A bill introduced last week with bipartisan support would substantially level the playing field for companies sued for patent infringement by non-practicing entities (NPEs), sometimes called patent trolls. The bill is referred to as the “SHIELD Act,” which stands for the “Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013.”
Companies that have been sued for patent infringement by NPEs appreciate the special problems such litigation presents. The NPE has substantial leverage over the company: Responding to discovery can be very burdensome and disruptive for the company, but not for the NPE, which generally has few documents to produce and perhaps no witnesses; the stakes for the company can be substantial, while the NPE has nothing to lose but its patent; and the company faces potentially large legal bills for defending the patent lawsuit and challenging the validity of even overbroad patents, while the NPE likely has small or no legal bills, because it likely has a contingency fee agreement with its lawyers. To make matters worse, NPEs typically sue an end user of a technology, such as a bank or retailer, which has less incentive and less ability to defend the lawsuit than the company that actually makes the equipment or technology at issue. And finally, the company is likely to be sued in a location like the Eastern District of Texas that is favorable to plaintiffs, convenient to the NPE, but quite inconvenient to the company.
With these leverage imbalances in mind, the NPE typically offers to settle for low six-figure sums, a much smaller figure than the average cost of litigating a patent lawsuit to conclusion. Not surprisingly, companies that are sued by NPEs generally choose to pay rather than litigate. A recent Boston University study estimates that NPEs collected $29 billion in 2011. Further, the number of patent cases brought before the International Trade Commission by NPEs swelled from 22 in 2010 to 232 in 2011.
The SHIELD Act is directed toward entities that buy patents, ostensibly to use them for litigation rather than to make products. Here’s how it works: The SHIELD Act increases the risks for an NPE by requiring an NPE that loses a patent lawsuit (or ITC action) to pay the accused company’s costs, including legal fees, unless the court finds exceptional circumstances that would make such an award unjust. It also makes it more difficult for an NPE to bring a lawsuit by requiring the NPE to post a bond sufficient to cover those costs and fees.
The SHIELD Act defines an NPE as anyone other than the patent’s inventor, or its original assignee if that assignee files for and receives the patent; a patent owner who has made a substantial investment to produce or sell products covered by the patent; or universities and their technology transfer organizations. The SHIELD Act’s fee-shifting and bond provisions apply only to the NPE, and not to an accused infringer. For an NPE to recover attorney fees from an accused infringer, it must meet the existing standard of showing that the case is exceptional.
The SHIELD Act is not without burden to an accused company, however: To recover its costs and fees, the company must litigate the case to conclusion, and obtain a judgment that it does not infringe the patent or that the patent is invalid. The need for an accused company to litigate a patent case to conclusion to recover its fees still leaves a large incentive to settle early.
To avail itself of the Act’s provisions, a company that is sued by an NPE needs to file a motion that the plaintiff is an NPE, in that it does not meet any of the exceptions listed above. If the accused company files the motion before its initial disclosures are due, the court must limit discovery to discovery that is necessary for deciding the motion, until that motion is decided. If the motion is filed after initial disclosures are made, the court is not required to decide the motion until after final judgment is entered, and thus no bond would be required.
The Act applies to actions filed after its effective date, and past practices with landscape-changing patent statutes suggests that a slew of NPE patent lawsuits would be filed shortly before the Act is signed into law, if that occurs.
Current NPEs will not be left without options by the passage of a SHIELD Act. NPEs may try to avoid its provisions by co-owing the patent with an inventor, or by funding litigation brought in the inventor’s name. Larger, more established NPEs will likely be able to post the bond, though the bond requirement may slow the pace at which an NPE is able to file lawsuits. In the short-term, however, the passage of the Act would provide accused companies significantly greater leverage when faced with patent infringement lawsuits brought by NPEs.