Patent Reform Act 2011: Winners and Losers

by: Mobile Guru

After six years in limbo and significant changes in proposed patent reform legislation from past years, the Patent Reform Act of 2011 is going to get hotly debated as it was approved by the Senate Judiciary committee on February 3 and now heads to the Senate. It is interesting to see who has lined up on each side of the argument for reform and why. Keep in mind even if the bill survives and stays somewhat intact getting through the Senate, it must get sent to and passed in the House.

Let’s take a look at some of the key items being proposed. For those who want to read the complete details click here.

As you review the list of subjects, it’s also interesting to see some of the unique areas being addressed that were obvious deal makers needed to get all sides to agree. Interesting that there are 17 topics and 16 people on the committee and it was approved 15 to 0 to send to the Senate with one abstention. Just a coincidence, I’m sure.

In my opinion, there are two areas that are of most interest to companies that have a lot of Intellectual Property “IP” being filed.

The first is the requested change in the first to file vs. the first to invent portion of the bill. Today in the United States being the first to the patent office to file your patent does not necessarily mean you will be the first one to eventually get awarded a valid patent. If you come in and file after someone else, but can prove you disclosed the invention anywhere up to a year prior, you can get the patent awarded to your company based on the disclosure being prior art. This is unique from any other patent system in the world, which follows the first to file procedure.

Why do companies disclose but not file? In some cases, it’s to expand the scope of the current invention and make it as broad as possible prior to filing. Many companies also don’t want to let other companies know what areas they are working in and want to keep research under wraps until they are ready to submit the entire package. What do I think the impact will be? I think large companies with large armies of engineers developing IP will have an advantage. There also will be a much lower quality but much higher volume of IP submitted as inventors rush to get filed before competitors. Small companies will get over burdened with more submittals of less value that take a lot of time to get through or risk the chance of not getting filed. The real winners will be companies like Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM) and Microsoft (NASDAQ:MSFT) that have the infrastructure to generate extreme amounts of IP per year.

The second area that may be significant going forward is in the area of challenging newly issued patents. As with any organization that is government run, the USPTO is under pressure to review and approve/disallow patents in a certain timeframe. At this point with the current structure the backlog is roughly three years. As with any process, there are going to be patents that get approved yet probably should not have. What is being proposed is the ability to try and invalidate an approved patent in a much faster process where both parties have an opportunity to prove their side of the argument. In terms of what evidence would be allowed; only prior publications or prior art would be utilized. This post grant review system, recently highlighted by Microsoft, is typical of patent practices from elsewhere in the world - particularly Europe. Microsoft claims this system is effective at "invalidating weak patents that didn't deserve to be granted." This is of special note given Microsoft's upcoming Supreme Court hearing over its request for a reexamination of i4i's patent of XML technology. The request had previously been denied twice by lower courts following Microsoft's attempts at invalidating the patent.

So what side is everyone on in this debate? The Biotechnology Industry Organization, the National Association of Manufacturers, National Venture Capital Association and the Association of American Universities are among those that support passage of the legislation in its current form. BIO represents more than 1,100 biotechnology companies including Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE) and Merck (NYSE:MRK), which should come as no surprise since the bill also covers areas of limiting potential damages resulting from litigation.

Two other supporters of the bill are Microsoft and IBM (NYSE:IBM). But a group representing 14 technology companies that include some of the biggest names in Silicon Valley - such as Apple, Google, Cisco, Intel (NASDAQ:INTC) and Symantec (NASDAQ:SYMC), issued a statement saying that the Senate judiciary bill still needs a lot of work. These companies are all part of a group called the Coalition for Patent Fairness, which is a diverse group of companies and industry associations dedicated to enhancing U.S. innovation, job creation and competitiveness in the global market by modernizing and strengthening our nation’s patent system. Coalition for Patent Fairness members include Adobe (NASDAQ:ADBE), Apple, Autodesk (NASDAQ:ADSK), Cisco (NASDAQ:CSCO), Dell (NASDAQ:DELL), Google, Intel, Intuit (NASDAQ:INTU), Micron (NASDAQ:MU), Oracle (NYSE:ORCL), Research in Motion (RIMM), SAP (NYSE:SAP), Symantec and Verizon (NYSE:VZ).

In the long run I’m sure the bill will have many changes and compromises if it is ever going to get through the Senate and the House. I think the winners are going to be the companies that have the ability to generate large amounts of IP that they can file for first. Additionally, companies that already own certain valuable patents may see their values increase as the burden to receive a patent on certain technologies will have increased. It may overburden the small inventor who cannot afford the cost or time to file IP that may not be very valuable in the long run, but needs to do it so they can get into the patent office first. In terms of job creation it should create many jobs for patent attorneys going forward. Regardless of what changes, the focus only further illustrates the more prevalent role IP is playing in changing the technology landscape.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.