New FTC Report Suggests Improved Alignment of Patent System With Competition Policy

On March 7, 2011, the FTC released a 300-page report, The Evolving IP Marketplace: Aligning Patent Notice And Remedies With Competition. The Report assesses the patent system’s benefits and challenges as more companies shift to “open innovation” and increasingly rely on technology transfers to adopt inventions created outside their own R&D efforts. See http://tinyurl.com/6jcrfmf. The FTC continues its engagement regarding the patent system that began with its 2003 Report, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, and continued with its 2007 Report, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition [http://tinyurl.com/4pnylqg]. The 2011 Report aims to better align the patent laws with competition policy by recommending improvements to two areas of patent law policies, namely how well a patent gives notice to the public of what technology is protected, and the remedies available for patent infringement.

Improving The Notice Function

The 2011 Report recommends improving policies relevant to the patent notice function through actions by the courts and the USPTO, including:

Claim Definiteness:

• making patent claims more definite and improving the utility of descriptions in patents for delineating their boundaries;
• giving weight to notice objectives when considering if a patent’s specification sufficiently supports a means-plus-function claim; and
• adopting the lower threshold of ambiguity set forth by the USPTO Board of Patent Appeals and Interferences by finding ambiguity wherever a claim is “amenable to two or more plausible claim constructions.”

Claim Construction:

• urging courts to direct heightened attention and provide additional guidance in assessing “person of ordinary skill in the art” levels;
• requiring applicants to designate a dictionary (or accept a USPTO-designated default dictionary) for all undefined terms in the patent specification and include a glossary for any other terms; and
• enhancing the patent examination record as a source for interpreting claim scope.

Claim Evolution:

• proposing legislation requiring the publication of all patent applications 18 months after filing regardless of the situation to avoid the competitive harms that flow from “submarine” patents;
• enactment of legislation to protect infringers who: (1) infringe only because of claim amendments following a continuation, and (2) made substantial preparation for using the patented product or process before the amended or newly added claims were published; and
• more fully incorporating consideration of third parties’ ability to predict the potential breadth of evolving claims into the administrative and judicial review of the written descriptions of patent applications. 

Patent Searchability:

• requiring the PTO to additionally classify patents using an industry-based certification system in order to foster greater uniformity in nomenclature; and
• requiring the public recordation of assignments of patents and published patent applications to identify the formal assignee and the real party in interest.

Consider Modification of Liability for Inadvertent Infringement:

• pending further investigation, consider changes to the strict liability scheme so that patent infringement litigation would no longer seek such severe damages from “inadvertent infringers” and allow for prior user rights or an “independent inventor” defense.

Improving Policies Regarding Patent Infringement Remedies

In addition, the 2011 Report makes recommendations to courts that would better ground damages calculations and injunction analysis in economic principles that recognize competition among patented technologies, including:

Lost Profits:

• recognizing that patentees need flexibility in creating the “but for” world absent infringement to establish lost profits, but
• rejecting the entire market value rule for calculating lost profits based on all infringing sales; and
• rejecting dual awards of lost profits and reasonable royalties when “competition from alternatives would have prevented the patentee from making all the infringer’s sales in a world of no infringement.”

Hypothetical Negotiation and Reasonable Royalty Damages:

• capping reasonable royalty damages at the amount a willing licensee would pay, which may be determined by the value of the invention over alternative technologies;
• setting the timing of the hypothetical negotiation at an early stage of product development, before the infringer has made final design decisions, adopted an industry-wide standard, and/or sunk costs into the infringing product design and manufacture, to minimize the influence of switching costs on damage awards; and
• increasing the role of district courts in excluding unreliable damages expert testimony at trial.

Permanent Injunctions:

• “courts should grant injunctions in the majority of cases, but criteria are needed to help identify those instances in which the harm to the patentee is small compared to the costs from ‘hold-up’” by considering (1) whether the patented technology is a minor component of a complex product, (2) whether the infringement affects the patentee’s ability to compete in a market, and (3) whether the infringer copied the patented technology; and
• incorporating concerns into the injunction analysis about the leverage that an injunction may give a patentee to obtain royalties exceeding the economic value of an invention (especially in cases where the patented product is incorporated into an industry standard).

ITC Actions:

• urging the ITC to consider whether only those licensing activities that promote technology transfer “exploit” patented technology per the “domestic industry” requirement.

Overall, the 2011 Report reiterates some of the same points made in previous reports by exploring ways to achieve greater alignment between the patent system and competition policy. The Report also notes the growing trend of licensing transactions, especially those involving “patent assertion entities.” The FTC recommends that the greatest alignment comes from a patent system that encourages technology transfers rather than after-the-fact licensing spurred by litigation. The 2011 Report concludes that early technology transfers benefit from greater notice to the public about what is patented, as well as clearly defined remedies that take into account the type of infringer and their contributions to innovation and competition.

The 2011 Report is based on eight days of hearings, public comments, and independent research. See also http://tinyurl.com/4bygrvq.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following:

Hon. Sharon R. Barner
Deputy Under Secretary of Commerce for Intellectual Property
and Deputy Director of the USPTO (2009-2011)
Partner, IP Department
Chicago, Illinois
312.832.4569
[email protected]

Jeanne M. Gills
Vice Chair, IP Department
Chicago, Illinois
312.832.4583
[email protected]

Jonathan R. Spivey
Chair, Chicago Office IP Department
Chicago, Illinois
312.832.5119
[email protected]

Michael R. Houston
Associate
Chicago, Illinois
312.832.4378
[email protected]

Manisha S. Bhangare
Associate
Chicago, Illinois
312.832.4359
[email protected]