SHIELD Act Part 2 and Other Proposals to Combat Trolls

For more on earlier proposals to address patent trolls see A Review of the SHIELD Act.

The latest incarnation of the SHIELD Act was introduced on February 27, 2013, and changes direction as if the first iteration were waived off in disgust before it could even lower its gears.  SHIELD Act 2, scuttles the “reasonable likelihood of succeeding” idea floated and introduces a new tool aimed at walling off the troll: a bond requirement.  If the plaintiff is not an original inventor or assignee, did not make a substantial investment in practicing the invention, or is not a university, that troll must post a bond.

The following illustrates the two iterations (SHIELD Act 1 Italicized):

Like SHIELD Act 1, SHIELD Act 2 does not require the troll to fire the first shot.  Interestingly, under SHIELD Act 2, Facebook would have had to post a bond in its battle against Yahoo! and theoretically an involuntary but necessary party joined as a plaintiff could be required to post bond.

SHIELD Act 2 also does not authorize fee shifting in the event inequitable conduct is proven.  If a troll that loses a patent case is on the hook for fees, an original inventor or assignee who is guilty of inequitable conduct should also be.

The Troll’s Response

Push for NDAs: The SHIELD Acts would increase the importance of confidentiality agreements and Non-Disclosure Agreements in the context of license negotiations.  The CAFC noted that Fed. Rules of Evidence 408 is insufficient, and written agreements are advisable “[t]o avoid the risk of declaratory judgment.”[i]

The CAFC held that ordinary cease and desist letters are not sufficient to subject the patentee to specific jurisdiction in the forum state.[ii]  Only enforcement or defense efforts related to the patent rather than the patentee’s own commercialization efforts are to be considered for establishing specific personal jurisdiction in a declaratory judgment action against the patentee.  It is unclear whether the negotiation and execution of an NDA would be “enforcement or defense” or “commercialization.”  It is also unclear who decides.  While the Federal Circuit adopted the role of determining whether an actual case or controversy exists so that a district court may entertain an action for a declaratory judgment of non-infringement and/or invalidity based on Federal Circuit law,”[iii] it nonetheless applies state law in interpreting contracts, such as NDA’s.   This will lead to a fragmentation of the standard, and will highlight the importance of forum shopping even prior to considering litigation.

Section 337 Investigations:  Similar to many provisions of the AIA, neither SHIELD Act appears to apply to the International Trade Commission, an investigative body, not a “court” overseeing “civil actions” that may or shall award attorneys’ fees under the SHIELD Acts.  While the ITC does not award damages, if SHIELD Act 2 becomes law, avoiding bondage will be a compelling argument to assert patents before the ITC to seek the exclusion order at the same litigation costs to the defendant.

“Patent friendly” courts will also be given a new tool to attract patent cases.  Indeed, the Eastern District of Texas has already shown a willingness to consolidate patent cases scattered by the AIA’s anti-joinder provisions.  While the AIA requires a District Court to rule on a motion for a bond within 120 days (285(a)(2), it does not require a specific deadline upon which a bond must be posted.  If the Court requires the bond on the eve of trial, the bond does little more than raise the stakes in a wasteful game of chicken.

Schumer’s Proposed Expansion of Post-Grant Review

On May 6, 2013, Senator Chuck Schumer introduced S.866, which would remove the sunset provision of the post-grant review provision of the America Invents Act, and would expand it to include all business method patents.  Large technology companies like IBM, Microsoft, Yahoo! and Google are major holders of business method patents, although in a remarkable display of ambivalence, IBM opposed them in a Supreme Court amicus brief, and time will tell what effect, if any, the new Post-Grant Review process will have.

Cornyn’s Patent Abuse Reduction Act of 2013

On May 22, 2013, Senator Cornyn introduced the Patent Abuse Reduction Act of 2013, (S.1013) which is not limited only to fee shifting, unlike the SHIELD Acts, but also addresses other procedural issues lamented by defendants in patent cases, such as the Delphic Form 18.

Senator Cornyn’s bill heightens the pleading requirements essentially to require disclosure of information typically found in claim charts after pleadings are at issue, such as:

• Identification of each patent, claim, and accused instrumentality, including if known, the name or model number;
• For each accused instrumentality, where each element of each asserted claim identified is found within the accused instrumentality;
• Whether such element is infringed literally or under the doctrine of equivalents; and
• How the terms in each asserted claim correspond to the functionality of the accused instrumentality.

The bill also requires factual pleadings for allegations of indirect infringement, merely codifying what the CAFC already requires for indirect infringement theories, which, unlike direct infringement, includes an element of intent.

A party alleging infringement would also be required to provide more “behind the scenes” information, such as prior licenses, ownership, exclusive licensees, the patentee’s principal business, and any other parties that have an interest in the outcome.

No privateering: The bill also appears to be targeting the privateering trend by requiring that a court grant a defendant’s motion to have any interested party (e.g. by sharing proceeds) joined.  Thus, if large firms such as Microsoft want to litigate its competition to death, it must now participate in the dirty work.

Limited Discovery:  The bill also limits discovery to issues of claim construction prior to the Markman hearing, defines what is considered “core discovery” (i.e., clearly relevant issues), and shifts fees and costs to the requesting party for what is termed “additional discovery.”

Fee shifting: Finally, the bill shifts fees to the prevailing party unless the position and conduct of the loser were objectively reasonable and substantially justified.  If the plaintiff is unable to pay, the court may make the award recoverable against any interested party, another jab at privateering.

Other Proposals

Another proposal brought up from time to time is a federal vexatious litigant statute.  On June 15, 2006 hearing before the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property, Congressman Schiff broached California’s vexatious litigant statute as a possible model tool against Trolls.  Several states have vexatious litigant statutes.  In California, a vexatious litigant is any unrepresented party that:

1. Within the last 7 years, brought and lost five litigations or unjustifiably drawn out at least two years without having been brought to trial or hearing;
2. After losing, repeatedly relitigates or attempts to relitigate the same issues;
3. Repeatedly files unmeritorious motions, pleadings, or other papers, conducts unnecessary discovery, or engages in other tactics that are frivolous or solely intended to cause unnecessary delay; or
4. Has previously been declared to be a vexatious litigant by any state or federal court of record in any action or proceeding based upon the same or substantially similar facts, transaction, or occurrence.

Like the SHIELD Act 2, California’s vexatious litigant statute provides that the Court shall award that the plaintiff furnish a security upon determination that he is vexatious.

Would an outfit like Intellectual Ventures or Mosaid be a vexatious litigant?  The same subcommittee heard on March 14, 2013 from six witnesses that the troll, as a business model, files costly frivolous suits based on shaky patents.  For example, Cisco’s General Counsel Mark Chandler testified that “low quality” patents are asserted, and that his company, which has 10,000 patents of its own, spends $50 million on outside attorneys’ fees fighting trolls.

J.C. Penny’s General Counsel Janet Dhillon testified that “the core of the problem is that patent trolls attempt to extend the reach of the issued patent far beyond the metes and bounds of what was allowed by the PTO.”

Based on a study by Pricewaterhousecoopers LLP, the success rate of trolls for 2006-2011 is a dismal 23.6%.  According to another study, that success rate drops to around 10% for “most litigated patents” (over 8 times).  A PACER search of Intellectual Ventures (ignoring the incestuous IV entities) reveals over 20 patent suits since 2009 around the country.  Based on either study, if IV only made par, it would qualify as a vexatious litigant, losing around 15 of its 20 suits.  Of course, a vexatious litigant statute aimed at trolls must be tailored differently than the one that snared Patricia McColm, dealing with the corporate shell game, and determining who the catalyst is to corrupt the troll’s blood, as it were.

1. Call the State Militia: Vermont’s May 2013 Anti-Troll Legislation

A few pages after new laws addressing propane storage tanks, the Vermont legislature enacted a statute addressing the bad faith assertion of patent infringement.  The legislature is refreshingly open about its intent to attract and nurture small and medium sized technology businesses by proscribing the bad faith assertion of patent infringement.  The Court should consider the following factors in assessing whether there is bad faith:

• A patentee sends a demand letter (defined as a communication accusing the target of patent infringement) that does not contain a patent number, contact information for the patentees, or specifics as to products covered by the patent;
• A patentee’s failure to provide the above information upon request by the target;
• A patentee’s demand for a license or response within a short time;
• An unreasonably valued license offer
• A claim of infringement that “is deceptive,” or that the patentee knew or should have known was meritless;
• Prior suits on a similar claim of infringement;
• Whether the patentee makes a substantial investment in the use of the patent or in the production or sale of a product covered by the patent;
• Whether the patentee is the original inventor, joint inventor, original assignee, or a university;
• Whether the patentee has demonstrated good faith business practices in previous enforcement or successfully enforced the patent through litigation; and
• Any other factor the court finds relevant.

Like SHIELD Act 2, the Vermont statute provides that the court shall order the patentee to post a bond upon a finding that a target has shown a reasonable likelihood that a patentee has made a bad faith assertion of infringement, up to $250,000.  The legislation also creates a cause of action a target can bring in the state superior court with damages set at the greater of $50,000 or three times the damages, costs, and fees.  It will be up to the Courts to harmonize such state measures with Vermont’s (and other states’) Anti-SLAPP laws.

Interestingly, the legislation authorizes enforcement by the Vermont Attorney General to enforce the law by investigations and litigation, which the AG is doing even prior to the effective date of the anti-troll legislation.  According to the AG’s website, it has already filed a “first of its kind” complaint on May 22.  Citing the RPX/Boston University’s $29 billion “cost” to the U.S. economy, the AG notes that Governor Shumlin was expected to sign Vermont’s anti-troll legislation the same day (and presumably, the propane tank legislation).

But perhaps one could find help in the rusty old tool shed, instead of trying to build a new legislative bulwark against the horde.

2. Old Hat

Under the All Writs Act, a District Court already has discretion to be the bouncer or require a cover charge in the form of a bond.  There are plenty of trial and appellate court cases addressing vexatious litigants.  In the 9^th Circuit, a court may issue an order requiring a litigant to seek permission prior to filing future suits.[iv]  A pre-filing review order may be imposed when four conditions are met:

1. plaintiff is given adequate notice to oppose a restrictive pre-filing order before it is entered;
2. the court provides an adequate record for review, including a listing of all the cases and motions that led the Court to conclude that a vexatious litigant order was needed;
3. the Court makes substantive findings as to the frivolous or harassing nature of the litigant’s actions; and
4. the Court order is narrowly tailored.

3. Rule 11

Perhaps Rule 11 will be dusted off by the District Courts after the CAFC issued a precedential opinion reversing the Hon. Leonard Davis’ denial of Rule 11 sanctions.  On Pearl Harbor day, 2012, the CAFC found that Judge Davis of the Eastern District of Texas abused his discretion when he denied Rule 11 sanctions based on the patentee’s frivolous claim construction arguments.

Rule 11 expressly requires that an attorney presenting a paper before the court certify that he has performed “an inquiry reasonable under the circumstances” such that he can verify that:

1. It is not being presented for any improper purpose, such as to harass, cause unnecessary delay, or needlessly increase the cost of litigation;
2. The claims . . . are warranted by existing law or by a nonfrivolous argument for extending, modifying, or reversing existing law; and
3. The factual contentions have evidentiary support or, . . . will likely have evidentiary support after a reasonable opportunity for further investigation or discovery.

As the 1993 advisory committee note explains, this rule “requires litigants to ‘stop-and think’ before initially making legal or factual contentions.”[v]

4. Patent Small Claims Court

On December 18, 2012, the USPTO requested comments on a proposed Patent Small Claims Court.   If it is true that the costs to defend a patent case is over $1 million, and that the troll settles cases for their nuisance value, a small claims court seems to offer a solution on many levels.  There are many different approaches, but the following are my proposals:

• Patent Small Claims Court must be compulsory (if Constitutional).  Whatever the maximum threshold is, if an amount in dispute is less, the case must be brought (or reclassified) as a small claims patent case.  A procedure should be implemented whereby a defendant can submit evidence – under penalty of perjury – what the royalty base is.  A troll should also submit prior license agreements (which are discoverable anyway) and other types of evidence as to a reasonable royalty (which is the usual damages measure), and a hearing and order would follow.
• Limit Discovery.  Perhaps the rule of 35 in California’s Limited Jurisdiction: pick your combination of discovery, but only up to 35 queries.  Make them count.  Add to that some Form Interrogatories to deal with the more mundane issues and Requests for Admissions that shall result in fee shifting for any denials later proven to be true.
• Limit Lawyers.  The clients must attend hearings alongside the lawyers.  No exceptions.  This will facilitate settlement and allow the parties to shake hands.
• Savvy Magistrates.  Having a tech savvy judge will dispense with technology tutorials and help focus on the issues.  The use of experts might also be less costly or dispensed with entirely.
• Offers to compromise.  If a party rejects an offer to compromise and does worse later, fees should shift to that party, similar to California “998” offers.

Which Way Now?

It is arguable that there is a systemic failure to deal with Patty Sue, and a solution will be found on many fronts, not just from Congressional tinkering with Title 35.  The Courts and Congress share the responsibility to reign in frivolous suits while incentivizing the small inventor to disclose an invention.  Fingers sometimes point to the examiners at the PTO, and perhaps the recent CAFC opinion assailing many software patents will open yet another front in the battle against trolls.  In the meantime, the multi-front skirmishes will continue.