Patent Trolls Evicted From The Eastern District of Texas!

TC Heartland LLC v. Kraft Foods Group Brands LLC

Written by: Christopher H. Blaszkowski

This article first appeared in the June 1, 2017 edition of the Legal Intelligencer.

Over the past decade or so, litigious non-practicing entities (also known as “patent trolls”) expressed a keen preference to litigation in the Eastern District of Texas (E.D. Tex.). This is because E.D. Tex. is known to be home to patent owner-friendly juries which have historically provided significant damage verdicts. E.D. Tex. was also known as a “rocket docket”—a forum which speedily and steadily moved towards trial. Patent trolls relied on these factors and others to “extort” settlements from defendants.

On May 22, the Supreme Court’s TC Heartland LLC v. Kraft Foods Group Brands LLC decision just put an end to that gravy train. TC Heartland confirms that, for purposes of the patent venue statute—28 U.S.C. § 1400(b)—the term “resides” is limited to the state of incorporation for a domestic corporation. Since TC Heartland was handed down, the flood of patent infringement cases filed in E.D. Tex. has slowed to a mere trickle.

By brief way of background, § 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 question before the Court was whether § 1400(b)is properly modified by the general venue statute, 28 U.S.C. § 1391. Under the general venue statute, “ [f]or the purposes of venue under this chapter, a defendant that is a corporation shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction at the time the action is commence.” § 1391(c). For close to 30 years, the Federal Circuit has interpreted the phrase “for the purposes of venue under this chapter” as language of incorporation relating to § 1400(b), as both sections are in the same chapter. VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (1990) As a result, the Federal Circuit found the definition of “reside” in § 1391(c) to also define “reside” as used in § 1400(b). Id..

Continuing the trend of its recent decisions, the Supreme Court reversed the Federal Circuit. Citing earlier Supreme Court precedent (including Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957)), the Court concluded that “reside” was “definitively and unambiguously” held to mean the state of incorporations for domestic corporations. In a footnote, the Court explained that this holding did not extend to foreign corporations. The Court also found instructive a subsequent amendment to § 1391, which added a saving clause that it does not apply when “otherwise provided by law.” § 1400(b)—a statute directed to venue in patent infringement cases—provided “otherwise,” in the Court’s view.

Using this logic, the Court reversed the Federal Circuit’s holding that venue existed in Delaware over TC Heartland, an entity organized under Indiana law and headquartered in Indiana, despite the fact that TC Heartland had indisputably shipped the allegedly infringing products into Delaware.

The Immediate Effects of TC Heartland

A review of the past few years shows that the anticipated redistribution of cases will be significant.

Lex Machina reports that in 2015, 2540 new patent infringement cases were filed in E.D. Tex. which represented almost half of the approximately 5,800 cases filed nationally that year, while Delaware (which received the second largest volume of patent cases) received 545 new cases (approximately 10% of the total cases). Perhaps as a result of the speculation regarding how the Supreme Court would decide TC Heartland, E.D. Tex. received only 36.4% of patent cases filed in 2016 (Delaware again received approximately 10%). And in 2017, that number dropped somewhat to 33% of cases filed in E.D. Tex. Regardless of the trend of somewhat slowed filings, prior to TC Heartland, E.D. Tex. continued to command the lion’s share of patent infringement cases filed in the U.S.

The impact of TC Heartland has already demonstrated an abrupt and noticeable response from patent owner plaintiffs. For almost an entire week following TC Heartland, no cases were filed in E.D. Tex. Friday, May 26 saw what appears to be the first four post-TC Heartland cases filed in E.D. Tex. (3 of those cases filed by Uniloc against Apple). By way of comparison, the week before TC Heartland saw approximately 17 cases filed in E.D. Tex., and the week before that approximately 45 new cases were filed in that district.

The redistribution of cases out of E.D. Tex. means that other districts can expect to see an uptick in new patent infringement filings. Delaware—“the incorporation capital” of America—and the Northern District of California (another incorporation hotspot) can expect to see a significant increase in the number of such cases.

What About Cases Already Pending When TC Heartland Came Down?

Due to the retroactive effect of Supreme Court decisions, TC Heartland applies to cases which were filed prior to the issuance of the decision. Technically, then, defendants in E.D. Tex. actions which were filed before TC Heartland came down may be able to challenge venue.

Certainly, any defendant who has not yet answered a complaint may file a motion to dismiss or motion to transfer challenging the sufficiency of venue, even if the complaint was served before the Supreme Court decided TC Heartland.

Propriety of venue is a “waivable defense” under Fed. R. Civ. P. 12(b), however, which means venue must be objected to in a defendant’s initial response (i.e., in a motion to dismiss or answer). Additionally, other defendants may have expressly conceded to venue in an answer (e.g., admitting the plaintiff’s venue allegations). It remains to be seen whether and to what extent courts in TC Heartland “improper venues” are willing to entertain transfer arguments following the pleadings stage.

It may be that some courts will be amenable to arguments that defendants could not waive rights that only became apparent after TC Heartland came down. Other courts may be less inclined to consider such arguments, especially where the parties (and the court) have already invested resources in the case such that transfer may not be in the interests of judicial efficiency.

Venue Outside of State of Incorporation?

§ 1400 includes two possible hooks for jurisdiction, though the “resides” prong was previously the most popular. That is, actions for patent infringement may be brought: 1) “where the defendant resides,” or 2) “where the defendant has committed acts of infringement and has a regular and established place of business.” Pre-TC Heartland, the established place of business prong did not received much attention.

Litigation regarding the meaning of this second prong will almost certainly occur in those cases brought outside the defendant’s state of incorporation. For example, in the post-TC Heartland cases against Apple (a California corporation having a principal place of business in California) filed last Friday, Uniloc alleges that venue is proper based on Apple’s “regular and established places of business” (providing the addresses for two Apple Stores) in E.D. Tex.

The patent bar will be closely watching how courts handle venue in the post-TC Heartland world. Stay tuned!