More on the SHIELD ACT

In my post last week, I provided some of my views on the recently proposed SHIELD Act.

For some additional and differing thoughts on this topic, here is a recent article written by one of my partners, Ken Levitt, also discussing (and generally supporting) this proposed legislation.

The SHIELD Act - Is creating “second class citizenship” for certain patent owners the answer to the “troll problem”?

Rep. Peter DeFazio recently introduced a bill to the House, H.R. 845, cited at the “Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013,” or by its cooler, short-hand name, the SHIELD Act.  The SHIELD Act has a noble purpose.  After all, who can argue with the proposition that innovators deserve saving from egregious legal disputes?  Despite the noble purpose, however, it is reasonable to question whether the method being employed by this bill – singling out a class of patent owners for disparate treatment by the courts – is the right way to solve the “problem.”  Let’s explore.

First, let’s consider what I perceive to be the real problem.  There has been a growing trend over the last decade for third parties to acquire patent rights as an investment vehicle and assert those rights to obtain a return on their investment.  Unfortunately, in many cases, the assertion is utterly baseless, yet respectable companies with a need to make reasonable business decisions are compelled to pay to settle these cases because it is far less expensive to pay than it is to fight and win.  This is certainly a problem:  bad actors bringing frivolous patent suits against good companies with the goal of extracting a settlement from those good companies based on the rational business judgment that it is far less expensive to settle the frivolous suit rather than pay much larger legal fees to prove non-infringement and invalidity.  No one can reasonably defend this type of abusive conduct and any legislation that could effectively eradicate this bad behavior, without prejudicing patent owners that did not engage in such egregious conduct, would be a tremendous benefit.  The question is, does the SHIELD Act acomplish this difficult goal?

The SHIELD Act has at its core a loser-pays provision that will require some patent owners (hint – NPE’s) to “post a bond in an amount determined by the court to cover the recovery of full costs [which include “reasonable attorney’s fees”].  If the patent owner does not prevail, on both infringement and validity,  “the Court shall award the recovery of full costs to any prevailing party asserting invalidity or noninfringement…upon the entry of a final judgment if the court determines that the adverse party did not meet at least one of the conditions described in subsection (d),” which defines the special class of patent owners subject to this Act.

Looking at subsection (d), the act applies to all patent owners, except those that fit into an enumerated exception.  These exceptions serve define who is a “good” patent owner who is outside the scope of the act.  The exceptions in subsection (d) include (1) the “original inventor” or “original assignee” at the time of patent issuance, (2) a party that can demonstrate “substantial investment…in the exploitation of the patent through production or sale of an item covered by the patent,” or (3) “University or Technology Transfer Organization[s]."  When you take out these exceptions, the SHIELD Act applies to entities that acquire the patent from the original owner and do not currently practice the invention.  This second-class of patent owners would be required to post a bond to cover the defendant’s litigation costs – typically in the 1-3 Million dollar range for a “simple” patent case with less than $25 Million in dispute – and risk forfeiting this amount if they don’t win at trial.  It is important to note, that the fees are not paid as a result of baseless litigation or misconduct.  It is simply because the patent owner does not prevail.

Even though I often represent corporate defendants accused of patent infringement by non-practicing patent owners, I am hesitant to define the “ NPE problem” more broadly to include all patent owners who don’t practice the patented invention but who have a reasonable and good faith basis to assert infringement. It is certainly a strategic concern for defendants that patent litigation against a non-practicing entity is the worst form of “assymetric warfare” with no upside for the defendant and little downside for the patent owner. It is also a practical business concern that once a defendant is named in a patent suit it is already a “loser” in that it must divert resources to address the suit, regardless of the merits. But, these concerns are not unique to patent litigation.   A patent is simply a bundle of rights, and those rights shouldn’t depend on the nature of the patent owner.   After all, even a landowner that is a complete jerk still has the right to enforce his no tresspassing signs and keep people off of his property.

The exceptions in the Act are intended to isolate “patent trolls” but will not be so limited.  For example, what happens if GOOD COMPANY assigns its patents to its own patent holding entity for tax or management purposes, e.g., GOOD COMPANY HOLDING LLC, (which is not uncommon), and it does not make a product within the scope of one of its patents but its competitor does with a directly competing product.   If GOOD COMPANY wants to bring suit to stop the infringement or secure a royalty from COMPETITOR, it would be subject to the SHIELD Act.  Lets go one step further and assume that COMPETITOR brought the first action and GOOD COMPANY asserted that same patent as a defensive counter-claim.  Same result, GOOD COMPANY is subject to the Act and may need to post a substantial bond in order to maintain its counterclaims.  What about an “original inventor” that wants to take advantage of the benefits of incorporation and assigns her rights to her company?  That small company formed by the “original inventor” is now subject to the SHIELD Act and must find a way to post a bond for several million dollars before bringing suit, regardless of how meritorious (or not) the suit may be.  It is not too difficult to think of more examples of how this Act may have unintended, or at least undesirable, consequences for many patent owners that are not "bad actors."

The SHIELD Act has a noble purpose in reducing the number of baseless patent infringement suits, but it seems to be punishing the wrong behavior.  The “problem,” as identified by the name of the Act, is “Egregious Legal Disputes.”  This is the conduct that patent reform needs to address rather than discriminating against a class of patent ownership that cannot be properly tailored to truly solve the “problem” without significantly impairing the value of all patents.  The bench, the bar and Congress each have a responsibility to keep looking at ways to curb litigation abuse and reduce litigation costs.  I applaud Congressman DeFazio’s efforts to curb litigation abuse, but the SHIELD Act, as it currently stands, does not seem to be the answer to the “problem.”

The opinions expressed above are ONLY mine and should not be attributed to Dorsey & Whitney, its clients, or anyone else. (This is always the case, but worth mentioning again in connection with this posting since reasonable minds can certainly differ on this topic.)

Recent and Upcoming Developments in Patent Law

GUEST AUTHOR:  Josh Engel, Dorsey & Whitney LLP

    Here’s a look at some of the recent and upcoming developments in the patent law realm in Q1 2013.

Patent Litigation Update

    Patent litigation continues to be very prevalent and very contentious as companies in many different industries continue to sue each other for infringement of each others’ patents.  Beyond the Apple v. Samsung family of cases that seem to dominate most media coverage of patent litigation, hundreds and thousands of other patent infringement cases quietly move along in the background.  Marvell, a semiconductor manufacturer, lost a patent lawsuit to Carnegie Mellon University in December 2012, and was ordered to pay $1,169,140,271 in damages, which may be tripled in the end if Carnegie Mellon can show willfulness.  The jury found that Marvell infringed just two claims related to signal/noise processing in computer memory technology.  Just a few months earlier, in August 2012, Monsanto won a $1,000,000,000 award against DuPont for infringing Monsanto’s patents on roundup-ready plant technology.  And, of course Apple was awarded $1,050,000,000 against Samsung in an extremely contentious lawsuit over smartphone technology. 

    While these cases are clearly outliers, and the vast majority of patents never become nearly so important, the trend of patent litigation is increasing, and the need for companies to secure their own patents for offensive use, as well as the need to be ready to defend against competitors’ patents, continues to be vital for companies in technology-heavy industries.

Patentable Subject Matter

    One of the most divisive issues in patent law today is “what is patentable?”  Software and human-gene-related inventions are currently in the cross-hairs, as the Federal Circuit (the appeals court that hears all patent-related cases) and the US Supreme Court consider what types of inventions should be eligible for patent protection.  Software patents, in particular, have strong proponents on both sides of the argument, with some arguing that mere computer code should not be patentable because it is too ‘abstract’ and others arguing that excluding patent protection for software would wreak havoc for nearly every technology company that depends on patent laws to prevent competitors from copying innovative system control inventions.  Within the next few months, the Federal Circuit will hear arguments and decide a case that will likely shape the software patentability debate for years to come. 

Upcoming – Patent Law Changes Effective March 16, 2013

    As part of the America Invents Act (AIA) signed into law in 2011, on March 16, 2013, the United States will join the rest of the world in having a “first-to-file” patent system.  This is a change from our previous “first-to-invent” system, and the most practical effect is that patent applications filed after March 15 will be examined under a different set of guidelines, at increased cost, and with more prior art available to the patent office to reject patent applications.  There are also procedural changes for patent applications filed after March 15, and new ways to challenge a granted patent.  In general, the best practice is to file a patent application before March 15, if at all possible, so that it gets examined under the previous “first-to-invent” rules.  After March 15, it will be all the more important to be diligent in identifying patentable inventions and getting applications for those inventions on file as quickly as possible.  Any delay can result in a competitor winning the “race to the patent office.”

Upcoming – Unified European Patent

    One of the most costly and complex regions of the world in which to obtain and pursue patent protection, Europe, is likely to get a facelift soon.  In December 2012 the framework was set for implementation of a unified European patent, which would streamline obtaining and enforcing patents throughout most of Europe.  Member states still must sign onto the program, but at this point it looks like most all of Europe will participate, with the notable exceptions of Spain and Italy (who will likely dissent because the official languages of the unified patent, if you will, are English, French, and German).  The unified patent program would eliminate or greatly reduce translation, validation, and maintenance fee costs in each European country that presently cost patentees thousands of dollars, and would also provide a common set of rules by which European patents are examined and enforced. 

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EDITOR'S NOTE - Many thanks to Josh Engel for providing this piece for use on the Point of Novelty!

Extra, Extra! Despite Current Reports, The Patent System is Not Stifling Innovation

For years, the main stream press has ignored patents.  As an attorney who embraces our patent system, I used to feel bad about being left out.  Now, I am afraid, I feel worse.  The main stream press as of late has stopped ignoring the patent system, and instead seems to be engaging in major league patent bashing.  Oh, how I long for the good ol’ days.

Yesterday’s New York Times featured an article “The Patent, Used as a Sword,” that paints a picture of a patent system that is so badly broken that it is actually hindering the progress of technology rather than following its Constitutional mandate to “promote science and the useful arts.”  My partner, Kent Schmidt, discussed this article briefly in his post on the Left Coast Law Blog.  I like Kent's post, but the Time's article - not so much.   Kent, who is not a patent guy by trade, picks up on the article's theme and asks the natural question this article begs: “Are we stifling competition and innovation” with our patent system?  I feel inspired to answer.

The short answer to this question is NO.  The patent system we currently have in place in the U.S. is certainly far from perfect and is being abused by some, but our patent system, despite its flaws, generally works as intended. 

 The Time's article bemoans the nearly $20 Bil reportedly spent on patent acquisitions and disputes over the last two years.  That is certainly a lot of money, but over $12 Bil of this amount was spent by Google to acquire Motorola Mobility – not just patents, but an iconic U.S. company known for generations as an innovator.  Years of innovation by Motorola were reflected in a robust patent portfolio that added substantial ongoing value to Motorola that was reflected in the purchase price of the company.  Another $4.5 Bil was reportedly spent at auction to acquire the Nortel patent portfolio, with the proceeds going to Nortel’s bankruptcy estate to help make creditors whole.  Although these patents fell into the hands of a licensing entity, Rockstar Consortium, the patents represent years of R&D investment  that was captured by a substantial patent portfolio.  As these two examples show, patents represent the conversion of a company's R & D efforts into a tangible asset and create a critically important incentive for investment in innovation.  

Patents not only serve to protect investment, but also spur the market forward.  As noted in the Times’ article  “[i]f Apple’s claims — which include ownership of minor elements like rounded square icons and of more fundamental smartphone technologies — prevail, it will most likely force competitors to overhaul how they design phones, industry experts say.”  This statement is intended to be some sort of dire warning from these unnamed “industry experts.” I don’t get it though.  This is exactly how the system is supposed to work – an innovator gets a patent and can get compensated for use of the innovation by others– that’s one part of a patent’s cycle of promoting innovation.  The limited monopoly presented by the patent also inspires the rest of the world to innovate to find new solutions to the problems addressed by the patent – that’s the second half of the cycle of innovation spurred by patents.  When a hurdle is placed on the track, it doesn't stop the gifted runner – it makes him work to get over it and still outpace his competition.  If competitors ultimately need to "overhaul how they design phones" because of patents, we will ultimately see new and better phones. The lack motivation to move past today’s status quo, such as the need to innovate around the patent of another, presents a far bigger risk of stifling competition and innovation than the current patent system does.

The risk of low quality patents being issued and asserted is real and improvements to patent examination are worth pursuing.  Patent litigation is expensive and thoughtful ways of reducing this expense and making it easier to ferret out bad patents are worth pursuing.  That being said, we should not abandon a system that is good in pursuit of a system that has unattainable perfection or no system of protection for innovation at all.    

The patent system is not perfect and likely never will be.  But, it is doing its job of balancing the competing requirements of maintaining an open competitive marketplace and rewarding innovators for bringing their ideas to the public for others to build on.  It is still an engine for "promoting science and the useful arts."

A Divided En Banc Federal Circuit Changes the Law of Divided Infringement

For the last five years, the law with respect to liability for inducement of a method claim was relatively clear and fairly consistently applied.  (A rare treat in patent law!) When infringement of a method claim was based on inducement, there needed to be either one party performing all of the steps of the claimed method or, if more than one party was involved in performing the method, there needed to be a “mastermind” directing all of the parties to perform the various steps of the method.  Without a "mastermind" (later clarified as requiring a contractual or agency relationship) there was no direct infringement of the method and, therefore, no liability for inducement.  The Federal Circuit took two cases en banc to consider the propriety of this “single actor” requirement.  Akamai Technologies, Inc. v. LimelightNetworks, Inc.,  2009-1372 and McKessonTechnologies, Inc. v. Epic Systems Corp., 2010-1291.  In a deeply divided decision, including a per curiam opinion along with dissenting opinions by Newman and Linn (joined by Dyk, Prost and O’Malley), the Federal Circuit announced a dramatic change in the law, holding that “we reconsider and overrule the 2007 decision of this court in which we held that in order for a party to be liable for induced infringement, some other single entity must be liable for direct infringement.  BMC Resources, Inc. v. Paymentech, L.P., 498 F.3d 1373 (Fed. Cir. 2007).  To be clear, we hold that all the steps of a claimed method must be performed in order to find induced infringement, but that it is not necessary to prove that all the steps were committed by a single entity.” 

The majority opinion sets out the elements of the inducement claim in the context of multiple actors as follows:  When the party accused of infringement does not itself perform any steps of the claimed method, such as in the McKesson case, “a party can be found liable for inducing infringement if it can be shown that (1) it knew of [the] patent, (2) it induced the performance of the steps of the method claimed in the patent, and (3) those steps were performed.”  Majority Opinion at 35. In the case where the party accused of inducement performs some steps and another party performed other steps, as in Akamai, the elements are slightly modified to “1) it knew of [the] patent, (2) it performed all but one of the steps of the method claimed in the patent, (3) it induced the [other party] to perform the final step of the claimed method, and (4) the [other party] in fact performed that step.”   Majority Opinion at 36.  From these two statements from the court, we can generalize a bit, and set out the current law of inducement for a method claim as a single set of elements: (1) the defendant knew of the patent; (2) it either performed certain steps of the method claimed in the patent itself and/or induced others to perform those steps; and (3) all steps of the method were performed.

Interestingly, and much to the chagrin of J. Newman, this holding only applies to inducement under 35 U.S.C § 271(b).  With respect to direct infringement, the majority punted, stating that “[b]ecause the reasoning of our decision today is not predicated on the doctrine of direct infringement, we have no occasion at this time to revisit any of those principles regarding the law of divided infringement as it applies to liability for direct infringement under 35 U.S.C. 271(a)."  Majority Opinion at 13.  As a result, the law remains that for direct infringement liability, a single party needs to perform all steps of a method.  Those parties that perform only some of the steps, but do not induce the performance of the remaining steps of a claimed method, can still invoke divided infringement as a viable defense to an allegation of infringement and likely face no liability.

J. Newman, in her dissent, harshly criticizes the majority, stating “[t]he majority’s theory is a spontaneous judicial creation.  And it is wrong.”  Newman dissent at 7.  J. Newman argues that precedent, legislative history and cannons of construction all indicate that under 271(a) direct infringement can be established when multiple actors perform the steps of the method and this act of direct infringement is the necessary predicate for finding liability for inducement. 

The Linn camp’s dissent is equally harsh on the majority, arguing that “[t]he majority opinion is rooted in its conception of what Congress ought to have done rather than what it did.”  Linn dissent at 3.  The Linn dissent argues that the single actor rule is properly founded in 271(a) and, like J. Newman, argues that precedent requires an act of direct infringement before there can be liability for inducement.   

As a result of this dramatic shift in the law, we can expect an increase in patent cases asserting inducement for method claims.  There are certainly patents out there with claims that were not asserted due to a divided infringement issue, but now are back in play. Companies that have previously evaluated patents and determined that they likely did not have exposure for infringement of method claims based on a divided infringement theory may need to revisit those patents and reevaluate those claims under this new law.

Given the import of this issue and the deep divide in the Federal Circuit, it would not be surprising to see this case go on the Supreme Court for final resolution.

Parallel ITC Investigation and District Court Proceedings: Be Careful What You Ask For.

Since the Supreme Court’s decision in eBay made it more difficult to obtain injunctive relief in district court proceedings, patent owners have given more attention to the International Trade Commission ("ITC") and have used parallel district court litigation and ITC investigations to pursue both money damages and injunctive relief.  A recent initial determination terminating the ITC investigation In the Matter of Certain Video Displays, 337-TA-828, highlights a potential pitfall with this approach. 337-TA-828, Order No. 9, August 1, 2012. 

In Certain Video Displays, complainant Mondis sought an exclusion order from the ITC against certain TV’s and Video monitors.  The asserted patents were previously asserted successfully against the respondents in the ITC action in an earlier district court case, Mondis Technology Ltd. v. LG Electronics, Inc. et al., 07-CV-565 (E.D. Tex.).  In this district court action, a jury found that the defendants willfully infringed Mondis’ patents and awarded damages.  In a post-trial motion, Mondis sought equitable relief in the form of ongoing royalties but did not seek an injunction from the district court.  After motion practice, the district court ultimately ordered the defendants to pay on ongoing royalty to Mondis for continued sales of the accused products.  Respondents’ motion before J. Essex at the ITC argued that the payment of the court ordered ongoing royalty was effectively a license and that sales subject to that royalty were not an act of infringement.  Judge Essex agreed, stating that “the ALJ finds that the ongoing royalty order constitutes a license authorizing CMI to use the asserted patents’ claimed inventions for the products covered by that the [sic] ongoing royalty order.”  Order at 21.  

This result sends a cautionary message to plaintiff/complainants that are pursuing parallel proceedings.  If injunctive relief is an ultimate objective of patent enforcement, it may be beneficial to run with the ITC investigation ahead of the district court case.  (Since ITC actions are typically significantly faster than district court litigation, this generally occurs by default when the actions are filed simultaneously, as is often the case).  As J. Essex noted, “in this case, the order [of cases] does matter,” since the district court’s ongoing royalty order effectively stripped the ITC of jurisdiction.  Order at 20.   If, for strategic reasons, the district court case does proceed first, the nature of any post trial relief from the district court needs to be given significant consideration.  For example, the plaintiff may forego ongoing royalties entirely or it may be possible to fashion the scope of the ongoing royalty Order in a way that would not foreclose a subsequent ITC action and exclusion order.  For example, the plaintiff may seek a short “sunset” royalty that only allows the defendant to continue sales for a short period of time and then expires.  Alternatively, the plaintiff may seek a provision in the district court order that discontinues ongoing royalty payment obligations in the event an ITC action is initiated and during the pendency of any ITC action.  

ITC on 337 Cases – No NPE Problem Here?

In the wake of substantial lobbying by many companies in the tech sector to limit ITC jurisdiction to prevent non-practicing entities (NPEs) from initiating 337 actions, the ITC published a press release, Facts and Trends Regarding USITC 337 Investigations.  This "fact sheet" presents some interesting data on recent trends in ITC 337 investigations and spins it in a way that suggests that there is no NPE problem at the ITC (and implying that no remedial action by Congress is required.)   

The data illustrates a clear uptick in the ITC’s case load, including NPE activity, since the Supreme Court’s 2006 EBay decision.  It also shows that, while perhaps not dominating the docket, NPE activity represents a significant portion of the ITC’s docket.  In fact, since 2006, 18% of ITC investigations were brought by NPEs, with what the ITC refers to as “category 1” NPEs (such as universities) accounting for 10% and “category 2” NPEs (patent investors/enforcers, sometimes called the not-so-nice term “trolls”) accounting for 8% of the ITC's 337 case load.  This doesn’t seem too imbalanced at first blush.  But, when one considers all of the enforceable IP rights in the U.S. that could form the basis of an ITC complaint, Category 2 NPEs must own or control some minuscule percentage of those rights.  As a percentage of IP ownership, it can certainly be argued that Category 2 NPEs do in fact represent a disproportionate share of the ITC docket.

With respect to settlements, the ITC data illustrates that on average, about 50% of all 337 investigations are terminated by settlement or consent order prior to completion of the investigation.  Category 2 NPEs show a somewhat higher settlement percentage, at 61 %.  This should not be too surprising, though, since the Category 2 NPE business model is one that ultimately seeks monetary compensation from patent enforcement efforts.  Injunctive relief, such as an exclusion order, only has value to a Category 2 NPE as a source of leverage in maximizing a financial return, not as the ultimate relief obtained.  

The ITC data is nicely presented in a short (four page) fact sheet and is worth a look, even if you don’t agree with the ITC’s spin on the data.  The data is certainly not so compelling as to prove that there is no NPE problem at the ITC or otherwise end the debate as to whether the ITC's domestic industry requirement should be limited in such a way as to foreclose NPE access to the ITC.