Congress Introduces SHIELD to Address Frivilous NPE Litigations

On February 27, 2013, Representatives Peter DeFazio (Oregon) and Jason Chaffetz (Utah) introduced the “Saving High-Tech Innovators from Egregious Legal Disputes Act of 2013 (H.R. 845). The so-called SHIELD Act would amend the remedies available under the federal patent laws. Representative DeFazio believes the bill will protect American innovators and companies from frivolous patent lawsuits filed by nonpracticing entities.

Under the proposal, parties asserting invalidity and/or noninfringement defenses in patent litigations will be allowed to move for a judgment that the adverse party is not (1) an original inventor, (2) exploiting the patent, and/or (3) a university or technology transfer organization. The adverse party will have 90 days to respond and prove that it meets at least one of these conditions. To succeed, the nonmoving party will need to show at least (1) that it is the inventor, a joint inventor, or in the case of a patent filed by, and awarded to, an assignee of the original inventor or joint inventor, the original assignee of the patent, (2) documentation of substantial investment made in the exploitation of the patent through production or sale of an item covered by the patent, or (3) that it is an institution of higher education or a technology transfer organization. The court will have 120 days after the original filing to decide the motion.

A party unable to prove that it meets at least one of the statutory conditions must post a bond in an amount sufficient to cover the full cost of litigation, including reasonable attorney’s fees. If that party loses at trial, the court will have the authority to award “the recovery of full costs . . . including reasonable attorney’s fees” to any prevailing party asserting invalidity or noninfringement, unless exceptional circumstances apply.

Representatives DeFazio and Chaffetz introduced a similar bill in August 2012. But that version stalled in the House. The 2013 SHIELD Act is broader than its failed 2012 counterpart. The 2012 version covered only computer hardware and software patents; the 2013 version applies to all types of patents. Representative DeFazio believes that all industries face potential lawsuits from nonpracticing entities. But he assures his constituents that innocent parties will not be affected as the SHIELD Act excludes independent inventors, businesses that produce patented items, and universities. Nonpracticing entities that buy patents on the open market, for the sole purpose of using them for predatory litigation, are the ones that will be subject to fee shifting under the SHIELD Act.

The 2013 SHIELD Act’s introduction has been well received; the bill is concise—only five pages long—and it proposes a solution to what many believe is a significant problem. But it is unclear whether the bill will become law. Potential problems exist with the definitions of original inventor, exploitation of the patent (i.e., what is the scope of “substantial investment”), and university or technology transfer organization. Companies that frequently assign their patents or create shells to hold patents might struggle to show original inventorship or substantial investment. Similarly, the bill might be viewed as too harsh and unfair on nonpracticing entities. Some may call for the adoption of a more European approach and make any losing party, regardless of their practicing status, pay the costs of litigation.

The SHIELD Act is currently with the House Committee on the Judiciary. On March 14, 2013, the House Subcommittee on Courts, Intellectual Property and the Internet discussed the SHIELD Act during its Hearing on Abusive Patent Litigations: The Impact on American Innovation & Jobs, and Potential Solutions.