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May 22 2017

SCOTUS Ends Forum Shopping in Patent Cases

Well the docket of the Eastern Texas Federal District Court is going to get much lighter in the coming months and years. In a unanimous 8-0 decision, in a case titled TC Heartland LLC v. Kraft Foods Group Brands LLC, the Supreme Court held that a person or entity claiming patent infringement must bring the suit in the State where the defendant company actually “resides.” In 1957, the Supreme Court decided, in Fourco Glass Co. v. Transmirra Products Corp., that “resides” meant the State of the company’s incorporation. But since then, and beginning specifically in 1990, the Federal Circuit, the mid-level appeals court that hears all patent-based appeals regardless of where they are filed, has ruled that a patent defendant can be sued anywhere it has “sales.” So for national and global brands that means practically any district in the country. This runs counter to the patent venue statute, 28 U.S.C. § 1400(b), which provides that “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”

Troll home no more

Patent plaintiff’s lawyer’s don’t choose any district; more than any other, they choose East Texas. Normally, cases in the rural East Texas court take less time to get to trial than in other districts. But East Texas has other qualities that have made it perennially attractive to patent-plaintiffs. Defendants are very unlikely to win a summary judgment motion, as judges in the district are much more likely to give the case to a jury. That dramatically raises the cost, and risk, for defendants which in turn raises the likelihood of a settlement. Given a choice between a $200,000 settlement and a $2.8 million trial – which is the mean cost to a defendant of litigating patent cases in Texas involving between $1 million and $25 million in damages, according the American Intellectual Property Law Association – most defendants choose to fold early and cut their losses. East Texas judges also move trials quickly. Trials are often over within a week which hurts larger defendants who generally like to take their time and mount long complicated defenses. In addition, East Texas juries seem more inclined to large verdicts and love a “little guy versus Goliath” story. Patent plaintiffs in East Texas win 88% of the time compared to 68% in all other districts.

That has lead to a second East Texas phenomenon: patent-holding companies that “reside” in East Texas. Essentially shell companies, they do little more than purchase patents with the purpose of squeezing quick settlements out of major technology companies whose technologies may overlap with the patented feature. Many of those companies are “headquartered” in small offices in the building next door to the federal courthouse in Marshall, Texas; or they’re in the Energy Center in nearby Tyler, Texas. So now, “David” can be portrayed as a local East Texas company fighting with Global Goliath. How you like them odds, cowboys?

Patent trials in East Texas have become commonplace as the thousands of cases filed make their way through the judicial system. According to Wikipedia, in 2016, 1,647 cases (or 36.4%) of the nation’s patent cases were filed in the Eastern Texas District, which more than the total number of lawsuits filed in the District of Delaware (455 cases or 10.1%), Central District of California (290 cases or 6.4%), Northern District of Illinois (247 cases or 5.5%) and Northern District of California (188 cases or 4.2%) combined. That’s ridiculous especially when you consider how many companies are incorporated in Delaware and California.

Justice Thomas, writing for the Court, ruled that the Federal Circuit was wrong in using the place where sales occurred rather than the place of incorporation as the proper venue. This decision puts an end to the forum-shopping and brings patent litigation back to where the statutes put venue – where the defendant company is incorporated. It will be interesting to see what effect this has on patent trolls and on the East Texas docket. Its day in the sun as the haven for patent plaintiffs has come to an end. What will they do with all the free time I have to wonder?

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5 comments

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  1. Mrs. Jones

    The state of incorporation makes no sense for venue. Let’s try location of the corporation’s primary headquarters which does.

    1. Oscar Michelen

      Defining “primary headquarters” may be easy for some corporations but not others. The point is that state of incorporation has been widely used as the “residence” of the corporations and this decision puts an end to “forum shopping”

      1. Jack Sprat

        The point is it makes no sense for DE/Nevada to try these cases unless the Corp. at issue has some actual connection to the state (e.g., offices of senior management, production facilities) other than filing a COI.

        Or we could flip a coin to determine venue. That will end forum shopping too and make as much sense.

  2. Bob

    How does that ruling affect patents held by individuals?

    1. Oscar Michelen

      It doesn’t. You’d have to be sued in the Federal District where you reside, that was always the case. The issue here was where corporations “reside.”

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