Supreme Court Report

Supreme Court makes venue shopping harder for patent trolls

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Could this be the end of out-of-town patent lawyers flocking to Marshall, Texas? They’ve become known for showing up in luxury cars, ordering catered gourmet meals for their trial war rooms and running up expensive hotel tabs.

Will major corporate patent litigants stop sponsoring events and festivals there?

That’s the future some observers predict for the top destination for patent infringement lawsuits after a U.S. Supreme Court decision limited the venues where such suits may be filed.

Writing for the court in TC Heartland v. Kraft Foods Group Brands on May 22, Justice Clarence Thomas said the definition of “residence” in the federal statute about patent venue—first adopted in 1897 but later amended—refers only to the state of incorporation for a U.S. company. The decision was 8-0, with Justice Neil M. Gorsuch not participating because the case was argued before he joined the court.

The court overturned a series of decisions by the U.S. Court of Appeals for the Federal Circuit. The Washington, D.C.-based court that specializes in patents had permitted a broader definition of residence that allowed patent suits to be brought virtually anywhere in the country.

The decision will create more challenges for plaintiffs known as patent assertion entities or nonpracticing entities—disparagingly referred to as “patent trolls.” These individuals and corporations typically acquire patents not to create products but to generate revenue by asserting them against alleged infringers.

“This is a major decision for how it will affect where patent cases are filed and the number of cases filed,” says Ted M. Sichelman, a professor at the University of San Diego School of Law who helped organize an amicus brief by law, business and economics professors in support of Kraft.

Many observers think the decision will be felt most severely in the U.S. District Court for the Eastern District of Texas. One of its courthouse locations in Marshall, 150 miles east of Dallas, has been popular for filing patent cases, including by trolls. In 2015, 44 percent of patent cases nationwide were filed in the Eastern District, according to Colleen V. Chien, an associate law professor at Santa Clara University, and Michael Risch, a law professor at Villanova University.

Flavored-Water Fight

The case before the high court was somewhat unrepresentative of the trends pushing the larger debate about patent trolls. Kraft Foods, a subsidiary of the Kraft Heinz Co., wasn’t a troll that sought to cash in on its patents. It filed a more traditional patent suit alleging that “liquid water enhancement” products by TC Heartland (which does business as Heartland Food Products Group) infringe three of Kraft’s patents. Kraft has a line of electrolyte-enhanced flavored-drink mixes that compete with Heartland’s Go Splash brand in a half-billion-dollar market.

Kraft, like many of the largest U.S. companies, is incorporated in Delaware, where it filed suit against Indiana-based Heartland, which challenged the venue. Heartland argued it has no business presence in Delaware.

Thomas’ opinion relied on a 1948 version of the patent venue statute and a 1957 Supreme Court decision interpreting it—Fourco Glass Co. v. Transmirra Products Corp. In that decision, the court ruled that for the purposes of the patent venue statute, a domestic corporation “resides” only in its state of incorporation. For many publicly traded companies, that state is Delaware because of its corporate-friendly state courts.

In 1990, the Federal Circuit interpreted a congressional change to a general litigation venue law to redefine “patent venue” to essentially allow such litigation to be brought almost anywhere in the country. The court reaffirmed its view last year with its decision in the TC Heartland case.

Thomas’ 10-page opinion avoided policy questions about patent venue and instead focused on statutory interpretation. He rejected Kraft’s argument, and the appeals court’s conclusion, that amendments to the general venue statute changed the earlier patent-specific venue statute.

Mark A. Lemley, a professor at Stanford Law School who helped organize a brief in support of Heartland, says the decision is the Supreme Court’s most important patent ruling since Alice Corp. v. CLS Bank International in 2014, in which the justices tightened the rules for deciding what inventions are eligible to be patented.

Under TC Heartland, plaintiffs “can sue where a defendant is incorporated—many in Delaware—or in a district where they have a regular and established place of business and have committed acts of infringement,” Lemley says.

Most observers think the decision will help technology companies and other large patent holders in their battles with patent trolls. “If you think patents are so important for innovation, you’re a happy camper with this decision,” Sichelman says.

Lemley says the location of a defendant’s corporate headquarters “will usually be fair game, and companies like Apple that have stores around the country can be sued in those places for products they sell in those stores.”

“We will see many, though not all, cases move out of the Eastern District of Texas toward Delaware and technology centers like California, Massachusetts and Virginia,” he adds. “And since the cases that gravitated toward the Eastern District of Texas were overwhelmingly low-value patent troll cases, defendants may find it easier and cheaper to resolve those disputes once they are no longer in the Eastern District.”

plethora of patent lawsuits

The decision was perhaps awaited nowhere more closely than in Marshall, a city of about 25,000 where not everyone agrees that patent litigation is going to dry up anytime soon.

“A plaintiff can still sue for patent infringement in Marshall if the defendant is incorporated in Texas or if the defendant is committing infringement and has a regular and established place of business” there, says Carl R. Roth of the Roth Law Firm in Marshall. “And of course, the opinion only applies to domestic corporations. The general venue statute still provides nonresident or foreign defendants may be sued in any judicial district anywhere, and foreign defendants are frequently sued here.”

Roth is partly responsible for the rise of patent litigation there. Texas Instruments hired him to represent it in the Eastern District in the mid-1990s, when the then-struggling tech giant had turned to its portfolio of patents for revenue. TI was suing the infringing companies, but federal trial courts in its Dallas headquarters were clogged with drug and other criminal cases.

TI started to file cases in the small federal courthouse in Marshall. Soon, the federal district judge in the city, T. John Ward (who’s now retired), was expediting patent cases and even used a chess timer to keep things moving.

Marshall became a destination for patent infringement lawsuits under the then-prevailing liberal venue interpretation. Legal teams from Dallas and elsewhere rented office space during trials. Caterers began to devise sophisticated menus for visitors’ palates. (One told the Dallas Morning News after the TC Heartland decision that chicken Florentine and mahi-mahi with mango salsa were favorites.)

When Samsung was in town for a trial, it distributed tech gadgets to the city’s schools, built the local ice rink and helped sponsor the FireAnt Festival. Some hotels even set up PACER accounts to try to track the federal district court’s patent docket.

Michael C. Smith, the partner in charge of the Marshall office of Siebman, Burg, Phillips & Smith and author of the Eastern District of Texas Blog, expects the patent docket to shrink in Marshall—in part because of the Supreme Court decision and partly because it was already trending downward.

But the notion that patent litigation is a major driver of the city’s economy is an exaggeration, he says. “We actually have other things we do for a living in Marshall,” Smith says.

Roth has long been mystified by criticism of the Eastern District patent docket. Besides the fast pace, he says, the judges have been scholarly in their approach to complex patent disputes, and the district’s juries take the cases seriously. Also, the notion that the venue is accessible for plaintiffs is belied by statistics in recent years, showing a near 50-50 split. “Neither side has a home-court advantage,” Roth says.

This article appeared in the July 2017 issue of the ABA Journal with the headline "Troll Hike: Supreme Court makes it harder for patent litigants to shop for favorite venues."

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