On August 2, 2012, the “Saving High-tech Innovators from Egregious Legal Disputes” (or “SHIELD”) Act was introduced in the House of Representatives by Democrat Peter DeFazio and Republican Jason Chaffetz. The legislation aims to "force patent trolls to take responsibility for their frivolous lawsuits," as Rep. DeFazio put it, by requiring the alleged trolls to pay the defendants' legal fees in the event that the patent owner loses the lawsuit.

Interestingly, the bill doesn't apply across the board for all industries: It is limited to lawsuits filed over computer hardware and software patents.

AIPR believes that the SHIELD Act is both unfair and unnecessary – unfair because it ultimately aims to punish small businesses that dare to sue Big Tech companies, and unnecessary because there are already laws on the books that deter the filing of frivolous lawsuits. Plaintiffs and their attorneys who bring frivolous lawsuits can be – and are – sanctioned by the courts under Rule 11. And regarding patent infringement litigation in particular, USC 35 § 285 provides for the award of reasonable attorney fees to the prevailing party in “exceptional cases” such as the bringing of a frivolous infringement claim.

AIPR urges members of the innovation community – and all Americans who support intellectual property rights – to contact their Representative and ask them to oppose the SHIELD Act.

Proposed SHIELD Act Is Anti-Innovation and Pro-Monopoly

By Alexander Poltorak, AIPR Founder and President

The ink has not yet dried on the Leahy America Invents Act and there is already yet another patent reform act introduced in Congress. This one is called the “Saving High–tech Innovators from Egregious Legal Disputes Act of 2012,” a.k.a. the SHIELD Act. The question is: Who is this act trying to shield – the innovators or the infringers? Just as with the previous patent reform, this legislative proposal is also sponsored by special interests and is squarely aimed at American inventors.

The bill was introduced last week by Reps. DeFazio (D. Oregon) and Chaffetz (R. Utah). This legislation proposes to introduce to U.S. patent litigation what is known as the “English Rule” – the loser pays the winner’s legal fees. Although this practice is totally foreign to American judicial tradition and widely criticized as intimidating would-be plaintiffs from bringing their grievances to court for fear of incurring even greater financial losses, the sponsors of this act are undeterred, because intimidating plaintiffs – in this case inventors and small patent owners – is precisely their goal.

The first question that comes to mind is: Is there a crisis in our judicial system that needs (yet another) urgent patent reform? According to the sponsors of this bill, high tech companies are inundated and harassed by inventors and small patent owners (collectively called NPEs, or Non-Practicing Entities – or worse yet, “patent trolls”) suing them for frivolous patent infringement claims. Let’s look at the statistics. First, according to the 2011 patent litigation study published by PricewaterhouseCoopers, the annual number of patent actions filed has increased at an overall compound annual growth rate (“CAGR”) of 4.9% from 1991 through 2010. This is roughly the same rate (4.5%) at which the number of patents issued by the U.S. Patent and Trademark Office (USPTO) has grown in the same period. Hardly a patent litigation crisis!

Moreover, according to the same study, NPEs’ win rate at trial is 63% – almost two out of three patent infringement cases are won by the patent owner. That means patent owner plaintiffs are right most of the time. Where is the harassment, one might ask? Furthermore, many of the cases lost by patent owners at trial are lost on validity issues. Although a patent issued by the USPTO enjoys the presumption of validity, it may be invalidated in court – which happens often enough. But this can hardly be anticipated before the filing of a lawsuit. The sponsors of the bill would have us believe that most patent infringement lawsuits filed by NPE’s have no “reasonable likelihood” that the patentee would prevail in the litigation. Hence they want to discourage filing such frivolous lawsuits by penalizing losing plaintiffs. But this notion is disproved by patent litigation statistics according to which NPE plaintiffs are right most of the time, and even when they lose, more often than not such an outcome was unforeseeable at the outset. So where is the crisis?

On first blush, the English rule, wherein the loser pays winner’s legal fees, seems only fair – the plaintiff who forced the defendant into spending money on the defense of a meritless lawsuit should pay for the defendant’s legal fees. But guess what? This is precisely how the U.S. patent system works now! First, in any litigation – patent or otherwise – litigants and their attorneys must satisfy Rule 11 of the Federal Rules of Civil Procedure which states that any claim or assertion made by a litigant or its counsel must have a basis in fact or in law. A plaintiff bringing a frivolous lawsuit that has no merit, i.e., has no basis in fact or in law, can be sanctioned under Rule 11. For instance, in Raylon v. Complus Data Innovations, et al. (EDTX, March 9, 2011), Judge Davis observed in his opinion that while not appropriate in that case, Rule 11 sanctions would be appropriate where, for example, “a case lacks any credible infringement theory and has been brought only to coerce a nuisance value settlement.”

Moreover, in addition to this general requirement, U.S. patent law, under USC 35 § 285, specifically provides that “The court in exceptional cases may award reasonable attorney fees to the prevailing party.” Frivolous litigation certainly qualifies as an exceptional case. A recent example is MarcTec, LLC v. Johnson & Johnson (SDIL, Jan. 3, 2012) in which the District court awarded the defendant $4.7 million in attorney fees and expenses.

So, you may ask, if we already have a judicial system where a party bringing a frivolous patent infringement lawsuit may be sanctioned under Rule 11 and slapped with paying the winning party’s attorney fees and cost, why do we need additional legislation? The answer is simple: To lower the bar for corporate infringers and to intimidate American innovators – patent owners whose IP rights are routinely infringed by corporate bullies. Congressmen DeFazio and Chaffetz want to hand a get-out-of-jail-free card to corporate infringers. This legislation should be appropriately called the “Shield the Infringer Act.”

Don’t be misled by the language in the proposed legislation that the losing patent owner pays the legal fees of the defendant only when there was no “reasonable likelihood” that the patentee would prevail in the litigation. Patent cases are rarely black and white. Most of the time, they are a close call. Infringement theories are fleshed out in discovery. Much turns on the claim construction by the court, which is difficult to anticipate at the outset. If this legislation is passed into law, it will likely become a basis for wholesale intimidation of inventors, small businesses, universities and other patent owners.

The intent of this ill-begotten legislation is transparent in its unabashed asymmetry. Existing laws, be it Rule 11 or Section 285 of the Patent Code, are symmetrical and equally applicable to litigation misconduct by both parties. The SHIELD Act, on the other hand, squarely aims to penalize only plaintiffs – in this case, the patent owners. What about frivolous declaratory action cases filed by infringers to intimidate patent owners? What about meritless counterclaims for invalidity or inequitable conduct routinely asserted by defendants? What about baseless requests for reexamination filed seriatim to keep a patent forever in limbo by tying it up in endless reexaminations? Surprise, surprise! None of these litigation misconducts by defendants would be penalized by this Shield the Infringer Act!

Who is behind this proposal? The usual suspects: The same computer industry monopolists that sponsored the Patent Reform Act of 2010 that passed into law as the infamous America Invents Act. It comes as no surprise that this latest piece of their legislative initiative singles out computer software and hardware patents, which are the sole subjects of this proposal. If it was so fair, one may wonder, why single out computer technology patents? Why not do it across the board? This bill, drafted by computer industry lobbyists, was ingeniously crafted not to provoke the wrath of big pharma who almost derailed their attempts to pass patent reform last time around. The SHIELD Act is just a 21st Century version of pork-barrel legislation!

The Shield the Infringer Act is a piece of legislation bought by lobbyists for the special interests and designed to intimidate American innovators. Judging by the previous patent reform and this new legislative assault on the U.S. patent system, American democracy remains the best democracy – that is, the best democracy money can buy!

The America Invents Act

Download “What Innovators Need to Know – and Need to Do – under the America Invents Act,” a white paper developed by AIPR and sponsored by General Patent Corporation.

The America Invents Act (S. 23) was passed by the U.S. Senate in March of 2011. It was initially introduced as the Patent Reform Act of 2011 in January. It was essentially a re-introduction of the Patent Reform Act of 2010, which was first introduced as the Patent Reform Act of 2009 and was not enacted into law. The Patent Reform Act of 2009 was a re-introduction of the Patent Reform Act of 2007 which also failed to be enacted into law.

The House version of the America Invents Act (H.R. 1249) – which differs significantly from the Senate version of the bill – was passed by the House of Representatives in June. The Senate version of the bill provided for full funding of the U.S. Patent and Trademark Office (that is, the agency keeps and uses all the fees it collects from patent applicants and patentees), while the House version requires that Congress approve an annual budget for the agency.

Since the Senate and House versions of the America Invents Act differed, the two bills had to either be resolved through a Senate-House Conference Committee or the Senate had to pass the House version of the bill. The Senate passed the House version of the America Invents Act in September and it was signed into law by President Obama. So this ill-conceived legislation is now the law of the land!

The Failings of the America Invents Act
While the America Invents Act includes many anti-innovation provisions, it makes two significant changes to U.S. patent law, and it fails to make the most important and needed change to the U.S. patent system.

• Change to First-to-File:The America Invents Act changes the U.S. from its traditional first-to-invent patent system (the original inventor is assigned the patent) to a European-style first-to-file regime (the first filer receives the patent, not necessarily the actual inventor). A first-to-file system favors large corporations that can afford to file multiple – and sometimes frivolous – patent applications. Besides being unfair to independent inventors, small businesses and universities, the change will result in a flood of new patent applications that will exacerbate the backlog of almost 700,000 patent applications currently in examination.
  
• Establishment of Post-Grant Review: The America Invents Act gives large corporations – often the most flagrant infringers of patents – an unfair advantage by establishing a third method by which an infringer can challenge a patent’s validity. There are already two forms of patent review – ex parte and inter partes reexamination – so adding yet a third system only serves to make patents more difficult to defend, especially for smaller businesses and individuals. Under post-grant review, an infringer could force the patent owner that does not have the resources to defend its patent to abandon it by essentially assassinating the patent it is infringing before the patent owner has the opportunity to enforce it!
  
• NO Full Funding of the Patent Office: The U.S. Patent and Trademark Office uses no taxpayer dollars, but is self-funded from the fees it collects from patent applicants and assignees. Under the new law, Congress still gives the Patent Office an annual budget each year, and if the agency collects (as it always does) more than its budget in fees, the overage goes into the general treasure. At his testimony at a public hearing at the U.S. Patent and Trademark Office last year, AIPR Executive Director Alec Schibanoff promoted an end to fee diversion and full funding for the Patent Office.

White Paper
American Innovators for Patent Reform is currently developing a White Paper, What Innovators Need to Know – and Need to Do – under the America Invents Act. We hope to have it ready for distribution in November 2011.