By John Bringardner
IP Law & Business/May 2007

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Micron Technology Inc., one of the world's largest semiconductor manufacturers, knows a thing or two about communication. Its chips are in cell phones, wireless devices, and computers worldwide. But when it came to getting the company's message on patent reform to legislators this year, Micron bosses in Boise put down the phone and hired their own Washington, D.C.-based lobbyist to press the flesh.

Micron opened a K Street office in March, with former Intel lobbyist Melika Carroll as its new director of federal government affairs. Patent reform is at the top of her agenda. The company spent nearly $1.8 million lobbying for patent reform in 2006, relying on firms like King & Spalding and Brownstein Hyatt Farber Schreck. With a portfolio of about 14,500 patents and the experience of costly patent litigation, Micron knows that the ante is high. Earlier legislative efforts at patent reform foundered, but the company, a key player in a new high-tech industry coalition, thinks that congressional patent reform is finally a real prospect in 2007-and it's spending the money to make it happen its way.

So are patent holders on the opposite side of the debate- and everywhere in between. Last year the Pharmaceutical Research and Manufacturers of America (PhRMA), which wants to preserve the high patent walls around the industry's profitable products, spent more than $18 million on IP-related lobbying, according to the Center for Responsive Politics. The Biotechnology Industry Organization (BIO) spent $5.46 million in lobbying on a range of issues including patent reform, follow-on biologics, drug safety and funding for the FDA. This January, old-line technology companies like 3M Company and General Electric Company and pharmaceutical companies like Johnson & Johnson and Eli Lilly and Company came together to form the Coalition for 21st Century Patent Reform, using Akin Gump Strauss Hauer & Feld lobbyists to push their moderate version of patent reform. Meanwhile, small inventors, including so-called patent trolls whose lawsuits have prompted the loudest calls for litigation reform, have gained help from well-funded allies like Intellectual Ventures, LLC, and the newly formed Innovation Alliance in their grassroots efforts to keep litigation rules favoring the "little guy."

The debate is not new, but advocates say that makes reform more likely in 2007. And whatever bill does pass, Congress is unlikely to revisit the topic anytime soon, notes Philadelphia IP lawyer Paul Prestia, which raises the stakes as to whether certain items are addressed or not. Some aspects of reform, such as switching from America's unique first-to-invent system to a first-to-file system, as is common in the rest of the world, have gained broad support. Reformers on all sides point to the backlog in patent applications-pendency can be as long as four years-as proof that the United States Patent and Trademark Office is overburdened.

Legislation on a complicated and esoteric segment of the legal system takes years of gestation before real reform can happen, says Gary Griswold, chief IP counsel for 3M. Texas Republican congressman Lamar Smith introduced a patent reform bill in 2005 that didn't make it out of the Judiciary Committee. Republican Utah senator Orrin Hatch and Patrick Leahy, a Democratic senator from Vermont, introduced their bipartisan Senate bill in August 2006. At the same time, the U.S. Supreme Court took on a record number of patent cases last year. In their 2006 decision in eBay v. MercExchange, the justices disabled automatic injunctions for patent litigation, effecting one of the planks of Smith's 2005 bill.

Last July, Micron, Microsoft, and 70 other high-tech companies and industry groups, as well as a handful of financial services firms, formed the Coalition for Patent Fairness. This group has quickly become a powerful voice for change. Hatch quotes Micron executives in his public statements on the issue. (Coalition members Micron and Intel Corporation recently built a large wafer fabrication plant in Lehi, Utah.) "We've been talking about the need for patent reform for several years now," says Joel Poppen, Micron's deputy general counsel, who knows about patent litigation angst firsthand from Micron's multiple court experiences.

In a February letter to Senate majority leader Harry Reid and minority leader Mitch McConnell, the coalition outlined its goals for reform. First on the list is ensuring that damages are proportionate to the value of the component in question rather than the entire product. Alcatel-Lucent's record $1.52 billion verdict against coalition member Microsoft Corporation in February is Exhibit A. Although Windows was the infringing software in question, damages were calculated by multiplying the number of buyers by the average cost of a PC, set at $1,100-about five times the average cost of Windows alone. The verdict was wildly out of proportion with the actual damages, claims Tom Burt, Microsoft's deputy general counsel-litigation group.

The coalition also wants "willful" treble damages assessed "only where there is truly egregious conduct." In another demand that relates to current Microsoft litigation, the coalition wants section 271(f) of the U.S. Patent Act eliminated, arguing that companies should not be held liable in U.S. courts for worldwide damages from acts of infringement that are claimed to have occurred in other countries. Half of the Alcatel-Lucent verdict was calculated from overseas damages. The Supreme Court is weighing the issue in a separate Microsoft case with AT&T, which should resolve the issue before legislators can tackle it. Finally, Micron and its allies seek an end to forum shopping, arguing that patent disputes should be resolved in "courts that have a reasonable connection to the underlying claim." They want to keep suits out of places like the Eastern District of Texas, which has become a favored spot for plaintiffs. (They may be out of luck. In February the House passed separate patent legislation that would create pilot patent training programs for judges in five districts: The Eastern District of Texas is one likely candidate.)

The pharmaceutical and biotech industries have long been accused of stalling patent reform because on most issues this is a zero-sum game-a concession to high-tech groups means a loss of protection for drug patent holders. The relative value per patent is much higher in the pharmaceutical and biotech industries than in the financial and IT sectors, says Hans Sauer, associate general counsel for intellectual property for BIO, the biotech industry group. The cost to develop new biotech products is now estimated to average $1.2 billion, according to a study by the Tufts Center for the Study of Drug Development. "What we're seeking is an engagement in this debate, but it has to be tempered and equitable," Sauer says.

The Coalition for 21st Century Patent Reform sits somewhere in between the pharma versus tech dichotomy. The group supports the switching from first-to-invent to first-to-file. But it opposes certain litigation reforms like the controversial "loser pays" principle for awarding attorneys' fees.

There is consensus among many large companies that litigation defense strategies like accusing the plaintiff of inequitable conduct in filing of the patent are not only complicating litigation, but also hampering the quality of patents. "This type of defense has become an absolute plague on the patent business," says BIO's Sauer. "Its effect is that people are extremely guarded when they write letters to the patent office, because they are afraid of being construed as being dishonest ten years later." This cautious approach by patent applicants means that examiners don't always get the full picture, resulting in vague patents.

The biggest threat to biotech and pharmaceutical companies in the proposed reforms is the creation of an open-ended "second window" for postgrant review. The Senate bill introduced last August would create a system allowing a patent to be challenged at any time in its life, repeatedly if necessary, through an administrative process run by the PTO. The process would open up the patent review process to any and all interested parties, without the limitations of the current reexamination system. For example, under the current system, if Apple Inc. challenged a newly granted Microsoft patent and lost, it would not be able to bring a court challenge later. A second window would enable patent challenges without restricting later litigation.

Harold Wegner, a Foley & Lardner partner and professor at George Washington University Law School, wrote in a December 2006 article that "immediate institution of a system of prompt, postgrant review with an appropriate 'second window' is the central, core patent reform that is needed as soon as possible." He sees it as the main tool for eliminating bad patents. But drug companies can't live with a system that might invalidate a patent at any time, claims BIO's Sauer. "If you need to knock out a patent after it is granted, do it quickly, like within nine months, as in Europe," he says. Wegner now says that his position could include some sort of penalty for challenging a patent more than nine months after the patent is granted, but maintains that the window should remain open for the life of the patent.

Meanwhile, small inventors and so-called patent trolls are agitating against most of the proposed reforms. Aligned with them are well-funded IP investment funds such as Intellectual Ventures, which has has filed close to 800 patent applications and has acquired thousands more across a broad range of industries, from high tech to biotech. It also spent $626,000 on lobbyists in 2006. Intellectual Ventures managing director Peter Detkin says that he and the biotech and pharma groups believe that there needs to be a point at which patent holders can be sure they have rights. "There are plenty of options for challenging patents, so you don't need yet another process," he says.

Detkin points out that the number of patent trials has been shrinking. A Pricewaterhouse-Coopers study shows that the number of filed patent cases fell to 2,720 in 2005, down from 3,075 the year before. Pat Choate, who authored a recent report on patent reform for the U.S. Small Business Administration, says that in 2006 only 102 patent cases went to trial in the United States, out of more than 200,000 cases filed in the federal courts. "There's no surge in patent litigation," he says. "I think most of this reform movement that's now under way is done by a handful of companies." That's also the argument of Nathan Myhrvold of Intellectual Ventures who testified before the Senate in 2005 that four leading technology companies-which later became members of the Coalition for Patent Fairness-paid $3.7 billion in patent settlements from 1993 through 2005. Collectively, they earned $1.4 trillion, making patent lawsuits and settlements just 0.26 percent of revenue. "The $3.7 billion number is large enough to motivate complaining on Capitol Hill," he told the Senate panel, but not enough to show the system isn't working.

Will the squeakiest wheels win? Senators Leahy and Hatch and Congressmen Smith and Howard Berman of California introduced new bicameral, bipartisan legislation on April 18. Executives and their lobbyists say that this early cooperation makes it all the more likely a bill will pass this year. But patent reform has a lot of competition for Congress' attention from issues such as from the U.S. attorney firing scandal and Iraq. Intervening political priorities might mean that Melika Carroll and her K street colleagues can count on steady work in 2008.