A Review of the Patent SHIELD Acts and Recent Proposals to Reform Patent Litigation

“Patty Sue Just Won’t Go Away.”  So went a 2002 article in the San Francisco Chronicle, one of a many articles spanning several years about Patricia McColm, a vexatious litigant blacklisted since 1994.  She was the Most Vexatious Pleader of the vexatious litigants.  If she were a patent attorney, frightened examiners would give her a 100% allowance rate without amendments.  If the anti-joinder provisions of the America Invents Act (“AIA”) applied to Patricia McColm, she would have her own clerk’s office.

One draws similarities between the problems presented by firms such as Intellectual Ventures, Acacia, and Lodsys and those presented by Ms. McColm, and a flurry of proposals were recently introduced in Congress.

To start, on August 2, 2012, a “bipartisan” bill was introduced in the House aimed to fix the perceived problems caused by patent trolls, or Non-Practicing Entities (“NPE”), entitled the “Saving High-Tech Innovators from Egregious Legal Disputes Act of 2012,” or the SHIELD Act.  The main point of the bill was to make patent holders pay the fees of those they allege infringe to (1) invalidate the patent or (2) defend an infringement action.[i]

The Perceived Problem

HR 6245 (“SHIELD Act 1”) was introduced by House Democrat Vic Fazio, who contends that the Act is intended to address an ongoing problem.  He said:

“Patent trolls don’t create new technology and they don’t create American jobs [….] 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.”

Co-sponsor Jason Chaffetz was the corporate spokesman for Nu Skin International, Inc. a marketing company that donated to his campaign and was sued for patent infringement in the loathed pirated waters of the Eastern District of Texas.

On February 14, 2013, Obama signaled no love for the NPE, repeating the view that trolls:

“[d]on’t actually produce anything themselves. They’re just trying to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them. Sometimes these things are challenging. Because we also want to make sure that patents are long enough, and that people’s intellectual property is protected. We’ve got to balance that with making sure that they’re not so long that innovation is reduced.”[ii]

Ouch.  It’s one thing to have professors and corporate spokesmen ruminate about the trouble with trolls or report on about the rise of patent suits in the last year (though the “rise” is due to the new, anti-joinder rules of the AIA), but a fireside chat about a horde of trolls invading corporate capitals across the globe sent waves across the tech world, that made Twitter’s declaration of Patifism sound as effective as the Maginot Line.

Couple that with a flurry of headlines about the rise in troll filings, and the claims by Chaffetz, DeFazio, and Schumer that trolls cost companies $29 billion in 2011 alone, relying on a questionable study published by Boston University using data from anti-troll firm RPX, and the mojo might be in the defendant’s, or as Gene Quinn of IPWatchdog.com calls them, “the infringer lobby’s’” corner.

A problem: Is it really?  In 2011, a record 4,142 patent suits were filed, a 22 percent jump from the previous year, according to PricewaterhouseCoopers LLP.  Again, likely due to the anti-joinder reform in the AIA prohibiting roping together unrelated defendants accused of infringing the same patents.  In fact, according to Dennis Crouch of Patentlyo.com, on September 15, 2011, a record 54 cases were filed against 800 defendants.  Now?  It’d be 800 cases, not 54.  Preliminary calculations suggest that trolls, in fact, will be more selective if it must single out alleged infringers in individual filings.  In the words of Sergeant Horvath, “[f]ive men is a juicy opportunity, one man’s a waste of ammo.”  Thus, some smaller infringers, who otherwise would be joined with other infringers in a suit, will be spared simply because of costs in seeking royalties in a one shot, one kill scenario in a battle where the Court of Appeals for the Federal Circuit (“CAFC”) is handing out Kevlar vests.  But for the most part, there simply was an increase in paperwork and filing fees.  Thus, the “reform” was really a boon to the Courts’ budget, which might be just in time in view of the sequester.  Below is a chart showing the volume of patent cases for a 12 month period (from March 31), according to the Administrative Office of U.S. Courts:

SHIELD Act 1

Nothing in the bill required that the patentee file an infringement action, but only allege infringement sufficiently to satisfy the “case or controversy” requirement of 28 U.S.C. § 2201(a) and Federal Circuit law.[iii]  This bill will emphasize the importance of Declaratory Judgment jurisdiction in the patent context.  The CAFC does not provide a clearly set hurdle to overcome, but it’s near the ankles.  For example, last year the CAFC ruled that a phone conversation between a 3M lawyer and an Avery lawyer, where it’s alleged that 3M’s product “may infringe” Avery’s patent and that Avery would send claim charts (but never did), the CAFC ruled that the conversation was sufficient to create an actual case or controversy.[iv]

Thus, one of the immediate effects of this bill would be to chill any communications between a patentee and others that might infringe.  “Fine by me” might say those members steering titanic members of the “infringer’s lobby.”  Greater burden will be placed on the small business or individual inventor who might be genuinely interested in discussing whether a license, is in fact, warranted.  On the flip side, if you’re a troll that paints with a broad stroke, perhaps this provision will make you hesitate prior to sending out infringement letters, and outfits that send thousands of letters, should be paying close attention.  Since this is a one-sided fee shift, greater emphasis will also be placed in writing enforceable NDA’s, and forum selection agreements.

That is, unless your invention relates to anything other than “computer hardware” or “software.”

The Scope: What is a Computer?

Somewhat comically, SHIELD Act 1 borrowed the definition of “computer” from the computer fraud criminal statute codified in 18 USC 1030(e):

Where Congress uses the same form of statutory language in different statutes having the same general purpose, courts presume that Congress intended the same interpretation to apply in both instances.[v]

Since the two provisions clearly do not have the same purpose, the fact that the drafters of the bill used the same language from Title 18 will likely not be instructive.[vi]

With little help from Title 35 or similar statutes, the definition of “computer” will be left for courts to interpret, and in any event, the bill’s insertion of subsection (B) suggests that “computer” is intended to include anything.  In interpreting the comparatively narrower use of “computer” in Title 18, the Eighth Circuit aptly quoted Steve Wozniak in observing that “everything has a computer in it nowadays.”[vii]  The Kramer Court was weighing in on the definition of “computer” when ruling that U.S. Sentencing Guideline enhancements for use of a computer included a Motorola Motorazr V3, or, as the Deputy District Attorney called it, a “computer” to call and text an underage girl for an illicit rendezvous.

In siding with the prosecutor, the Court noted that the language in Title 18 is exceedingly broad and likely included microchips and electronic storage devices, coffeemakers, microwave ovens, watches, telephones, children’s toys, MP3 players, refrigerators, heating and air-conditioning units, radios, alarm clocks, televisions, and DVD players, in addition to more traditional computers like laptops or desktop computers.  Additionally, each time an electronic processor performs any task—from powering on, to receiving keypad input, to displaying information—it performs logical, arithmetic, or storage functions, which are the essence of its operation.[viii]

Ideally if statutory language is to be borrowed, it would be promoting similar policy such that the patent bar is not citing criminal authority aimed at modern Humbert Humberts.

The bill also encompasses software patents, which is defined as “any process that could be implemented in a computer regardless of whether a computer is specifically mentioned in the patent,” including any computer system programmed to perform that process.  Thus:

SHIELD Act 1 only provided for fee shifting in cases where the validity of the “patent” is challenged.  If a patent has 30 claims asserted, but only the validity of only 15 claims is challenged, is the “patent” challenged, triggering 285A?  If a patentee asserts some claims against multiple products, resulting in a mixed result of validity and infringement, who is the prevailing party?

The bill also apparently excludes a finding of unenforceability as a trigger of 285A, leading to the perverse result where a patentee who is shown by clear and convincing evidence to have defrauded the patent office is insulated from fee shifting (at least under 285A), but if invalidity is shown – whether by a preponderance during re-exam or clear and convincing evidence in Court, fee shifting is possible.  In fact the CAFC notes approvingly that fees might be justified as a matter of policy where fraudulent patents are invalidated.[ix]

1. How does this change the law?

Section 285 already permits a court to shift reasonable attorneys’ fees to the prevailing party in “exceptional cases.”[x]

The CAFC refused to extend 285 to cover a patentee’s bad faith conduct toward an accused infringer prior to litigation.[xi]  The Senate history noted that fee shifting was not expected to be an ordinary thing in patent suits.[xii]  District Courts shift fees only to prevent “a gross injustice” to the accused infringer,[xiii] such as where a patentee procured its patent or litigated in bad faith.[xiv]

What makes a case “exceptional” is a question of fact.  Absent litigation misconduct or bad faith in procuring the patent, sanctions under 285 may be imposed on the patentee where (1) the litigation is brought in subjective bad faith, and (2) the litigation is objectively baseless.[xv]

Therein is a notable change: Section 285 requires that the movant show a subjective and objectively baseless case was brought.  SHIELD Act 1 and Rule 11 in most circuits require only the objectively baseless showing.

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Part 2 addresses the newly revised SHIELD Act introduced earlier this year, as well as other proposals and suggestions.