Peeved politicians want “loser pays” rule for patent trolls | Ars Technica

Last year, the first bill that could take a bite out of the business model of so-called "patent trolls" was introduced. Not much happened with it, but today a reworked bill has been introduced by the same sponsors: Reps. Jason Chaffetz (R-UT) and Peter DeFazio (D-OR). The bill is called the SHIELD Act of 2013, which stands for "Saving High-Tech Innovators from Egregious Legal Disputes."

Essentially, the bill (PDF) creates a "loser pays" system for certain types of lawsuits, in which do-nothing patent holders will be forced to pay the defendant's legal bills if they lose their lawsuit. However, losing defendants won't have to pay, so it's more like a "losing plaintiff pays" system.

At a press conference, Chaffetz and DeFazio explained how the bill would work and why they are introducing it.

"Patent trolls add no economic benefit to our nation," said Chaffetz. "They have captured part of the system, and they're exploiting it for their own financial gain. They're hampering the innovation that our country deserves. Literally every segment of our society's business is being attacked by these patent trolls." 

DeFazio was inspired to create this legislation when a small software business in his Oregon district was attacked. He noted that patent trolls are "morphing" in alarming ways. Specifically, DeFazio cited the new wave of scanner-trolls demanding around $1,000 per worker from businesses that "use routine technology" like scanning documents to e-mail. "They just broadcast letters—they've done this in Georgia, and for some odd reasons, North Dakota, so far—to any and all small businesses that they think might have scanners and tell them they've got to pay $20,000 if they want to keep using their scanners and attaching e-mails," said DeFazio.

The bill would allow patent defendants to file a motion seeking to have a judge rule that the patent owner is a certain type of "non-practicing entity"—although the bill doesn't use that term. If the motion is successful, the lawsuit can still proceed, but if the patent-holding company loses, it will be on the hook for legal costs.

Since defending a patent lawsuit through trial can easily cost $2 million to $5 million, that could be a significant deterrent. The usual patent troll strategy is to ask for a six-figure settlement well below the cost of litigation. Some trolls are more ambitious, while others settle for amounts below $100,000, which are basically considered "nuisance" payments in the patent world. 

Bill tries to figure out: who’s a patent troll?

The trick of course, is defining exactly what kind of patent litigation is the "bad" kind that needs to be transferred to a loser-pays system. One man's "patent troll" is another's "independent inventor." It's a tough divide to navigate, since some entrenched and clearly "non-troll" organizations in the US like to wield their patents as plaintiffs: namely, pharmaceutical companies, and increasingly, universities.

While last year's bill only applied to the computer and software industries; this year's bill forgoes the tech-specific focus and lays out definitions for what type of entity has to play by the "loser pays" rules. In the system set up by the SHIELD Act, patent owners will be defined as non-practicing unless they meet one of the following conditions:

• The plaintiff is an inventor or original assignee. This has the potential to be a loophole, since many of the most vigorous NPEs, like ArrivalStar, are owned directly or have strong ties to the patent's inventor.
• The plaintiff is actually using the patent.
• The plaintiff is a university or "technology transfer organization"

Many questions remain about how the bill would be implemented. Would larger public patent-licensing companies, like Rambus and Tessera, be defined as NPEs? Probably not, since they acquire many of their own patents.

Also, under these definitions, some operating companies could be defined as NPEs; this could actually hurt defendants in the corporate smartphone wars. Google, for example, acquired patents from IBM and Fujitsu in order to counter-sue British Telecom, which started a patent fight with Google a few years ago. While I don't know the technical details of those patents well, they are telecom-related and it seems unlikely that Google really practices them. But they are being used defensively and are strengthening the defendant in that case.

The "loser pays" system is prevalent in the United Kingdom, but in the US defendants generally have to bear their own costs in all types of litigation, even when they win a lawsuit. Usually, it requires extraordinary abuses on one side or the other for a judge to order that legal fees be paid. There are precedents for creating "loser pays" systems in the US, however. For example, successful copyright plaintiffs usually win attorneys' fees if they have a registered copyright. 

The bill has been released to much acclaim from the tech sector. That's no surprise, since it's one of the first serious attempts to take a whack at a problem estimated to cost the economy $29 billion in direct legal costs alone. A few statements from my inbox this morning: 

• "Patent trolls can't have a free roll of the dice, and SHIELD would help to ensure that they do not," stated the Coalition for Patent Fairness, which includes Cisco, Google, Verizon, Adobe, Dell, Oracle, and other tech giants.
• "This won’t instantly fix our dysfunctional patent system, but it will start to chip away at the insanity that is stifling innovation and costing our economy billions," said Computer and Communications Industry Association President Ed Black.
• The Application Developers Alliance praised the bill but noted that many small software makers can't afford to pay lawyers through the course of even one litigation. "They need more relief than the SHIELD Act offers," said Alliance President Jon Potter. "A quicker and cheaper program for challenging trolls’ patents in the Patent and Trademark Office is needed as an alternative to litigation." 
• The Electronic Frontier Foundation, which has been active in fighting patent trolls for many years, called for the House Judiciary Committee to investigate the patent troll issue further. "The introduction of the SHIELD Act sends an important message to patent trolls: their business model is dangerous and their days are numbered," said EFF lawyer Julie Samuels.

DeFazio and Chaffetz say the bill should come up for a hearing in the near future.