Guest Editorial by Peter Schechter (Edwards Wildman Palmer LLP)
Some years ago, a few patent lawyers realized that the cost of U.S. patent litigation had become so expensive that most companies sued for infringement would probably pay something just to make it go away, regardless of the merits. This realization forms the fundamental underpinning of most U.S. patent litigation today. If most of the plaintiffs were shining examples of Horatio Alger stories, no one would be too upset about this state of affairs. But they are not – far from it. Most patent infringement plaintiffs today are Non-Practicing Entities (NPEs), or "patent trolls." Rates of success on the merits for NPEs, in those few cases that actually get determined on the merits, are very low, ranging from less than 10% to about 25%, according to different studies. Many people view NPE cases as being generally meritless, generally speaking, regardless of the accuracy of that view in any specific case. On February 14, 2013, even President Obama voiced his displeasure with patent trolls, saying they "are essentially trying to leverage and hijack somebody else's idea and see if they can extort some money out of them."
Recently, Congress has at least been trying to fix what many feel is this most broken aspect of the U.S. patent system. Last year, Rep. Peter DeFazio (D-Ore.) and Rep. Jason Chaffetz (R-Utah) introduced the bipartisan H.R. 6245 --"Saving High-tech Innovators from Egregious Legal Disputes (SHIELD) Act" -- a bill intended to curb the flourishing patent troll business model by shifting the patent litigation system away from the "American model" (everyone pays their way, win or lose) to a "loser pays" system, at least in some types of infringement cases. H.R. 6245 was applauded by some and decried by others; among its faults were the limitations on the types of cases to which it applied, and its lack of "teeth" for implementing the "loser pays" fee-shifting provision. The bill died with the end of the 112th Congress.
Reps. DeFazio and Chaffetz last week reintroduced a "new and improved" version (H.R. 845) of the SHIELD Act (now "of 2013"). Now the bill bites – hard -- on NPEs. Gone are the industry-specific limitations. New for 2013 is the most significant provision of the bill: the requirement that the NPE (as defined in the bill) must post a bond early in the case to cover the recovery of the "full costs to any prevailing party asserting invalidity or noninfringement, including reasonable attorney's fees …." This provision does more than implement fee-shifting in NPE patent litigation; it strikes at the heart of the patent troll's business model, and may cut out that heart completely.
To understand the importance and effect of the bond provision, one must first understand the NPE business model. Many, and probably most, NPEs today are "special purpose vehicles" created for the sole and exclusive purpose of owning and suing on patents. In many instances, these limited liability companies are owned by the patent litigators doing the suing. These plaintiffs have few or no assets other than the patents themselves, the out-of-pocket expenses of litigation being fronted by the lawyers, and the lawyer's fees being entirely contingent upon settlement payments. In other words, NPEs are designed to be, and typically are, judgment-proof. For this crucial reason, the traditional fee-shifting mechanism in the Patent Act, 35 U.S.C. Sec. 285, is not an effective deterrent to truly unwarranted patent infringement allegations. Only in rare situations are the litigation attorneys held jointly and severally liable for Sec. 285 attorney's fees awards. While Rule 11, Fed. R. Civ. P., always exists to deter the very worst offenses, Rule 11 awards against signing attorneys are even rarer in patent infringement cases than Sec. 285 awards.
As a result, NPEs are often analogized to gamblers playing with house money – they can win, but cannot lose. The bond requirement of the SHIELD Act of 2013 recognizes and addresses this economic reality, because virtually every type of judicial bond available from a surety, bank, insurance company, or other bond provider is fully 100% collateralized. In practical terms, this fact may well throw the trolls off the bridge.
Bail bonds and appeal (supersedeas) bonds are two examples of judicial bonds. Both the party seeking the bond and the company giving the bond know the exact amount of the potential liability that the bond must cover. In some cases, the amount of a supersedeas bond is set by statute, and may include a required amount to cover interest.
The bond required by the SHIELD Act is different – no one knows, at the beginning of a patent case, what the "full costs to any prevailing party asserting invalidity or noninfringement, including reasonable attorney's fees," might ultimately be. Qualcomm, the prevailing defendant in a patent case, was recently awarded more than $12.4 million in attorney's fees alone; "full costs" would presumably be substantially more. Prevailing defendant Takeda Chemical was awarded $16.8 million in attorney's fees in 2008. Dozens of attorney's fees awards have exceeding $1 million, and in almost all of those cases, the prevailing defendants had to establish that the cases were "exceptional" under Sec. 285.
"Losing NPE pays full costs including reasonable attorney's fees" would become the default standard for NPEs under the SHIELD Act; no "exceptionality" is required. Given the NPEs' current strategy of filing numerous substantially simultaneous separate suits (as a result of the anti-joinder provisions of the America Invents Act), critical questions arise. Would an NPE be required to post a "full costs" bond in each, separate suit? If not, the law would be pointless. How would the "full costs" amount of the required bonds be determined at the beginning of each, separate suit, when different defendants will employ different defense strategies, and incur different "full costs"? Will the bond amount be the subject of legal opinions of counsel, or of expert opinions? What banks, sureties, or insurance companies would offer to provide SHIELD Act bonds to NPEs? Assuming that some financial institutions would, in fact, offer to provide SHIELD Act bonds, what amount and type of collateral would be required and, more importantly, how would typically asset-free, judgment-proof NPEs provide that collateral?
Given the historical reluctance of insurers to offer patent infringement insurance of any kind at all, the 100% collateral requirement is virtually a sure thing. It also seems reasonable to assume that only a very tiny fraction of currently operating NPEs will be able to raise sufficient capital to provide 100% collateral for more than a very small number of SHIELD Act bonds at any given time – should they even decide to take that risk, knowing full well their low probabilities of success on the merits. If the SHIELD Act of 2013 becomes law as written in H.R. 845, the business model of patent infringement litigation as currently practiced by most NPEs would likely become economically unfeasible, and the era of NPE patent litigation as it currently exists would likely come to an end.
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The views expressed in this article are the author's alone, and do not necessarily reflect those of Edwards Wildman Palmer LLP or anyone else.
DC Note: Artwork is by my daughter Robin.