Piercing the SHIELD Act

By Jessica Lanfordϯ

On August 1, 2012, Rep. Peter DeFazio (D-Or.) introduced a bipartisan bill that seeks to protect American start-ups from the destructive costs of frivolous lawsuits brought by patent trolls.[1]  Backed by the software and computer hardware companies that it seeks to protect, the Saving High-Tech Innovators from Egregious Legal Disputes Act (SHIELD) effectively forces Non-Practicing Entities (NPEs) to pay defendants’ legal costs.

This Article provides an overview of the bill, then analyzes its effectiveness by asking three questions: 1) What is the NPE problem? 2) Is fee-shifting a sensible policy instrument? and 3) Do we need to go beyond existing law to prevent frivolous lawsuits?  Ultimately, a closer look shows that the system proposed by the SHIELD Act is premature, ineffective, and unnecessary.

Overview of the SHIELD Act:

The SHIELD Act proposes a “loser-pays” system[2] for cases involving computer hardware or software patents, with the following language:

(a) In General—Notwithstanding section 285, in an action disputing the validity or alleging the infringement of a computer hardware or software patent, upon making a determination that the party alleging the infringement of the patent did not have a reasonable likelihood of succeeding, the court may award the recovery of full costs to the prevailing party, including reasonable attorney’s fees, other than the United States.[3]

The preamble suggests that the statute applies to both validity and infringement actions.  But the bill then limits the system to apply only against the party “alleging the infringement.”  Thus, the SHIELD Act is a one-way system: alleged infringers can recover their costs if they prevail in court—but patentees may not seek recovery against accused infringers who assert frivolous defenses.[4]

The bill also provides definitions for “Computer,” “Computer Hardware Patent,” and “Software Patent.”  If passed, the bill will define “software patent,” for the first time, to mean: a) “any process that could be implemented in a computer regardless of whether a computer is specifically mentioned in the patent,” or b) a “computer system that is programmed to perform [such] a process.”[5]  But the bill stops short of endorsing the controversial software patent with a disclaimer: the SHIELD Act should not be “construed as amending or interpreting categories of patent-eligible subject matter . . . .”[6]

1. NPE Problems: Where’s the Beef?

An NPE is defined as an entity that does not manufacture products itself—also known as a “patent troll.”[7]  Universities, independent inventors, and failed businesses are all examples of NPEs.  But the term “patent troll” can also mean a specific type of NPE that buys patents from others merely to assert them.  Critics liken these businesses to the fabled greedy troll who hijacks bridges, then threatens to gobble-up anyone who passes his way.[8]

Is the SHIELD Act really anti-troll legislation?  Supporters claim that the fee-shifting provision could help “the good guys” beat patent trolls.[9]  But the bill’s effects are far broader than its proponents suggest: any plaintiff that alleges infringement without a “reasonable likelihood of succeeding,” could be forced to foot its opponent’s legal bills.[10]  And by leaving the construction of “a reasonable likelihood of succeeding” up to the court, the SHIELD Act could end up creating more litigation than it seeks to prevent.[11]

In a news release, Rep. DeFazio claimed that patent trolls “pad their pockets by buying patents on products they didn’t create and then suing the innovators who did the hard work and created the product.”[12]  But current evidence of NPE activity seems to show otherwise.   For example, last year, one of the largest publicly traded NPEs reported that it paid more in royalties to inventors than it did to the patent attorneys who enforce their patents.[13]

Rep. DeFazio also claims that patent trolls’ lawsuits hurt American innovation and tech startups.[14]  His belief is widely shared, but it lacks credible support. [15]  In reality, NPE activity has the potential to spur innovation, and stimulate investment in start-ups.[16]   And the NPEs that Rep. DeFazio targets could actually help the little guy.  By buying patents from inventors and owners who can’t afford to market their own technologies, NPEs give non-manufacturing inventors the opportunity to monetize their patents—one that they may otherwise not have.

The bill is also intended to neutralize NPEs’ controversial business practices.  Specifically, Rep. DeFazio points to patent trolls’ habit of buying broad patents for the purpose of filing “flimsy lawsuits” for infringement.[17]  Perhaps he is unaware of recent evidence that the patents enforced by “trolls” are substantially similar to patents litigated by practicing entities.[18]  For example, patents litigated by NPEs have the same range of claims and references cited as other litigated patents.[19]  And contrary to popular belief, a recent study shows that the patents NPEs typically litigate are more important and influential than those litigated by non-NPE plaintiffs.[20]

Yet, no studies show that NPEs actually file frivolous lawsuits, or that they are routinely accused of Rule 11 violations.  So, where’s the beef?  Until we have a realistic understanding of so-called “patent troll” litigation and NPE behavior, we should refrain from passing laws aimed at limiting their activity.

2. Is Fee-Shifting a Sensible Policy Instrument?

For more than 200 years, litigants in the United States have operated under the “American Rule”: each party pays its own litigation costs, whether it wins or loses.  In contrast, under both the “English Rule” and the SHIELD Act, the loser pays.

Despite its effectiveness in discouraging frivolous lawsuits, the English Rule produces unwanted results.  First, in a “Loser Pays” world, a potential plaintiff decides whether to litigate by considering its financial risks, rather than the merits of its case.  As a result, plaintiffs with meritorious claims that are not sure-fire winners will give up on litigation for fear of paying the defendant’s costs.

Second, the English Rule encourages more litigation than its American counterpart by reducing settlements, particularly in cases involving higher stakes and confident parties.  Naturally, in a “Loser Pays” system, a confident high-stakes litigant will pursue trial for full recovery.  But the American Rule reduces litigation: a confident party will prefer to settle when the cost of doing so is less than the cost of victory at trial.

Finally, if the British experience is any indication, patent enforcement costs arising from the SHIELD Act could drown small businesses and startup patentees[21]—the same entities that the bill claims to protect.  Therefore, unless we want to limit small businesses’ access to courts, the SHIELD Act and its “Loser Pays” system is ineffective.

3. Do We Need to Go Beyond Existing Law to Prevent Frivolous Lawsuits?

If supporters of the SHIELD Act simply want protection from frivolous lawsuits, then why do they need this bill?  Existing patent law allows the court to award reasonable attorney’s fees to the prevailing party in “exceptional” cases, under Section 285.[22]  Courts typically award attorney’s fees under Section 285 when evidence shows that the plaintiff brought litigation in bad faith.[23]   But without a showing of bad faith, attorney’s fees under Section 285 are unavailable.[24]

A plaintiff of a frivolous lawsuit is also subject to sanctions under Rule 11 of the Federal Rules of Civil Procedure.  Under Rule 11, attorneys are required to certify that the papers they file are legally sound, rooted in fact, and “not interposed for any improper purpose.”[25]

Yet the SHIELD Act seeks to shift the standard’s focus from a plaintiff’s conduct to his or her perceived probability of success.  The bill proposes that even in the absence of bad faith, a patentee should be liable for attorney’s fees based on the court’s opinion of his or her “reasonable likelihood of success.”

The SHIELD Act is a hollow sword.

If passed, the SHIELD Act has the potential to hurt those that it claims to protect.  The threat of overwhelming legal costs will keep small innovators from litigating worthy claims, giving alleged infringers a free pass.  At the same time, the bill’s supporters seek to expand existing protections against frivolous lawsuits without any meaningful understanding of NPE activity.  Before we even consider passing legislation aimed at limiting the behavior of patent trolls, we need to take a close look at what they actually do.

ϯ J.D. Candidate, University of Illinois College of Law, expected 2013.

[1] Press Release, Congressman Peter DeFazio, DeFazio Introduces SHIELD Act to Protect American Innovation, Jobs (Aug. 1, 2012), available at http://defazio.house.gov/index.php?option=com_content&view=article&id=792:defazio-introduces-shield-act-to-protect-american-innovation-jobs&catid=69:2012-press-releases; Cong. Research Serv., H.R. 6245: Saving High-Tech Innovators from Egregious Legal Disputes Act of 2012, govtrack.us,  http://www.govtrack.us/congress/bills/112/hr6245 (last visited Oct. 15, 2012).

[2] Loser Pays System Introduced in Congress, PatentlyO (Aug. 9, 2012, 10:21 AM), http://www.patentlyo.com/patent/2012/08/loser-pays-system-introduced-in-congress.html.

[3] SHIELD Act of 2012, H.R. 6245, 112th Cong. (2012).

[4] Ron Katznelson, Here They Go Again – This Time with the Patent SHIELD Act, IPWatchdog (Aug. 26, 2012, 7:25 AM), http://www.ipwatchdog.com/2012/08/26/here-they-go-again-this-time-with-the-patent-shield-act/id=27476/.

[5] H.R. 6245.

[6] Id.

[7] Michael Risch, Patent Troll Myths, 42 Seton Hall L. Rev. 457, 459 (2008); David L. Schwartz & Jay P. Kesan, Analyzing the Role of Non-Practicing Entities in the Patent System 2 (July 25, 2012) (Ill. Program in Law, Behavior and Soc. Sci. Paper No. LBSS13-03; Ill. Pub. Law Research Paper No. 13-01; Chi.-Kent Coll. of Law Research Paper No. 2012-03), available at http://ssrn.com/abstract=2117421.

[8] Peter Christen Asbjørnsen & Jørgen Moe, Three Billy Goats Gruff, in 37 Popular Tales from the Norse 275–76 (George Webbe Dasent trans., London, George Routledge and Sons 2d ed.); Schwartz & Kesan, supra note 7, at 2.

[9] Julie Samuels, Can You Believe It? Legislation that Would Actually Help Fix the Patent System, Electronic Frontier Found. (Aug. 1, 2012), https://www.eff.org/deeplinks/2012/07/can-you-believe-legislation-would-actually-help-fix-patent-system.

[10] H.R. 6245.

[11] Timothy J. Maier, The Proposed Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act, Maier & Maier, PLLC (Aug. 10, 2012, 2:47 PM), http://www.postgrant.com/2012/08/the-proposed-saving-high-tech-innovators-from-egregious-legal-disputes-shield-act.html.

[12] Press Release, Congressman Peter DeFazio, supra note 1.

[13] ACACIA Research Grp., Annual Report (Form 10-K), (Feb. 29, 2012), available at http://biz.yahoo.com/e/120229/actg10-k.html; Schwartz & Kesan, Analyzing the Role of NPEs in the Patent System, Patentlyo (Aug. 21, 2012, 4:04 AM), http://www.patentlyo.com/patent/2012/08/analyzing-the-role-of-npes-in-the-patent-system.html.

[14] Press Release, Congressman Peter DeFazio, supra note 1.

[15] Risch, supra note 7, at 492–93.

[16] From Exposing NPE Myths to Explaining NPE Math, RPX, http://www.rpxcorp.com/index.cfm?pageid=14&itemid=25.

[17] Press Release, Congressman Peter DeFazio, supra note 1.

[18] Risch, supra note 7, at 480; Schwartz & Kesan, supra note 13.

[19] Risch, supra note 7, at 480.

[20] Id. at 481.

[21] Katznelson, supra note 4; Richard Tyler, Inventor Fury as Patents Prove Too Costly to Defend, Telegraph (Mar. 8, 2012, 11:11 AM), http://www.telegraph.co.uk/finance/yourbusiness/9130815/Inventor-fury-as-patents-prove-too-costly-to-defend.html.

[22] 35 U.S.C. § 285 (2006); Alexander Poltorak, Proposed SHIELD Law Is Nothing but a Gift to Infringers, Hill (Aug. 10, 2012, 3:15 PM), http://thehill.com/blogs/congress-blog/technology/243135-proposed-shield-law-is-nothing-but-a-gift-to-infringers.

[23] ICU Med., Inc. v. Alaris Med. Sys., Inc., 558 F.3d 1368, 1379–80 (Fed. Cir. 2009).

[24] Brooks Furniture Mfg. ., Inc. v. Dutailier Int’l, Inc., 393 F.3d 1378, 1381 (Fed. Cir. 2005).

[25] Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990).