Technology and Small Business

Inventors wary of reform bill: Radical changes to U.S. patent law may be hindrance to small players

March 17, 2008

A federal bill expected to receive a vote from the Senate this year would trigger the most radical changes to the U.S. patent system in more than 50 years.

Supporters of the Patent Reform Act of 2007 want to switch to a "first-to-file" system that would grant patent rights to the first person to file an application. The United States is the lone country still using a "first-to-invent" system that rewards an inventor who first conceives the innovation, even if another person submits an earlier application.

The results can be costly, complex and time-consuming. When at least two people file an application on the same invention, the Patent Trademark Office conducts a trial, known as an interference proceeding, to determine the first inventor.

Eliminating interferences and aligning the United States with the rest of the world are the main arguments for switching to a first-to-file system. But opponents argue the change would harm solo inventors and small companies, which account for about 45 percent of patent applications.

Here's why: The new system would create a race to the Patent Trademark Office, and the entity most likely to win is the one with the most resources-corporations with deep pockets. They're less concerned about filing fees and are more likely to file an application even though the commercial benefit of the technology may be risky. Small businesses, on the other hand, will wait to file until they're certain a market exists for the product before committing funds for filing fees.

"[A small inventor's] money is more precious to him, and he's not going to risk it filing an application that has no commercial value," said John Daniluck, a patent attorney at Bingham McHale LLP, whose clientele includes small and large companies. "A big corporation will file and stake their claim to it, and fend off others."

Filing fees range from $500 to $1,000. But navigating the lengthy process, which typically takes two to three years, often requires legal assistance. Attorney fees can push the costs for a simple invention to $20,000 and to $40,000 for a complex filing.

Indianapolis-based Specialty Coating Systems Inc. holds dozens of patents relating to materials and how to apply them. Its director of technology, Rakesh Kumar, is concerned the potential change could hurt business.

"We are not a billion-dollar company, so that puts us in a very bad position," he said. "Big companies have enough money to file a patent, even if they have not demonstrated it in the lab."

Too much litigation

With 1.6 million active patents in the United States, the possibility of infringement has led to more litigation, particularly within the technology sector.

Microsoft Corp. is among larger software developers that support a first-to-file system because the company is often forced to fend off infringement suits brought later by smaller competitors, Daniluck said. Unlike the auto industry, for instance, in which large sums of money are necessary to produce an innovation, an independent inventor sitting at his kitchen table can develop software.

Some of the litigation stems from what is known as "patent trolling," a term used to describe an individual or company that holds a patent with no intention of marketing an idea or making a product.

The patent holder instead waits for another company to develop a similar product and then threatens it with expensive patent-infringement lawsuits to extract large monetary settlements.

Under the reform act, a new venue would provide a less expensive and more streamlined way to hash out disagreements. It would allow anyone to seek cancellation of an existing patent within a year of its approval. The proceeding, however, would be available only for patents issued after the date of the bill's enactment.

The bill also would change how patent damages are calculated, including limitations on their availability for willful infringement. Proponents of changing the damage provisions argue that large patent awards are excessive compared to the actual value of the patent.

For Simran Trana, Purdue Research Parks' director of technology commercialization, the reform package conjures a "mixed-bag" of opinions. She favors the attempt to reduce litigation, but is against limiting damages.

"If you take away that leverage from a patent holder, you undermine their ability to drive the value of their intellectual property," she said. "It's going to reduce the level of investment and engagement."

Further, budget limitations of not-forprofit universities often constrain the resources they can devote to rapidly filing patent applications, making it more difficult for them under a first-to-file system.

Growing backlog

Not everyone is convinced reform is needed. Pharmaceutical firms such as locally based Eli Lilly and Co. are satisfied with the current system and depend upon court injunctions to stop generic drugmakers from infringing upon their patents.

Daniluck, the Bingham McHale partner, agreed that certain aspects of the patent system should be reformed, but stopped short of calling it broken. The biggest problem, he said, is the PTO is inundated with applications.

Indeed, from 1996 to 2006, the number of patent applications more than doubled from about 200,000 to 450,000, according to the PTO.

Nearly 1.1 million applications are currently pending, and 760,000 of those still await first action. The average time it takes to get approval is 32 months.

To shave the backlog, the PTO hired 1,200 patent examiners in 2007 and has plans to employ 1,200 more examiners this year.

Compounding the problem of delays is that the tedious work leads one of every two examiners to leave the job within the first year.

If the legislation is approved, inventors ultimately will lean on their attorneys even more, said Clifford Browning, a partner in Krieg DeVault LLP's intellectual property practice. In turn, the lawyers will shoulder more responsibility.

"It will cause us to treat patent applications as hot potatoes," he said. "You won't want to hang onto them; you will want to file them as soon as possible."
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