On February 27, 2013, Congress proposed the “Saving High Tech Innovators from Egregious Legal Disputes (SHIELD) Act.” This bill is designed to stem the tide of patent litigation initiated by non-practicing entities, also known as “patent trolls.” A non-practicing entity (“NPE”) generally operates by forming a shell corporation to acquire and hold patents, then litigating against anyone who uses the covered technology without a license. The NPE’s goal is to monetize its patent portfolio through license revenues obtained in connection with patent infringement settlement agreements. According to President Obama, the NPE business model is designed to “leverage and hijack somebody else’s idea and see if [the NPEs] can extort some money out of them.”

Business is booming. Numerous NPEs have come into existence in recent years, initiating hundreds of patent infringement lawsuits. Estimates from 2011 show that NPEs received as much as $29 billion from U.S. companies. At the heart of the NPE business model is the stark reality that defending a patent infringement lawsuit costs hundreds of thousands, and often millions of dollars. Some patent trolls therefore assert dubious claims against accused infringers knowing that most defendants will settle by executing a patent license rather than risk the costs and uncertainty of patent litigation. The SHIELD Act is designed to address this issue by shifting risk back to the NPEs. Its authors hope that shifting enough risk to NPEs who instigate frivolous patent infringement lawsuits will discourage and reduce such meritless lawsuits.

Although the SHIELD Act appears to be well intentioned, the current version of the bill may have some serious flaws. The bill is designed to apply to shell companies which acquire patents from others, where those companies do not practice the inventions they have acquired. Yet, the bill contains no provision or exemption addressing holding companies that are often formed by innovative entities to hold intellectual property rights for tax purposes or other legitimate business reasons. As a result, the SHIELD Act may have the unintended consequence of increasing liability exposure to intellectual property holding companies even when those entities are wholly owned and operated by legitimate innovators. This could create a chilling effect on the ability of some patent holders to vindicate their exclusive rights. Smaller entities who have acquired patent rights, but have not yet been able to commercially exploit their intellectual property, may also potentially fall within the scope of the SHIELD Act. The current bill therefore may be over broad in its impact

Although the pejorative term “patent troll” has been applied to NPEs with an attitude of righteous indignation, many NPEs have done nothing unlawful and are simply exploiting a business opportunity created by the exclusive nature of the patent grant. Although obtaining a patent only to remove it from public use defeats the purpose of the patent system’s goal of advancing innovation by placing inventions into the hands of the public, an NPE’s enforcement of exclusive patent rights is clearly permitted, and not all NPE-initiated litigation is frivolous. Yet the SHIELD Act could potentially operate under the assumption that patent litigation by any NPE is frivolous.

Would anyone buy a patent license if the intellectual property owner never enforced its rights against unlicensed parties? Of course not. The SHIELD Act, however, would potentially elevate risk for businesses who have elected to monetize a portfolio of intellectual property by licensing it to others in lieu of actually manufacturing products. The authors of the SHIELD Act and its proponents should consider the proposition that, while all patent trolls are NPEs, not all NPEs are patent trolls.