Last week, the U.S. Supreme Court handed down a pro-business, pro-innovation decision that severely limits the federal district(s) in which a domestic company can be sued for patent infringement. The decision was applauded this week by tech firms, large and small, and is sure to drastically reduce the total number of patent infringement cases filed each year in the U.S. In particular, it should substantially reduce the often-baseless cases filed by entities that buy-up bogus patents and use costly patent litigation, or the threat of costly patent litigation, to bully companies into settlements – often referred to as “patent trolls.”
The Supreme Court’s unanimous decision in TC Heartland v. Kraft Foods (Case No. No. 16-341) (Judge Gorsuch took no part in the decision) dealt with the patent venue statute (28 U.S.C. § 1400(b)) that determines where a patent holder may file suit. Section § 1400(b) 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.” The Supreme Court’s decision dealt with the “where the defendant resides” prong of the statute in reversing the Federal Circuit.
For decades, District Courts have interpreted the phrase “where the defendant resides” very broadly, effectively allowing patent holders to file suit in practically any district court in the United States. Such broad interpretation resulted in extreme forum shopping by patent holders, who often chose to file infringement cases in certain plaintiff-friendly districts, such as the Eastern District of Texas. And, over the years, many small Texas towns within the district (such as Marshall and Tyler) have benefited from the steady flow of patent litigation traffic (e.g. local restaurants, shops, hotels and IP litigation attorneys).
The Eastern District of Texas has been a particularly popular filing venue for patent trolls because of the districts’ fast-track litigation procedures, favorable jury awards to patent holders and its relatively remote location. Forcing a company to defend a case far from its headquarters and resources often resulted in lucrative settlements for the patent trolls, no matter how weak the patent asserted or how specious the infringement claims. In fact, over 40% of all patent cases are filed in the Eastern District of Texas and one District Judge in Marshall, TX (Judge Gilstrap) is estimated to handle ¼ of all patent cases filed nationwide.
In this week’s decision, the Supreme Court held that the phrase “where the defendant resides” in §1400(b), as applied to domestic corporations, refers only to the State of incorporation. Thus, a patent infringement action may not be brought against a corporation in a judicial district in which it is not shown to have committed any of the alleged acts of infringement and which is outside the State where it was incorporated, even though the company may have a regularly established place of business in that district.
The Supreme Court determined that its 1957 decision in Fourco Glass Co. v. Transmirra Products Corp., 353 U. S. 222, 226, remained controlling. In Fourco Glass, the Supreme Court concluded that for purposes of §1400(b) a domestic corporation “resides” only in its State of incorporation, rejecting the argument that §1400(b) incorporates the broader definition of corporate “residence” contained in the general venue statute, 28 U. S. C. §1391(c). In this week’s decision, the Supreme Court pointed out that Congress has not amended §1400(b) since Fourco, but it has twice amended §1391, which now provides that, “[e]xcept as otherwise provided by law” and “[f]or all venue purposes,” a corporation “shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” §§1391(a), (c).
The Supreme Court concluded that because Congress has not amended §1400(b) since Fourco and because Congress did not indicate an intent to change the meaning of “reside,” as used in §1400(b) when amending §1391, its decision in Fourco (and the implicit “State of incorporation” qualification of §1400(b)) is controlling. It should be noted that only cases against domestic corporations are affected by the Supreme Court’s decision in TC Heartland, apparently leaving patent holders free to choose where to file against accused infringers that are not domestic corporations.
Nonetheless, after TC Heartland, patent infringement filings by patent trolls should be greatly reduced because they can no longer simply file and maintain cases against domestic corporations in plaintiff-friendly districts such as the Eastern District of Texas. Unfortunately for Marshall, Tyler and other East Texas towns, the torrent of lucrative patent litigation-related business traffic may slow to a trickle.