Interesting Development in the Patent Troll War

[DontSayBanana]

Basically, they nerfed the East Texas district court. Glad to see it, since it was pretty blatant venue shopping.

https://arstechnica.com/tech-policy/2017/05/supreme-court-makes-it-much-harder-for-patent-trolls-to-sue-in-east-texas/

Supreme Court makes it much harder for patent trolls to sue in East Texas
Folks got sued in East Texas "just because they had a website." Those days may be over.



JOE MULLIN - 5/22/2017, 4:25 PM

The US Supreme Court ruled (PDF) today on how to interpret the patent venue laws, and the controversial business of "patent trolling" may never be the same.

In a unanimous decision, the justices held that the US Court of Appeals for the Federal Circuit, which handles all patent appeals, has been using the wrong standard to decide where a patent lawsuit can be brought. Today's Supreme Court ruling in TC Heartland v. Kraft Foods enforces a more strict standard for where cases can be filed. It overturns a looser rule that the Federal Circuit has used since 1990.

The ruling may well signal the demise of the Eastern District of Texas as a favorite venue for patent lawsuits, especially those brought by "patent trolls," which have no business outside of licensing and litigating patents.

The TC Heartland case will affect the entire tech sector, but the parties here are battling over patents on "liquid water enhancers" used in flavored drink mixes. TC Heartland, an Indiana-based food company, got sued by Kraft Foods in Delaware, then sought to move the case back to its home turf. Neither the district court judge nor the Federal Circuit would allow such a transfer.



Back to the Future

Congress last re-codified the patent venue law in 1948, and it updated the general venue laws at the same time. In that year, the general venue law was liberalized to allow a lawsuit to be filed where a defendant corporation "resides or is doing business."

Several years later, the US Supreme Court considered whether a more liberalized venue rule should apply to patent cases. In a 1956 decision called Transmirra Products v. Fourco Glass, the high court held that, in patent cases, the stricter rule, 28 U.S. Code § 1400, is the "sole and exclusive provision controlling venue" for patent infringement cases. Such lawsuits can only be filed "where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business."

In that clause, the word "resides" means only the state where the defendant company is incorporated. The Supreme Court rejected the opposing argument, which is that the patent laws should adopt the general venue statute's broader meaning of "resides." Patent and general venue laws were separate, just as they were the last time the Supreme Court considered the matter, a 1942 case called Stonite Products v. Melvin Lloyd.

In 1988, Congress changed the general venue laws again, granting yet broader leeway over where a defendant can be sued. In 1990, the same question came up through the courts again: should the patent venue rules be interpreted in light of the more general venue law, or should patent venue retain its own, more strict, guidelines?

This time, the question went to the Federal Circuit, a court which didn't exist in the days of Fourco. In a 1990 ruling called VE Holding v. Johnson Gas Appliance, the Federal Circuit said the general venue law controlled. When TC Heartland wanted to move its case to Indiana, it asked the Federal Circuit to reconsider VE Holding, but the appeals court stood by its 1990 precedent.

In today's opinion, the Supreme Court has essentially said that VE Holding is a 27-year-old mistake.

On behalf of a unanimous court, Justice Clarence Thomas wrote:

The only question we must answer is whether Congress changed the meaning of §1400(b) [the patent venue law] when it amended §1391 [the general venue law]. When Congress intends to effect a change of that kind, it ordinarily provides a relatively clear indication of its intent in the text of the amended provision.... The current version of §1391 does not contain any indication that Congress intended to alter the meaning of §1400(b) as interpreted in Fourco.

The argument for changing patent venue law to be aligned with the general law isn't any better than it was in the days of Fourco, Thomas wrote, and it may in fact be worse.

Now, the case has been reversed and remanded to the Federal Circuit. That court will have to reconsider TC Heartland's request for a transfer, bearing in mind today's Supreme Court decision.



Troll Control

Not a word about "patent trolls" appears in today's 13-page opinion, but it's no secret that do-nothing patent holders were the issue at the heart of the contentious debate over patent venue. Plenty of companies had reason to complain about the Federal Circuit's rule, and they let their concerns be known. A brief (PDF) signed by 48 Internet companies and retailers asked the Supreme Court to uphold the "restrictive patent venue statute" that Congress had approved, and to "stop forum shopping." Trade groups representing bankers, realtors, and big software companies also supported TC Heartland.

The Texas attorney general, joined by 16 other states, filed a brief (PDF) as well, noting the incredible concentration of patent cases in the Eastern District of Texas. The AGs sided with TC Heartland, writing that they "have an interest in protecting their citizens from abusive claims of patent infringement, which businesses and residents confirm are a drag on economic growth."

Finally, the Electronic Frontier Foundation, Public Knowledge (PDF), and Engine Advocacy (PDF) chimed in, complaining that the venue rules had empowered "patent assertion entities" to the detriment of small innovators.

Several briefs focused on East Texas' disproportionate share of cases, but that wasn't the only venue of concern. Generic pharmaceutical companies filed a brief (PDF) decrying an "undue and unhealthy concentration" of pharmaceutical patent cases in Delaware and New Jersey.

Today's ruling was a good result for defendants that have been getting roped into patent disputes in faraway venues for years now, said EFF attorney Vera Ranieri. (For more on why East Texas has been so attractive to patent trolls, see these two blog posts by Ranieri and her colleague Daniel Nazer.)

"We saw a lot of small innovators get sued in Texas just because they had a website that was available in Texas," said Ranieri in an interview with Ars today.

Overall, the TC Heartland case is likely to usher in a seismic change in the geography of patent litigation. Exactly how that change plays out remains to be seen. One possibility is that patent suits may pile up in Delaware, where many companies are incorporated. That could create its own problems.

"The District of Delaware already has a glut of patent cases and two District Judge vacancies," said Ted Mathias, an IP partner at Axinn Veltrop & Harkrider, via e-mail. "It remains to be seen whether patentees will look elsewhere or file in Delaware and bet that the vacancies get filled quickly."

Another open question is what effect today's decision will have on the politics of patent reform. With pro-patent lobbies able to point at yet another defense-friendly Supreme Court decision, it may dampen enthusiasm for legislative patent reform.

"This extremely important decision radically changes where  patent lawsuits may be filed, and blows the 'Eastern District of Texas' problem out of the water," said Q. Todd Dickinson, a senior partner at Polsinelli LLC and a former director of the US Patent and Trademark Office. "While this will surely reduce the workload and influence of the Eastern District of Texas, especially as a preferred forum for patent-assertion entities, its other major impact is likely to be further lessening the call for patent litigation reform in the Congress."

[The Minsky Moment]

The article identifies the problem - pile up in Delaware.  The ruling solves one venue problem - EDTX - but creates another. 

[DontSayBanana]

The article identifies the problem - pile up in Delaware.  The ruling solves one venue problem - EDTX - but creates another. 

Agreed, but it's a wholly different issue unrelated to patent trolling. EDTX was a plaintiff pile-up. Delaware is a defendant pile-up because their foreign qualification process is too forgiving, with the end result being a ton of companies whose only connection to DE is a registered agent to get them those sweet, sweet tax perks.

EDTX was plaintiffs venue-shopping; DE is defendants venue-shopping.

[The Minsky Moment]

Well if we're being picky venue reform isn't about "trolls" either.  It affects the ability of all plaintiffs - owners or NPEs - to forum shop.  It may reduce the ROI to the NPEs but it doesn't affect their standing to sue. 

The DE issue also isn't about defendant forum shopping - at least in the patent context.  D. Delaware isn't a bad forum for patent plaintiffs.  In fact historically it's been a pretty decent forum for patentees, which is why given the choice between risking being hometowned in defendant's established place of business, and Delaware, plaintiffs are likely to go to Delaware.

The issue arises not b/c of Delaware's merits as a patent case venue for defendant, but because the Delaware charter is still highly preferred by corps and venue can always be laid in place of registration.  It's the same issue that now arises in federal litigation generally post-Daimler [for lay people - SCT case that significantly limited the ability to bring cases against companies in any place they do business while preserving the ability to sue them in the state of registrations].

Chancery's a great court, Delaware is convenient to NY, and I like lots of the local bar there - but at some point it has to be questioned whether its a good idea to keep centralizing company-related litigation in a tiny state.

[Barrister]

"Patent trolls" is an irksome buzzword for me.  Not that it isn't a real phenomenon - non-practicing entities who buy up old patents then try to extort royalties through over-wrought claims of infringement, but where the cost of settlement exceeds the cost of defending the claim.

But I often see it applied in almost any patent dispute, even when the patents are apparently quite valid, even when the party making the claim is in the business of using it's patent.

[DontSayBanana]

"Patent trolls" is an irksome buzzword for me.  Not that it isn't a real phenomenon - non-practicing entities who buy up old patents then try to extort royalties through over-wrought claims of infringement, but where the cost of settlement exceeds the cost of defending the claim.

But I often see it applied in almost any patent dispute, even when the patents are apparently quite valid, even when the party making the claim is in the business of using it's patent.

Fair enough. I use it specifically to refer to two types of entities:

1) Fraudsters using illegitimate/untenable "patents" racketeering threats of lawsuits to extort money, and
2) Firms with "portfolios" of patents and no distinguishable connection to any manufacturer riding the licensing fees.

Even in EDTX, the hucksters in group 1 tend to crumple under any pressure as soon as they attack a firm with the legal firepower to trigger the IPR process.

The ones in group 2 are somewhat more concerning as they're neither inventors nor manufacturers, yet the law can still somehow favor them over actual participants in the industry in which they're holding patents. Those are the firms we're talking about when we get going on the subject of patent reform.

[The Minsky Moment]

The ones in group 2 are somewhat more concerning as they're neither inventors nor manufacturers, yet the law can still somehow favor them over actual participants in the industry in which they're holding patents. Those are the firms we're talking about when we get going on the subject of patent reform.

If you bend the law against the NPEs, then you significantly restrict the marketability of patents and hence their value.
But the bigger issue is that patent is problematic to begin with because its a mechanism to reward innovation by creating an economic distortion - monopoly.
One could argue that if one is going to have such a system it's better to shunt patents to NPE because they will have an incentive to auction off the monopoly right to the most efficient producer or even license to multiple parties, this still permitting some competition with the patented article.  Whereas industry participants may be otherwise crappy companies that have good research arms or just got lucky and are bad stewards of the monopoly rights.