One of the discussion points about the new PATENT Act reform proposal
making the rounds is the "reach through" that pierces the corporate veil for those entities that must pay attorneys' fees. Like so many of these fee shifting proposals, I'm left scratching my head
and wondering whether this is where we want to make our stand, heading down the slippery slope of corporate veil piercing. I can think of so many other worthy plaintiffs and defendants where I would rather pierce the veil, and yet we don't.
I don't want to minimize the concern. The protection offered limited liability companies is a real problem for those who want to collect against them. I've known this since I was shocked to read Walkovszky v. Carlton
in corporations law. The defendant owned 20 taxicabs in 10 corporations, but the court allowed liability only against the one corporation that owned the cab that ran over the plaintiff. While it seems ridiculous to allow corporations to avoid liability this way, this is a deeply engrained rule of law in this country. In any event, I haven't seen any real data about how often fee awards go unpaid, so I don't know just how much of a problem this really is. I suppose it will become a more common problem if there is more fee shifting.
Make no mistake, though, the PATENT Act and all other veil-piercing fee proposals are not about under-capitalized shell companies - not at a deeper level. These proposals stand for the proposition that we hate patent enforcement by non-practicing entities so much that we're just going to throw out all the rules that apply to everyone else, no matter how bad an actor all those other people are. Only patent plaintiffs are so despicable that they are no longer entitled to corporate status. And this is not just about patent acquisition companies - this covers inventor operated companies, research companies and think tanks, failed startups, and anyone else who doesn't make a product.
I should note here that I'm not wholly opposed
to fee shifting. I think there can be some benefit to reciprocal fee shifting, and I also think that the "objectively unreasonable" standard is better than a presumption. I should also note that this is not a plaintiff only issue. Only a few short years ago, record companies sued a venture capital firm for investing in copyright defendant Napster, a company that had, at best, a crapshoot of winning its case. That investor suit was also unwarranted for the same reasons that this proposal is: targeted veil piercing to support substantive policy goals is not a great idea -- the bell tolls for thee.
After the jump is my nitty-gritty analysis of the fee-shifting and veil-piercing proposal, and discussion about why I think it's a problem.