A very early draft of patent reform legislation that will be proposed on the floors of both the US House of Representatives and Senate later this afternoon would change the very fabric of patent law. Among other changes, the proposed Patent Reform Act of 2007 would limit plaintiffs' damages in patent reform suits to only the amount to which they may have been entitled had they been allowed to profit from their work under normal economic conditions.

Such a change would eliminate not only massive patent damages judgments in US courts, but also the likelihood of huge settlement fees in attempting to avoid those damages. That change could irrevocably alter the patent portfolio business, which has recently blossomed into a legitimate industry unto itself.

Companies such as Transmeta which once produced their own processors are now in the architecture licensing business, openly threatening companies that do not license their designs. Many portfolio licensing companies now rely upon settlement fees as their principal source of income.

Under the provisions of the Act, amended US law would read as follows: "The court shall conduct an analysis to ensure that a reasonable royalty...is applied only to that economic value properly attributable to the patentee's specific improvement over the prior art. In a reasonable royalty analysis, the court shall identify all factors relevant to the determination of a reasonable royalty under this subsection, and the court or jury, as the case may be, shall consider only those factors in making the determination."

In that determination, a jury or judge would be prohibited from considering the economic value of prior art - the state of affairs prior to the invention being claimed - as a factor in establishing the value of the invention, if that invention aims to be an improvement over the prior art.

So for example, if you were to invent a process for improving the distribution of e-mail to portable systems, and you were granted a patent for that invention, and then later on a certain portable fruit-flavored e-mail distribution service were to use something very much like it without licensing it from you first, the court couldn't use the multi-billion dollar value of the existing industry as a factor in concluding you were cheated out of multiple millions of dollars.

In other provisions of the bill that could directly benefit open source proponents, a patent could not be obtained for an invention if it was found to have been in general use more than one year before the date of the invention, or if it was to have been used at all except for purposes of demonstration within that one-year period. Such a provision would give prospective inventors a one-year window of opportunity to demonstrate their inventions to interested parties, have their proposals rejected, and still obtain patents before the rejecting party beats them to the table.

Open source advocates may appreciate the amplified language that would prohibit any organization from claiming patentability over a concept that was "in public use or sale" (note the distinction) prior to the claim.

Senators Patrick Leahy (D - VT) and Orrin Hatch (R - UT) are scheduled to appear at a press conference at 2:15 pm ET this afternoon, to introduce their bill to the public. BetaNews will update this story following that conference.