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H.R. 1908 --- Patent Reform Act of 2007 (*Rep. Berman, D-CA*)

[Preliminary Assessment]{.smallcaps}

**[Summary]{.underline}:** H.R. 1908 would make substantial changes to
U.S. patent law that is expected to have a significant impact on the
U.S. patent system. Among the more notable provisions is a shift to a
first-to-file priority system (instead of the current first-to-invent
system), applying new "apportionment" rules to patent infringement
damages, new post-grant review procedures, and other provisions that
address patent litigation and "willful infringement," as well as
harmonization of U.S. patent law with the prevailing laws of other major
industrialized nations.

**[History]{.underline}:** Article I, Section 8, Clause 8 of the U.S.
Constitution states that Congress shall have power to:

> "promote the Progress of Science and useful Arts, by securing for
> limited Times to Authors and Inventors the exclusive right to their
> respective Writings and Discoveries"

Congress passed the first patent statute in 1790, which did not create a
patent office, but directed applicants to file a petition with the
Secretary of State. The Patent Office remained under the Department of
State until 1849, was then transferred to the Department of the
Interior, and in 1925 was transferred to the Commerce Department, where
it remains today. The last major overhaul of U.S. patent law was over 50
years ago.

**[Cost]{.underline}:** There is no CBO score of H.R. 1908 at this time.
The U.S. Patent and Trademark Office (USPTO) operates entirely from user
fees collected from those filing applications for patents and
trademarks, so the federal cost share of this legislation is not
expected to be substantial.

**[Major Provisions]{.underline}:** The following is a brief discussion
of the major provisions of H.R. 1908, and potential concerns and
objections that have been raised about each one:

[First-to-File System.]{.underline} Currently, the U.S. operates under a
"first-to-invent" patent system, where a patent is awarded to the
inventor that was the very first to invent the patented item (in cases
where two patent applications are filed at the same time). In instances
where a patent has already been awarded, current law provides a vehicle
(initiating "interference proceedings") to determine the first inventor.
H.R. 1908 would replace the current system with a first-to-file system,
under which the first inventor to file for a patent would be awarded the
patent, regardless of the actual date of invention. This change would
harmonize a major component of the U.S. patent system with the vast
majority of other countries in the rest of the world (there is no global
patent system, so the various provisions of patent law in different
countries can have significant impact upon inventors around the world).
The U.S. is currently the only industrialized nation that does not
operate under a first-to-file system. The bill would replace
interference proceedings with "derivation proceedings," which would
provide a forum to determine if a patent application that was first
filed was misappropriated from another inventor.

Proponents of this provision assert that a first-to-file system would
make major strides in addressing the current disparities between U.S.
law and foreign law, and would eliminate expensive and lengthy
interference proceedings that are often ineffective. Some have estimated
that the average cost of an interference proceeding is \$600,000, which
can present a substantial barrier to smaller players in the patent
system (such as universities and small high-tech firms). Opponents of
this provision assert that it will create a "race to the Patent Office,"
which will in turn significantly disadvantage small inventors that do
not have the resources that larger corporations do, resulting in poorly
crafted patent applications and lost opportunities for those entities.

[Patent Infringement Damages.]{.underline} Current U.S. patent law
provides that a patent holder is entitled to damages to compensate for
patent infringement, and must at least receive a "reasonable royalty."
Thus, patent owners who do not manufacture their patented item may seek
a reasonable royalty as compensation, while those that do manufacture
their patent may seek lost profits. A court currently has broad
discretion in determining fair compensation and penalty for infringement
by considering a range of issues appropriate to the circumstances (based
on the 15 factors enumerated in *George Pacific Corp v. U.S.
Plywood-Champion Papers, Inc.* decided in 1999).

Determining appropriate damages for infringement of a particular patent
can be a difficult and cumbersome process, since a product (such as a
computer) can draw upon hundreds or even thousands of different patents.
Thus, determining the value of a single patent to the overall value and
marketability of the overall product requires various steps. The "entire
market value rule" may be used by a court to permit recovery of damages
"based upon the entire apparatus containing several features, where the
patent-related feature is the basis for consumer demand."[^1]
Conversely, a court may apply principles of "apportionment" to determine
the appropriate amount of damages for infringement, where damages are
awarded only for the portion of the product value that is affected by
the relevant patent. In addition, a court may find that a patent was
willfully infringed, which allows the damages to be increased up to
three times the amount assessed.

H.R. 1908 would change the damages calculation in patent infringement
cases regarding reasonable royalties. The reported version of the bill
would allow judges the discretion to determine how a royalty assessment
should be conducted either using an apportionment analysis, an entire
market analysis, or other factors (including the 15 factors listed in
the Georgia Pacific case). The bill would also narrow the potential
situations where willful infringement may be found (and therefore limit
additional damages that can be awarded).

Proponents argue this provision is necessary in light of recent cases
where patent owners have been awarded excessive judgments when only one
component of a complex product may infringe on a patent, and often cite
the \$1.52 billion judgment against Microsoft in *Alcatel-Lucent v.
Microsoft*. Proponents also argue that the current system has created an
industry of patent speculators who use the threat of an expensive and
unpredictable lawsuit to extort money from infringement defendants.
Opponents argue that these provisions would not adequately compensate
patentees for the actual harm caused by the patent infringement and the
related cost of the research and development that produced the invention
in question. They further argue that courts can (and do) ensure that any
damages awarded by juries are appropriate and not excessive by
exercising their discretionary oversight, and cite the fact that the
damages verdict in the Microsoft case was recently reversed (due to an
incorrect calculation for damages by the jury) and a new trial granted
to determine damages.

[Post-Grant Review Procedures.]{.underline} Current U.S. law does not
contain post-grant review procedures, providing for a comprehensive
review of a patent already granted to ensure its validity, while similar
procedures are common-place in foreign law. While U.S. law does provide
for reexamination proceedings, this is viewed by some as too narrow and
limited in scope and application. Some critics charge that the lack of
post-grant review procedures has resulted in poorly defined patents and
increased litigation after patent issuance.

H.R. 1908 creates a new post-patent grant review process administered by
the USPTO to determine patent validity. Under a provision referred to as
"first window," certain parties could petition for the cancellation of
an issued patent within 12 months of its initial issuance (where there
is no presumption of validity of the patent in question). The bill also
provides for a "second window" in which a patent, again without the
presumption of validity, could be challenged at the Patent Office. A
petitioner would have to meet several hurdles before being able to
initiate a second window review.

As noted above, proponents of these provisions argue that this will
improve patent validity and decrease patent litigation, as well as
harmonize U.S. law with that of other countries. Opponents argue that
because the provisions provide for challenges to a patent's validity by
only a "preponderance of the evidence," this diminished standard
threatens to undermine the confidence in the validity of patents issued
by the USPTO. Currently, a patent is presumed valid once issued (under
35 U.S.C. § 282) and can only be invalidated in court upon a showing of
"clear and convincing evidence" that the patent is invalid. Opponents
object to an open-ended second window that can be invoked up to the
expiration date of the patent. Opponents argue that the resulting
uncertainty regarding issued patents may make it very difficult to
attract venture capital necessary for research and development on new
innovations.

[Rule-Making Authority.]{.underline} The USPTO currently has limited
authority to promulgate regulations regarding patents -- only those
directed toward the conduct of proceedings at the USPTO. As explained by
a Federal Circuit Court, "Congress has not vested the \[USPTO Director\]
with any general substantive rulemaking power..." H.R. 1908 would grant
USPTO broad rule-making authority, allowing the USPTO to "promulgate
such rules, regulations, and orders as the Director determines
appropriate to carry out the provisions of this title or any other law
applicable to the \[USPTO\] or that the Director determines necessary to
govern the operation and organization of the Office."

Proponents, including the USPTO and the Commerce Department (its parent
agency), argue that broader authority is necessary to "ensure an
efficient and quality-based patent examination process." Opponents argue
that the current provisions would grant overly broad rulemaking
authority to the USPTO Director, misplace congressional power and
responsibility in this sphere, and dilute the effective role courts have
played in recent years.

There are numerous other important provisions contained in the reported
version of the bill, which will be addressed at length in the RSC
Legislative Bulletin on H.R. 1908 to be distributed later this week.

**[Bonus Fact]{.underline}:** The first patent statute was passed on
April 5, 1790, by the Congress of the twelve United States. Rhode Island
was ratified and joined the Union as the thirteenth state 49 days later,
on May 29, 1790. Patents were originally valid for 14 years, whereas
currently a patent has a 20-year lifespan, during which time the patent
holder may sell the patent, license it, or enforce granted patents
rights.

**[RSC Staff Contact]{.underline}:** Derek V. Baker;
[derek.baker@mail.house.gov](mailto:Derek.baker@mail.house.gov);
202-226-8585

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[^1]: State Indus., Inc. v. Mor-Flo Indus., Inc. See CRS Product
    RL33996, p. 21.