Loser Pays System Introduced in Congress

Congressman Peter Defazio recently introduced H.R. 6245.  The working title of the bill is the “Saving High-Tech Innovators from Egregious Legal Disputes Act of 2012” also known as SHIELD.  The Bill would permit the award of attorney fees to successful defendants accused of infringing a computer hardware or software patent if the action “did not have a reasonable likelihood of succeeding.” Currently attorney fees are only awarded in “exceptional cases” under 35 U.S.C. 285 or as a sanction for violation of Fed. R. Civ. Pro. R. 11.

The statute would read:

(a) In General- 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, the court may award the recovery of full costs to the prevailing party, including reasonable attorney’s fees, other than the United States.

The computer hardware and software would both be broadly defined by the new statutory provision.

Most jurisdictions around the world follow a loser-pays rule in civil litigation.  In theory (and with certain assumptions) a loser pays rule results in more meritorious claims and fewer non-meritorious claims.  The system (again in theory) allows a legally vindicated party to walk away without direct financial loss due to the litigation. A major difference between those systems and that proposed here is that the normal loser-pays system is two-way while this bill proposes a one-way system that only injures patentees.  The stated purpose of the bill is to reduce the amount of patent litigation brought by “patent trolls.”  For several reasons, I think that it is unclear whether the bill would achieve that result in any respect.

About Dennis Crouch

Law Professor at the University of Missouri School of Law. Co-director of the Center for Intellectual Property and Entrepreneurship.

51 thoughts on “Loser Pays System Introduced in Congress

  1. How can some clueless folks here
    want claim charts before court-ordered discovery ?
    What if it’s an ASIC device 1/10 inch in size ?

    We will end up with “meritorous” patent assertions
    on things like “slide-to-unlock” or a “movable toolbar”

    All with nice claim charts and maps filed in the original court complaint…

  2. I should add, so if Congress wanted a SHIELD law that ended notice pleading for patent infringement, they could.

  3. I don’t know why this matters. None of the SCOTUS’ decisions changes any of the standards when a statute, federal or state, requires a higher standard. The default rule is notice pleading.

  4. Jump, We already have increased pleading requirements for some things, like fraud. I don’t see why congress could not order increased pleading requirements for patent infringement.

  5. This will not have any impact on small NPE’s whatsoever. The small NPE that has enough capital to even pay its own legal fees are few and far between. If you were the owner of an NPE, why would you leave any more money in it than you needed to pay the immediate costs of litigation? And most of them, even the ones dropped out of the very large NPEs are set up just to litigate a certain patent or patent family, so a loss is the end of the line anyway. BFD, you got an award of attorneys fees from an entity that has no money, no legitimate assets (other than the patent you just trounced), and is now insolvent.

  6. Well, at first blush and without putting much thought in:

    It only limits small entities’ ability to play. Most serious NPEs have very deep pockets, and most large-scale assignees aren’t even NPEs to begin with. You won’t find a corporation in the Fortune 50 without a substantial IP portfolio that they’re willing to enforce and monetize. Most of them are more involved in what is casually called “patent trolling” by laypersons and detractors than the “evil NPEs.” These organizations spend millions a year on prosecution – it’s unlikely they’ll be wholly dissuaded by a risk of paying legal fees. Further, they’re not going to take a sunk cost approach to the millions (often more) spent on their portfolios. IP weighs heavily on balance sheets, and they’re going to fight to keep the associated value and revenue streams.

    Who this hurts is small NPEs, or pre-practice/small-practice startups who can’t take the risk of getting hit with a major organization’s legal fees. Higher barriers to entry with a lower likelihood of succeeding.

    This will also reduce filings by small entities who are disincentivized from seeking patent protection given the increased risks of bothering to enforce. Small organizations will be easy to run out of business. The corresponding reduction in small entity prior art will open the patent space for larger entities capture and protect down the road. Many of these larger entities will be international organizations. For organizations looking to protect IP, it favors large entities, and it puts loss leaders in a position to force out organizations that do not protect IP even if they’re first movers. This will directly eat into the US economy, including US jobs, as IP is both one of our biggest assets and strongest competitive advantages.

    As an aside, what can an old dude with two arts degrees who has been living on the taxpayer dime for 25 years tell me about computers and software? His resume doesn’t quite give the impression he’s a legislative subject matter expert. I mean, he is the co-chair of the craft brewer’s caucus, so maybe he saw a PLC once on a brewery tour? Chaffetz doesn’t inspire much more confidence – football suits him more than patent law.

  7. Methinks you do not know what the corporate veil is, 6. What “knowledge” are you trying to ascertain from this “lawlyer”?

  8. This seems like a very easy law to get around. All a troll has to do is buy products and resell them.

    Also, companies like having patents as assets. Some of the value from those assets comes from being able to sue and recover a certain amount. Do you think most companies would want to reduce their valuations because they do not practice certain patents in their portfolios?

  9. Because it was so much healthier when attorneys were filing their own patents on ‘new paradigms.’

    Meaningless non-sequitur. Do try to stay on topic.

  10. and the ability to inflict harm with malicious litigation is often one-sided (especially with NPE’s operating out of a UPS store in Texas).

    We already have rules for that. The answer is not another rule. The answer is to use the rules we already have.

  11. Even saying this in jest is an effront to anyone who has been a victim of brutality. Brutality in real life is far different than your TV life would have you believe. May I suggest that you volunteer at a victim’s shelter and gain a little real world appreciation before you next post such a thoughtless message.

  12. “a breaching the corporate veil theory to get at those that own the LLC.”

    I never did understand why this corporate veil never led to people who wished it pierced simply hiring “fixers” akin to hitmen to ascertain this knowledge by voluntary submission, blood or beating. According to Breaking Bad, there is very little that a lawlyer will not tell you as you are preparing to bury him in a hole in the ground. Indeed, if you put 5 dollars in his pocket you even get attorney-client privilege concerning his having told you.

  13. Would this bill affect NPEs at all?

    (1) “did not have a reasonable likelihood of succeeding.”
    — Would the courts give this any teeth?

    (2) Bankruptcy / No Assets But the Patent
    — I’m not a bankruptcy attorney, but most NPEs create an LLC which basically holds nothing but the patent(s)-in-suit. After the judge awards attorney fees, can’t the LLC declare bankruptcy? Then the only asset that you can get is the patent (which you may have already invalidated, although if just non-infringement was found, there could potentially be some value left). I guess you could try a breaching the corporate veil theory to get at those that own the LLC.

  14. End notice pleading for patent infringement.

    This will never happen. The Supreme Court is busy trying to deconstruct any differences in law for patents, not make new differences. You would need to push for abolishing Notice Pleading across the board.

    What types of unforeseen consequences would spring from that move?

  15. I would make it simpler. End notice pleading for patent infringement. Require claim charts be served with the complaint. If the claim charts do not show every element, or a reasonable basis for why the PO believes the element is present, dismiss for failure to state a claim.

  16. My point? Why limit to computer hardware and software? Either Loser Pays is a good rule; or it isn’t. Which is it?

    Why pile layer upon layer, ever making the law ever more unnecesarily complicated? Why not instead legislate once, do it all, and do it right?

    Who the F cares? I don’t know. That’s why I asked.

  17. It only applies to the party asserting infringement. The “action disputing the validity” language is to cover declaratory judgement actions where the DJ defendant counterclaims infringement.

    You are right that it will not impact infringers who choose to drag out litigation in hopes of forcing a meritorious plaintiff to settle.

  18. Of course they’re one-sided. They’re meant to mitigate the nuisance cost of litigation.

    Plaintiffs already have the playing field tilted because: (1) they control the filing/timing of the suit; and (2) they have the opportunity to engage the experts and get the due diligence done prior to filing and without being under any gun. If you don’t think that those are HUGE advantages to the plaintiff, you haven’t been involved in much high-stakes litigation.

    My #2 is really a fairness question. I could see an exchange: if you don’t want to keep that rule, then you can give up a willfulness claim. Seems fair because you can’t articulate what the claim means with specificity and clarity, thus making a defendants actions in view of such lack of clarity NOT reckless by definition.

    My #3 is to get the defendant up to speed with the plaintiff at the time of filing. It’s also meant to deter fishing expeditions, not unlike #1.

  19. The burden of proof is one-sided. That is so unfair to plaintiffs!
    Anyway, patent local rules in California and Texas may already require what you suggest, but the commitment to claim term definitions from the plaintiff comes way too late in litigation. I think it is fair to insist that if you don’t know what your claims mean, you have no business filing suit. If you know what your claims mean, and that meaning is hidden from the defendant, you have not provided useful notice to the defendant.
    I use an analogy to illustrate my point: Suppose a claim that recites two pieces of wood secured together with a phillips head screw. You have the same device, except you secure two polyurethane boards with a nail. The patentee sues you, but has not prepared claim charts. Deep in litigation, you learn that the plaintiff interprets the word “screw” to include any long fastening device that can be rotated while securing the two boards. His “screw” does not require screw threads. Plaintiff also asserts that wood includes polyurethane. Currently, you cannot learn this until the Markman briefs are filed (unless you file a SMJ, which is not always a good idea to do early in litigation). It is not one-sided to require claim definitions from the plaintiff upon filing the complaint. While I have used a simple example (which closely parallels an actual litigation), the need for earlier commitment and confession re claim definition is more important when vague intrinsically meaningless claim terms are involved. Mike’s suggested disclosure can be seen as one sided, but then again, the assertion of infringement is one-sided, and the ability to inflict harm with malicious litigation is often one-sided (especially with NPE’s operating out of a UPS store in Texas).

  20. …the court may award the recovery of full costs to the prevailing party, including reasonable attorney’s fees, other than the United States.

    That’s some pretty poor drafting there. Perhaps: …the court may award the recovery of full costs, including reasonable attorneys’ fees, to a prevailing party other than the United States.

  21. The proposal will not affect well funded NPEs or other large patent owners. Small businesses and startups will be the group that is most deterred by the risk of an adverse judgement and associated fees.

    Assuming that this bill would actually increase the probability of an award of attorney fees, wouldn’t the impact be the opposite of what you suggest? A “well-funded NPE” or large patent owner would actually be exposed to the risk of a judgment that could easily be $1-$2M. There would be no chance of any actual recovery from a tiny little LLC with no assets other than the patent. Once the LLC loses the case, its reason for existence vanishes anyway.

  22. Whoever wrote this bill fundamentally misunderstands how NPE’s operate. This law would accomplish nothing.

    In fact, this is more or less already the standard for getting attorneys fees in patent cases.

  23. 4. Require immediate disclosure by defendant of all technical information (to avoid the need for fishing and the ability of the defendant to play hide the ball).

    5. Allow the defendant a single opportunity to define the claim terms.

    All of your points are one sided. You’re just trying to ensure a victory for one side, not speed the case along to make it more efficient. Point 1 has some merit, but the rest are just tilting the playing field.

  24. This bill enjoys broad bi-partisan (both I and Eugene) support. Although I would say make it cut both ways, and expand it to everyone, not just those two industries.

  25. Keep messing with everything and it will collapse…

    Because it was so much healthier when attorneys were filing their own patents on “new paradigms.”

  26. suckie: Questionable patents are not the sole domain of “Trolls.”

    “Mentally ill people are not the only people who go on killing sprees.”

    Right. So let’s not do anything.

    Classic self-interested dust-kicking from suckie.

  27. 4. Require disclosure by the plaintiff of all patents and published applications owned by the plaintiff which include statements in the specifications or the prosecution histories (identified by line) relating to claim terms that are similar or identical to claim terms in the asserted claims.

  28. I’m okay lowering the threshold for awarding a defendant attorneys fees, but I think that there would be three litigation-related changes that would make a marked difference if implemented:

    1. Require immediate disclosure of claim charts by the plaintiff BEFORE the answer is required. Any pieces that require discovery being definitively identified. This is to prevent a fishing expedition.

    2. Require the plaintiff a single opportunity to define their claim terms. Look either your patent does a good job of defining the scope of your patent or it does not. If you’re not able to explain what the claim terms mean and how they apply and why it does not read on the prior art at the time the suit is filed, then it fails its essential purpose.

    3. Require disclosure, immediately, of all pre-suit investigation information relied upon to come to the conclusion that they have a substantial likelihood of success on the merits. Allow courts to dismiss a case if the pre-suit investigation does not show that (and award fees).

  29. “a reasonable likelihood of succeeding” – Too broad. Many small plaintiffs likely don’t have a reasonable likelihood of succeeding because of funding issues. I would change to “a reasonable likelihood of succeeding based on legal basis” or the like.

    Also, I’d recommend Romney’s compromise: Loser pays amount equal to it’s legal fees to the winner to reduce risk of small plaintiff being hit which outsized legal fees.

  30. What happens to the NPE if it gets DJ’d?

    Also, how about making the provision mutual? I.e., when an NPE asserts a valid and infringed claim for damages of about $50k, but the “High Tech Innovator” refuses to discuss settlement in good faith, and the case goes to trial, we are OK with the NPE/attorneys collecting $2m in fees?

  31. Another opportunity to cross-post, this time from: link to ipwatchdog.com

    Patent trolls use questionable patents and highly specious assertions of infringement to bully truly small businesses to pay what some federal courts have called “extortion-like” settlements.

    This statement, like most statements regarding “Trolls,” is both under and over inclusive.

    Questionable patents are not the sole domain of “Trolls.” In fact, Pete Zura’s blog (RIP) exposed this as a canard in an analysis that showed that most entities considered “Trolls” actually had higher qualilty patents!

    Specious assertions of infringement are not the sole domain of “Trolls.” This is part and parcel of the larger system we have called Notice Pleading. Your argument with this is with the larger system.

    Bullying truly small businesses is not the sole domain of “Trolls.” In fact the bullying (and the concomitant ignoring of actual rights – see i4i, for example), is a staple of the large established powers – the very same powers that initially coined the term “Troll” as a smear campaign in their efforts to negate the power of patents.

    Any legislation – this included – that purports to deal with the “Troll” problem must be carefully evaluated to make sure that it is not just some anti-patent device (or wolf) in sheep’s clothing.

    And I would add (as I have noted many times) that the “specter” of litigation is a scare tactic in itself. The actual rate of litigation runs at far under 2% of all active patents (if only ALL areas of law had such a small litigation rate…!).

    If we let the scare tactic of litigation run patent law, we are not letting the tail wag the dog, we are letting the flea’s tail on the flea on the tail of the dog wag the dog.

  32. So it says, “in an action disputing the validity or alleging the infringement of…” but then fails to describe anything about what happens in the disputed validity situation.

  33. The sponsors cite the high cost of taking a case to trial, but how many cases will survive summary judgement or 12(b)(6) motions and “not have a reasonable likelihood of succeeding…”?

    The proposal will not affect well funded NPEs or other large patent owners. Small businesses and startups will be the group that is most deterred by the risk of an adverse judgement and associated fees.

    It may actually provide incentive to accused infringers who may not have much of a defense to drag out litigation because only patent owners have the risk of paying the other sides fees.

  34. Yes. It means that small design firms and individual inventors will be obsolete as a business model.

  35. In any journey, the first is always the hardest step. Suppose you were today designing from scratch a system of litigating civil disputes, that would necessitate a system of courts. Who would prevail: those advocating a Loser Pays rule, those who say such a rule stinks, those advocating no courts at all, or those advocating judging but not by public servants?

    In theory at least, it isn’t impossible to design from scratch. Europe did it in 1973, with the substantive patent law of the European Patent Convention, which was new for every country in Europe

  36. For several reasons, I think that it is unclear whether the bill would achieve that result in any respect.

    such as…?

  37. I do not understand this vary well but doesn’t this mean that a small developer who is infringed on will be risking massive legal fees to challenge a big developer?

  38. “ensuring outside development groups don’t get paid act of 2012”

    From the same geniuses who brought us TARP, AIA, Stimulus, Son of Stimulus, and Obamacare.

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