The US ‘Anti-Troll’ SHIELD Act – A Waste of Legislative Effort?

In 1 August 2012 a new bill was introduced into the US House of Representatives with the stated intention of curbing the activities of ‘patent trolls’.

In a fabulous example of acronym contrivance (which perhaps took longer to devise than the content of the the proposed legislation itself) the bill is named the Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act.

The SHIELD Act has caused a flurry of excitement amongst the anti-software-patent lobby, not least because it supposedly has bipartisan support – having been co-sponsored by Rep Peter DeFazio (D-OR) and Rep Jason Chaffetz (R-UT) – and because it is explicitly targeted at curbing the enforcement of ‘dubious’ computer software and hardware patents.

The principle of the SHIELD Act is simple: it permits a court to award a full recovery of costs against an unsuccessful litigant asserting a ‘computer hardware or software patent’ in the event that the court determines that the patent holder ‘did not have a reasonable likelihood of succeeding’.

Even more excitement has been caused by the fact that the bill includes definitions of computer hardware and software patents, along with an express statement that nothing in the bill should be construed as amending or interpreting the categories of patent-eligible subject matter defined by 35 USC 101.  This means that Congress will neither endorse nor oppose the patenting of software should the bill be passed.  And while this would maintain the status quo, under which software is patentable in principle, this has not prevented some commentators from placing additional emphasis on the refusal to endorse.

In our view, however, the SHIELD Act is a complete waste of the Congress’ precious time.  While its co-sponsors’ hearts are doubtless in the right place – not to mention that it is playing well in the media, for now – its passage will achieve little of any consequence in terms of change, and may actually be harmful to the innovators and small technology startups it is intended to protect.

THE BILL IS FOUNDED ON FLAWED ASSUMPTIONS

The assumptions behind the bill are flawed, or at the very least unsupported by credible evidence.  The announcement by bill co-sponsor, Congressman Peter DeFazio, includes the following background discussion (emphasis added):

“Patent trolls don’t create new technology and they don’t create American jobs,” said DeFazio. “They pad their pockets by buying patents on products they didn’t create and then suing the innovators who did the hard work and created the product. These egregious lawsuits hurt American innovation and small technology start ups, and they cost jobs. My legislation would force patent trolls to take financial responsibility for their frivolous lawsuits.”
…
Patent trolls often buy broad patents that allow them to file flimsy lawsuits against multiple companies for infringement. Despite very thin evidence to back their lawsuits, companies are often forced to settle because going to court can easily cost over $1 million in legal costs even if the company prevails. Patent trolls most often target software and computer hardware companies. According to a recent Boston University study, patent troll suits cost American technology companies over $29 billion in 2011 alone.

Not one of the underlined assertions above is supported by evidence.  To start with the most outrageous allegation, as Patentology – along with others better-equipped than ourselves – has pointed out, the $29 billion ‘cost’ estimated by Boston University law researchers James Besson and Michael Meurer is simply not credible (see A $29 Billion US Troll-Tax or Just Another Statistical Smokescreen? and Patentology Cited in Academic Paper on Cost of Patent Trolls).

There is also no evidence that non-practising entities (NPEs) do not create jobs, or that they in fact cost jobs.  Certainly it is anecdotally believed in certain sections of the community that this is the case.  However, the observation that many people claim to know somebody who knows somebody whose startup was allegedly ‘killed’ by a patent troll is not evidence.  In other contexts this would readily be identified as a likely urban myth.

The fact is that no study has ever looked at the benefits of NPEs to those individual inventors and businesses from which many of the patents are acquired in the first place.  Nor has anybody ever conducted a proper study and analysis of the impact of NPE lawsuits across a truly representative range of defendant companies.  We simply do not know whether the net effect of NPE activity is more or less innovation or job creation.

Next, it is grossly disingenuous to assert that NPEs buy patents on products they did not create, and then sue the real innovators.  NPEs buy patents on inventions which somebody invented prior to the development of any product embodying the invention.  The fact is that the original inventor was an innovator but – for whatever reason (and there are many) – did not commercialise their idea themselves.  By this logic, Thomas Edison was a patent troll, though we are sure that this is not what the good Congressman is intending to imply!

Similarly, there is very little data – other than anecdote and popular belief – which could be used to support the assertion that most NPE litigation is based upon ‘broad patents’ and ‘thin evidence’.

THE ‘TRUTH’ ABOUT TROLLS

Villanova University School of Law researcher Michael Risch has conducted a study of the ten most litigious NPEs, examining their litigation (nearly 1000 cases), their patents (about 350 of them), and the companies that created those patents.  In his paper Patent Troll Myths, Risch concludes that:

Much of the conventional wisdom is supported by one-time stories that do not reflect the whole picture.

Risch has in fact found that most of what people believe about NPEs – positive and negative – is unsupported by evidence.  This is not to say that none of it is true, just that there is no sound reason to believe that any of it is true, and thus certainly no good basis to pass piecemeal legislation that may or may not address any real problems.

The main conclusions – and some implications – of Risch’s study are set out below.

1. NPEs are not particularly new.  Two of the ten NPEs in the study have been operating under the same business model since filing their first cases in 1986.
2. NPE patents ‘look like’ other litigated patents, i.e. it is not possible to tell, just by looking at an asserted patent, whether a suit is more likely to have been brought by an NPE, or by a practicing/competing company.  This is clearly not good news for any legislation that purports to target trolls without causing unintended collateral damage!
3. Business methods are not the dominant form of NPE patent, though there are plenty of software patents and no biotech, pharmaceutical, or chemical patents.
4. Available information indicates that NPE patent quality is not drastically lower than other litigated patents, although it is true that NPEs are less often successful in proving infringement than other litigants.  As Risch points out, this could be because NPEs act strategically to extract rents with non-infringed patents, but equally NPEs could believe that their patents are broader than they really are.  In the context of the SHIELD Act it actually matters which of these possibilities is true, because the second would most likely avoid the provisions of the bill.
5. Productive companies originally obtained most of the patents now asserted by NPEs.  Presumably these companies determined that they had no use for the patented technology in their own businesses, but by monetising the patents by sale to NPEs they would have obtained additional capital to reinvest in productive activity.  Indeed, Risch also found that most of the productive companies which had been the initial source of NPE patents are still in operation.
6. The timing of NPE lawsuits was, at most, only somewhat ‘trollish’, with the average patent sitting on the shelf for more than seven years before being litigated, though several were asserted almost immediately.
7. Risch did not find evidence to support the theory of some NPE supporters that NPEs incentivize investment by providing a market for patents.  On the other hand, he does not seem to have found any evidence that they do not.
8. Another pro-NPE theory for which Risch found no evidence is that NPEs can ‘vindicate’ the rights of small companies forced out of business by infringers.  Indeed, as noted above, most productive patent originators remained in business.
9. However, Risch’s study does confirm that NPEs provide a better way for individual inventors to enforce their patents than by bringing lawsuits themselves.

Clearly, this tells quite a different story to the one in Congressman DeFazio’s announcement, perhaps proving only that what University studies giveth, (other) University studies taketh away!

THE BILL DOES NOT TARGET TROLLS

The substantive provision of the SHIELD Act is that:

…in an action disputing the validity or alleging the infringement of a computer hardware or software patent, upon making a determination that the party alleging the infringement of the patent did not have a reasonable likelihood of succeeding, the court may award the recovery of full costs to the prevailing party, including reasonable attorney’s fees…

Notably, this does not address the status or behaviour of the patent-holder.  Nor does it take reference from the state of mind of the patent-holder, i.e. whether or not it had a reasonable belief that it could succeed.  It simply states that if the asserted patent is ‘a computer hardware or software patent’, and the court determines that the holder ‘did not have a reasonable likelihood of succeeding’, then full recovery of costs may be ordered.

So, for example, in a case where a small operating software company unsuccessfully sues a large competitor, e.g. Microsoft, for infringement of a patent, it runs the risk that the court may decide that its case did not have a ‘reasonable likelihood of succeeding’ (and you can bet that Microsoft would argue this in court), in which case the court may award full recovery of Microsoft’s costs.  We do not imagine that Microsoft runs cheap litigation!

In other words, the SHIELD Act may actually provide a deterrent to innovative small businesses against asserting their patent rights against larger companies, simply due to the added risk associated with a possible loss.

THE SHIELD ACT MAY INCREASE THE COST OF LITIGATION

As the saying goes, the road to Hell is paved with good intentions.  And the problem with well-intentioned legislation is that it is still legislation, and nobody is ever really sure how it will work until it encounters an actual dispute before a court.

Any defendant against a ‘hardware’ or ‘software’ patent, as these are defined in the SHIELD Act, will inevitably assert that, should the court find non-infringement, it should make an award of costs under the Act.  This will require the court to consider whether the patent in suit falls within the definitions of ‘computer hardware’ and/or ‘computer software’ appearing in the Act.  It will also need to determine whether the patent-holder did or did not have, a ‘reasonable likelihood of succeeding’.  And even if the court finds that both of these requirements are satisfied, it will then need to determine whether or not to exercise its discretion to award costs, since the Act says that ‘the court may award the recovery of full costs…’

All of these are issues upon which both parties will most likely wish to lead evidence.  For example, is it enough, for the patent-holder to have a ‘reasonable likelihood’ of success, that it have obtained a legal opinion on infringement before commencing infringement proceedings?  Are there any other equitable defences to the award of costs?  Does the conduct of the alleged infringer have any bearing on its entitlement to costs?

It is not difficult to imagine these kinds of questions occupying significant amounts of court and attorney time.  All of which would itself correspond with costs that may or may not be awarded.

WOULD A TRUE TROLL EVEN CARE?

As we pointed out in our previous article (Patent Trolls: As American As Apple Pie?), the canonical ‘patent troll’ business model involves building a portfolio of patents, not unlike a portfolio of stocks or insurance policies.  Some patents in the portfolio will be characterised by potential high returns, but also high risk (e.g. that they will be invalid, or will be found too narrow in scope to be infringed by large prospective licensees).  Others will be more secure, both in terms of validity and in providing steady, though perhaps not spectacular, returns.

Managing such a portfolio is an actuarial exercise.  If the rules change so that the risk and/or average cost associated with litigation increases, then the portfolio managers just adjust their spreadsheets for the new circumstances, and carry on business as usual.  The ‘go/no-go’ decision on litigation in some cases may be different as a result, but the general business model is unchanged.

In short, you cannot deal with any genuine troll problem simply by tinkering with the rules of the game.  You have to change the whole game.

CONCLUSION – A USELESS SHIELD?

As we have previously explained (also in Patent Trolls: As American As Apple Pie?), the normal practice of not awarding costs against a losing party is just one of a raft of factors which make the US system uniquely productive for NPEs.  Others are:

1. the right to a jury trial;
2. a guarantee of minimum damages;
3. possible award of treble damages;
4. strong statutory presumption that an issued patent is valid; and
5. a liberal approach to subject matter.

An attempt to address the costs issue alone is therefore unlikely to have a significant impact.

A further consideration is that it is not possible to hobble the trolls without also harming the very innovators and small technology startups that the legislation is supposed to assist.  The unique characteristics of the US system have developed because of a particular focus on the central role of the inventor in generating innovation, and on small businesses in driving technological and economic growth.

The patent system of most other countries – Australia included – does not have the same emphasis.  We are quite comfortable with this, and would be happy to see greater harmonisation from the United States.  But our experience tells us that this is not something that many US citizens wish to see happening.

There is, therefore, a sting in the tail of the SHIELD Act, once people catch on that it will not only be used against patent trolls.  Not only is it likely to be ineffective for its intended purpose, it may also come back to bite the very people it is intended to protect.

Tags: Law reform, Legislation, Patents and society, Trolls, US