JULY 9, 2007

GOVERNMENT

Look Who's Fighting Patent Reform

VCs, trade groups, and universities have taken up the fight against Big Tech

Since the mid-1990s, America's largest computer and software companies have been trying to rewrite U.S. patent law. The goal was to stem the tide of patent litigation, much of it generated by inventors and small companies trying to protect their intellectual property. But each time Big Tech tried to sell Congress on reform, it ran into an even mightier constituency: Big Pharma. Drugmakers had no problem with the current system, and they had the ear of Republican leaders.

Now Democrats are in charge, the drug industry has fallen out of political favor, and lawmakers backed by the likes of Microsoft (MSFT ), Intel (INTC ), and Hewlett-Packard (HPQQ ) are fast-tracking a new plan to overhaul the patent system. But they still aren't getting an easy ride. The past few weeks have brought an unexpected surge of opposition from what one lobbyist calls the "innovation ecosystem"?a sprawling network of entrepreneurs, venture capitalists, trade groups, drug and medical equipment manufacturers, engineering societies, and research universities including Northwestern and Wisconsin. All of them agree that the legislation would weaken the value of patents, deal a blow to innovation, and send shock waves through the knowledge economy. "New companies use patents to protect the only thing they really have: their ideas," says Hans Sauer, associate general counsel for the Biotechnology Industry Organization, a trade group.

This band of innovators has taken up Big Pharma's fight because it shares a similar business model. Startups rely on the temporary monopoly a patent confers to establish a foothold in a market. And for a pharma company, a single patent on a blockbuster drug can hold generic products at bay and guarantee high profit margins. In contrast, big technology integrators are often less dependent on a monopoly position. They tend to pool and trade patents with other technology suppliers to create complex products such as laptops, printers, network switches, or cell phones. These goods must battle it out with other such products on the basis of design, features, or marketing advantages, while intellectual property is shared through licensing deals.

Big Tech says reform is overdue. Congress hasn't seriously updated patent law since 1952, long before the dawn of the Silicon Age. Since then, rapid innovation in information technology, materials science, biotech, and other areas has resulted in a tsunami of patent grants. In 2006 the Patent & Trademark Office received 443,652 applications, more than double the tally in 1996, and the office granted 183,187 of these, up from 116,875 awarded 10 years ago.

WHOSE INNOVATION?
Hardly anyone disputes that the chronically understaffed patent office has been approving far too many low-quality patents in recent years. One result: Large manufacturers have trouble figuring out whether or not the complex products they sell contain any bits of innovation patented by others. That's why so many major companies have landed on the losing side of big-dollar legal judgments.

Legislation sponsored by Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) and Senator Orrin G. Hatch (R-Utah) seeks to improve patent quality by allowing the public to challenge the validity of a patent application before it wins final approval. The bill also would curb damage awards in infringement suits through a simple trick. It would allow courts to force infringing companies to pay royalties, as they do today. But the law would limit those sums to the value the patented component adds to the overall product, instead of calculating royalties based on the value of the entire product. Similar legislation is moving through the House, and both chambers could vote before August.

Small patent-holders say the reforms would make it even more difficult to defend their ideas against infringers. But T. Andrew Culbert, associate general counsel at Microsoft Corp., downplays the doomsday rhetoric. "The last time there was patent-reform legislation was before I was born," he says. "It's time to make a tweak."


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