Congress Takes Aim at 'Patent Trolls' With SHIELD Act

Lisa Shuchman

Corporate Counsel

08-06-2012

Representative Peter DeFazio (D-Oregon) was only vaguely aware of the so-called "patent troll" issue plaguing small technology companies until he visited software firms in his district about a year ago. It was then that he heard stories about outrageous patent lawsuits threatening the viability of the firms, he said.

"They started telling me about all these unwarranted attacks that came at great cost," DeFazio told CorpCounsel.com. "Instead of fighting costly court battles, they had to buy their way out and settle."

DeFazio, whose congressional district includes Eugene and other locations that have spawned a growing software industry, was incensed when he discovered that patent suits by non-practicing entities (the more formal name for patent trolls) were a common problem at small tech companies and concluded it was cramping innovation and costing jobs. So at the end of July, he and Representative Jason Chaffetz (R-Utah) introduced legislation in the U.S. House of Representatives designed to discourage NPEs from filing frivolous lawsuit. 

"Patent trolls don't create new technology and they don't create American jobs," DeFazio said. "This legislation would protect tech companies by forcing patent trolls to take financial responsibility for their frivolous lawsuits."

The bill, dubbed the Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act [PDF], would require NPEs to pay defendants' legal costs if the suit is unsuccessful. Patent trolls often buy broad patents and then sue companies for allegedly infringing on the patents they've purchased. Despite thin evidence to back their lawsuits, small companies are often forced to settle because going to court is prohibitively expensive. 

"Patent litigation has been called 'the sport of kings' because of the high cost," said Julie Samuels, an attorney who focuses on intellectual property issues at the nonprofit Electronic Frontier Foundation. "It can cost tens of millions of dollars to defend a suit, and while big companies might be able to afford the fees, smaller companies can't and are left having to pay up and settle."

Indeed, DeFazio said the companies he spoke with were in some cases named as co-defendants with larger companies that were willing to fight in court but wanted to split the cost of litigation equally. "They couldn't afford that," he said. 

A recent Boston University study estimated that patent troll suits cost U.S. technology companies more than $29 billion in 2011 alone. 

"The SHIELD Act ensures that American tech companies can continue to create jobs rather than waste resources on fending off frivolous lawsuits," Chaffetz said in a statement.

The new legislation would shift the burden of legal costs to the plaintiff. It would discourage NPEs from filing baseless lawsuits that would probably not hold up in court but could lead to a settlement payment. This fee shifting, also known as "loser pays," would "empower innovators to fight back while discouraging trolls from threatening lawsuits," Samuels said.

The bill applies to software and computer hardware patents only and is an attempt to chip away at the failings of the patent system rather than take a one-size-fits-all approach to patent reform. This is an approach that has already been taken in other areas, Samuels said, noting that the Hatch-Waxman Act singled out pharmaceutical patents. "Now it's the software industry's turn," she said.

The bill also has support from the Consumer Electronics Association. The group's senior vice president of government and regulatory affairs, Michael Petricone, said in a statement that the bipartisan effort "is an important first stop in bringing patent trolls under control." He urged Congress to swiftly pass the bill.

DeFazio said he was unaware of any major objections to the bill. He  did note, however, that Congress is entering what he termed "the silly season"—a time when it is unlikely to pass significant legislation because of the impending Presidential election. "But there is high awareness among members that this is a serious problem, so I'm hopeful," he said.