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Patent Suit Bill Clears House Hurdle

Large tech companies are looking to curb lawsuits.

SAN FRANCISCO -- Congress has taken a big step toward limiting the number and scope of patent lawsuits -- measures that many large tech companies have sought for years.

On Friday, the House of Representatives passed

a bill with bipartisan support that would help companies challenge the validity of existing patents while limiting a plaintiff's ability to receive large rewards in rulings of infringement.

The Senate Judiciary Committee has already passed a bill with many of the same key provisions; it will likely go before the full Senate for a vote this fall.

The move follows intense lobbying from companies on both sides of the issue.

Working under the banner of the Coalition for Patent Fairness, tech companies including

Hewlett-Packard

(HPQ) - Get Report

,

Cisco Systems

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and

Microsoft

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have lobbied federal legislators, filed friend-of-the-court briefs in high-profile patent cases and testified before congressional committees.

The large tech companies believe the current system favors plaintiffs by setting a low bar for bringing suits and for awarding excessive financial penalties. To avoid costly litigation and the threat of severe penalties, tech companies say they often settle even if a patent claim is weak.

Mark Chandler, Cisco's chief legal counsel, says the U.S. sees about 3,000 patent cases each year -- nearly triple the amount from 1990. Cisco spends at least $3 million on each of their roughly dozen cases a year, and $10 million or more if they go to trial.

One of the bill's key reforms would limit the way that damages are calculated. Tech products include numerous innovations covered by patents. High-tech companies say the current laws inflates infringement awards by allowing judges and juries to calculate damages based on the entire value of a product, not the value of an individual patent in question.

On top of that, the proposed changes would raise the bar for finding a defendant guilty of willfully infringing on a patent, a finding that allows judges to assign punitive damages that triple the economic loss a plaintiff suffers.

"The central features of the bill ensure that patents truly reflect innovation and tie damages to the economic value of the invention that is reflected in the patent," says Chandler.

The proposed changes can also blunt the tools used by companies that acquire patents but don't manufacture products.

Apple

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, for example, is facing a lawsuit by SP Technologies, a small company that doesn't make anything.

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SP holds patents that it has used to bring lawsuits against

Nikon

and

Canon

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.

SP filed its suit in the District Court of the Eastern District of Texas, where neither it nor Apple has headquarters or is incorporated. Juries in this district have handed large awards to plaintiffs in patent cases, making it a popular place for plaintiffs to file complaints.

Tech companies hope that the bill will limit this type of "forum shopping," especially by companies that don't make anything.

Hewlett-Packard hailed the House vote as a "milestone step" that would limit "speculative litigation."

But a host of companies, including

General Electric

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and

Johnson & Johnson

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, say the bill weakens the value of patents.

Philip Johnson, J&J's chief patent counsel, says the bill needs "substantial improvements" to make patents enforceable in cases where the patent holder may have misled patent examiners.

Johnson says the rules are too vague and allow judges to find misleading behavior based on circumstantial evidence. This makes it easier to use other companies' intellectual property without paying royalties, he says.

But another opponent of the legislation, Ronald Riley of the Professional Inventors Alliance, says limiting the way damages are calculated would discourage patent holders from filing suit because circumscribed damage awards might not cover litigation costs.

"There's nothing in this bill that doesn't devalue intellectual property," says Riley, who derisively referred to the tech-company group as the "Coalition for Patent Piracy."

Tech companies vigorously dispute the notion that they want to weaken the value of patents, which could put their own patents and products at risk. Hewlett-Packard, for example, spends about $4 billion each year on research and development and has a large stable of its own patents.

The proposed reforms could lead to closer scrutiny of patent applications and help unclog the courts of litigation that should never have been filed, says David Cavanaugh, a partner and intellectual property lawyer at WilmerHale who previously worked as a federal patent examiner.

But lowering the bar for finding willful infringement "could reduce the perceived value of patents in the marketplace," he says.

Patent laws are supposed to balance incentives to develop innovative products with incentives to make those innovations commercially available.

The pitched struggle for patent reform is "the marketplace telling us that the balance is not right," says Cavanaugh.