Joff Wild

There has been great excitement on various internet sites over the so-called SHIELD Act, a revised version of which was introduced in the US House of Representatives yesterday. According to its backers, Representatives Peter DeFazio (D-OR) and Jason Chaffetz (R-UT), the proposed legislation – the full name of which is the Saving High-tech Innovators from Egregious Legal Disputes Act – “is a targeted reform that will force patent trolls to take financial responsibility for their frivolous lawsuits”. It will do this by requiring “trolls” to pay the costs of the other side if they take a case to court and lose. Given that in the US such costs can run into the many millions, that is potentially a very powerful incentive to think twice before pressing the litigation button.

The bill does not define who will be covered by its provisions. Instead, it sets out who is exempt:

(1) ORIGINAL INVENTOR.—Such party is the inventor, a joint inventor, or in the case of a patent filed by and awarded to an assignee of the original inventor or joint inventor, the original assignee of the patent.

(2) EXPLOITATION OF THE PATENT.—Such party can provide documentation to the court of substantial investment made by such party in the exploitation of the patent through production or sale of an item covered by the patent.

(3) UNIVERSITY OR TECHNOLOGY TRANSFER ORGANIZATION.—Such party is— (A) an institution of higher education (as that term is defined in section 101 of the Higher Education Act of 1965 (20 U.S.C. 1001); or (B) a technology transfer organization whose primary purpose is to facilitate the commercialization of technology developed by one or more institutions of higher education.

Everyone else is presumably fair game.

My first thought on reading the text of the legislation is that if I were a patent lawyer I would be going down on my knees each and every night to pray that the SHIELD Act becomes law. Although I am not an expert in these things, it seems to me that the wording is so vague in so many places – especially when it comes to definitions of who is exempt – that weeks of argument, and hundreds of hours of billable time, could be eaten up deciding whether a plaintiff should be considered “a troll” or not.

Of course, this would also be wonderful news for deep-pocket defendants, which could spend even more time dragging out a suit in order to leave a far less wealthy plaintiff more financially exposed: it is not beyond the wit of man to imagine that seeking a ruling on whether or not a plaintiff is a troll would become a standard defence play, especially in David v Goliath cases. Then there is the fact that the provisions would kick in if a party, claiming that it feared a suit, filed a motion for a declaratory judgement of non-infringement. Given the legal uncertainty surrounding the circumstances under which DJs can be filed and then granted, it is not hard to see innocent parties being reeled into actions in which they may end up paying the costs of the other side, even though they have done nothing concrete to threaten them. Once again, how powerful a tool would that be in the hands of a deep pocket corporation with top dollar legal representation?

There also has to be some concern that if passed the legislation would over embolden defendants in a case. Thinking they are bound to win and no longer fearing the cost of employing a lawyer, they may actually decide to fight suits that they would be better advised to settle; so ending up being exposed to much higher outgoings than otherwise would be the case.

Beyond all of that, though, if anyone thinks that the SHIELD Act will come close to putting trolls/NPEs/PAEs out of action they are very much mistaken. A certain kind of low level troll may be put off, but for serious NPEs and PAEs the risks of being asked to pay your opponent’s fees if a dispute should end up in court will be far outweighed by the riches on offer should a case be won – not only in an immediate damages award but also from on-going licensing fees. Although NPEs and PAEs do not actually want to go to court in the first place, it’s worth remembering that the evidence seems to indicate that when they do, in certain jurisdictions they have a 40% plus success rate, while the awards they win are generally higher than those handed to operating companies.  That said, it is possible, I suppose, that NPE royalty rates in general may rise slightly as they seek to cover themselves for the additional costs they'll incur when they do lose.

For their part, privateers might begin to ask for some kind of indemnity from the partners they work with to cover themselves in cases of unsuccessful assertion. Sadly, however, many smaller companies which for whatever reason are not thought to be covered by Exemption 1 in the SHIELD Act, may not be able to offer such indemnities and could find that they are unable to take action against infringers because under Exemption 2 they are not able to “provide documentation to the court of substantial investment made by such party in the exploitation of the patent through production or sale of an item covered by the patent”.

Finally, because the SHIELD Act only takes effect if a plaintiff loses a case, those who may potentially be labelled as NPEs will do all they can to ensure that they are not put in an exposed position in the first place. For those looking to sell high quality patents reading on key technologies that is surely going to be very good news in terms of the prices they'll be able to command. 

There is, however, one very big caveat to all of the above. Despite the fanfare, there is little chance that the SHIELD Act will find its way onto the statute books. The website gives the legislation a 1% shot of making it. That may be under-cooking it somewhat, given that President Obama has recently talked about needing to do more to thwart trolls and big companies, such as Microsoft, have advocated a loser pays rule and may be willing to throw lobbying efforts into supporting the act. But even if it were to get some traction, the likelihood is that it will get stuck in Congress for many a long year.

I don’t think that there are many people who would defend the activities of the kind of troll that sends out letters to small companies seeking to intimidate them into paying licence fees for decidedly dodgy patents. But whether they are worth legislating against is another issue entirely –especially when the legislation has the potential to harm many and to provide extra weapons to very big and very wealthy corporations which do not need them. If bottom-feeding trolls are the huge problem it is claimed they are, the market itself has every incentive to come up with solutions to deal with them. It should be left alone to do so. What is pretty certain is that in time the market would certainly develop ways of getting around the provisions of the SHIELD Act.

A couple of years ago, an academic named Michael Risch wrote a very powerful study of NPEs in which he concluded that: “It turns out that just about everything we thought about patent trolls – good or bad – is wrong.”  I would be surprised if Representatives DeFazio and Chaffetz, or any of their staffers, have read “Patent Troll Myths”; they should.