As the Managing Principal of a patent advisory firm that services nearly every segment of the patent industry, I am often asked what keeps me awake at night. Obviously, for anyone engaged in the patent business as of late, there is no shortage of material. But with a newly minted Congress expected to get moving on patent reform, there is one clear winner: presumptive fee shifting.
The most recent patent reform bill to pass the House, which is now expected to receive Senate backing as well, is the Goodlatte Innovation Act (H.R. 3309). Included within the various provisions of H.R. 3309 is the presumption of fee shifting for the losing party in a patent case. Put simply, this means the loser in a patent case pays the winning side’s attorney fees. In the context of a patent case, such costs often total in the millions.
But as someone who operates at the center of the patent market, and is certainly sympathetic to the dangers of frivolous patent litigation, I can only hope that if additional patent reform does pass, the presumptive fee shifting provisions are nowhere to be seen. Although seen by those unfamiliar with the nuances of patents as a way to curtail abuses in the patent system, a presumptive fee shifting provision is not only unnecessary, but also likely to cause of host of unintended consequences.
Here’s why Congress should drop the issue:
- We Don’t Need Presumptive Fee Shifting Because Current Patent Reform is Already Working
Although fee shifting provisions continue to dominate Congressional attempts at patent reform, it is surprising this is so considering how “well” current patent reforms — both legislatively and judicially driven—are working. Between the America Invents Act, which introduced the post-grant proceeding known as Inter Partes Review (a patent killer), and slew of recent Supreme Court decisions in the last year — which have substantially eroded patent rights and values —patent infringement is now a very risky proposition from the standpoint of a plaintiff.
The reality, in light of these developments, is now this: even if you think your patent is being infringed, if you assert it in litigation there is a very good chance that you will lose and/or that your patent will be invalidated. And because patent holders, non-practicing entities (NPEs) and law firms aren’t in the business of losing money and/or having their patents invalidated, they are going to stop filing patent cases on all but the best patents. The enlightening statistics of Lex Machina already prove as much, as patent infringement filings are down 40%.
And let’s not forget that fee shifting reforms in particular aren’t needed because the Supreme Court, in its recent Octane Fitness decision, already made it easier for prevailing parties in a patent litigation to recover attorneys’ fees. In lowering the standard for recovering such fees, the Supreme Court emphasized the need to give district court judges increased discretion when considering such issues. The very same logic should carry the day here. Put simply, the federal judiciary is best positioned to determine, on a case-by-case, basis, whether attorneys’ fees are justifiable. This is particularly so where, as here, the proposed legislation, if mechanistically applied, has the potential to cause severe, unintended consequences. So let’s leave the issue with our federal judiciary.
- Presumptive Fee Shifting Will Require Innovators To Unfairly Risk Financial Ruin As A Prerequisite to Enforcing Their Patent Rights
In a recent article on the ironies of patent reform, I noted a point that is worth repeating here: presumptive fee-shifting provisions will require many innovators to risk financial ruin as a prerequisite to enforcing their intellectual property rights. That is the definition of a broken patent system.
Indeed, we must remember that a large proportion of innovation in America comes not from Google, but from individual inventors, start-ups, and micro to mid-cap technology companies. These entities churn out innovation, and in turn, depend on strong patent rights to not only protect their technologies, but to foster discussions with the technology giants that can bring their innovation to the masses.
Now let’s consider a few scenarios common to those who counsel technology companies. The first is the all too common story of a start-up in discussions with a technology giant interested in the start-up’s technology. The story often goes like this: start-up enters into discussions with the giant, who appears very interested in the technology. Although things seemed promising at first, the giant decides to pass on the opportunity. Then, months or years later, giant introduces a technology remarkably similar to the start-up’s patented technology.
The second scenario is the familiar experience of any technology company whose patents appear to be infringed, to the tunes of many millions of dollars, by an industry giant. The resulting licensing discussions often go something like this:
Innovator: Dear Industry Giant, It appears you may be practicing our patented technology. We don’t want to sue or litigate, as that would be a waste of everyone’s resources, but would like to discuss a reasonable license agreement to the benefit of all.
Industry Giant (knowing all too well the leverage they now possess in light of recent reforms): Dear Innovator, Thanks so much for contacting us. Unfortunately, due to the number of demand letters we receive each week, it is company policy not to enter into licensing discussions unless we are sued.
In either scenario, the passage of a presumptive fee-shifting provision creates an impossible situation for the innovator. Either a) unwilling to accept the risk of losing and paying the other side’s fees, innovator lets the infringement continue and, with no chance of competing or receiving licensing revenues, continues on a downward trajectory toward irrelevance, or b) innovator, in a world where many companies will not negotiate unless sued, pursues what is generally its only option — patent litigation — and risks complete financial ruin as a prerequisite to doing so.
Obviously this is not much of a choice at all. And in a presumptive fee shifting world, we can expect companies to infringe others’ patents with greater impunity than ever. Why? Because these companies know that to all but the mega-financed, the risks of pursuing an infringer will be just too great. The result: continued disincentives for innovators to innovate, or at the very least, share their technology with partners capable of bringing it to the masses. Why would an “Innovation” Act encourage such a result?
- Presumptive Fee Shifting Won’t Accomplish Congress’s Goal of Eliminating NPEs; It Will Only Further Legitimize The Need For NPEs
Although the ironies and unintended consequences of patent reform have been discussed at length in various prior articles, including one of my own, presumptive fee shifting is primed to be yet another notch in the belt of unintended consequences. For instance, instead of disrupting the NPE business model, fee shifting is set to drive NPE business and revenue even further.
Again, perhaps this is not intuitive to lawmakers, but it must be understood. The passage of a fee shifting provision will without doubt deter all but the best-financed innovators from protecting their intellectual property rights. Whether a big or small company, very little licensing is done on friendly terms. It is, and always has been, an adversarial process driven by litigation or the threat of litigation. With the passage of a fee shifting provision, however, this leverage is gone for all but the most well financed innovators. The risk of financial ruin in the event of a loss is just too great.
Instead, such innovators must turn to well-financed NPEs to assist them with licensing their patents. NPEs will be the best game in town and will no doubt raise the terms of their deals to reflect that. And not only will fee shifting provisions drive business towards NPEs, it will further legitimize the NPE business model. Because without question, fee shifting will create tremendous market need for NPEs, as NPEs will be the absolute only hope for innovators intent on protecting their IP. And again, the ironies are apparent. Although this author does not frown on the legitimate practices of NPEs, Congress seems to. Yet, Congress’s attempt to thwart NPEs via fee shifting legislation will go further than ever toward the legitimizing the market need for NPEs.
- Presumptive Fee Shifting Will Encourage Nuisance Settlement Demands
In a final irony, although a pointed goal of patent reform is to end nuisance settlement demands, presumptive fee shifting legislation is geared to increase them. First, patent holders too fearful to file a patent suit will likely avoid district court altogether, instead resorting to the types of letter writing campaigns that have become infamous as of late. Second, many patent holders who do file infringement suits will have every incentive to avoid a final court determination, which could go against them, thus triggering the award of fees. Obviously, the easiest way to accomplish this is to offer to settle for an amount low enough to deter a defendant from fighting all the way toward a decision of the court. Again, the potential is for the reform to cause the harm it was meant to remedy in the first place.
So in the end, we can only hope that before voting on further patent reform, Congress asks whether it’s wise to pass a provision of an “Innovation Act” that is not only unneeded, but likely to create the alleged harms the reform is meant to redress in the first place. The answer is obvious. Let’s hope Congress sees it that way as well.