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Patent Reform: Will Fee-Shifting Solve the Patent Troll Problem?


Written by Gene Quinn (left), Founder of IPWatchdog, Inc.
Steve Brachmann (right), Freelance Journalist
Posted: December 18, 2013 @ 7:45 am

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In the American legal system, the popular notion is that the courts should be equitable and fair to all parties, both plaintiffs and defendants, regardless of the issue at stake. This is reflected in our system’s handling of lawsuit legal fees, which typically keeps the costs of engaging in litigation with the party who contracted those costs during the legal process. Only in the most special of circumstances does the losing litigant have to pay the attorneys fees of the prevailing party in the United States. This has long been believed to be the best way to make sure that even those of modest means have meaningful access to seek redress in Court for wrongs suffered.

The American concept that each party should ordinarily pay for legal representation regardless of whether they win or lose has developed in sharp and direct contrast to legal fee rules in other countries. The two contrasting regimes are named for the two countries that most clearly represent these differing views: the United States and England. In recent days, the United States Congress, urged on by certain high-tech corporations, has considered legislation that would create new rules regarding fee shifting for patent lawsuits as a way to discourage so-called “patent trolls” from engaging in litigation. Unfortunately, the legislative proposals currently being considered are not at all narrowly tailored to address the patent troll problem, even assuming there is a patent troll problem, which the objectively available data calls into question in the first place.

Certainly, there is abusive litigation that occurs in the patent world. This abusive litigation does not, however, signal a problem with the patent system. Rather, the abusive litigation tactics leverage judicial inefficiencies to force litigants into paying exceptionally paltry sums rather than pay to fight a patent litigation that on average could cost $2 million to see through to the end. Those sending demand letters for $500 or $1,000 to small entities should be stopped. Those that sue large entities without care of whether there is infringement and settle for $25,000 or $35,000 should be stopped.

The question that should be asked is whether this impending legislation will actually protect companies against frivolous patent lawsuits, or is there a chance that these new regulations may simply tip the playing field too far in favor of large technological companies, ultimately smothering the innovation that largely comes from smaller firms and universities? A compelling argument can be made that the proposed legislative changes will do nothing to prevent frivolous patent lawsuits, but will significantly deter independent inventors, small businesses, start-ups and Universities from seeking redress for infringement. That will weaken the patent grant, make patents less valuable and very well could lead to the rise of “super patent trolls.”

 

American Rule vs. British Rule

Around the world, there are two major rules that pertain to who is legally liable for paying attorney’s fees at the conclusion of a trial. These are known as the “American rule” and the “British rule.” In America, we’re used to a legal system for that requires each party to pay for their own attorney, regardless of the lawsuit’s victor. In England, fee-shifting rules apply that require the losing party to take on the attorney’s fees of both parties.

For an example, let’s assume that a plaintiff has brought a lawsuit against a defending party for medical malpractice, breach of contract or any other tort (i.e., legal wrongdoing). In America, the plaintiff would only be responsible for covering his or her own attorney’s fees at the conclusion of the trial. In Britain, if the plaintiff loses the case, that party must pay their own fees as well as the fees of the defending party. If the plaintiff wins the case but loses on an appeal, not only is the lawsuit award overturned, but they now owe the attorney’s fees for both parties.

The philosophy behind the British rule is that the possibility of shifting fees will cause a plaintiff to think twice before filing a lawsuit and possibly chill any potential litigation that may be unnecessary.  Potentially open ended liability influences behavior, as specifically desired by the British Rule. In the United States, however, we historically do not want fear of seeking redress to influence behavior. While the British rule may make those with weak cases think twice, the British rule also makes those with very strong cases think twice, which has not been acceptable from a philosophical standpoint in the U.S. Indeed, the potential open ended liability presented by fee-shifting can cause someone with a very strong case who has suffered egregious wrongdoing to decide to simply not pursue redress in Court. Thus, the party with the greatest resources can prevail, even if they are completely at fault, without ever having to justify themselves in Court.

Is that what we want for our patent system? Sadly, the question about whether this is what we want for our patent system has never been asked or addressed by Congress. The debate started in earnest and moved at extraordinary speed in Congress. The question about whether this is a good idea was never raised. The only question seemed to be about the specific details associated with how the U.S. patent litigation system implements the British rule.

 

H.R. 3309

With the passage of H.R. 3309, dubbed the “Innovation Act,” a shift to the British rule for patent litigation seems very likely in the near future, particularly since the Senate has rushed to hold the first hearing on the companion Senate bill prior to the end of 2013. See House Passes Innovation Act, Battle Goes to Senate.

Introduced to the House of Representatives in late October of this year, the Innovation Act creates a system of fee shifting for cases involving patent litigation that shifts the burden of attorney’s fees to the losing party. President Obama, a big supporter of the causes of big-tech and the companies seeking to weaken the patent system, will undoubtedly sign the legislation if the Senate passes patent reform. Thus, the last chance to fight this round of patent reform is in the Senat. If the Senate passes patent reform the American legal system will be adopting a version of the British rule for patent lawsuits.

There are certain instances under this law that provide an exception to this rule. Fee-shifting would not take place in cases where the losing party was acting in a way that was reasonably justified by law and fact or special circumstances, such as extreme financial hardship, which may make the financial damages unjust. But this is a substantial departure from current law, which would only award fees in patent cases where there is some kind of truly egregious behavior on the part of one of the parties. Make no mistake, such a large departure that strikes at the very heart of the incentive to enforce patent rights will have a ripple effect. Likely a large fipple effect.

What Happens Now?

Of course, the Innovation Act won’t become the law of the land unless it is passed by the U.S. Senate. However, the speed at which this law was approved by the House of Representatives points to some fairly strong lobbying efforts supporting this bill. In fact, sources have told us that Google alone has spent $12 million lobbying Congress on this round of patent reform, which is a staggering amount given the abbreviated time frame.

Will these regulations make it less likely that a patent troll might take on a frivolous lawsuit? Perhaps, but it may also result in a higher win percentage for plaintiffs who only take sure bets to court, and those plaintiffs will be in line to obtain payment of their attorneys fees as well. Also, there’s nothing to prevent the most nefarious actors, the true trolls who only intend to reap money from patents regardless of infringement, from deciding to go bankrupt and not pay fees if they lose. Still others who are extremely well funded are likely be to able to purchase patents for pennies on the dollar, building enormous portfolios that will make the Intellectual Ventures portfolio look small in comparison. Will big-tech fight against such well funded super patent trolls? If the don’t then what good does fee-shifting do? You have to win to obtain the fees, so there is a real possibility that this legislation will not only fail to cure the problem but instead make it worse while destroying the smaller players who are the real innovators.

Many leading experts in this field of law feel that this change to the British rule for patent litigation is unnecessary and will cause more harm than good. An online forum on the topic published by the debate website NewTalk includes dissenting opinions from many distinguished legal scholars, including Samuel Issacharoff, Reiss Professor of Constitutional Law at the New York University School of Law, and E. Donald Elliott, law professor at Yale Law School. Elliott particularly raises a very good point about the actual effects of the law: “Plaintiff’s lawyers are the ones who actually decide whether or not to bring claims. So a rule that creates economic incentives that affect the client but not the lawyer will not get at the actual decision-maker in that situation.”

Many top officials within the judicial system oppose the measure, and a handful of Congressional representatives, include a small group within the Judiciary Committee that approved the measure. In support of the bill are the White House, most members of Congress and an assortment of large corporations in the technology sector.

The protections extended to brick-and-mortar businesses that merely use the technologies provided from outside vendors makes the Innovation Act as a whole a very popular bill for Main Street America. But will the bill solve the asserted problem and stem the ever-growing tide of lawsuits from non-producing, bad acting patent trolls? It would have been nice to have an intelligent discussion about that and related questions. Instead, big-tech apparently will get their way.

So who are the big winners? The Chinese. But that is another topic for another day.


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Posted in: Congress, Gene Quinn, Guest Contributors, IP News, IPWatchdog.com Articles, Patent Litigation, Patent Reform, Patent Troll Basics, Patent Trolls, Steve Brachmann

About the Authors

is a US Patent Attorney, law professor and the founder of IPWatchdog.com. He is also a principal lecturer in the top patent bar review course in the nation, which helps aspiring patent attorneys and patent agents prepare themselves to pass the patent bar exam. Gene started the widely popular intellectual property website IPWatchdog.com in 1999, and since that time the site has had many millions of unique visitors. Gene has been quoted in the Wall Street Journal, the New York Times, the LA Times, USA Today, CNN Money, NPR and various other newspapers and magazines worldwide. He represents individuals, small businesses and start-up corporations. As an electrical engineer with a computer engineering focus his specialty is electronic and computer devices, Internet applications, software and business methods.


Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than five years. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. He also provides website copy and documents for various business clients.




2 comments
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  1. A recent paper studying patent litigation in the U.K.:

    http://www.lse.ac.uk/collections/law/wps/WPS2012-13_Mcdonagh.pdf

    suggests that there are two reasons why PAE activity has been relatively limited in the U.K. to less than 6% of all patent cases. “Firstly, the majority of patent cases which reach a judgment in the UK result in a ruling invalidating the patent. Secondly, the costs regime in the legal system of England and Wales requires that the losing party pay the costs of the other side. In other words, even if its own costs are kept low, a PAE which loses a case may have to spend a substantial amount of money in order to cover the costs of the other side.”

    However, the corporate structure of some PAEs in the U.S. that set up subsidiary companies with no assets (other than the patent being asserted) and no revenues precludes fee shifting or sanctions (against the plaintiff, not from counsel) from having any effect. Even the “interested party” provisions of the Innovation Act passed in the House won’t be sufficient because PAEs may simply set up foreign subsidiaries owning the U.S. shell companies thereby creating a jurisdictional corporate veil. No court will be able to force a foreign entity to disclose its owners or parties with a financial interest.

    The core issue is weak patents or weak cases that have little or no merit. It’s a problem with litigation abuse and is not unique to patent trolls or patent litigation itself.

  2. What about making patent infringement a criminal act?- punishable by imprisonment, like copyright infringement.

    http://www.justice.gov/usao/eousa/foia_reading_room/usam/title9/crm01847.htm