There’s been much ado in the patent community over the past week over the re-introduction of H.R. 845, the Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 — more commonly known as the SHIELD Act. This legislation, co-sponsored by Rep. Peter DeFazio (D-OR) and Rep. Jason Chaffetz (R-UT), seeks to “protect American tech companies from frivolous patent lawsuits that cost jobs and resources” by implementing a “loser pays” fee-shifting paradigm for patent infringement cases brought by certain types of non-practicing entities. (A prior version introduced last year, H.R. 6245, was much more limited in its implementation of fee-shifting.)
While this is a bit off-topic for our blog, we thought this proposed legislation is sufficiently important to our readers that we’d do a brief post on it — especially given the penchant by some NPEs to assert standard-essential patents. The legislation (at least as it’s currently drafted) has raised a lot of questions and issues and has generated a lot of commentary (both pro and con) from the business and legal communities. After the jump, we’ll run through a quick summary of the provisions of the SHIELD Act, some first impressions about questions it may raise, and provide some links to a variety of others’ views on the proposed law.
The SHIELD Act, in brief
The SHIELD Act amends § 285 of the Patent Act to allow “a party asserting invalidity or noninfringement” in “an action involving the validity or infringement of a patent” to file a motion asking the court to determine whether the adverse party either (1) is an inventor or original assignee of the patent; (2) has made “substantial investment…in the exploitation of the patent through production or sale of an item covered by the patent”; or (3) is a university or university-associated tech transfer organization. Depending on when the motion is filed, the court can limit discovery to what is necessary to make this determination, it can delay issuing its scheduling order until after making the determination, or it can delay ruling on the motion until after final judgment on issues of validity/infringement.
If the adverse party does not satisfy at least one of these conditions, the SHIELD Act mandates that the court “shall award the recovery of full costs to any prevailing party asserting invalidity or noninfringement” upon entry of final judgment unless “exceptional circumstances made an award unjust.” To ensure that such a party is actually able to pay the costs, the SHIELD Act also requires that the party post a bond that would cover the full costs and attorneys’ fees of the prevailing party.
Questions and Issues Abound
As with virtually any new legislation, the specific language and provisions raises a whole host of questions and potential unintended consequences. For instance:
- Under the SHIELD Act, might an opportunistic company be able to file an affirmative declaratory judgment action seeking to invalidate a non-practicing entity’s patent and be able to recover full costs if it is successful in invalidating the patent?
- What happens to the award of “full costs” in cases where a defendant prevails on a subset of claims of invalidity or infringement (i.e., a subset of claims within a patent or patents within a lawsuit)? Can the costs be apportioned effectively in these cases?
- Given how rarely courts award costs under the current version of Section 285, might they likewise often find “exceptional circumstances” that preclude awards of fees under the SHIELD Act?
- Bond Requirement:
- How will courts determine the amount of a bond required to cover the “full costs,” especially in situations where the bond is required early in the litigation?
- Does requiring a party to post a (potentially very substantial) bond without regard for the merits of the party’s claims raise potential First Amendment concerns surrounding a party’s right to petition the government for redress of grievances (i.e., patent infringement)?
- What is the scope and complexity of the inquiry a court needs to make in order to determine whether the cost-shifting mechanism would apply to a patent holder who contends that it practices its patent? For example, in order to determine whether an item is “covered by the patent”:
- Is this similar to an infringement analysis (like the ITC’s domestic industry inquiry)?
- If so, is claim construction required before a court can make this determination?
- Is an item used in practicing all (or part) of a method claim “covered by” the patent? If the patent owner and another party combine to perform the steps of a claimed method, is this sufficient?
- Can the item be “covered by” any claim of an asserted patent (again, like the ITC’s domestic industry requirement), or does it need to be covered by an asserted claim?
- Does the “substantial investment” in the exploitation of an item covered by the patent need to be made in the United States? What amount of investment is “substantial”?
- The SHIELD Act exempts original inventors or original assignees (e.g., an inventor’s employer) from the fee-shifting provision. But does this exemption also apply to:
- The inventor’s heirs?
- A corporation formed by the inventor?
- An affiliate of the original assignee (e.g., parents, subsidiaries, or different entities resulting from changes in corporate structure, etc.)?
- An exclusive licensee plaintiff who has joined the inventor or original assignee in bringing suit?
Given the SHIELD Act’s aim of discouraging non-practicing entities from bringing meritless claims and attempts at cost-shifting, some have questioned whether there are other ways of accomplishing these goals (either in addition to or instead of the SHIELD Act). Some of these other suggestions include strengthening the pleading requirements for claims of infringement (similar to how pleading requirements for inequitable conduct and indirect infringement have gotten tougher), requiring earlier disclosure of infringement contentions (an approach favored by Chief Judge Rader), and implementing stricter rules or fee-shifting provisions for discovery in patent cases (a major driver of litigation costs). Some have even suggested implementing the so-called “loser pays” regime for all patent litigation.
Commentary by others about the SHIELD Act
Below is a list of some of the many articles written in the past several days about the SHIELD Act.
- The Atlantic: “Death to Patent Trolls”
- David Balto (former FTC Policy and current private practitioner): “Forging a SHIELD against patent trolls”
- Tim Worstall at Forbes: “The Shield Act tries to kill the patent trolls. But does it go far enough?”
- Electronic Frontier Foundation: “SHIELD Act: The Internet Shows It’s Ready to Smash Patent Trolls”
- Patent Progress: “We applaud reintroduction of SHIELD Act”
- Point of Novelty: “The SHIELD Act – Is creating “second class citizenship” for certain patent owners the answer to the “troll problem”?”
- Intellectual Asset Magazine: “The SHIELD Act will deter few trolls, but is great news for deep-pocket corporations”
- A VC (Fred Wilson): “The SHIELD Act”