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Reality May Thwart Purpose of SHIELD Law
Daily Business Review
Patent troll litigation is the hot topic in any discussion about how our patent system is failing. A patent troll is a derisive term used to describe a type of non-practicing entity, or NPE. Traditionally, NPEs have been universities or individual inventors who do not wish to commercially use the patents themselves, so they license them to third parties. The patent troll model involves the creation of investment companies that acquire patents but do not use the patented technology. Instead, they monetize the patents by enforcing them against others.
This business model has led to a huge spike in patent litigation and claims that our patent system is broken instead of encouraging innovation, it is quashing creativity by choking startups with the overhead of defending such suits.
It is therefore no surprise that one of the issues raised during the debates on the Leahy-Smith America Invents Act (AIA) was how to address the proliferation of patent suits being filed by NPEs. The AIA directly addressed the issue in two ways. First, it incorporated a procedural prohibition against filing a patent suit against multiple defendants unless those defendants were collectively involved in the allegedly infringing activity. And second, the AIA directed the General Accounting Office to conduct a study of the consequences of patent litigation by NPEs.
The study confirmed that lawsuits by NPEs have increased from 22 percent of the patent cases filed in 2007 to nearly 40 percent of the cases filed in 2011. Others that have studied the phenomenon report that over the past decade, there has been a tenfold increase in the number of NPEs and the number of lawsuits brought by them.
Apart from the potential liability for a damage award, one of the biggest problems for a defendant in an NPE patent suit is the cost of litigation. Statistics show that defending a patent suit can cost in excess of $1 million in attorney fees and costs where $1 million in damages are at stake.
The typical scenario involves a demand that the accused party make a lump sum royalty payment in exchange for a license to use the patent. The royalty demand is usually a fraction of the cost to defend against the charge of infringement, presenting the accused party a difficult choice, especially if the accused believes that it is not infringing or that the asserted patents are unlikely to withstand a challenge to their validity. To make matters worse, sometimes the filing of one suit by an NPE triggers the filing of suits by other NPEs, or the settlement with one NPE prompts others to make demands on their patents.
Much has been written and discussed regarding NPE lawsuits, but no solution has been proposed that satisfies everyone involved. After all, it is difficult to find a legal distinction between a company that owns and uses patented technology and one that merely owns it. Moreover, there is no legal difference between a traditional NPE (like a university) and the pure patent monetizing NPE. Defining the so-called NPE is not as clear cut. President Obama recently acknowledged the issue, commenting that "the folks that you're talking about are a classic example; they don't actually produce anything themselves. They're just trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them." As in the case of universities that own patents, however, often times the NPE model is how the institution underwrites its research and development.
Last year, U.S. Representatives Peter DeFazio (D-Ore.) and Jason Chaffetz (R-Utah) introduced HR 6245, a bill they titled the "Saving High-tech Innovators from Egregious Legal Disputes" Act, also known as the shield act, as a proposed law to curb the number suits. The thrust of the bill was to create a fee-shifting statute, making the loser liable for attorney's fees in cases involving patent lawsuits if certain conditions were proven. The bill died, but was reintroduced as HR 845 earlier this year and is now in committee.
Under the proposed legislation, in order to qualify for the fee-shifting, the accused party must ask the court to find that the patent owner does not meet any of the following conditions: (1.) that the party is the inventor or the original assignee assigned the patent by the inventor, (2.) that the party can document a substantial investment in the exploitation of the patent through production or sale of an item covered by the patent, (3.) that the party is an institution of higher education (i.e., a university), or (4.) a technology transfer organization whose primary purpose is to facilitate the commercialization of technology developed by one or more institutions of higher education.
Once the accused party asks the court for this finding, the patent owner then has a limited amount of time to show that it qualifies for at least one of the exceptions. If the patent owner does not fall within one of the exceptions above, then the fee shifting statute applies.
Although the intent of the SHIELD Act is to put the financial burden on NPEs, the realities of patent litigation may thwart that intent. Patent litigation usually involves a significant dedication of resources even early in the case. In many jurisdictions, the courts have adopted local rules specific to patent cases that require initial disclosures of infringement contentions and invalidity contentions within weeks of the initiation of the lawsuit. Often times, experts are utilized even for these early disclosures.
When weighing the expense of defending the lawsuit even through the early part of the lawsuit against a settlement "royalty payment" that may be comparable in magnitude, accused parties opt to settle because of the certainty that the suit is over. The proposed SHIELD Act fails to take this factor into account.
Finally, many NPEs are created for the sole purpose of monetizing patents. Even if an accused party is successful in obtaining an award of attorney fees under the proposed law, that party is also bearing the risk that the award will be uncollectable by the time it is awarded.
Patent attorney William R. Trueba Jr., a founding member of the law firm of Espinosa Trueba, centers his practice on the domestic and international enforcement of intellectual property rights.
This article originally appeared in the Daily Business Review.