3 Things You Need to Know About the SHIELD Act, Which Aims to Make High-Tech Patent Litigation More Risky for NPEs

3 Things You Need to Know About the SHIELD Act

On August 1, 2012, a new bill was introduced in the House of Representatives to help protect high-tech companies from frivolous patent lawsuits. The bill is sponsored by Congressmen Peter DeFazio (D-OR) and Jason Chaffetz (R-UT). Entitled the “Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act,” the bill seeks to make it easier for companies accused of patent infringement to recover their attorney's fees and other litigation costs. According to Congressman DeFazio, this fee-shifting measure will "put the financial burden on so-called 'patent trolls' that buy patents solely to sue the American tech startups that created the products." [1]

Patent trolls—also known by the less pejorative term, non-practicing entities (NPEs)—hold patents but do not produce any goods or services covered by their patented technology. NPEs frequently target high-tech companies and are notorious for bringing nuisance suits against them (i.e. suits of questionable merit that are nevertheless settled for approximately the cost to defend the case). A recent Boston University study indicates that NPE lawsuits impose significant costs on American businesses—to the tune of $29 billion in 2011 alone. [2]

Congressman Chaffetz claims that the SHIELD Act will reign in these costs by "moving to a 'loser pays' system for software and hardware patent litigation." [3]

Here are three things you need to know about the SHIELD Act:

1. A Loser Pays System (of Sorts) Already Exists under U.S. Patent Law

Under 35 U.S.C. § 285, a "court in exceptional cases may award reasonable attorney fees to the prevailing party." Exceptional cases have been found in lawsuits involving frivolous claims. Frivolous claims are those in which there was no reasonable expectation of success. Showing that a claim is frivolous, however, does not in and of itself guarantee an award of attorney's fees since section 285 states that courts "may" award attorney fees in such cases.

The United States Court of Appeals for the Federal Circuit recently clarified that prevailing parties seeking an award of attorney's fees must also show that the other side knew or should have known that their claims were frivolous. [4] This is a difficult burden for accused infringers to meet as courts presume that infringement claims based on a duly granted patent are made in good faith. [5]

2. The SHIELD Act Makes it Easier for Accused Infringers to Recover Attorney's Fees, But Only in Software and Computer Hardware Patent Cases

The SHIELD Act appears to create a new standard of proof in which prevailing parties are only required to prove that a claim is objectively frivolous. The Act states:

“Notwithstanding section 285, in an action disputing the validity or alleging the infringement of a computer hardware or software patent, upon making a determination that the party alleging the infringement of the patent did not have a reasonable likelihood of succeeding (emphasis added), the court may award the recovery of full costs to the prevailing party, including reasonable attorney's fees.”

Interestingly, the SHIELD Act still contains the permissive word "may." But inasmuch as the SHIELD Act is written as an exception to section 285, it is doubtful that courts would read the subjective, "known or should have known" prong into it. The SHIELD Act's lesser burden of proof would apply to declaratory judgment and infringement actions, but only in cases in which computer hardware or software patents are at issue.

3. The SHIELD Act Shifts the Financial Risk to All High-Tech Patentees, Not Just NPEs

While the SHIELD Act is being touted as a bill to combat NPEs, its fee-shifting provision would apply to any party "alleging the infringement of [a] patent." This shifts the financial risks to any holder of a software or computer hardware patent—NPEs and their operating counterparts alike. Some have speculated that this could lead to unintended consequences, such as deterring startups and small businesses—who could be crushed by having to pay the other side's costs—from asserting their patents. Whereas for NPEs, it would be business as usual as many of them are cash flush and could bear the cost of the SHIELD Act's sanctions from time to time.

That said, the SHIELD Act clearly intends to give accused infringers more choices when dealing with NPEs, and that is a good thing. Instead of having to choose between mounting an expensive legal defense or accepting an equally expensive nuisance settlement, accused infringers could fight back. The SHIELD Act's fee-shifting provision could give accused infringers the leverage they need to negotiate more palatable settlements. Accused infringers could also defend frivolous suits on the merits and then count on being reimbursed for having to do so.

This is certainly a step in the right direction for the high-tech business community.

[1] Press Release, Congressman Peter DeFazio, DeFazio Introduces SHIELD Act to Protect American Innovation, Jobs (Aug. 1, 2012),
http://defazio.house.gov/index.php?option=com_content&task=view&id=792&Itemid=135 (hereinafter "DeFazio Press Release").
[2] James Bessen & Michael J. Meurer, The Direct Costs from NPE Disputes 19 (Boston Univ. School of Law, Working Paper No. 34, 2012).
[3] DeFazio Press Release.
[4] Highmark, Inc. v. Allcare Health Management Systems, Inc., No. 2011-1219, slip op. at 8 (Fed. Cir. Aug. 7, 2012).
[5] See id. at 10-11.