Litigation Alert: Supreme Court Announces New Limits on Venue in Patent Cases, Blunting Key Troll Tool

For the past 27 years, plaintiffs have been able to bring patent-infringement suits against most corporations almost anywhere in the United States. So-called non-practicing entities, also known as patent “trolls,” have taken advantage of that fact to make the U.S. District Court for the Eastern District of Texas the country’s most popular forum for patent lawsuits by a huge margin. But this week, in TC Heartland LLC v. Kraft Food Group Brands LLC, the U.S. Supreme Court changed the dynamic, simply by reinterpreting a single word in the patent venue statute. As a result of the Court’s decision, a corporation not organized under Texas law and without a “regular and established place of business” in the Eastern District is no longer amenable to suit there.

Legal Framework: Where does a Corporation Reside?

The legal question posed in the case is relatively simple: Where does a corporation “reside”? The general venue statute provides that a defendant may be sued where it resides, and that “for all venue purposes”—“except as otherwise provided by law”—a defendant corporation “shall be deemed to reside” in any judicial district where it is “subject to the court’s personal jurisdiction.” In practice, this has meant that corporations that direct their activities nationwide can more or less be sued nationwide. A more specific venue statute for patent cases provides that a corporate defendant may be sued for patent infringement either in a district where it has a “regular and established place of business” and has committed alleged acts of infringement, or in the state where it “resides.” The issue before the Court, therefore, was whether the general statute supplies the definition of “resides” in the patent-specific statute, or whether the specific statute is, in the words of the general statute, an exception “otherwise provided by law.”

The Supreme Court had previously addressed this question in its 1957 decision Fourco Glass Co. v. Transmirra Products Corp., in which it canvassed the history of the statute and determined that Congress had enacted the patent venue statute specifically to limit the fora in which a corporate defendant could be sued for patent infringement. The Fourco Court accordingly held that a corporation’s residence for patent purposes was only its domicile—the state in which it was incorporated—and that the patent venue statute stood “complete, independent and alone controlling in its sphere.”

In 1988, however, Congress amended the general venue statute. Shortly thereafter, in its 1990 decision VE Holding Corp. v. Johnson Gas Appliance Co., the U.S. Court of Appeals for the Federal Circuit held that those amendments to the general venue statute had brought the patent-specific statute within its ambit. Because the Federal Circuit hears all patent appeals from the nation’s trial courts, absent review by the Supreme Court, that decision was binding on the lower courts. Thus, for the following 27 years, the Federal Circuit’s expansive view of patent infringement venue held sway, and the Eastern District of Texas ultimately become the home of more than 40 percent of all patent lawsuits filed in the United States.

The seeds of change were planted when Kraft Foods sued TC Heartland—an Indiana-based company—for patent infringement in another popular forum for patent suits—the U.S. District Court for the District of Delaware. TC Heartland moved to dismiss for improper venue. Although the Delaware court rejected TC Heartland’s attempt and the Federal Circuit relied on its precedent in VE Holding to affirm that ruling, the Supreme Court granted certiorari and reversed.

Justices Disfavor Implied Amendment

The Supreme Court’s unanimous decision in TC Heartland rejected the Federal Circuit’s decision in VE Holding and restored the Fourco regime. Invoking the canon against implied repeals—here applied to implied amendment—the Court reasoned that absent a “relatively clear indication of its intent,” Congress does not alter the meaning of one statute by amending another. Here, Congress may have amended the general venue statute in 1988 and 2011, but it had left the patent venue statute untouched since the Fourco decision. The Court accordingly held that the amendment of the former did not affect the meaning of the latter. That statute therefore continues to mean what it meant in Fourco: A corporate defendant in a patent-infringement case must be sued either where it has an established place of business and commits an act of alleged infringement, or in the state in which it is incorporated.

Uncertainty for Foreign Corporations

What all this means for foreign defendants is uncertain—the Supreme Court studiously avoided commenting on the subject in its opinion in TC Heartland. But in its last word about foreign defendants in patent lawsuits, the Court held that “suits against aliens are wholly outside the operation of all federal venue laws, general and special.” The statutory framework has changed since that decision, but the general principle has not: “a defendant not resident in the United States may be sued in any judicial district.” The Court’s decision means that the question will be subject to litigation, but in all likelihood, venue for patent suits against foreign corporations will continue to lie anywhere in the United States.

Takeaway: Patent Trolls No Longer Pick the Playing Field—Most of the Time

As discussed above, in the 27 years since VE Holding, patent plaintiffs—in particular, NPEs—have flocked to a single district court tucked away in Marshall, Texas, and the small cities nearby. More than 40 percent of U.S. patent cases are filed in the Eastern District of Texas, and a quarter of all patent cases nationwide are overseen by a single judge there. More than 90 percent of those cases are brought by non-practicing entities. Indeed, some see the explosion in such suits in the last decade as a driving force behind the Supreme Court’s recently renewed interest in the field of patent law.

TC Heartland is a game-changing decision for a large majority of NPE lawsuits, but it will not end such suits, nor will it keep all of them out of the Eastern District of Texas. Although the majority of such cases will need to be filed elsewhere, venue will remain proper against any defendant that maintains a “regular and established place of business” in the district and is alleged to infringe there—by making, using, selling, or offering to sell the allegedly infringing product or service. This raises the possibility that NPEs will target retailers that have stores in the Eastern District with suits aimed at their sales of allegedly infringing products. In addition, as discussed above, suits against companies incorporated outside the United States are also likely to be proper in the Eastern District.

So if they cannot consistently file in the Eastern District of Texas, where will NPEs seek to assert their patents? The answer is that such cases will be more widely dispersed, but are likely to concentrate to a certain extent in Delaware, where many companies are incorporated, and in technology centers such as the Northern District of California, where many NPE targets are headquartered. Ironically, the case that initiated this sea change—the TC Heartland case itself—will not go forward in Delaware where it was brought. The Supreme Court’s holding resulted in the dismissal of that case against its Indiana-based defendant. Delaware is likely to see many more patent lawsuits to take the place of that one case the Supreme Court’s decision has cost it.