The SHIELD Act: Baby Steps Towards Slowing The Patent Troll Epidemic

Patent trolls are back in the news again, primarily as a result of the re-introduction of the “Saving High-tech Innovators from Egregious Legal Disputes” Act. (As The Register notes, the “SHIELD Act” is “risibly backronymed.”) Yesterday, the United States House of Representatives Subcommittee on the Courts, Intellectual Property and the Internet held a hearing on “abusive patent litigation.” I would say their heart was in the right place, but, in typical congressional committee fashion, rather than host a forum at which worthy ideas could be debated for the benefit of society, the subcommittee called four management-level lawyers at Fortune 500 companies, one lawyer from a multi-billion-dollar private company that provides software to most of the Fortune 500, and one lawyer from a litigation firm that touts its success representing Fortune 500 companies.

 

The SHIELD Act was first introduced last fall and it was, to be frank, useless. The original SHIELD Act would have forced plaintiffs to pay the defendants’ attorney’s fees if the defendant could show the plaintiff “did not have a reasonable likelihood of succeeding.” That sounds all well and good, except that the primary problem with our current patent system is not that plaintiffs are filing wholly-frivolous lawsuits (i.e., where there’s no chance of proving infringement), but that patents are granted way too easily, and then cost too much to invalidate. “A reasonable likelihood of succeeding” is a meaningless phrase — indeed, what better indication of the “reasonableness” of a patent infringement lawsuit could there be than the existence of a valid patent granted by the patent office?

 

The revised SHIELD Act (copy available via the EFF at this link) makes far more sense. Instead of attacking purely frivolous claims — which simply aren’t the problem — the SHIELD Act has an elegant solution to the patent troll problem: to maintain an infringement lawsuit, the plaintiff must be able to show it is engaged in “a substantial investment… in the exploitation of the patent through production or sale of an item covered by the patent.”

 

If enacted, the bill would end the practice of companies buying patents and then enforcing them against others without bothering to do anything with the patent themselves. Patent protection exists to protect legitimate inventors trying to utilize their patents, not to enrich shell companies unwilling to take on the risk of making a product that actually uses the invention. The revised SHIELD Act would be a step in the right direction, but it has three big exceptions that render it toothless in most cases. Moreover, it fails to attack the primary problem with patent lawsuits these days: the lopsided cost of pursuing a patent lawsuit to defending one, which gives the holders of weak patents the power to extract sub-million-dollar settlements without their patents actually being tested in court. 

 

Starting with the exceptions, the bill wouldn’t impose the same “substantial investment” requirement on inventors, their assignees, or any “university or technology transfer organization.” Why should any of these entities have a special license to troll businesses with patents they aren’t bothering to use themselves? Is there some special value to society by letting institutions of higher education thwart research, development and investment elsewhere by sitting on patents and filing lawsuits?

 

But the bigger problem to me is the lack of any changes to the nature of patent infringement litigation itself. As Michael Risch argues, “we should address the behavior, not the owner.” Put aside the epic, multi-billion-dollar battles in the smartphone patent wars and think about patent infringement lawsuits against small and mid-sized businesses, those companies wholly ignored by the House Subcommittee’s hearing. As Chief Judge Randall Rader of the United States Court of Appeals for the Federal Circuit — the end of the appellate road for the vast majority of patent infringement cases — summarized recently:

 

Let me tell you my definition of a patent troll — A patent troll is anybody who asserts a patent far beyond the value of its contribution to the art. That means that any institution can be a troll. We all understand that there are entities that are created solely for the purpose of litigating patents, which is not intrinsically bad. Again, if they are properly valuing and properly using the system to vindicate the incentives in investment and opportunities on behalf of the Patent Act there is no problem in that.

The problem comes when they will sue on a minor, minor patent… and then keep the infringement contentions very vague. Then approach and say “wink, wink, you know this is going to cost you $2 to $3 million in discovery expense alone. I’ll be happy to save you money by settling at far less than that.” And, of course, that it litigation blackmail. That’s the tactical use of the expense of the system, which is abusive. And I’m happy to say that the Federal Circuit and its Advisory Council is targeting for some kind of correction.

 

The whole discussion over at IPWatchdog is worth reading, not least because it’s reassuring to see that the Chief Judge at the most important patent court has recognized the problems, and has particularly recognized the ability of trolling plaintiffs to keep stringing cases along, like a troll in a comment thread, by keeping their claims sufficiently vague that the defendant has to spend hundreds of thousands of dollars preparing defenses against all of the claims that might eventually be made. Let me sum up the problem in one sentence: with a miniscule amount of work, a plaintiff with a dubious patent infringement lawsuit can force the defendant to expend over $500,000 in defense fees. An injury plaintiff and their lawyer in routine car accident case have to do more work to obtain a $25,000 settlement than an inventor and their lawyer in a patent infringement case have to do to obtain a $250,000 settlement.

 

Sound crazy? Think of all the work that has to be done by the plaintiff or their lawyer in a typical whiplash case. The plaintiff has to file a bunch of paperwork with their insurer, find a competent physician and then repeatedly follow-up with them, then start the same process over again with the other driver’s insurance company. When all the first-party coverage, police reports, wage loss statements, medical records, and so forth are done, it’s a fair amount of work just to put a pre-litigation settlement package together, and then even more paperwork and depositions if they file a lawsuit.

 

Now think of what needs to be done in a patent infringement lawsuit. Thanks to McZeal v. Sprint Nextel Corp., 501 F.3d 1354 (Fed. Cir. 2007), the initial complaint need not say anything of substance — it need merely identify the patent and the defendants. I can automatically generate one with my case management software. A couple weeks after that, the plaintiff has to put together an infringement chart that doesn’t say much beyond “your product X infringes claim Y of my patent.” A couple weeks after that, the plaintiff produces documents relating to their initial development of the device (and, frequently, the plaintiff makes a half-hearted effort at even finding the documents). Then they sit back and do nothing.

 

Meanwhile, the defendants are desperately scouring everything listed in the patent file history — which can include references to hundreds of other patents, which themselves reference hundreds of other patents — and everything from old devices to old trade show brochures to show the existence of “prior art” that could invalidate the patent. They’re also either working internally, or working with experts, to come up with technical arguments for why no part of their own products infringe upon the patent, even before they really know the details of the plaintiff’s infringement allegations.

 

That’s where the bulk of the money goes in defending patent infringement suits: to defense lawyers investigating and reviewing thousands of pages of technical documents. Do some law firms abuse that position and use it as an opportunity to overbill? Sure. But it can’t be denied that, even in a best-case scenario, it will cost $75,000 or more just to get through the initial round of defense attorney work.

 

Now, this system makes sense in the abstract: the inventor has already proven to the patent office the novelty and utility of their invention, so they should be able to rely on those prior efforts in the litigation. The problem, however, is that the patent office has regrettably begun giving out patents like candy, including patents for rounded corners and that cute rubber-band effect when you scroll to the end of a list on a smartphone. Part of this problem relates to the nature of the patent office — all applications are review ex parte, with no input from others in the industry — and part of it relates to more complicated issues specific to our time and political climate.

 

The end result is, as described in part by this interesting article on the rise of contingency fee patent lawyers, a significant “bottom” of the patent market, in which plaintiffs bring claims on dubious or weak patents and make the defendant an offer they can’t refuse: settle it by paying roughly the cost of defending it, a cost they would have to bear anyway. Note that the plaintiffs in cases involving legitimately useful and novel patents that are infringed don’t need to rely on this trolling behavior to succeed, they can affirmatively state early on the precise nature of their allegations.

 

It’s good to hear Judge Rader understands these problems, but at the same time he has made clear he believes “There is nothing wrong with the patent system.” If we’re going to reform the patent system, we need move beyond an obsession with “non-practicing entities” or “patent assertion entities” — i.e., the companies that exist only to make infringement claims, rather than to actually use the patents — and start discussing patent litigation itself. It may be true that “patent assertion entities” initiate more than half of all patent infringement lawsuits, but that’s a symptom, not a cause, of the system’s problems.

 

 

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  • Ralph Jacobson

    Our firm did some contingent fee patent cases in the late 90′s. All of them ultimately settled, but only after incredible amounts of work: one case had 14 summary judgment motions. I just want to disabuse anyone of the notion that it’s some sort of exploitive, easy money.

    • http://www.litigationandtrial.com/ Max Kennerly

      Thanks for the comment. Patent cases can be easy money depending on the case and the lawyers. Real patent litigation is the second most expensive and time-consuming plaintiff’s work out there, second only to plaintiff’s steering committee work in the MDLs, and the patent work is generally more risky than the PSC, because there aren’t a dozen more firms to spread the expense and work. As you know, and as your example with the 14 MSJs shows, patent cases are fraught with uncertainty, and unpredictable judicial rulings can dramatically alter the course of the case.

      I don’t propose any changes that would significantly affect that sort of work, but look on the other side of the uncertainty and difficulty of patent cases: had you chosen to do so, could you have simply filed your case, vaguely asserted every conceivable form of infringement under the sun, stalled instead of searching for documents, and then watched as defendants paid you between $50k and $500k to avoid their huge monthly defense fees? I bet you could have, and that’s the problem in my eyes.

      I also bet that, if we implemented stricter standards requiring earlier disclosure of the details of infringement allegations, it wouldn’t have affected you one bit, as you would have already investigated and review all of that information in your due diligence.

  • Fnord

    It seems like you’ve identified two separate problems, though each is exacerbated by the other. First, there’s the problem of being too generous with patent applications. Allowing overbroad patents, patents for things that are not substantial novel innovations, etc. The second is the ability of patent prosecutors to force defendants into expensive procedures using vague claims that are hard to initially show to be non-meritorious.

    Even a legitimate patent could be used in a vague lawsuit against a company that’s not actually infringing to allow a troll to extort a settlement, although of course handing out patents like candy gives the trolls that much more ammunition. And even if legal system were somehow reformed to make defending against patent trolls easy, there’d still be a problem with the patent system blocking the creation of devices that are actually infringing, but that infringe upon patents that shouldn’t have been granted in the first place.

    I’m hardly enough of an expert to know exactly what solutions are needed. But it does seem like we need two separate solutions for the two separate problems, probably one reform primarily targeted at the patent office and one targeted at the courts.

    It looks like this specific reform does neither (although I can see how it might deal with some of the worst offenders). Apple (among many others) is certainly exploiting smart-phone related patents, but that doesn’t prevent it from taking out patents for things that aren’t actually novel and using those patents to file vague claims against competitors.

    • http://www.litigationandtrial.com/ Max Kennerly

      I think you’ve hit the nail on the head. Reform at the patent office is probably the more important of the two, but it’s also likely the much harder one to accomplish, for both political and practical reasons. We complain about them, but they have a tough job, and the process is designed to grant patents, particularly to inventors with a team of lawyers to endlessly lobby the patent office and introduce irrelevant limitations in the patent in order to get it granted.

      You’re quite right that patents legitimately granted for novel and useful technologies can be used in a trolling fashion. My suggestion (which I think is similar to Judge Rader’s suggestion) is to force plaintiffs to detail the particulars of their case much earlier in the litigation process. Truth is, when you have a valid patent, and when a legitimate lawyer is performing their due diligence, they will already have the bulk of those details on hand before they even file suit. Thus, I think the burden on legitimate plaintiffs will be minimal, while the burden on the vague-allegation trolls will be large, because it ruins the economics of that type of trolling.

      The SHIELD Act addresses a very limited problem: precluding entities set up for the sole purpose of purchasing dormant patents (i.e., patents that aren’t being utilized by the inventor or assignee) from bringing suit. I suppose that’s laudable but, as noted above, it has big exceptions, and it doesn’t address the reason why people are setting up shell entities for the sole purpose of trolling with dormant patents: because the litigation process allows them to troll for six-figure settlements! Address the cause, and the symptom will go away.

      • Fnord

        Oh, I certainly don’t mean to denigrate the people at the Patent Office when I say they it needs reform. Indeed, some of the most obvious problems, like the mandate to be self-funded from filing fees, were externally imposed upon it.

  • guest

    Max:
    I enjoy your blog, but it is disappointing that you buy the “tort reform” arguments of big corporations with regards to patent litigation (but not curiously, with regards to personal injury or other types of plaintiff’s work).

    • http://www.litigationandtrial.com/ Max Kennerly

      I’m glad you like the blog otherwise. If the wealthy didn’t on whole enjoy and profit from our current patent system, it would be gone yesterday. The current patent system doesn’t reward ingenuity, it rewards the investment of money into patent lawyers, and it rewards having lots of capital around to weather the ambiguities — something small businesses and startup companies don’t have. If IBM and Johnson & Johnson and the rest of the Fortune 500 didn’t like this system, they’d make a phone call and get rid of it.

      My proposed reforms are pretty darn modest, and wouldn’t affect most non-trolling plaintiff’s firms. I don’t even propose changing damages or burdens of proof, just some procedural changes. Which of my arguments has you worried?