[A2k] Bruce Sewell op-ed in the Wall Street Journal: Patent Nonsense

[thiru@keionline.org]

Mr. Sewell is general counsel for Intel Corp.

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Patent Nonsense
By BRUCE SEWELL
July 12, 2007; Page A15

The U.S. patent system is beginning to show its age; outpaced by the swift
evolution of technology and commerce, it increasingly favors speculators
over innovators, impeding innovation and economic growth. Fortunately, the
bipartisan "Patent Reform Act of 2007," introduced in both the House and
Senate, would improve the process for granting patents, and rebalance
court rules and procedures to ensure fair treatment when patents wind up
in litigation. The Senate Judiciary Committee will take up S.1145 today.

Congress needs to pass this bill, during this session, as the need for
reform is clear. Nationwide, the number of patent lawsuits nearly tripled
between 1991 and 2004, and the number of cases between 2001 and 2005 grew
nearly 20%. Until 1990, only one patent damages award exceeded $100
million; more than 10 judgments and settlements were entered in the last
five years, and at least four topped $500 million. One recent decision
topped $1.5 billion.

The number of questionable, loosely defined patents, moreover, is rising.
One company holds patents that it claims broadly cover current
technologies that allow people to make phone calls over the Internet.
Another has staked a claim on streaming video over the Internet generally
and has pursued colleges for royalties on their distance-learning
programs. In 2002, a five-year-old boy patented a method of swinging on a
swing.

Unfortunately, under current law, parties that want to innovate in areas
covered by questionable patents have only two options, both of them bad:
an ineffective, rarely used re-examination process, or litigation -- the
average cost of which is, by some estimates, $4.5 million. This impedes
innovation, as the FTC noted: "One firm's questionable patent may lead its
competitor to forgo R&D in the areas that the patent improperly covers."

The Patent Reform Act would allow patents already issued to be reviewed,
either immediately after the patent is granted or later, if a party can
establish that significant economic harm may arise from the assertion of
the patent. This new procedure would help weed out bad patents and cut
down on litigation as a first resort, as it would allow for meaningful
challenges to bad patents in the patent office, which is best situated to
evaluate the claims. While some fear this will give patent infringers a
tool to challenge patents they are infringing, the Patent Reform Act
authorizes the director of the patent office to develop and enforce rules
to prevent such abuse.

Another area for reform is the standard for calculating damages. Many
products are comprised of thousands of patented components, but if one
infringes just one patent on, say, a windshield wiper, the patent holder
can seek damages based on the value of the entire car to which that wiper
is attached. This threat of artificially high damages encourages
litigation, premature settlements and distorts the value of patents. In
addition, a finding of "willfulness" -- which may trigger treble damages
-- can result from a defendant merely being aware of a patent which the
defendant in good faith believed was invalid.

To remedy these problems, the Patent Reform Act would establish a standard
for calculating damages based on the actual value of the patented
invention -- not the value of a whole product that has many other
components -- unless the patent in question is predominantly responsible
for the value of the product. It would establish more rigorous standards
for a finding of willfulness that would require actual bad faith on the
part of a defendant.

Make no mistake, damages do run amok. One recent example is the $1.5
billion recently awarded to AT&T in its case against Microsoft regarding
patent claims on MP3 technology. How did the jury arrive at such a high
number? The award was based on the value of the PCs on which Microsoft's
software was installed rather than on the value of the patented component
in question. Such disproportionately sky-high awards are not uncommon, and
they have a tangible, adverse impact on both the prices consumers pay and
the willingness of companies to take risks and bring innovative, new
products to market.

Today a company that puts products into the stream of commerce can be sued
for patent infringement virtually anywhere in the U.S. that the product is
sold. This encourages lawsuits in venues with little relationship to the
actual alleged acts of infringement or the parties in the suit.

Shell corporations have been established all over the country to take
advantage of this loophole, with patents being assigned to such
corporations simply for the purpose of filing a suit. For example, one
California-based company aptly named Plutus IP routinely transfers patents
to shell corporations that it incorporates in remote jurisdictions it
perceives as advantageous days before filing lawsuits. Earlier this year,
it incorporated one such shell corporation, Gemini IP, in Wisconsin just
10 days before it filed a lawsuit there against a major, California-based
networking company to get procedural advantages -- even though no known
witnesses or documents relevant to the case were located in Wisconsin.

To address this abuse, amendments to the Patent Reform Act would require
that cases are brought in venues that have a reasonable connection to the
infringement claim -- where either party resides or where the defendant
has committed acts of infringement and has a regular place of business.

The U.S. Supreme Court has taken four patent cases over the past year, an
astonishingly high number, and in all four of those cases it decisively
ruled in favor of those advocating reform. "Gobbledygook," "worse than
meaningless" and "retards progress" are just a few phrases used by
justices recently to describe some key patent standards.

The Patent Reform Act of 2007 responds to the need for comprehensive
patent reform that protects the rights of inventors while eliminating the
incentives that encourage speculators to game the system. No good-faith
patent holder with a substantial claim of infringement would be denied his
day in court, or appropriate remedies for infringement. The bill would
benefit inventors, consumers and businesses, while maintaining faith in
the "crown jewel" of America's intellectual property system.

Mr. Sewell is general counsel for Intel Corp.

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