Prior User Rights, Inter Partes Limitations Debated at House Patent Reform Hearing

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A March 30 hearing in the U.S. House of Representatives on its patent reform bill, H.R. 1249, showed the clear divide among stakeholders on the two primary differences between the House and Senate bills--whether prior user rights should be expanded as the nation shifts to a first-inventor-to-file system and how limited the availability of inter partes review should be.

H.R. 1249, introduced the same day, differs from the Senate-passed bill, S. 23, in other ways, but the witnesses and their interrogators from the House Judiciary Committee Subcommittee on Intellectual Property, Competition, and the Internet repeatedly focused on the FITF and inter partes issues.

Debate Moved to House After Senate Vote.

S. 23 was approved by the Senate 95-5 March 8 (81 PTCJ 593, 3/11/11). The debate in the Senate was focused on four provisions--the shift to FITF, a new post-grant review option for challenging a patent at the Patent and Trademark Office in the first nine months after issuance, limits on inter partes review, and a ban on the diversion of fees collected by the PTO for use for other non-patent government services.

Amendments that would have killed FITF or expanded post-grant review and inter partes opportunities were either withdrawn or defeated early in the Senate floor debate (81 PTCJ 547, 3/4/11).

However, three recent hearings touching on patent reform in the House revealed that several legislators and stakeholders were not on board with the Senate's approaches to FITF and post-grant opposition (81 PTCJ 484, 2/18/11; 81 PTCJ 629, 3/18/11). Undoubtedly based on stakeholders' comments in those hearings, House Judiciary Committee Chairman Lamar S. Smith (R-Texas), the bill's primary sponsor, made several additions to the Senate bill.

Prior User Rights Provision Causes a Stir.

H.R. 1249 maintains the FITF language from S. 23, but adds a section amending 35 U.S.C. §273, which currently allows an exception to infringement of business method patents to prior users, “if such person had, acting in good faith, actually reduced the subject matter to practice at least 1 year before the effective filing date of such patent, and commercially used the subject matter before the effective filing date of such patent.”

The House bill allows prior user rights on any invention, not just business methods, but apparently early versions of the bill met with stiff resistance from universities and research centers whose inventions arise from government funding. H.R. 1249 thus carved out an exception, not granting prior user rights if the patent at issue was covered by the Bayh-Dole Act or any “nonprofit institution of higher education, or a technology transfer organization affiliated with such an institution, that did not receive funding from a private business enterprise in support of that development.”

During the March 30 hearing, PTO Director David J. Kappos said that the administration had yet to comment on the prior user rights provision, but he offered his own views that expanding prior user rights was “pro-manufacturer, pro-small business, and, on balance, good policy.”

That position was attacked by Rep. F. James Sensenbrenner Jr. (R-Wis.), who argued that prior user rights “harm inventors who share and reward those who choose to remain silent.” He further criticized the provision for allowing prior user rights to foreign firms, saying it gave the Chinese “a get out of jail free card.”

Kappos disagreed. The director, who spent most of his career at IBM Corp., argued that U.S. manufacturers take into consideration as one reason to build plants overseas the fact that most developed nations allow prior user rights. “The U.S. not having a prior user rights system is at a comparative disadvantage,” he said. “The message we're sending to manufacturers is that you are in jeopardy of paying on a patent filed much later.”

Kappos otherwise debunked criticisms of the shift to FITF, noting that the PTO investigated the applications filed in the last seven years and determined that “only one independent inventor's filing out of more than three million total patent filings would have received a different outcome under the first-inventor-to-file system.”

In an interview with BNA prior to his testimony, Kappos also discounted the argument that FITF also would affect cases in which a later filer can “swear behind” or antedate, a third party's disclosure of a reference after the invention date but before the filing date, in a Rule 131 declaration (37 C.F.R. §1.131). Swearing behind gives a “false sense of security,” Kappos said, and “only delays the day of reckoning.”

“If the patent is important enough,” he said, litigation will result, “and you'll be right back in the soup.”

The other witnesses seemingly accepted that the shift to FITF was going to happen and focused on the prior user rights provision.

Mark Chandler, general counsel at Cisco Systems Inc., San Jose, Calif., and member of the Coalition for Patent Reform insisted that H.R. 1249's sponsors should “hold your ground” and retain the provision. “Prior user rights are vital to a functional first-to-file system,” he said. “These rights protect users who have already commercialized an invention, but were not the first to file a patent application.”

Is University Carve-Out Enough?

John C. Vaughn, executive vice president of the Association of American Universities, Washington, D.C., on the other hand, said, “Universities strongly oppose any expansion of the prior-user rights defense in patent reform legislation. … Such an expansion would degrade the patent system overall by substantially reducing patent certainty, and any reduction in patent certainty could seriously impair the process by which universities transfer their discoveries into the commercial sector for development.”

Vaughn said that the university carve-out provision was inadequate. “Many companies to which universities license their patents intermingle university patents with their own patents in developing new products,” he said, thus contending that universities' ability to distinguish which inventions would qualify for the carve-out would be limited.

However, Rep. Zoe Lofgren (D-Calif.) asked, “How do prior user rights create problems for academics?” Vaughn contended that an academic could publish a paper that gives someone else an idea for further development, depriving the academic of patent rights, but Lofgren was clearly not convinced.

Kappos, who testified before Vaughn, apparently anticipated Vaugn's misgivings about the bill's prior user rights prvisions. “I am also aware of the university community's concerns and would like to work with [the subcommittee] and the university community to address their concerns,” he said.

Disagreement on Inter Partes Review as Well.

Agreement on the prior user rights issue thus seemed possible. The post-grant opposition issues were significantly more contentious, though.

H.R. 1249 added three more months to the “first window” post-grant review option, allowing challenges to a patent on any grounds up to one year after issuance. That change is dwarfed, however, by the modifications made to the provisions on inter partes review:

• The bill retains the current threshold for the PTO to authorize inter partes review if “a substantial new question of patentability exists.” S. 23, in comparison, allows such review if “there is a reasonable likelihood that the petitioner would prevail with respect to at least 1 of the claims challenged in the petition.”

• H.R. 1249 automatically stays a subsequent declaratory judgment action as to patent validity by the inter partes review petitioner unless the patent owner responds.

• The House measure gives an alleged infringer in court nine months to initiate inter partes review. S. 23 allows six months.

• H.R. 1249 adds a new Section 320, expanding the likelihood of a stay of court proceeding--as well as proceedings before the International Trade Commission--for any patent in post-grant or inter partes review.

Asked specifically about the threshold differences in the two bills, Kappos told BNA that the PTO can implement the review either way, but said, “On balance, the substantial new question of patentability standard is better policy.” He told the subcommittee that his major concern would be “false negatives”--patents that should have been reviewed in light of new prior art but were not because the heightened threshold was not met. “Our first test is imperfect anyway,” he said to BNA, so it is best to let challenges over the threshold so they agency can review them.

Steven W. Miller, general counsel for intellectual property at Procter & Gamble Co., Cincinnati, and a member of the Coalition for 21st Century Patent Reform--almost always on the opposite side as the Coalition for Patent Reform--vehemently disagreed. He praised the Senate's “safeguards” against abuse of post-grant opposition opportunities in his testimony, and in response to questions from Rep. Thomas W. Reed II (R-N.Y.), said the lower threshold wasted PTO resources. “Any decent patent attorney can find a substantial new question of patentability,” Miller said.

Chandler disagreed with equal fervor. He noted that, with the current “SNQ” threshold, at least one claim is invalidated in 89 percent of the inter partes challenges, and the entire patent is thrown out 47 percent of the time. “With that level of results,” he said, “it doesn't seem that the threshold needs to be raised.”

Business Method Patents Process Lauded.

Steve Bartlett, president and CEO of the Financial Services Roundtable, an association of banking, insurance, and investment firms based in Washington, D.C., concentrated his testimony on the provision in the two bills “establishing an opposition proceeding at the PTO to review qualified business method patents against the best prior art.”

The S. 23 version of that provision eliminated the nine-month window for filing a post-grant review petition and lowered the estoppel effects. It also set a loose standard for obtaining a stay in court for any business method patent subject to this “transitional program.”

H.R. 1249 retained those terms and went further: forcing litigation in a venue preferable to the defendant, allowing immediate interlocutory appeal of a denial of a request to stay litigation, and awarding attorneys' fees and costs to the prevailing party.

“It is our belief that the stay should be mandatory, but short of that we appreciate this significant improvement designed to ensure that neither plaintiffs nor defendants bear the costs of parallel proceedings,” Bartlett said.

Inequitable Conduct Concern to Rise Again?

One other issue that was not debated in the Senate in this Congress but appears likely to be revived in the House is reform of the inequitable conduct doctrine.

The bills do not directly address inequitable conduct, as had prior bills. Instead, they propose a new procedure called “supplemental examination,” essentially an ex parte reexamination initiated by the patent owner, but with a different purpose. The procedure allows the patent owner to make pre-litigation submissions to the PTO to potentially correct mistakes in disclosures during prosecution. Submissions of the patent owner taking advantage of that option could not then be used to support an inequitable conduct defense.

In his preliminary comments, subcommittee Chairman Robert W. Goodlatte (R-Va.) indicated that he was not completely satisfied with the supplemental examination provision.

Chandler said, “As drafted, supplemental examination effectively nullifies a patent applicant's duty of candor. … This provides a patent applicant with an incentive to conceal material information and wait to disclose it to the PTO only once the applicant realizes that it has been caught.”

Miller again disagreed. He said, “Any patent emerging from such reexamination shall not be held unenforceable on the basis that such information had not been previously considered.” Though he acknowledged that the original impetus for patent reform in 2005 raised a greater concern about the abuse of the inequitable conduct defense, he said, “I believe the supplemental examination concept would be helpful to patent owners and would relieve the courts of unnecessary litigation.”

In a March 30 press release, the Generic Pharmaceutical Association agreed with Chandler. “[T]he bill as drafted would allow a patent holder to 'cleanse' its patent, even if the patentee engaged in deceptive or inequitable conduct to obtain the patent. It is clear to GPhA that this language could be interpreted as allowing patent applicants to use the cleansing procedure even if they previously withheld or misrepresented information with the intent to deceive the PTO during the patent application process.”

Fee Diversion Ban Not Resolved.

Finally, the provision for a ban on PTO fee diversion is not likely to have as easy a path in the House as it had in the Senate as well.

The controversy is not among the patent community--which virtually unanimously supports the ban. The conflict is between the Judiciary Committee and House appropriators, who have relied on fee diversion in the past, tacking $800 million of fees submitted by patent applicants and owners and using the funds for other purposes.

An anticipated fight in the Senate on the issue never materialized. Conversely, during the House hearing March 30, Sensenbrenner specifically recommended that the fee diversion provision be pulled out of H.R. 1249 and voted on separately.

That move would undoubtedly be criticized by the patent community, which has generally argued that the provision in H.R. 1249 that gives the PTO fee-setting authority must be tied to the ban on fee diversion. Under Sensenbrenner's plan, it is conceivable that the fee-setting provision would be approved while the fee diversion provision would not.

Stakeholders See Further Negotiations.

Brent K. Yamashita of DLA Piper, East Palo Alto, Calif., told BNA that there is some reason to expect agreement on a final bill given the similarities between the two bills. “Members of both bodies have stated that they worked together prior to introduction to craft bills that had a higher probability of passing than the bills offered in previous years,” he said.

However, Stephen B. Maebius of Foley & Lardner, Washington, D.C., was more skeptical. “Despite the more challenger-friendly inter partes procedures in the House version, they still do not appear to have satisfied the Coalition for Patent Fairness as evidenced by today's testimony on the Hill,” Maebius told BNA. “Assuming the House bill moves forward for a vote and if it passes in its current form, there will have to be further negotiations and changes in the final language in conference. So what is clear at this point is that we don't have a final version of the bill--it will change before it can become law.”

Richard Lazarus of Barnes & Thornburg, Washington, D.C., was wary of the bill regardless of how it is negotiated. “The present inter partes review and post-grant review provisions of the House bill will add significant work, rules, and procedures to the already overburdened PTO,” he told BNA. “The value of these provisions under less tenuous circumstances may be the subject for vigorous discussion, but to add them now is not patent reform; rather it is undermining the patent system that has so well served our country.”

By Tony Dutra  

H.R. 1249 at

S. 23 at