Biggest Overhaul of Patent System Since 1952 Passes Senate

The Senate passed an overhaul of the U.S. patent system that President Barack Obama has called crucial to his administration’s effort to boost job growth.

In an 89-9 vote yesterday, the Senate cleared a bill passed by the House in June that would fundamentally alter the way patents are reviewed and mark the biggest change to U.S. patent law since at least 1952. The measure, called the America Invents Act, now heads to the White House for Obama’s signature.

The legislation, H.R. 1249, would let the U.S. Patent and Trademark Office set its own fees and exercise greater control over its budget, providing the agency with more funding to address a backlog of almost 700,000 applications awaiting first review. Reducing the time it takes to give inventions legal protection will speed new products to the market and spur economic growth, according to the bill’s supporters.

“The creativity that drives our economic engine has made America the global leader in invention and innovation,” Senator Patrick Leahy, a Vermont Democrat who sponsored the measure, said in a statement. “The America Invents Act will ensure that inventors large and small maintain the competitive edge that has put America at the pinnacle of global innovation.”

The original patent model for Thomas Edison's light bulb is displayed in the U.S. Patent and Trademark Office, in Alexandria, Virginia. Photo: Christopher Powers/Bloomberg Close

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The original patent model for Thomas Edison's light bulb is displayed in the U.S. Patent and Trademark Office, in Alexandria, Virginia. Photo: Christopher Powers/Bloomberg

The legislation, which culminates more than six years of negotiations and lobbying, covers every step of the patent process, setting new procedures to review issued patents while curtailing some litigation. It has the support of large companies including Microsoft Corp. (MSFT), International Business Machines Corp. (IBM) and a group that represents Johnson & Johnson (JNJ), Eli Lilly & Co. (LLY), 3M Co. (MMM) and General Electric Co. (GE)

‘Rational Patent System’

“The America Invents Act, coupled with recent court decisions that provide more clarity and confidence for inventors, puts our patent system in a much better position to spur innovation and economic growth in the 21st century,” Robert Weber, IBM’s general counsel, said in an e-mail. He called the measure a “bipartisan, common-sense bill that will significantly improve the U.S. patent system.”

The funding provision, which also would let the agency increase fees paid by inventors and patent owners, is the cornerstone of the bill and has been a unifying issue even for those who oppose other provisions. Since 1990, the agency says, more than $800 million in fees have been diverted by lawmakers to non-patent purposes.

34-Month Wait

The patent office is funded entirely by user fees. The Obama administration says the money is needed to hire more examiners and improve agency computer systems to cut the current 34-month wait for patent approval.

“This legislation should enable us to access all of our fees,” David Kappos, director of the patent office, said in a statement. “Having access to all of our fee collections will enable us to immediately start hiring new examiners, instituting new patent acceleration tools, and aggressively modernizing our IT infrastructure.”

The U.S. Chamber of Commerce, Washington’s largest business lobbying organization, supported passage, as did the United Steelworkers. A group representing large technology companies including Google Inc., Apple Inc. (AAPL), and Intel Corp. (INTC) also backed the measure.

“By promoting clearer, more certain and more consistent patent rights, this bipartisan legislation gives America’s inventors the intellectual property guarantees they need to raise funds, invest in research and development and launch technologies that will help them expand and hire more workers,” Acting Commerce Secretary Rebecca Blank said in a statement.

Job Creation

Representative Lamar Smith, the Texas Republican who sponsored the House version, said that once the president signs it into law, the measure “will be one of the most significant jobs creation bills enacted by Congress this year.”

Obama cited the bill’s passage in his speech last night to a joint session of Congress. “You passed reform that will speed up the outdated patent process, so that entrepreneurs can turn a new idea into a new business as quickly as possible,” he said. “That’s the kind of action we need.”

A group of technology companies that includes InterDigital Inc. and Tessera Technologies Inc. (TSRA) had said the House-passed measure doesn’t do enough to guarantee more funding for the patent office since the agency still has to get congressional approval to spend money it collects above its annual budget.

Coburn Criticism

“Hopefully, Congress will deliver on the funding the PTO needs to administer its charge,” Brad Ditty, general patent counsel for InterDigital, said in an interview. “One of the things we’re concerned about is the PTO has a lot of difficult work ahead of it, and without knowing what type of multiyear funding situation they’re in, it could be difficult for them to execute some of the more aggressive steps they need to take.”

Senator Tom Coburn, an Oklahoma Republican who tried unsuccessfully to alter the bill to give the agency full control over the fees it collects, said language in the House bill was inadequate to keep Congress from diverting the funds.

Groups representing small businesses say the legislation will benefit large companies over independent inventors, create a rush to the patent office and establish onerous review procedures that will weaken the power of patents to protect inventions.

“This legislation will irreversibly damage the ability of small-business owners and entrepreneurs to create, develop and commercialize their innovations,” said Todd McCracken, president of the National Small Business Association, a Washington-based group that says it represents 150,000 small businesses nationwide. “To think this bill will have anything but negative implications on job creation is absurd.”

First to File

Under the bill, patents would be granted to the first inventor to file an application, ending an often time-consuming procedure to determine who came up with an idea first and bringing the U.S. in line with patent laws in other countries.

All newly issued patents may be subject to a challenge from third parties, a variation of a process used by the European Patent Office. Third parties would be allowed to submit information for consideration during the application process.

The bill also would limit patents on tax-avoidance strategies, though companies including Intuit Inc. (INTU) and H&R Block Inc. (HRB) have said they would retain protections for their tax- preparation software.

Finance Patents

Banks including Bank of America Corp. (BAC) and Citigroup Inc. (C) would get new power to seek to cancel finance-related business method patents that they argue are of questionable validity. Companies that own such patents, including DataTreasury Corp. and Trading Technologies International Inc., have accused the banks of using their clout in Washington to avoid paying for using someone else’s inventions.

The trade group for generic-drug companies including Mylan Inc. and Watson Pharmaceuticals Inc. opposes the bill because there’s a provision that lets patent owners retroactively correct errors that might otherwise lead a court to invalidate the patents.

The Washington-based Generic Pharmaceutical Association also objects to language in the bill that would ease deadlines for seeking a patent-term extension granted to compensate drugmakers for the time it takes to get regulatory approval.

The provision would provide a clear victory to Medicines Co. (MDCO), which won a court ruling that it was entitled to an extension even though it missed a deadline for an extension on the main patent for its only drug, the anticoagulant Angiomax.

Fresenius SE (FRE)’s APP Pharmaceuticals unit is appealing that decision after the government said it wouldn’t challenge the judge’s decision in favor of Medicines Co.

Other provisions would limit lawsuits in which a manufacturer is accused of putting expired patent numbers on packaging and establish satellite offices the agency could set up nationwide to tap into local workforces.

To contact the reporters on this story: Kathleen Hunter in Washington at khunter9@bloomberg.net; Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editors responsible for this story: Katherine Rizzo at krizzo5@bloomberg.net; Allan Holmes at aholmes25@bloomberg.net

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