Prof. Lemley continued to argue for the apportionment principle in addition to the court’s role as gatekeeper.

Some of the disagreement on the panel on the damages issue seems to line up along party lines.  Sen. Feinstein may be on to something along the lines of a potential compromise.  It seems that it will be difficult to reach consensus.

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