In their landmark decision on May 22nd, the Supreme Court decided 8-0 in favor of TC Heartland over Kraft Foods Group, changing the dynamics of patent litigation across the country. In the case itself, Kraft sued TC Heartland, claiming that TC Heartland had infringed on Kraft’s patent for the low-calorie water sweetener, MiO. The Court held that the defendant could only be sued in the state in which it was incorporated. Earlier this week, the House Judiciary Committee’s Subcommittee on Courts and Intellectual Property held a hearing on the impact of the TC Heartland decision, and heard testimony that although the TC Heartland decision is helpful, it is not a panacea for litigation abuse.
First, some background. Prior to this case, the Federal Circuit had allowed litigants to bring patent lawsuits in any court in which the defendant “resides”, defined as anywhere the defendant could be legally brought into court. For nationwide firms, that meant that a patent case could be brought anywhere in the country.
According to a unanimous Court, the Federal Circuit’s decision rested on a legal error. Patent cases had long had their own venue statute (28 U.S.C. 1400(b)) that applied specifically and only to patent suits. In a case from the 1950s, the Supreme Court authoritatively construed the word “resides” in that statute as meaning “in the state of incorporation.” Congress made some changes to the general venue statute in 1988 and 2011—for example, changing the phrase “for venue purposes” to “for venue purposes under this chapter” in the chapter that deals with venue for federal courts. Notwithstanding the existence a patent-specific provision and a prior SCOTUS decision on what it meant, the Federal Circuit held that that change permitted patent suits capable of being brought anywhere that the defendant could be “found”.
The Federal Circuit’s mistake would have negative consequences that, over time, became pronounced and severe. As a result of the Federal Circuit’s decision, the U.S. District Court for the Eastern District of Texas became a hub for patent litigation, hearing over 40% of all patent trials. In 2015, ninety percent of the cases in the E.D. Tex. were brought by non-practicing entities. However, many of these patent litigants became to be known as patent trolls, individuals or companies who use patents as legal weapons by purchasing overbroad and likely unenforceable patents, and preemptively suing companies who may or may not have been infringing on these patents. The costs of litigation are far too high for the companies being sued. Knowing this, the patent trolls would demand settlement amounts that made litigation impractical and uneconomic. In addition, the Eastern District of Texas had procedural quirks that made defending patent claims—even meritless ones—extremely expensive and difficult. It also bears mentioning that in 2016, non-practicing entities brought over ninety percent of the claims involving software and so-called high-technology patents.
Against this backdrop, it’s important to remember what the role of the Supreme Court is. It is generally not a court of error correction: it takes cases that either represent a split in the Circuits or present issues of extraordinary importance. To prove that latter condition for a grant, practical arguments are helpful to the Court. But if you read the transcript of the argument on the merits, the policy implications concerned the Court hardly at all at oral argument, and there is no mention of them in the opinion. The legal basis of the decision comes down to application of a standard rule of statutory construction favored by the late Justice Scalia:
A clear, authoritative judicial holding on the meaning of a particular provision should not be cast in doubt and subjected to challenge whenever a related though not utterly inconsistent provision is adopted in the same statute or even in an affiliated statute. Legislative revision of law clearly established by judicial opinion ought to be by express language or by unavoidably implied contradiction. We know of no case to the contrary, and we think that is as it should be.
Scalia and Garner, Reading Law: The interpretation of Legal Texts 331 (2012) (cited in Slip op. at 8).
Here, the Federal Circuit read minor changes to the general venue statute as overriding the authoritatively-construed specific patent provision. That was a legal error, and it is one that the Court fixed by applying settled rules of statute-reading. Characterizing this decision (as one of the Judiciary Committee witnesses did) as part of a parade of “one sided, unbalanced court decisions” rather misses the point. (Kraft Foods does not strike the casual observer as a shrinking violet, and they were ably represented by a former member of the Solicitor General’s Office).
To be sure, TC Heartland has policy consequences, and it’s both healthy and appropriate for Congress to evaluate those consequences and see whether legislation is appropriate.
For example, by limiting the definition of “reside” for corporations to mean the state of incorporation, patent trolls will not be able to sue in the forum of their choosing (in this case, the E.D. Texas). But, as the witnesses at the hearing noted, it’s not like the problem caused by that forum will disappear. First, there are a significant number of patent cases that will remain in the Eastern District of Texas. Objections to venue, if not made at the motion to dismiss stage, are waived. Many previously filed cases will remain in Texas, and some cases will shift. Professor Chien points out in her testimony, though 60% of patent assertion entities would had to have moved their cases, 51% of operating company cases would also have had to move.
Second, the patent venue statute contains a clause that (due to the pre-TC Heartland case law) hasn’t received a lot of attention for the past twenty years. That phrase allows a case to be brought anywhere that the “defendant has committed acts of infringement and has a regular and established place of business.” As one Committee witness pointed out, many restaurants, retailers and other brick-and mortar businesses will have establishments in the Eastern District, even though their corporate headquarters (the place where any evidence is likely to be located) is elsewhere.
Although the scope of TC Heartland is uncertain, what is fairly clear is that NPEs do not want to leave the friendly confines of the federal courthouse in Marshall. For example, on June 1st, Uniloc filed a new complaint to the federal courts in eastern Texas after having sued Google earlier this year. The complaint described Google’s alleged ties to the Eastern District of Texas by virtue of the availability of its search engine and education services used by citizens of the eastern district of Texas. However, nearly all these allegations are legally irrelevant. Nonetheless, Uniloc’s complaint highlights the need to keep a close eye on patent litigation cases around the country and how courts define “a regular and established place of business.”
What all this means is that Congress may have more work to do on venue, depending on how loosely the courts reads the statute. By and large, the majority of the members at the hearing welcomed the Court’s decision as an improvement but recognized that questions remain about whether the decision can address all the problems of forum shopping in patent cases. [STM1]
In our podcast SIIA Presents: What You Need to Know in 10 minutes or less - TC Heartland vs Kraft Foods Group, we discuss many of these issues. These cases are especially pertinent to our members, many of whom software companies, that are overly burdened by the claims of patent trolls. For more information, feel free to reach out to Chris Mohr.
This blog was co-authored by Niko Marcich, SIIA's Summer Public Policy Intern. Niko is an Undergraduate student at the University of Virginia studying International Affairs and Economics.