SHIELD Act: a good next step in limiting patent assertion entity

May 2013 | EXPERT BRIEFING | INTELLECTUAL PROPERTY

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The SHIELD Act – Saving High-Tech Innovators from Egregious Legal Disputes — is back. The SHIELD Act was originally introduced in the last Congress. It would have awarded costs, including reasonable attorney’s fees, to a prevailing defendant when, upon completion of the case, a Court held that the patentholder’s case had not had a reasonable likelihood of success. Many raised concerns about whether the original SHIELD Act’s reasonableness standard would be significantly different than the § 285 exceptional case standard, pursuant to which a winning party may be awarded its attorney’s fees when a case is deemed ‘exceptional’. There were also concerns that the original SHIELD Act would not change a patent assertion entity’s (PAE) calculus in filing or prosecuting the case because defendants had to take the case to resolution to find out whether fees would be awarded. And finally, the SHIELD Act was both under and overbroad because it only applied to computer hardware and software technologies without separating out competitor cases in those technology sectors.

Earlier this year, Congressman DeFazio (R-Oregon) introduced a new version of the SHIELD Act. This new version addresses many of the issues with the original version. The current SHIELD Act would award costs, including reasonable attorney’s fees, to a prevailing party that had asserted noninfringement and/or invalidity defences in a patent case, if the Court holds that the patentholder does not meet any of the criteria that roughly define PAEs. Those criteria are: (i) the plaintiff is the inventor of the asserted patents, a joint inventor of the asserted patents or the original assignee of the patents; (ii) the plaintiff provides “documentation ... of substantial investment made by such party in the exploitation of the patent through production or sale of an item covered by the patent”; or (iii) the plaintiff is an institution of higher education (as defined by the Higher Education Act) or a technology transfer organisation associated with one or more institutions of higher education.

These three factors are a rough cut at identifying PAEs. Of course, there is a significant question as to how courts will interpret the ‘substantial investment’ prong. For example, does the investment have to result in the making or sale of a product, or is it enough that there was significant investment, even if the investment did not come to fruition? Additionally, there is a question as to how substantial is defined. Is it substantial relative to the entity or substantial on some objective standard? And while allowing suits by the original inventor is defensible, there is some concern that this limitation is overbroad. For example, an original inventor could be funded behind the scenes by a troll and side-step the SHIELD Act.

Furthermore, there is some concern that 75 percent of PAEs will be excluded from the SHIELD Act based upon its three factors. Approximately 75 percent of PAEs assert only patents originally assigned to them (60 percent) or a mix (15 percent). That means that as many as 75 percent of PAEs could avoid the reach of the SHIELD Act. Creating a loser pays system for one of four PAEs would significantly limit the impact of the SHIELD Act.

The current version of the SHIELD Act also makes an important timing change. In order to get a fees award, the accused infringer will be required to file a motion seeking a finding that the patentholder does not meet any of the three conditions above. If an accused infringer files that motion before the deadline for serving its initial disclosures, the Court must stay discovery except for that related to the motion until the Court rules upon whether the patentee meets any of the conditions. If the accused infringer files its motion after the initial disclosures deadline, the Court is free to defer ruling until after a final judgment is entered in the case. But the SHIELD Act gives accused infringers the ability to determine at the outset of the case whether they will get an award of its reasonable attorney’s fees when they prevail.

That would be a critical change in the law. Today, as an accused infringer evaluates its defences and strategy throughout a case, it can weigh its opportunity to get its fees paid at the back end of the case if it prevails and then if the Court finds the case exceptional. But knowing at the outset of a case that it will gets its attorney’s fees if it prevails is a much more tangible possibility which will likely factor heavily into the analysis for many accused infringers. And it may cause PAEs, at least those covered by the SHIELD Act, who know they do not fit any of the three conditions, to never file a case that is weak or even closer to the line.

Finally, where a Court finds that the PAE does not meet any of the three criteria, the PAE must secure a bond sufficient to cover the ‘full costs’. That could be a several million dollar bond. While the PAE would only be required to put up a portion of the amount of the bond to secure it, it still creates an upfront cost that PAEs have not had before which levels the playing field at least to a degree. And even if the actual cash cost of the bond is not prohibitive, it will crystallise the reality of the potential fees award for the PAE. And that alone may change a PAE’s calculus.

So, while there are questions as to how broadly applicable the SHIELD Act will be based upon its exclusion criteria, it is a positive development for the targets of PAE suits. At a minimum, it would provide some levelling of the playing field, both in terms of costs to PAEs via the bond and a much more defined ability to recover reasonable attorney’s fees upon successful completion of the case.

R. David Donoghue is the Deputy Practice Group Leader for IP at Holland & Knight. He can be contacted on +1 (312) 578 6553 or by email: david.donoghue@hklaw.com.

R. David Donoghue

Holland & Knight