PublishedDecember 16, 2013

Before I Kill You, Mr. Bond[ing Requirement]

One big reason that being a patent troll is so profitable is that there isn’t a lot of downside risk for the troll. You just set up a holding company with no assets other than the patents you’re using and sue. You can afford to take risky positions because even if the judge awards fees to the defendant, there’s no money for the defendant to collect.

The Innovation Act tries to deal with this problem with a complicated provision that allows the court to bring in parties with an interest in the patent or in the case. But in order to protect a party from being brought in unfairly, there are notice requirements and a way for a party to object to being joined.

There’s a much simpler solution, which Senator Hatch (R-UT) proposed in the Patent Litigation Integrity Act: require a holding company with no assets to post a bond against an award of fees and expenses. Senator Hatch’s bill lets a defendant move the court to require the patent owner to post a bond; the bill lays out 7 different exceptions, the net effect of which are to make sure that the only patent owners who ever have to post a bond are holding companies with no assets.

It’s a straightforward solution to the problem of shell companies and it doesn’t harm legitimate patent claims at all. Small inventors don’t have to post a bond; universities don’t have to post a bond; operating companies don’t have to post a bond; and, in fact, any company that can demonstrate that it can pay a potential award of fees and expenses is exempt from the bonding requirement.

Only shell companies with no assets have to put up a bond, which completely changes the economics of trolling.

So why hasn’t this idea taken hold?

Part of the reason has to do with a hardening of conventional wisdom. There has been an assumption that Democrats would never vote for such a provision. And now it’s just become something that everyone “knows” to be true.

Except that Democrats voted 2-1 in favor of the Innovation Act with its more complicated joinder provision; so there is plenty of Democratic support for a solution to the holding company problem. I have to believe that Senator Hatch’s cleaner solution would garner similar support.

With the Senate hearing tomorrow on patent reform, it’s definitely time to take another look at bonding.

Matt Levy

Previously, Matt was patent counsel at the Computer & Communications Industry Association

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