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TC Heartland Attacks The Heart Of Patent Forum Shopping

The Supreme Court decided TC Heartland v. Kraft on Monday.  The decision addresses a procedural point with huge effects on patent litigation.  

The Problem

The basic problem before this case was that it was very easy to pick the court you wanted to sue someone in; it’s called “forum shopping.”  And (if you’re a patent assertion entity) the forum you want is usually the Eastern District of Texas.  It has rules that tend to make cases expensive for defendants right up front, a relatively quick caseload, and juries who tend to be supportive of patent rights (and award large amounts of damages.)

Not everyone wanted to sue in Texas, of course.  Universities tend to want to sue near the university.  Real companies tend to want to sue where they’re located.  But if you don’t have any actual home base (because you don’t actually make or invent anything), you probably wanted to be in the Eastern District of Texas.  

The Statute

If you want to sue someone, you need to do it in the right place — there needs to be personal jurisdiction, subject-matter jurisdiction, and you need to pick an appropriate venue.  TC Heartland is all about venue.  In patent cases, venue is governed by 28 U.S.C. § 1400(b):

(b) Any 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.

So the defendant either has to reside in the district, or else have committed acts of infringement there and also have a regular and established place of business there.  The TC Heartland decision defines where a corporation “resides.”

The Decision

In TC Heartland, the Supreme Court said that a corporation resides only where it is incorporated.  If you’re a Delaware corporation, you reside in Delaware.  If someone wants to sue you, they either have to do it in Delaware, or somewhere where you have a regular and established place of business and also infringe.  

(This, by the way, is exactly what CCIA, among many others, urged the Supreme Court to say in our amicus brief.)

The best explanation of “regular and established place of business” is probably from in re Cordis.  Basically, a regular and established place of business is when a corporation “does its business in that district through a permanent and continuous presence there.”  So if you’re only occasionally in the district, or maintain a temporary presence, you don’t have a regular and established place of business.

This doesn’t necessarily require a permanent place of business – that was the main issue in Cordis.  Continuous presence in an area, even if it’s done from an employee’s home can be enough.  But intermittent sales via a website probably aren’t.

The Outcome

This decision is going to change things — especially in the Eastern District of Texas, and especially for patent assertion entities.  Like I said above, the Eastern District of Texas was a particularly desirable venue for patent assertion entities; they’ll have a much harder time bringing cases there now.  Courts in Texas will have less impact on companies that actually make and invent things.

Most importantly, it means that small companies aren’t going to face the spectre of being hauled cross-country to a jurisdiction they don’t operate in to fight a patent lawsuit just because the plaintiff might have bought one of their products online and had it shipped to Georgia.  (Yes, someone tried that.)  A few companies may still have to go to the Eastern District, but it’ll be based on those companies actually having operations in Texas, not just on the attractiveness of Texas as a place to sue someone.  After this decision, you have to bring a lawsuit either where the defendant is incorporated, or else where they infringe and have a regular and established place of business.  

Where Will Cases Go?

It’s going to depend on who the defendant is.  For Silicon Valley companies who operate primarily online, venue is going to be a lot more limited, potentially to just the place they’re incorporated.  For small companies with limited resources, it’s going to likely be just their headquarters (which is probably also where they’re incorporated).  But for companies with significant brick and mortar operations, or widespread physical presences (e.g., networks of dealers or installers), there’s still going to be the possibility of a trip down to Texas.

Delaware is also likely to see a general increase in litigation, given the existing popularity of Delaware as a patent litigation venue (second only to the Eastern District of Texas) and the number of corporations who choose to incorporate in Delaware.  Beyond Delaware, though, venues for litigation will more closely resemble where defendants actually operate.  

Who’s Still Going To Be In Texas?

There are some defendants who are still going to have to show up in Texas.  The big ones are companies with significant brick and mortar operations — especially retailers and banks.  (And of course, companies that actually operate out of Eastern Texas can still be sued there.)  There are also some more borderline cases, where a company with no permanent physical presence like a store has contracts with people to install their products within Texas.  That situation may require another Federal Circuit decision to nail down, but will probably be heavily dependent on the facts of the case.

What Other Effects Might We See?

One thing we might see resulting from this is a trend of suing retailers, rather than manufacturers.  Selling a patented article is enough to be considered an act of infringement, so if a troll wants to stay in Texas, they could sue Walmart or Costco instead of the manufacturer of the product.  The manufacturer can try to take the case elsewhere and get the customer suit stayed, but this doesn’t always succeed.

Another effect this case might have is making incorporation in Delaware less favorable, particularly for high tech startups who might expect a risk of facing a patent lawsuit down the road.  While Delaware isn’t quite as favorable as the Eastern District of Texas, it’s been the second most popular venue for a while now.  If you’re just getting your startup going, you might decide to incorporate in your home state instead in order to save yourself some potential heartburn down the road.

Finally, we’ll probably see an increase in what’s called “multi-district litigation.”  This is a procedure set up by the AIA which allows multiple cases filed in multiple places to be centralized for some pre-trial purposes, with trials eventually occurring in each district.  Given that multi-defendant lawsuits may be forced to be filed in more locations now, multi-district litigation may be more common going forward.

While there are possible aftershocks, all in all, TC Heartland helps fix some of the problems in patent litigation; fewer small companies will face expensive litigation far from home, and fewer large companies will be brought to Texas to defend against patent assertion entities.

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