Juelsgaard Clinic Urges Supreme Court to Rein in Patent Trolls to Unleash Innovation and Startups

The Juelsgaard Clinic filed an amicus curiae brief in the Supreme Court this week urging the Court to limit forum shopping in patent cases. Clinic students Stephen Liu, ’17 and Michael Hoosier, ’18 represented Engine Advocacy, a non-profit technology policy, research, and advocacy organization that works to bridge the gap between policymakers and startups. Their brief asks the Court to reverse a decision of the Federal Circuit that allows plaintiffs in patent cases to file suit almost anywhere in the country. That decision has led to rampant forum shopping in patent cases, a huge concentration of patent cases in a handful of districts, and the rise of patent trolls, all of which impose large costs on startups, small businesses, and entrepreneurs.

This case, TC Heartland LLC. v. Kraft Food Group Brands LLC., will decide where companies can be sued for patent infringement. Currently, patent suits can be filed in any district court where a defendant’s product or service is sold. For anyone who sells a product online, or puts their app on an app store, this often means they can be sued anywhere in the country. Patent trolls exploit this rule by shopping around for the forum with the most plaintiff-friendly rules. The added costs of forum shopping in patent cases drain money and employee time from startups and small businesses. This decreases innovation, costs jobs, and damages the entire economy.

For decades, federal courts followed the narrow venue rule that Congress specially crafted in 1948 that limited patent suits to the district where the defendant company is incorporated, or where it has a regular and established business presence, like an office branch or corporate headquarters. 1990, the Federal Circuit departed from this rule and long established Supreme Court precedent by greatly expanding where patent defendants could be sued.  The Clinic’s brief asks the Court to return to the proper, limited rule.

The brief focuses in particular on one small judicial district, the Eastern District of Texas, which has become notorious as the kind of pro-plaintiff venue that encourages patent trolls to bring weak suits in faraway districts. The brief cites some stark statistics:

  • Even though the Eastern District of Texas is home to very few technology companies, it heard the most patent cases of any district court in the United States for eight of the last ten years, and for every one of the last six years (it was the second most popular district in the two years it was not first).
  • In 2015, a whopping 43.6% of all U.S. patent cases were filed in the Eastern District.
  • Over one-third of all patent cases in the country were heard by just two judges in E.D. Texas.
  • Since 2014, one judge, Rodney Gilstrap, has heard one-fourth of the nation’s patent cases—more than all patent cases filed in the states of New York, California, and Florida combined.
  • Only 14.8% of patent cases in E.D. Texas involved an inventor or a defendant with a branch in the district.  In the Northern District of California, which covers Silicon Valley, that number was 87.6%.

The Eastern District of Texas has achieved this wildly disproportionate share of patent suits and has become the destination of choice for patent trolls because it offers a host of plaintiff-friendly jurors, procedures, and rules. These advantages translate into both a higher settlement rate and a higher plaintiff win rate (55% in E.D. Texas compared to 33% nationwide). The Clinic’s brief describes for the Supreme Court these advantages and other local efforts to “sell” the E.D. Texas as a favorable district for trolls to bring suit.

For example, a group of local businesses and organizations in Tyler, Texas (home of one of the two popular “divisions” within the E.D. Texas) created a website that seeks to lure new companies to the area. One page, (pictured below and in the brief), prominently titled “IP Friendly,” touts Tyler as “a popular venue for patent cases” due to “plaintiff-friendly local rules” and “speedy dispositions.” It assures that “principled jurors in East Texas show a propensity for understanding the true value of Intellectual Property and have awarded IP owners appropriately.” It then lists seven major patent verdicts in the district that awarded patent owners over $1 billion.

Juelsgaard Clinic Urges Supreme Court to Rein in Patent Trolls to Encourage Innovation and Startups

The absurdity of the rule that allows patent trolls and others to sue companies anywhere, especially in the E.D. Texas, is highlighted by the efforts that patent litigants there find themselves compelled to go to try to level the playing field. The brief provides a few startling examples:

  • Samsung, the Korean electronics giant, has been sued for patent infringement dozens of times in Tyler and in the small town of Marshall, Texas, seat of another popular division within the Eastern District. Understandably, Samsung has engaged in a variety of highly visible charitable and civic activities to raise its positive profile. For several years Samsung sponsored an ice rink, emblazoned with its name and logo, in the downtown square across the street from the federal court house. The brief included a color photo of this Samsung Ice Rink (see below) and noted that Samsung felt compelled to also sponsor other major local events, to donate over $75,000 for college scholarships to local high school students, and to donate to numerous other local organizations. These contributions led the local Marshall News Messenger newspaper to call Samsung “the South Korean company that has fortunately become Marshall’s benefactor,” and led satirist John Oliver to lampoon the absurd situation in an episode of his HBO show “Last Week Tonight” (cited in the brief).

Juelsgaard Clinic Urges Supreme Court to Rein in Patent Trolls to Encourage Innovation and Startups 1

  • Another tech company, the California based Tivo, in the middle of a patent trial in Marshall in 2006, bought the “prize steer” at the Marshall Farm City Week for a then-record price of $10,000 and later took out a large advertisement in the local paper touting its purchase. Other companies involved in patent suits in Marshall have since also purchased the “prize steer” at the event.

As the Juelsgaard Clinic brief explains, these sorts of actions by companies to build positive reputations because of how often they face patent litigation in one district are extremely unusual and troubling.  They are the results of a misguided rule that allows patent trolls to drag any company into the E.D. Texas to face a patent lawsuit. And they risk undermining the appearance of integrity and fairness of the entire patent litigation system. Even the popular podcast “This American Life” reported on the absurdities in the Eastern District in an episode “When Patents Attack!” These included dozens of empty, locked offices purported to be locations of the patent trolls that use E.D. Texas as their forum of choice.

The brief describes how this situation is especially harmful because startups play a crucial role in the U.S. economy, and suffer most from these rules. New companies and startups are responsible for the vast majority of our job creation. Yet, the forum shopping that has been unleashed by the Federal Circuit’s overbroad rule puts heavy costs on startups. They include the time that managers, engineers, and other employees lose in preparing for litigation; the money that is spent in the preliminary stages of defending a suit, in litigation costs, and most likely in settling a case; and the stress that abounds from defending against frivolous claims. These costs lead to cancelled projects, halted product lines, and stalled innovations. Lost innovation clearly harms society as a whole. Perhaps even worse is the fact that such costs can force a firm to lay off workers, and sometimes, even close their doors.

The Clinic’s brief reminds the Supreme Court that startups and innovators will benefit from a return to the proper rule that limits lawsuits to the district where a corporate defendant actually resides. The number of patent cases will go up in the Northern District of California, because it is home to Silicon Valley, and the District of Delaware, because it is the state where most public companies are incorporated. Critically, though, the share of cases filed in the Eastern District of Texas would likely shrink dramatically to a more reasonable 11% from the 43.6% filed in 2015. This change should allow businesses, and particularly startups and other, smaller firms, to defend themselves more easily in their home districts. With the scales of patent litigation balanced more fairly, patent trolls will hopefully find it harder to extort settlements out of defendants. That should keep more money in the pockets of innovators and entrepreneurs as they look to expand their business and increase jobs.