Will the SHIELD act reduce patent litigation?

A new “loser pays” bill aimed at reducing “patent troll” litigation is getting a lot of attention since its introduction last week.

The Saving High-Tech Innovators from Egregious Legal Disputes (SHIELD) Act of 2013 proposes to allow defendants who prevail in patent lawsuits to recover costs from the plaintiff if the plaintiff is not: (i) the inventor or the original assignee; (ii) a party who made substantial investment through production or sale of an item covered by the patent; or (iii) a university or research institution.

According to co-sponsor Congressman Jason Chavetz (R-UT):

The SHIELD Act ensures that American tech companies can continue to create jobs, rather than waste resources on fending off frivolous lawsuits. This bill combats the problem of patent trolls by moving to a ‘losers pays’ system for software and hardware patent litigation.

The bill has already been amended to go beyond software and hardware patents, but it still raises some potentially significant issues.

For example, many companies who make and sell products covered by patents currently place the patents in a holding company for tax or other accounting purposes.  The bill does not expressly exempt such patent holders from the “loser pays” provisions.

In addition, the law only awards damages to the defendant “upon entry of a final judgment” of non-infringement or invalidity.  Because of the high cost of patent infringement, most patent cases settle well before they reach a final judgment. Will the new bill encourage defendants to take a case all the way to final judgment, given the large investment of time and corporate resources required to do so? It is not clear how defendants can value — and whether they can recover — such costs under the SHIELD Act.

It may take a few amendments — or perhaps additional bills in future sessions of Congress — before issues like the ones described above are resolved. Despite these issues, the SHIELD Act may be a first step toward a broader set of patent litigation reforms.

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