Days Numbered for “Patent Trolls”

By HunterMaclean Attorneys

For Business in Savannah

Imagine developing an innovative software product and then being sued for patent infringement as part of a premeditated, frivolous lawsuit designed to gain as much money as possible through a settlement.

A growing trend of patent infringement litigation has emerged in the world of technology start-ups, offering a potentially lucrative payday for non-practicing entities (NPEs), otherwise known as “patent trolls.” However, a new bi-partisan bill on the horizon threatens to put an end to this practice.

On July 23, 2012, Rep. Peter DeFazio, a Democrat from Oregon, and Rep. Jason Chaffetz, a Republican from Utah, co-sponsored the Saving High-Tech Innovations from Egregious Legal Disputes Act of 2012 (SHIELD). This legislation introduces a new “loser pays” rule in patent infringement litigation.

If passed, the new bill would require a non-practicing entity to pay the legal costs of the defendant if the court determines the lawsuit is without merit, effectively discouraging frivolous lawsuits that won’t hold up in court but often lead to settlement payments.

NPEs claim to help inventors profit from their creations, however there is overwhelming evidence to the contrary. The truth is NPEs have established a practice of collecting broad computer hardware and software patents with no intention to develop any products — and then filing suit against companies for alleged patent infringement.

Unethical at best, this practice often places financial hardship on small to medium size companies who are often forced to settle due to the prohibitive costs of litigation, despite the arbitrary nature of the claim.

In June, a Boston University study revealed NPE litigation is on the rise, affecting 5,842 defendants in 2011 alone and costing an estimated $29 billion in direct costs. While large firms accrued over half of the direct costs, 37 percent of the defendants were small to medium-sized companies.

Much of the litigation consists of nuisance suits that settle for a few hundred thousand dollars. However, there are a number of “big game hunters” who seek out large settlements.

While the SHIELD Act only applies to computer hardware and software patents, it will provide a layer of protection for high-tech innovation and protect American jobs. Moreover, this fee shifting or “loser pays” rule could potentially lead to broader lawsuit litigation reform that is desperately needed to protect small businesses.