PublishedNovember 29, 2012

The SHIELD Act Is a Step in the Right Direction

The SHIELD Act is an important step in the process of common sense patent reform where it is most needed: computer hardware and software patents.  The Act introduces a “loser pays” rule in computer hardware and software patent litigation when a court determines that a plaintiff did not have a reasonable likelihood of success.  The SHIELD Act will make it much more difficult for abusers of the patent system like Patent Assertion Entities (PAEs) to file frivolous patent suits against vulnerable companies in the hopes that the companies choose to pay licensing fees rather than spend the money necessary to fight the infringement claims in court.

A patent infringement claim can easily cost millions of dollars to defend and take over two years to fight in court.  The cost and disruption to business caused by an ongoing court case is too much for most tech startups and small businesses to bear. PAEs – or companies that do not produce anything, but rather earn profit strictly by asserting patent infringement claims – take advantage of these high costs to force settlements on vulnerable businesses.  This is in spite of the fact that PAEs only have a 23% success rate when taken to court. Patent infringement claims have had a devastating impact on startups, scaring both entrepreneurs and their financial backers out of the market.  In fact, a recent study by Boston University concluded that last year PAEs created $29 billion in direct costs. Small and medium-sized firms made up most of the defendants in these cases.

The SHIELD Act is a simple, straight-forward piece of legislation that targets this problem by making it easier for smaller businesses to challenge weak patents and frivolous claims.  The Act should reduce some of the risk involved in creating a tech startup; an investor will have more incentive to fund a startup knowing that they have lower exposure to frivolous patent suits.  This Act will also help reduce the value and number of weak patents as they get struck down in court.  As Ars Technica points out, the SHIELD Act represents “the first time Congress has defined the term ‘software patent.’”

The bill’s sponsors, Rep. Jason Chaffetz (R. Utah) and Peter DeFazio (D. Ore.), have also taken care to avoid unintended negative effects.  The Act will have no effect on legitimate patent infringement complaints and these claims will continue to be resolved mostly through settlements and beneficial cross-licensing agreements.  Software and computer hardware patents are defined in the SHIELD Act, but the bill takes care not to endorse their patentability.  This is to prevent the bill from unintentionally being used to legitimize controversial software patents, which many believe should not be eligible for patent protection in the first place.

The CEO and Chairman of the General Patent Corporation Alexander Poltorak expressed disapproval of the SHIELD Act in an op-ed, stating that it is “nothing more than a gift to large computer technology companies and their lobbyists and an attack on American inventors” and criticizes the bill for unfairly punishing plaintiffs without doing anything to curb “frivolous declaratory judgment cases.”  GPC “represents clients in IP enforcement matters and licensing transactions on a contingency basis” and calls its product “patent enforcement services.”  This criticism is unfairly myopic concerning the problem, and undermines the significant benefit that legislation as simple as the SHIELD Act can have.  The problem of PAEs and other patent aggregators is not unique to large established corporations.  For these companies the PAEs become a cost of doing business, a tax they must pay to operate.  The broader problem for competition is the PAE as the barrier to entry.  The next Facebook, Google, or Apple faces a very different reality, where the slightest evidence of commercial success will be seen as an open invitation for every PAE.  A loser pays model equips these companies with the ability to defend themselves, and serves as a deterrent for the PAE who is looking to leverage the size of its portfolio and the uncertainty that comes with prolonged litigation.

Unfortunately the bill appears to have stalled in the Subcommittee on Intellectual Property, Competition and the Internet.  This may be in part due to concerns that enacting the SHIELD Act would violate America’s commitment to the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”) which requires that patents “be available and patent rights enjoyable without discrimination as to … the field of technology.”  This concern is likely misstated.  First, the SHIELD Act does not discriminate about the granting of a right, but rather punishes a patent holder for incorrectly asserting that right.  There is too much focus on the “field of technology” element, and not enough analysis about whether or not the SHIELD Act calls for discrimination, which it does not.  The drafters went to great lengths to ensure that the proposed bill would not create discrimination, and even included a “Rule of Construction” section to clarify that the bill would not change patent-eligible subject matter.  Alternatively, even if one were to believe that the SHIELD Act somehow disproportionately discriminated against a specific field of technology, this has not stopped the legislature before.  The Hatch-Waxman Act creates a unique patent system for pharmaceutical patents, and this has survived TRIPS.  A review by the Congressional Research Service which cites an article from Maria Victoria Stout comments “In fact, a WTO panel “rejected a strict interpretation of Article 27.1 prohibiting any differentiation between fields of technology,” and the “accepted view is that ‘the pejorative concept of discrimination must be distinguished from differentiation for legitimate reasons.’”  Surely the drain on our economy created by PAEs constitutes a legitimate reason under this analysis.

There is no magic bullet to solve our current patent problems.  The SHIELD Act only targets one aspect of patent abuses, and even under the Act there will still be a tremendous up-front cost for litigation and risk that a successful defendant will not be able to collect on awarded legal fees.  But comprehensive patent reform will be complicated with many legitimate competing ideas and interests.  It is therefore important that common-sense legislation like the SHIELD Act be passed to help protect the most vulnerable victims of the patent wars.  This Act is an incremental, but important, step in solving our patent woes.

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David Balto

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