Supreme Court Venue Decision Will Limit Texas Patent Docket

First-year law students quickly learn that procedure matters, and the enormous impact of procedural rules is nicely illustrated by the patent venue dispute addressed by the Supreme Court last week. On the surface, TC Heartland v. Kraft simply concerned 28 U.S.C. § 1400, which states that a “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.”

But what was really at issue was the ability of patent plaintiffs to forum shop, and the resulting concentration of patent cases in the Eastern District of Texas, which received 40% of all patent cases filed in 2015 or 2016. This was permitted under the Federal Circuit’s broad interpretation of “resides,” but the Supreme Court held that for purposes of § 1400, a corporation only “resides” in its state of incorporation—which will severely limit plaintiffs’ choice of forum. TC Heartland is thus a win for corporate defendants and a loss for many patent plaintiffs.

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Professor Lisa Larrimore Ouellette

For those just tuning in to this blockbuster case, here’s a rundown of what happened:

How did E.D. Tex. accumulate such a disproportionate share of the nation’s patent cases? Daniel Klerman, Greg Reilly, and Jonas Anderson have argued that Texas judges engaged in “forum selling”—procedural changes to attract plaintiffs—based on motivations such as “prestige, a desire to help the local bar and economy, and eagerness for a more interesting caseload.” One such procedural factor is timing: a comparison with other districts by Brian Love and James Yoon shows that E.D. Tex. patent cases are slow to get rulings on defendants’ motions to transfer or dismiss and motions for summary judgment—but quick to go through discovery and trial. As This American Life fans likely recall, these rules have made E.D. Tex. particularly attractive to patent assertion entities (frequently called “patent trolls”), whose cases make up 94% of its recent patent docket.

Is the concentration of patent cases in Texas a problem? The answer probably depends on how you feel about the patent system more broadly. An amicus brief authored by Mark Lemley and signed by 61 law and economics professors argued that the Federal Circuit’s broad venue rules “exacerbate[d] the most significant problems with the modern patent system, including the prevalence of nuisance-value lawsuits by patent trolls,” and that “[t]his level of concentration is a problem for the legal system whatever one thinks of the decisions of the Eastern District of Texas.” And yet the Supreme Court’s new, more restrictive venue rule will not greatly reduce the concentration of patent cases. Instead, Colleen Chien and Michael Risch showed that the primary effect will be to shift cases from E.D. Tex. to N.D. Cal. and D. Del.—districts that Ted Sichelman’s competing professors’ amicus brief called “less hospitable to patent owners.” The relative merits of these different venue rules were the subject of fierce debate in the briefing.

Were the Justices moved by this policy debate? If so, they didn’t show it. As Ronald Mann summarized at SCOTUSblog, one of the “most surprising” parts of the oral argument was “the general lack of interest among the justices in the horror stories about the concentration of venue in the Eastern District of Texas.” The terse and unanimous Supreme Court opinion, authored by Justice Thomas, never mentions Texas or any policy considerations. Rather, it simply relies on the Court’s 1958 Fourco decision, which concluded that a corporation only “resides” in its state of incorporation. The Federal Circuit had concluded in 1990 that Fourco was superseded by Congress’s 1988 amendment of the general venue statute, 28 U.S.C. § 1391, to say that 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,” i.e., essentially everywhere for large corporations. The Supreme Court disagreed, finding no indication that § 1391 was intended to alter the meaning of § 1400 or that Congress intended to ratify the Federal Circuit’s erroneous interpretation when amending § 1391 again in 2011.

Where can patent lawsuits be filed now? Venue is now proper in the state of a corporate defendant’s incorporation and in any district “where the defendant has committed acts of infringement and has a regular and established place of business.” The latter language was largely superfluous under the Federal Circuit’s broad interpretation of “resides,” but it is now critical—and will likely be the subject of numerous future disputes. IP professors have already started speculating about whether patent asserters will shift toward suing big retailers with national footprints, foreign parent corporations (which can be sued anywhere), or end users, and whether Apple will consider shutting down its E.D. Tex. store. TC Heartland might also affect firms’ decision about which state to incorporate in. In some cases, patent plaintiffs may have to file suits in multiple jurisdictions, with early-stage motion practice then being consolidated through multidistrict litigation.

What about the 1000+ open patent cases in E.D. Tex.? The exodus has already begun, with a number of cases being transferred to other venues or receiving sua sponte orders for new briefing on the venue issue. As civil procedure students may remember, however, improper venue is waivable if not raised in the answer or a Rule 12 motion, and a study by Paul Janicke suggests that as many as half of defendants without a business location in E.D. Tex. may have waived this defense. This influx of patent cases may be particularly overwhelming for Delaware, where two of the four judges are taking senior status, but the district has asked four Pennsylvania judges to help with its case load. Now we’ll just have to see whether the Wilmington courthouse gets its own ice skating rink.

Lisa Larrimore Ouellette is an Assistant Professor at Stanford Law School. Her scholarship addresses empirical and theoretical problems in intellectual property and innovation law.