Forging a SHIELD against patent trolls

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The status quo in our patent system is unsustainable. The patent infringement claims filed every day by trolls cost millions of dollars to defend. Trolls are acquiring patents and blanketing competitors, users and end users with litigation threats and lawsuits. Tech startups and small businesses that are typically the target of these suits with little choice but to settle and pay hundreds of thousands of dollars in patent licensing fees that should have been used for research and job creation.

In fact, a recent study by Boston University concluded that in 2011, PAEs cost technology companies more than $29 billion per year. And the rate of patent litigation by these trolls is skyrocketing.

The SHIELD Act is an important step in the much needed process of common-sense patent reform. The key provision in the bill is a new “loser pays” rule, which would require the party alleging infringement to pay the defendant’s costs if the court finds that the patent at issue was not infringed or was invalid. This mechanism greatly diminishes the incentive for trolls to file frivolous suits against vulnerable companies. Whereas filing countless lawsuits against any potential defendant is currently a consequence-free roll of the dice for the troll, the SHIELD Act will dampen that strategy by making them pay when they lose.

Or consider this from the perspective of the defendant that has been sued by a troll. The costs of patent litigation are typically over $1.7 million. If you prevail in litigation against a troll – after investing hundreds of hours and millions of dollars what do you get? Nothing. No wonder why very few firms have the incentive or ability to fight trolls.

Will the legislation work? We have to look no further than our borders. Patent trolls are an unfortunate innovation of the U.S. Outside the U.S. where a loser pays rule applies trolls are simply unknown.

The SHIELD Act should reduce some of the risk involved in creating a tech startup; an investor will have more incentive to fund a startup knowing that they have lower exposure to frivolous patent suits. The bill will also help reduce the value of weak patents, which would be another important reform in the patent system.

Importantly, this year’s SHIELD Act increases the scope of last year’s bill by removing references to computer hardware and software patent litigation. The new bill covers any entity that has been the target of a patent assertion claim. This will protect the retailers, supermarkets, and other non-high-tech businesses that have been hit with infringement suits in recent years, typically over the use in their stores of commonplace technology (e.g. Wi-Fi).

In a recent Google Hangout, President Obama responded to a question about trolls, correctly summarizing their business plan “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them,” adding that “what we need to do is pull together additional stakeholders and see if we can build some additional consensus on smarter patent laws.”

The President has got it right. The bipartisan support for the SHIELD Act shows the need to stop this legalized extortion that is creating a tremendous obstacle to economic growth and innovation. Everyone agrees that we should not let frivolous lawsuits drive out or deter the next Facebook or Google from launching their business. Congress should act swiftly to pass the SHIELD Act, and put a stop to the trolls’ drain on innovation and economic growth.

Balto is a former policy director of the Federal Trade Commission, attorney-adviser to Chairman Robert Pitofsky, and antitrust lawyer at the U.S. Department of Justice. He has been a senior fellow at the Center for American Progress, and is a contributor to Patent Progress, a website dedicated to promoting innovation through the reform of the patent system. Patent Progress is hosted by the Computer & Communications Industry Association (CCIA).