House Approves Patent Reform Bill 304-117; Dissent on PTO Funding Change Quelled

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The House June 23 approved its version of patent reform (H.R. 1249) with a change to the provision banning diversion of fees collected by the Patent and Trademark Office that arguably does not change the status quo, a controversial departure from the Senate counterpart.

The manager's amendment to H.R. 1249 was extensive, but sparked opposition almost entirely based on the change to the PTO funding mechanism. The manager's amendment was adopted, and 14 other amendments were presented for voting. Substantive challenges to the bill were rejected; the six amendments that were adopted were not controversial.

The House then voted 304-117 to approve the revised bill.

The primary sponsor of patent reform in the Senate, Patrick J. Leahy (D-Vt.), applauded the House action in an e-mail sent to BNA. “I commend Chairman Smith, [Rep. Steny] Hoyer [D-Md.], and others for their work to create and pass true patent reform,” he said.

“The House-passed bill differs slightly from what the Senate approved overwhelmingly in March, but the core reforms are consistent,” Leahy added. “Just as the Senate did when it passed the America Invents Act in a significant 95-5 vote, we should come together and approve this bill once again, and send it to the President's desk to be signed into law.”

H.R. 1249 will now have to be reconciled with S. 23 in conference committee. There are a number of other differences between the bills. The additional H.R. 1249 features likely to have the greatest impact on the patent community are the expansion of prior user rights under 35 U.S.C. Section 273 and a new provision stipulating that performance of a patented genetic test for the purpose of providing a second opinion to a patient does not constitute infringement.

Change to PTO Funding Mechanism

The Senate version of patent reform, S. 23, would create a “USPTO Revolving Fund” to ensure that all funds collected by the PTO, including fees in excess of early estimates, remain under the agency's control until expended. After a 283-140 vote approving the manager's amendment, though, H.R. 1249 now includes language keeping the collected funds in a “Reserve Fund” that would be released to the PTO only “[t]o the extent and in the amounts provided in appropriations Acts.”

PTO Director David J. Kappos said, “We are encouraged by the statements of so many Members of Congress calling for the USPTO to have full access to all of its fee collections.” Recalling a commitment a day early by House Appropriations Committee Chairman Harold Rogers (R-Ky.), Kappos added, “We are particularly thankful to Chairman Rogers for his commitment to ensure that the USPTO has full access to its fees when fee collections exceed Congress' annual appropriation for USPTO.”

One group, however, reiterated its concern about the PTO funding issue. “The Innovation Alliance is disappointed that the House of Representatives has approved legislation that will not end permanently the diversion of user fees from the U.S. Patent and Trademark Office,” the organization's Executive Director Brian Pomper said. “Along with many other patent stakeholders across a range of sectors and business models, we believe that the anti-fee diversion provisions approved by an overwhelming vote of 95-5 in the U.S. Senate and a 32-3 vote in the House Judiciary Committee offer the USPTO the reliability and structure it needs to reduce today's significant backlog of 700,000 patent applications.”

A voice vote was taken June 22 and the acting chairman at the time announced that the“ no” votes appeared to prevail.

However, the primary sponsor of H.R. 1249 and the sponsor of the amendment, Rep. Lamar S. Smith (R-Texas), asked for a recorded vote, leading to the favorable result on the afternoon of June 23. Though patent reform has largely been a bipartisan issue, the parties were split on this vote. Republicans supported the amendment overwhelmingly, while a majority of Democrats voted against the measure.

Other Substantive Amendments Rejected

Fourteen other amendments were presented. Sponsors were given five minutes each to present their arguments. Smith rose to speak against each of the amendments.

• First inventor to file. Both S. 23 and H.R. 1249 would change the United States from a first-to-invent to a first-inventor-to-file (FITF) system. The change was initially the most heavily discussed in House Judiciary Committee hearings on H.R. 1249.

Reps. John Conyers Jr. (D-Mich.) introduced an amendment, No. 2, that would delay implementation of the change to FITF until “the President's finding that major patenting authorities have adopted a grace period having substantially the same effect as that contained under” the FITF provisions of the bill. The amendment failed by a vote of 316-105.

Amendment No. 12, presented by Rep. F. James Sensenbrenner Jr. (R-Wis.), to delete the FITF provision altogether, failed by a vote of 295-129.

• Prior user rights. Given the change to FITF, some stakeholders were concerned that the first inventor might have had various reasons not to file a patent application but had already commercialized the invention. The House Judiciary Committee thus added a provision expanding the prior user rights statute, 35 U.S.C. Section 273, which currently applies only to prior commercializations of business method patents.

Smith's manager's amendment features a complete replacement of Section 273, “Defense to Infringement Based on Prior Commercial Use.” Prior user rights would apply to any technology, with commercial activity also including “premarketing regulatory review” for drugs and “nonprofit laboratory use” such as in a university or hospital. However, it would generally not allow the defense against patents owned by institutions of higher education.

Reps. Tammy Baldwin (D-Wis.) and Sensenbrenner, in amendment No. 3, sought to strike the expansion of prior user rights. The amendment failed by a vote of 342-80.

• PTO fee-setting authority. S. 23 and H.R. 1249 give the PTO the authority “to set or adjust by rule any fee established or charged by the Office” under certain provisions of the Patent and Lanham Acts, “provided that patent and trademark fee amounts are in the aggregate set to recover the estimated cost to the Office for processing, activities, services, and materials relating to patents and trademarks, respectively, including proportionate shares of the administrative costs of the Office.”

Rep. Donald Manzullo (R-Ill.) defended his amendment, No. 13, to delete the provision and keep fee-setting entirely within Congress, but it was defeated 329-92.

• Post-grant opposition proceedings. One of the earliest key drivers of patent reform was the cost of litigation and the desire to offer cheaper alternatives at the PTO. Both bills support a new “first window” post-grant review (PGR) procedure allowing challenges within nine months of an issued patent on any ground. They both also support a revised inter partes review procedure with a higher threshold for the PTO to accept a challenge.

Reps. Dana Rohrabacher (R-Calif.) and Marcy Kaptur (D-Ohio) argued in favor of their amendment, No. 14, to exempt individual inventors and small businesses with 100 or fewer employees from PGR and inter partes review challenges to their patents. The amendment failed, 342-81.

• Business method transitional program. Both House and Senate patent reform bills set up a “transitional program” allowing attacks against the enforceability of business method patents by strongly favoring stays in court while the PTO reexamines the patents. Smith said in June 22 remarks on the floor, “Section 18 deals with mistakes that occurred following an activist judicial decision that created a new class of patents called business method patents in the late 1990s. The PTO was ill equipped to handle the flood of business method patent applications.”

Reps. Aaron Schock (R-Ill.) spoke as the primary sponsor of an amendment, No. 15, that would delete Section 18. He claimed that Smith's premise was belied by the low issuance rate of business method patents. The House voted 262-158 against the attempted deletion.

• Tax strategy patents. The House and Senate versions would exempt patents of tax filing and preparation software from a proposed ban on tax strategy patents. The House version went one step further by including language exempting patents on financial management software.

Rep. Jared Polis (D-Colo.) defended an amendment, No. 8, that would also exempt more than 160 tax strategy patent applications currently pending at the PTO. He argued that the applicants had already made the disclosure of their inventions, and they would not get the quid pro quo of patents in return.

Reps. Bob Goodlatte (R-Va.) and Brad Sherman (D-Calif.) joined Smith in vigorously opposing the amendment—defeated by a voice vote—because of the “bad public policy” of tax strategy patents generally. “It was a mistake for the PTO to issue these patents in the first place,” Smith said, speaking about the 140 or so tax strategy patents that already exist.

• Severability clause. One anticipated amendment was withdrawn at the last minute. Amendment No. 11 was scheduled to be offered by Rep. Maxine Waters (D-Calif.) but it was presented by Rep. Melvin L. Watt (D-N.C.) when Waters could not be found on the House floor.

It would have added a severability clause protecting the remainder of the bill if the Supreme Court determines that any section or provision is unconstitutional. As Watt noted, this is fairly typical language to add to bills with multiple provisions, but Waters returned and let it be known that she meant to withdraw the amendment.

“Today's vote is a victory for America's innovators and job creators who rely on our patent system to develop new products and grow their businesses,” Rep. Smith said in a House Judiciary Committee press release. “The America Invents Act is the most significant jobs creation bill passed by Congress this year. No longer will American inventors be forced to protect the technologies of today with the tools of the past. H.R. 1249 brings our patent system into the 21st century, reducing frivolous litigation while creating a faster and more efficient process for the approval of patents.”

Six Amendments Adopted

Neither Smith nor any other legislator opposed any of the following five amendments, each of which was adopted by voice vote:

• FITF “derivation” proceeding challenge. The new FITF provision adds a derivation proceeding to replace current interference practice. Rep. Jackie Speier (D-Calif.) proposed an amendment, No. 10, “to direct the PTO to prescribe a requirement that parties provide sufficient evidence to prove and rebut a claim of derivation.”

• Diversity study. Rep. Gwen Moore (D-Wis.) introduced an amendment, No. 4, “to direct the USPTO to develop methods for studying the diversity of patent applicants, including those applicants who are minorities, women, or veterans. Any results of the study shall not be used for preferential treatment in the patent process.”

• Small business assistance. Rep. Sheila Jackson Lee (D-Texas) rose to speak in favor of her amendment, No. 5, “to add a sense of Congress that it is important to protect the rights of small businesses and inventors from predatory behavior that could result in cutting off innovation and may provide an undue advantage to large financial institutions and high-tech firms.”

Reps. Gary Peters (D-Mich.) and James B. Renacci (R-Ohio) later presented an amendment, No. 7, “to mandate a USPTO-led study on what USPTO, SBA, and other agencies can do to help small businesses obtain, maintain, and enforce foreign patents. This study is to be conducted using existing resources” within 120 days of the enactment date. Smith clarified that he did not support the implication that the amendment created any new PTO authority for activities in foreign countries.

• PTO satellite offices. The bills require that the PTO set up three or more new satellite offices—including the Detroit office previously announced—subject to the availability of funds. Rep. Ben Ray Luján (D-N.M.) argued in favor of his amendment, No. 6, adding requirements to the satellite office location selection process. The amendment makes the purposes of setting up such offices, such as outreach to local communities, part of the selection criteria, as well as local recruitment costs and the impact on the local economy.

A sixth amendment was adopted despite Smith's opposition:

• Patent term extension. H.R. 1249 initially included a section clarifying the method for calculating the 60-day period for patent owners to file for a patent term extension. The manager's amendment deletes the clarifying language.

Conyers came forward with an amendment, No. 9, that would restore the patent term extension language that the manager's amendment struck. The amendment was adopted by a 223-198 vote.

Smith argued that the “Angiomax” case on which the language is based, Medicines Co. v. Kappos, No. 01:10-cv-286, (E.D. Va. Aug. 3, 2010), is ongoing and Congress should not be involved until litigation is complete. Effectively, he said, this is a statutory fix for one company, the plaintiff in the case.

Recommittal Defeated

Finally, a motion to recommit to the House Judiciary Committee by Rep. Brad Miller (D-N.C.) would have amended the bill to require that the PTO give priority to patents underlying products that will be manufactured in the United States. “The people who go to the front of the line will be those who pledge to do their manufacturing here,” he said.

Smith countered. “We need to update our patent system and we need to do it now,” he said emphatically, concerned with the additional time such a change would require of the committee he chairs.

The House rejected the motion by a 251-172 vote, almost entirely on partisan lines. Only one Republican favored the motion; only 17 Democrats voted against recommitting the bill to the committee.

The legislators then proceeded to the final vote on the bill, which was bipartisan. Republicans voted 168-66 in favor; Democrats voted 135-51 in favor.

Other Provisions in Manager's Amendment

The manager's amendment also included the following significant provisions that were not at issue in the House floor debate.

• PTO fee increase and new prioritized examination. The manager's amendment would allow the PTO to impose a 15 percent increase on a number of patent fees and would authorize the PTO's “Track I” prioritized examination program. The $4,800 fee—with a 50 percent discount for small entities—is aimed at providing a response from the agency within 12 months of patent application filing, rather than the current three-year wait.

• False patent marking. Both House and Senate bills eliminate qui tam lawsuits for false patent marking. H.R. 1249, as introduced, further expanded limitations on litigation by offering a three-year safe harbor after a patent expires. A provision in the manager's amendment would eliminate altogether the right to sue when the marking is on an expired patent.

• Supplemental examination. The PTO's new “supplemental examination” procedure—giving patent owners some protection against future inequitable conduct challenges—would not be available if “the Director becomes aware” of fraud upon the part of the applicant. It would not require that the PTO implement a fraud-detection procedure as some had feared after the House Judiciary Committee's April 14 markup.

• DNA diagnostic test patents. The manager's amendment to H.R. 1249 included a provision limiting enforcement of DNA diagnostic test patents when a patient needs a second opinion. Rep. Debbie Wasserman Schultz (D-Fla.) initiated the provision in the House Judiciary Committee vote, though she withdrew the amendment at that time for further “tweaking.” However, on June 22, she introduced a stand-alone bill, H.R. 2276, addressing the genetic testing issue.

• Patents ‘encompassing a human organism.' The language echoes the so-called “Weldon Amendment” provisions that have made their way into Commerce Department appropriations bills for the PTO in past years. They were proposed to reflect the PTO policy of refusing to grant patents on a “human life-form,” including a human embryo or fetus.

Other Provisions Moving Forward

Both patent reform bills also contain the additional provisions that are not the subject of amendment and so appear to have unchallenged approval:

• Best mode. The bills would eliminate an alleged infringer's ability to argue that the patent owner did not identify the best mode for enablement in the patent specification. The PTO retains the ability to reject an application for lack of best mode disclosure, but such rejections are reported to be rare.

• Litigation against the PTO in Virginia. A provision would change the location of litigation against the PTO to the U.S. District Court for the Eastern District of Virginia, rather than the federal court in the District of Columbia, as is now statutorily required.

• Jurisdiction clarification. The bills confirm that state courts do not possess jurisdiction to hear claims for relief under patent, plant variety protection, and copyright laws.

• Inventor's oath and assignee filing. The bill eases the ability for employers and other assignees to file patent applications in lieu of the named inventors.

• Priority examination for certain technologies. The bills allow the PTO to “provide for prioritization of examination of applications for products, processes, or technologies that are important to the national economy or national competitiveness without recovering the aggregate extra cost of providing such prioritization.”

However, the bills still differ on the following additional terms.

• Federal Circuit judge residency. H.R. 1249 does not address the repeal of the “Baldwin rule,” Section 11 in S. 23. That rule requires judges of the U.S. Court of Appeals for the Federal Circuit to live within 50 miles of the court.

• Micro entity status. The bills also establish a new “micro entity,” entitled to a 75 percent discount of many PTO fees. Smith's manager's amendment made a technical correction to the definition of a qualifying higher education institution.

By Tony Dutra

Text of H.R. 1249 as reported by the Judiciary Committee is available at http://pub.bna.com/ptcj/HR1249asreportedApr14.pdf .

Smith's final manager's amendment, including the fee diversion compromise, is available at http://pub.bna.com/ptcj/HR1249MgrAmendJun20.pdf .

The House Judiciary Committee report on H.R. 1249 is available at http://pub.bna.com/ptcj/HR1249ReportJun1.pdf .

Text of S. 23 is available at http://pub.bna.com/ptcj/S23aspassedMar8.pdf .