I’ve spoken on several panels on patent reform in the last few months. My feelings about it are mixed: I favor rules that decrease the cost of litigation (like limited discovery stays until claim construction), I think that some rules are well-meaning but ridiculous and costly (like putting a claim chart into a complaint), some seem to make sense but far more complicated than most people realize (end-user stays), and some are probably a good idea but won’t change much (like the transparency rules).
But my overarching comment throughout is that we should be very careful about discarding distinctly American institutions, like access to justice and independent inventorship, in attempts to implement solutions that are not directly tied to strong causal empirical evidence.
This brings me to the PATENT Act reform proposal for fee shifting. Everyone knows that it proposes a presumption of loser pays fee shifting. What few have focused on is a provision that allows “reach through” that pierces the corporate veil for those entities that must pay attorneys’ fees. This, to me, is a problem, because it would discard a longstanding American rule: limited liability for corporations. This important organizing rule is longstanding and long debated. I don’t mean to argue that it should never fall; I only wonder whether this an area where we should brazenly discard it.
I don’t want to minimize the concern that leads to the proposal. The protection offered limited liability companies is a real problem for those who want to collect against them. But it’s a problem for every creditor who wants to collect against every limited liability company. I haven’t seen any real data about how often fee awards go unpaid, so I don’t know just how much of a problem unpaid fees are in patent law. Of course, if there is more fee shifting, there will be more collection problems. Further, I’m not wholly opposed to fee shifting. I think there can be some benefit to reciprocal fee shifting, and I also think that the “objectively unreasonable” standard is better than a presumption.
Even so, the PATENT Act and all other veil-piercing fee proposals are not about under-capitalized shell companies — not really, anyway. If it were, we would see many more proposals to pierce the veil against defendants in all industries: construction, transportation, etc. Instead, this proposal is only floated in one direction: against patent plaintiffs that do not practice a patent, and not any other kind of patent plaintiff or the patent defendant. One-way veil piercing (against the plaintiff, no less) stands for the proposition that we hate patent enforcement by non-practicing entities so much that we’re just going to throw out all the rules that apply to everyone else, no matter how bad an actor all those other people are. Only patent plaintiffs are so despicable that they are no longer entitled to corporate status. And this is not just about patent acquisition companies – this covers inventor operated companies, research companies and think tanks, failed startups, and anyone else who doesn’t make a product.
Indeed, if we are so worried about shells, why not require all patent plaintiffs to show that they have funds, rather than just those that are NPEs? Surely underfunded startups can file patent suits. And why not make all defendants guarantee they can pay damages or else we’ll pierce the veil? We hate shells and undercapitalized parties, right? The answer, of course, is that we only hate a shell this much if it is of a particular type, and that’s a non-practicing patent plaintiff. It’s not even anti-troll, really, because under the proposal, anyone that doesn’t make a product is on the hook, regardless of whether the plaintiff does the things that one would associate with a patent troll (whatever that definition is).
The reach of the veil piercing is also unprecedented. Under proposed 285(c)(1)(G)(2)(A), an interested party is anyone with an interest, including employees. The exception in (G)(2)(C) makes this clear, because it excludes professors that assign all rights to a university and only get a royalty. This implies that an inventor who assigns to other companies that make no products and stand to make a royalty is an interested party. Think about that – we are no longer considering charging just investors or shell company owners with attorneys’ fees. Instead, the proposal would pierce the veil all the way down to the inventor that assigned the patent to his or her employer. If this broad a reading seems unreasonable, consider the recent manager’s amendment, which clarifies to exclude lenders, because the language is so broad it might have included lenders before.
My concern about discarding old rules only when it suits is not limited to plaintiffs. Only a few short years ago, record companies sued a venture capital firm for investing in copyright defendant Napster, a company that had, at best, a crapshoot of winning its case. That investor suit was also unwarranted for the same reasons that this proposal is: targeted veil piercing to support substantive policy goals is not a great idea — the bell tolls for thee.
In another blog post, I highlight the implications of this proposal: more patents will obtained for a flat fee rather than royalties, stock, or other incentive based reward. This is the exact opposite of what we want patent policy to do, and yet those that complain too little of rewards of invention go back to the inventors seem to be sanguine about the veil piercing proposal.
The message is clear: If you plan to make money on patent enforcement, whether you are an inventor, shareholder, lender, employee, or otherwise, then there is no corporate veil for you. You are simply not entitled to the protections we give every other limited liability company, no matter how scummy they are, no matter how many people they rip off, no matter how putrid their business model. You are worse; for you, we make an exception, we make it non-mutually, and we only make it if you are small.
This last point bears special note: this proposal not only discards the corporate veil, it does so in an anti-competitive way. It will surely make it difficult to enter the market. Indeed, BIO has now come out in favor of this provision because it “deters shells.” As Ted Sichelman has noted, fee shifting likely just means consolidation to larger enforcement companies that can cover fees.
As a result, almost all of the pushback against patent reform has been focused on whether or not innovation will be affected. While I have views on this, I don’t know the outcome. But I do know this: almost no one has mentioned veil piercing because the big players don’t have to worry about it. But my research, along with the research of others, shows that there are many small players that obtain patents and will be affected.