And now a return to a favorite topic here at AVC – patents, patent trolls, and the urgent need for patent reform here in the US.

One of my favorite ideas for sensible patent reform is "loser pays" for the legal costs of the other side.

The reality is that patent trolling is a low cost form of shakedown and that there isn't much economic cost on the troll to deter this behavior. If challenged in court, patent trolls win less than 25% of the time. And yet so few of these shakedowns ever go to court because the cases get settled for economic reasons (settlement cost are less than expected defense costs). And these settlements fund the trolls to keep shaking companies down. If the target company can recover their legal costs by defending themselves and winning, then the math over the settlement changes and more cases will be litigated, thus increasing the costs for the trolls.

This is where the SHIELD act comes in. There are so many things to like about this bill. It is only five pages long. It only does 1 1/2 things. The one thing is amend patent law to provide for loser pays. The 1/2 thing is it allows the court to require the troll to post a bond early on in the case to be sure they can and will pay the legal costs if they lose.

This is a bi-partisan piece of legislation being introduced by a representative from Oregon (Peter DeFazio – D) and a representative from Utah (Jason Chaffetz – R). In their press conference introducing the bill (embedded below), they say that the leadership is going to get moving on this bill quickly.

I think we should all help them by letting our representatives know we support this legislation. I just did that and it only took 15 seconds.


Comments (Archived):

  1. fredwilson

    my hope is it will put a lot of trolls out of business

    1. JimHirshfield

      Word. Trolls don’t build.

      1. scottythebody

        But you could argue a lot of the things people make money off of don’t build. Options trading, oddly-packaged securities, stock trading…

        1. JimHirshfield

          Not sure that’s relevant.

      2. Steve

        But, not everyone builds. Suppose you have a great idea — a novel one — but, no capital (or inclination) to build a product. But, you would like to license your idea out, so that others might build it. Or maybe other are already using your invention (either because they intend to free-ride, or they through of it independently, but after you). Why shouldn’t you be able to profit from the value of your invention (as long as it’s truly a patentable invention), if someone else is using it in a product to make money? Why should you have to build it before you can realize the value of your invention?

        1. JimHirshfield

          Parents were intended to protect inventors in the marketplace, not in the imagination.

          1. Steve

            But, companies frequently license out technology that they are not using — which both makes that technology (legally and logistically) available to others who may make profitable use of it for society, and extracts the value of the invention for the inventor who has used skill/knowledge/time to make the invention. There is no requirement in the patent law (nor should there be) that you are not entitled to a patent, or that you should forfeit your patent, if you do not use it to make a product.BTW, patents are an economic concept more than a manufacturing concept. A patent gives you the “right to exclude” others from using the technology that is within the scope of your patent.

    2. LE

      Maybe maybe not. Paying someone else’s legal fees (if you lose) is a cost of doing business. It will cause them to be more careful in the cases they pursue for sure. Or maybe they will simply reduce the amounts demanded to make it more attractive to settle and/or (as I’ve said elsewhere) widen the net. Or pay less for the patents and factor in the litigation cost. (Or reduce expenses by moving into cheaper offices!)The people who do these types of things are not clinicians they are strategists and are seizing upon an opportunity. They will work very hard to find someway to make this work and work around this law. Even if they make less money it’s still will be a viable money making scheme for someone.

  2. JimHirshfield

    This is awesome. It makes so much sense. Should be the case in so many other areas, no?Do you think this will compel more patent holders to build stuff instead of litigate?

    1. Scott Barnett

      I hope this gets passed and goes well beyond patent trolls.

  3. JimHirshfield

    FYI, the last two days the twitter short links haven’t been working. Maybe it’s just me?

    1. William Mougayar

      Thank you. I was having the same issues & thought it was me or my browser. C’mon Twitter.

      1. ShanaC

        for here or for lots of twitter shortlinks?

        1. William Mougayar

          For the links. It seems to be ok now.

  4. jason wright

    as an aside, why does the US allow software patents and the EU not?

    1. fredwilson

      i don’t know the answer to that

    2. Cam MacRae

      The EPO does grant patents for computer implemented inventions providing they make a novel technical contribution. In contrast, the USPTO does not require the CII to make any technical contribution at all.The EPO’s position is similar to that of the SCOUS in the 80s, before shit got weird and the Federal Circuit went off the rails.

      1. jason wright


    3. Kinkfisher

      As Cam says, so-called software patents *are* allowed (and even common) in the EU. However the bar for technical contribution is rather low, and the only thing it realistically blocks is business method patents. Most run-of-the-mill software patents that you find in the US could also be valid (and in fact often have counterparts) in the EU.

      1. jason wright

        education part IIyes, business method, that’s what i was grasping at.

  5. William Mougayar

    As an observer, I noticed 4 good characteristics about this Bill.1. Its draft is short 2. Reps introducing it want to move quickly 3. Bi-partisan4. Nothing stupid about it (internal AVC joke)Good example for other Bills. Maybe you need a Bill that stipules all other Bills should be short, pass in 30 days, be bi-partisan & not be stupid.

    1. JimHirshfield

      Micro legislation?

    2. awaldstein

      How is this handled in Canada?Everyone in the world has an opinion of how we in the US should manage ourselves and our laws.We couldn’t be the only country that is not perfect (which we certainly ain’t) šŸ™‚

      1. William Mougayar

        I was putting my “US hat” on, sort of speak.As far as I know, the origin of the problem isn’t as apparent in Canada as it is in the US, i.e. patent troll type of lawsuits don’t abound.The US is a land of excesses. On both sides. Extraordinary and extreme things happen there more than any where else, on a relative scale.

        1. awaldstein

          Thanks…Are you saying this is about the US culture? Or about the culture of dirt bags that grows up around our legal system?Cause it’s legal and legislative by nature?Illogical to me that if there are patent protections internationally there are not trolls as well as long as the legal system protects them.

          1. William Mougayar

            The difference about the US and other places is there are too many powerful lawyers in the US. Only in the US can you so easily sue anyone about anything and get away with it. You said it in more harsh words than I would: “culture of dirts bags that grows around our legal system.”I interpret the SHIELD act as a way to curb excesses in patent lawsuits. Protecting patents where it makes sense is fine, but not when the motives are ulterior.

          2. awaldstein

            Is a culture of litigation driven by the practitioners more than the system that allows them?It’s always intent that is the cause in my opinion. Lawyers are not the problem.BTW–I like this bill a lot.It’s interesting to me how the US culture and laws are coffee table chatter for the world.

          3. William Mougayar

            Not just US culture and laws. The US is an open laboratory for the world. Each country copies things differently. Japan’s initial rise in manufacturing post-WW II was because they devoured US research and started their manufacturing revolution that way.Innovation often starts by copying the basics of something, then adding to it. But we’re a bit on a tangent now šŸ™‚

          4. awaldstein

            Tangents are good….and interesting.My big issue is that this thought of as a problem perpetuated by ‘bad’ lawyers.Drug dealers are the not problem. Supply is.

          5. William Mougayar

            It’s perpetuated by the legal system, not bad lawyers. I think what lawyers do is a by-product of the system itself.

      2. JamesHRH

        All civil cases in Canada can, at the judge’s discretion, carry the potential for the awarding of costs. It is a British tradition, which is why it didn’t spring to mind for M. Mougayar šŸ˜‰

        1. awaldstein

          Yes–I lived in BC for awhile and the British tradition is certainly strong.

    3. ShanaC

      4 might mean more agency discretion. which can suck

  6. Jason Hull, CFPĀ®

    This is exactly how the legal system works in England, and I wholeheartedly agree that the loser should pay both sides. It would reduce the instances of us being a tortious society and encourage innovation and more risk-taking, since people not be looking over their shoulders all the time waiting for a suit-happy goon to try to get us to settle instead of taking them to court.

  7. John Beales

    I was going to suggest that a “poser pays” principle may discourage people from defending their patents in court when they really should be defended, but then I red the proposed bill and see that it limits “loser pays” to patent trolls. It does look like someone might still be able to troll by buying patents from the original inventors, but I’m not sure, (is “original assignee” someone who bought a patent from the inventor, or is it the inventor’s employer, who owns the IP created by its employees?).It’s also pretty sneaky, in a good way, that the “loser pays” judgement can be requested at the beginning of the whole process and stop the suit before it really gets started, thus freeing the courts for hearing cases where people are actually wronged.

  8. Richard

    Might need an additional small entity exemption

    1. fredwilson

      this is only for non practicing entities

      1. Richard

        Lets say you have two Phd students each with a patent. one assigns his patent a npe and one to a small entity. The small entity would like to commercialize the claimed subject matter but to do so needs additional VC. I don’t think the bill distinguishes between the two.

      2. scottythebody

        ah. that sort of addresses one of my concerns.

  9. Tom Labus

    Over it’s history, Seagate has been sued by the same group 7 times. They were using Seagate as an ATM since the average settlement was around 4M. Seagate actually went private, for a while, because of this extortion.

  10. William Mougayar

    The other parties that need to lay off on this are Lawyers. Several lawyers pursue startups & convince them they need patents when they don’t really need them.

    1. Matt Zagaja

      I’m a lawyer and as a law student I got to help draft patents for start-ups as part of my law schools IP & Entrepreneurship Law Clinic. Patents are expensive but the way the law is written if you don’t file it you lose it once there is a public use. Patents are not appropriate for every startup in every case, but it is something they need to think about before they start selling their things. Also investors tend to like patents. However we also try and remind people that patents are only worth what they can protect. You can get a patent on a rather narrow improvement, but often it isn’t worth the expense, and if it is one of these frivolous patents it won’t hold up in court. You’ve paid money for a worthless patent.Of course as a state entity our incentives were different so we would decline to pursue patents that did not seem worthwhile because our bandwidth for doing them was limited. Our labor was paid for by the state so the incentives were different. When you’re a firm looking for clients, the incentives aren’t aligned in the same way.

  11. takingpitches

    Good start, but I think it barely registers for Chef Myhrvold who is extremely well-funded and can absorb a few losses. Also knocks out some of his smaller competition for him.

  12. Sue Purvis

    Definitely helps the big companies. Not convinced it would help the little guy who can’t afford the possibility of losing in court.

    1. Matt A. Myers

      It will at minimum make trolls be cautious, and with a bond required will prevent a firm from suing 1000s of startups at a time, unless they have access to a lot of funds and/or are confident they have legitimate claims.

    2. ShanaC

      this is a problem with the patent system overall. The system as we have it now, due to cost to file, understaffing, the fact that it is extremely difficult as an individual to file a patent without the help of a lawyer, and the new first to file rules, really stack towards bigco.Unless all of these things change, why bother?

    3. Krishna

      Very true, Sue. My friend spent a fortune to pay patent attorneys to get his patents. Now, his patents and ideas are being shamelessly copied by a large firm that invited him for a potential M&A at one point. They figured out how small he was and did not go fwd on the M&A citing that his team was pretty small (2 people). Now, with this bill coming through, would he have any chance whatsoever of taking on these guys? Particularly, if he has to put a bond upfront? I really hope Fred Wilson thinks about that scenario too and advises the authors of the bill to leave clauses for genuine inventors. Last I heard, the foundations of our legal system are built on the notion that even if a guilty person goes free, an innocent person must never be punished. This Shield Act is not in tune with that ideology. They are just taking the small guy for granted .Truly & painfully – a shame!

  13. Dave W Baldwin

    This is a “go figure”… I don’t have a Rep in Congress.Is the EFF communicating to the world effectively beyond the software industry? All of the legitimate concern regarding trolling over the past 5 years will be magnified big time over the next 10 if we don’t get our hands around it.

  14. Richard

    The bill is a little vague on prevailing on an invalidity defense. Lets say the patent has 10 claims. Claims 1-5 are held to be invalid. Claims 6-10 are valid and the defendants infringe these claims but in a trivial way (that is they can quite easily be designed around). Which party pays?

    1. Matt Zagaja

      The courts don’t tend to care if you “could have” not infringed. If you infringe, then you infringe. The burden is on you to make sure you don’t.

      1. Richard

        For sure…but the issue is under this legation is a npe saved from costs when a single claim number 59 is held valid and infringed, yet claims 1-58 are invalidated.

    2. Matt A. Myers

      Probably the most frequent issue that will arise. I imagine it could only work where the patent owner is still the winner, though the damages would be considered less.

    3. ShanaC

      i wouldn’t be surprised if this becomes the norm due to how software engineering works. Or design

  15. crazy computer dad

    I’m all for the reform, but I worry about this way of going about it. We all hate the trolls that try to capitalize on the opportunity of using patents to get a piece of something entirely through litigation and never putting any money into making a block diagram on a piece of paper into reality on their own. But that also works the other way when large companies squash smaller startups with litigation they can’t afford, but are legitimately following up on their ideas. it is a two edged sword.

  16. Adam Schwartz

    Last year we settled with a patent troll knowing the settlement cost was cheaper than fighting it. Without a doubt we would have fought it knowing we could recoup atty fees.

    1. Matt A. Myers

      Likely chance most others they went after felt the same. I feel just these simple things in place will really quickly rid bullshit patents / force definitions of what is legitimate and what’s not.

  17. Matt A. Myers

    This sounds great if it will work how you say.

  18. Martin Wawrusch

    I was born in Austria, where this system is in place for all lawsuits by default. Works out very well, there are very few frivolous lawsuits.

  19. Software Developer

    I don’t like the law because big companies are patent trolls too. This law only treats a symptom, not the problem. This bill fails to stop big trolls.One problem is patents are being granted on the goal itself instead of the invention that leads to that goal. Amazon’s one-click patent is a perfect example. It doesn’t matter how creatively I implement my checkout process, if it only takes one click, it infringes on Amazon’s patent. Just patent “Make X easier” and you can start suing too.Design patents are another problem. Like fashion, designs should be considered too utilitarian to be patentable. Nobody can patent the spread collar. Why are companies like Apple even allowed to patent rounded corners? There’s a great TED talk by Johanna Blakley which covers this from a fashion perspective in greater depth. You should watch it sometime.Finally, there’s the problem that the patent office is simply granting bad patents. To be patentable, an invention must be non-obvious. Nokia’s multiuser patent on mobile handsets is a good example. Multiuser systems operating systems have been around for decades. Yet somehow Nokia won a patent for a multiuser operating system … on a mobile phone. This is ridiculous.This bill solves none of these problems and will only tilt the playing field in the direction of big patent trolls. If this is all they’ve got to fix the problem, they just need to put an end to the patent system entirely.

  20. LE

    Disclaimer: I didn’t read the 5 pages I’m going on what’s written in this blog post with my comment below.So going on this and what I know about this issue so far:And yet so few of these shakedowns ever go to court because the cases get settled for economic reasons (settlement cost are less than expected defense costs). And these settlements fund the trolls to keep shaking companies down. If the target company can recover their legal costs by defending themselves and winning, then the math over the settlement changes and more cases will be litigated, thus increasing the costs for the trolls.This, while a step in the right direction and certainly a help, does nothing to discourage trolls from going after small business such as the local Holiday Inn franchise sued as a result of using a wifi patent or a machine that they use that bakes the morning rolls.A troll sending out an invoice for $500 is not worried about paying legal fees in the absolutely minor chance that the people who own that property will decide to fight the case. Or even to hire an attorney to review the case. It’s simply not going to happen. This is much different then a VC backed company or a larger established company with 1000 employees who gets sued for a much larger amount which of course this is a great benefit. If I was a troll I could easily game this. Lower the amount and increase the number of people or business targeted. Problem solved.The legislators have taken a step in the right direction. But it seems that this legislation (see disclaimer that I started with again) has been written after lobbying by a certain group of people/companies who will benefit from it. The trolls will just pick other targets. Where is the legislation to block that? You probably won’t see it since small business people will not muster resources over an occasional small shakedown they will just pay and move on to putting out the next fire.Fred, Arnold, JLM, William, Kid, Phil Sugar or anyone else if you got hit with a $500 invoice from a patent troll would you waste your time fighting to recover legal costs? Or would you pay the troll and concentrate on your business?See this for reference:

  21. ShanaC

    This isn’t so helpful in light of moving towards a first to file system. As long as the troll has the patent, who cares?

  22. J Nicholas Gross

    This piece of legislative pandering is as bad as the get out of free card that Schumer and his cronies passed a few years ago where they carved out an entire industry (banking) and declared it immune from certain patent lawsuits. Wow, what other business can buy itself such protection?Its further amazing to me that so many so-called protectors of “property rights” are so blind to their hypocrisy in all things patent. Patents, whether you like them or not, are a form of property bestowed by the government, which provide the power to exclude, just as anyone who owns a piece of real property can evict squatters. We don’t differentiate or question HOW the owner got the property, or penalize them if they did not build the building themselves. No one would be shedding a tear if a landlord got rid of a tenant that was not paying their rent for the use of the property.Patents are just another asset that has government and public recognition and protection. In fact they are more highly regarded because they are expressly called for in the Constitution as representing the best way to promote the progress of Science. These types of laws are nothing more than corporate pandering to protect some group lining the pockets of these politicians at the expense of inventors.Until someone calls for a constitutional amendment and changes the law, I submit you ought to stop siding with the IP thieves.

    1. fredwilson

      you sound like you are pro patent. i am not, certainly not for software and business someone a property right in an idea is a bad idea

      1. Jim Ritchie

        Hit the nail on the head. Patent law in US was conceived when a patent was for a tangible and physical item. Patent law has been extended to intellectual property, software, and business methods, which does not make much sense.I used to be on an internal patent review team at a large public software company. 99.9% of the patents we filed were intuitively obvious things that any undergraduate CS major learned in school. Many of these patents were granted. I ran corp dev and was personally against doing this, but was overruled by the new VP of Legal and CEO. Both came from expensive hardware biz where suing their rivals was just part of doing biz. They were eventually fired as they did not get the SW biz.

        1. Glen Coates

          That job sounds simply awful. I can’t imagine being able to sleep particularly well knowing that I’m going to work to try and patent depth-first search algorithms or some other nonsense.Dry heave.

          1. Jim Ritchie

            Was not really my job, just a committee that met once a month to review our potential patent submissions. CTO, VP of Engineering, VP of Legal were also on committee. But yes, filing baloney patents simple to fill your defensive arsenal is not rewarding at all.

      2. J Nicholas Gross

        appreciate your perspective, but there are no patents on “ideas” – and there are few “software” patents in the true sense of that wordwhat people call “software” patents – particularly in this sphere – are actually patents covering machines (computers) configured to operate in a particular manner by code – so, in effect, they are programmed machinesbut to the outside world there is no perceptible or meaningful difference between a “computer” that is “pure” hardware and coded using hardware logic gates/or ROM, and a programmable machine that can be changed using “software” codethey are in effect just different machines, and you can get patents on those just as you can get patents on any other variation of a machine, or toolso the argument against software is rather weak -the argument against business methods is a bit more subtle, but, again, the patent act recognizes novel processes as worthy of protection – if one is performing a new process that is unlike and different enough from the prior art, it doesn’t matter that the process is used to operate a businessI usually hear this complaint from people who see another online business, want to copy it, and then are surprised when they get caught. The software business tho is rife with folks who are mostly used to taking what they want without accountability, so its no surprise that they protest when someone calls them to task

  23. Eric Friedman

    Done. Great start.

  24. Chris Johnson

    This is likely an improvement, but my fear is what happens when Apple steals from me? Where do I get my money to pay the costs of Apple’s score of $700/hour employees?

    1. martinowen

      Quite so @genuinechris:disqus . Making the cost of litigation a barrier for those defending their legal rights is surely unconstitutional. Before this is put in place the cost of litigation needs to be addressed.

      1. scottythebody

        This is exactly what I was thinking. How do you determine if somebody is a troll or a person legitimately trying to defend their legal rights and, furthermore, this seems to shift everything in favor of those with means.

  25. JamesHRH

    You can only hope that this leaks into the entire US legal of luck!

  26. Steve

    I understand the burden for companies of defending against true trolls with bogus patents. But, I worry that the proposed change would stack the deck against the small company or solo inventor who has genuinely invented something of value, but can’t protect that value (by demand or lawsuit) because of the now larger financial burden/risk. In that scenario, why should the alleged infringer (often, but not always, a larger company) be able to profit by infringing (whether willful or not) simply because they have greater resources and (now) an additional financial barrier to protect that infringing behavior?It seems like the challenge is to find the right balance between these two interests. I don’t know if this proposed change strikes that balance right or not.

  27. iamronen

    wouldn’t it be possible to use a similar tactic to battle lobbying? Requiring all “donations” to be met with equal donations (or split in half) to an “equalizing fund” that is made available (don’t know how) to alternate and unfunded voices?

  28. Prokofy

    Yes, I can get behind this. It’s fair and it sounds effective. It’s a good idea, and it doesn’t collectivize property, which is of course what you really want to do — at least not yet.I’m not for monkeying with the patents system like Beth Noveck or your or others are for doing really as a strategy to undermine other people’s property and collectivize it. I don’t believe patents are really the issue you claim. The prevalence of lawsuits lets me know that they are valued.But this way, you can get rid of the “trolls” that you think plague the system — that is, you think that’s what they are and that they plague the system.The first thing you will discover — and this will be beneficial to your de-bolshevikation — is that those people you think are trolls — some of them — will not back off and will not be deterred by cost because they think they are right. This may shock you.

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