United States: Patent Venue: How We Got To TC Heartland, And What's Next

TC Heartland¹ will profoundly affect patent litigation. TC Heartland reasserts the court's Fourco² holding that venue in a patent infringement case is controlled exclusively by 28 U.S.C. § 1400, and not by the general venue provisions. Before examining the decision's impact, we will consider first how we got here. Next, we will consider the court's holding. Then, we will consider the impact this decision will likely have. Finally, we will explore options for dealing effectively with the changes that this and other decisions may have.

How Did We Get Here?

The growth of the Eastern District of Texas as a venue for patent cases did not occur overnight. It was the result of multiple factors hat coalesced over decades.

First, over the past 30 years, the patent bar has seen at least three iterations of the "Invasion of the Body Snatchers"—general practice firms either buying a patent practice or acquiring laterals to enhance their patent capacity.

In the early 1980s, the patent infringement bar was a sleepy corner of the law dominated by—what are now considered small—boutiques. Most practitioners played the scientific and technical issues straight. Attorneys generally behaved civilly toward one another. And cases were typically tried to a single district judge.

The first of these "invasions" was in the mid- to late-1980s to early 1990s. General practice firms began teaming patent practitioners with their civil trial lawyers. This first "invasion" generally enhanced the trial skills of the patent bar. Because they were comfortable trying cases to a jury, general civil trial lawyers tended to ask for jury trials. And not only were lay juries up to the challenge, they tended to award higher damages than judges.

Second, tort law had developed substantially. And certain districts became havens for tort cases, Texas among them. In 1975, Page Keeton, then dean of the University of Texas Law School, chaired a committee proposing tort reform in Texas but the Texas Legislature was either unwilling or unable to adopt them.

Third, although the creation of the Federal Circuit in 1982 eliminated forum shopping at the regional circuit level, it ended up encouraging it at the district court level. The patent-specific venue provision—Section 1400—provides that a patent case can be brought only in the district in which (1) the defendant resides; or (2) the defendant has both a regular and established place of business and has committed acts of infringement. 28 U.S.C. § 1400. The first thing that happened in many patent infringement cases was a motion to transfer for improper venue. This practice however, virtually ended with the VE Holding³ decision by the Federal Circuit.

The issue in VE Holding was whether the intervening congressional amendment of the general patent venue provision (28 U.S.C. § 1391) modified the specific venue provision (§ 1400). The general venue provision (28 U.S.C. § 1391(c)) had been modified to state that a corporation "resides" wherever personal jurisdiction over it can be found. Moreover, the general venue provision covered venue for "all purposes under this chapter." The Federal Circuit held that these revisions overruled the patent-specific venue provision of Section 1400. A patent case could be brought in any district having personal jurisdiction over the defendant. Some courts, including Texas, maintained an aggressive definition of personal jurisdiction. If the accused product found its way into the jurisdiction, even through no fault of the defendant, personal jurisdiction was proper and, therefore, venue was proper.

Fourth, tort reform played a significant role. Perhaps the high water mark for the plaintiffs tort bar was the mass tort cases on various drug, asbestos and tobacco products in the mid- to late-1990s. The settlement of a secondhand smoke class action in Miami in October 1997 effectively ended decades of tobacco litigation. The November 1998 Tobacco Settlement Endowment Trust imposed liability in the billions of dollars and generated billions of dollars in contingency fees. Similarly, the potentially vast liability for asbestos-related damages became apparent to the industry by the mid-1990s. This culminated in a series of Chapter 11 bankruptcy filings permitting many of the companies to pay their liability over time or simply shut down.

From the '70s through the '90s, tort reform efforts in Texas were largely unsuccessful. Numerous proposals were made but all of them either bogged down in committee or were defeated on the floor of the Texas Legislature. Texas did eventually enact limits on tort recoveries. But in 1988, the Texas Supreme Court declared them unconstitutional. Finally, in 2003, substantial tort reform measures passed and were signed into law. These were accompanied by a constitutional amendment, permitting the law to take effect. Thus, by 2003, with most of the big mass tort cases concluded, and medical malpractice claims being reined in by tort reform, plaintiffs tort lawyers were looking for work.

Fifth, by the late 1990s, the "dot-com" explosion unleashed a flurry of startups and of new patent applications. Rather than rigorously enforcing the requirements for patentability, however, the U.S. Patent and Trademark Office loosened them. The PTO issued hundreds of thousands of patents that may not—and when challenged often do not—pass muster under today's more rigorous criteria.

At the same time as the PTO was granting these questionable patents, the courts were also weakening some of the requirements for a valid patent. Had the rules been enforced then as they are understood today,⁴ they might have prevented this proliferation of bad patents. In Exxon Research,⁵ the Federal Circuit held that a claim was indefinite only if it was insolubly ambiguous. Yet, there is a substantial distance between "insolubly ambiguous" and the "reasonable certainty" required by Section 112. And into this gap the patent office issued hundreds of thousands of patents. The general practice bar one again looked hungrily at patent practice resulting in the second "Invasion of the Body Snatchers."

Nothing lasts forever and the dot-com explosion was followed by the dot-com bust of 2000-2002. This substantially increased pressure on these new entrants into intellectual property practice. Although a growing number of law firms were chasing a decreasing number of viable clients, the number of patent infringement lawsuits continued to climb.

Sixth, in 2007, the financial crisis intervened and 2008 saw a deeper downturn than the depths of the Great Depression. This placed additional pressure on BigLaw. Transactional work was down, as was corporate and securities work, and virtually no one was doing initial public offerings. Bankruptcy work was down. Real estate work was down. One area of work did not seem to be down—patent infringement litigation. So too, many plaintiffs tort lawyers were also looking for new opportunities. And a third "Invasion of the Body Snatchers" followed.

Seventh, the America Invents Act in 2011 was a major turning point. This, along with more liberal fee-shifting for filing an objectively unreasonable claim,⁶ has slowed the growth of new cases. The number of new patent filings has dropped from its peak of about 6,497 in 2013 to 5,080 in 2016.

What Happened?

Following the VE Holding decision, defendants gave up and were not even filing venue transfer motions. One lesson from TC Heartland is that simply because the U.S. Supreme Court declines to take cert. it does not necessarily mean that it agrees with the holding below. Ironically, TC Heartland is not an Eastern District of Texas case. Rather, Kraft sued TC Heartland in Delaware. TC Heartland is an Indiana corporation headquartered in Indiana. TC Heartland moved to transfer the case to Indiana and the motion was denied.

Many in the patent bar expected that the Supreme Court would affirm the Federal Circuit's decision. Fourco is an old decision. The venue statute had been amended repeatedly since Fourco. And, the Federal Circuit in VE Holding articulated a reasonable explanation why the intervening amendments to the general venue provisions of Section 1391 overruled Fourco.

Nonetheless, the court in TC Heartland held that, as applied to a domestic corporation, "resides" in Section 1400 (b) refers only to the state of incorporation. The amendments to the general venue provision equating residence with personal jurisdiction did not modify the meaning of 1400 (b).

Where Are We Going?

Can patent cases no longer be filed in the Eastern District of Texas? Although some may desire this result, TC Heartland is not quite so severe.

The first prong of the patent venue statute provides that a domestic corporation can be sued only in its state of incorporation. 28 U.S.C. § 1400 (b). Similarly, individuals can be sued only in the state in which they reside. The second prong of the patent venue statute provides that a defendant can be sued, alternatively, in a district in which it has a regular and established place of business and has committed acts of infringement. The vast majority of cases currently filed in the Eastern District of Texas are neither. These will now have to be filed in other districts. This will likely include the: District of Delaware; Northern, Central and Southern Districts of California; Northern District of Illinois; Southern District of New York; and others. Most already have experience trying patent cases. TC Heartland will likely also distribute patent cases to districts that have little experience with patent cases.

Having amassed 20 years of expertise trying patent cases, what will become of the Eastern District of Texas? Fear not. Section 1391(d) provides that a foreign defendant may be sued in any district. Texas aggressively defines personal jurisdiction based on a stream of commerce theory. These rules will continue to capture foreign defendants whose products end up in Texas.

Best Practices

1. Preserve your position on unsettled legal issues: Although the Federal Circuit has brought greater uniformity to patent jurisprudence, many issues remain unresolved. Consider how best to preserve the issues you care about even if you expect an adverse initial ruling.
2. Know the law: Intellectual property is complicated, both technically and legally. If you do not have the necessary expertise, either get it or associate with someone who has it.
3. Keep up with developing trends: Recent years have seen active development of the patent law, both at the Federal Circuit and Supreme Court. There have been significant changes in the law. Keep up.
4. Think through your defenses: Many defendants simply recite a checklist of defenses in answering the complaint. Research the facts of your case early, and, if necessary, timely amend your contentions, interrogatory answers, and pleadings.
5. Join the real party in interest or move to dismiss if they cannot be joined: There is a robust secondary market for patents. Yet, the PTO's assignment register is a mess. In addition, litigation financing is now more readily available than it used to be. Although financing is not necessarily admissible, or even relevant, some financing options are a little too creative. Call out arrangements that are not appropriate.
6. Act responsibly: The patent bar now includes more lawyers in general practice firms than it does in boutiques. Some parts of the general practice bar are polarized between defense and plaintiffs counsel and this is now extending to the patent bar. As this trend has progressed, the level of civility and professionalism has—at least in this author's view—fallen, sometimes dramatically. It is not a positive or necessary outcome. Octane Fitness empowers district courts to do something about the lack of civility and bad behavior. And they are.
7. Participate in the patent bar: You will at least get to know your competition. You may make friends. Getting to know your opponent personally may help you avoid engaging in the type of behavior that will get you sanctioned. Who knows? You may learn something. We in the patent bar—well at least some of us—welcome you with open arms.

Footnotes

1 TC Heartland LLC v. Kraft Foods Group Brands LLC, 581 U.S. ___ (2017).

2 Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957).

3 VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (1990).

4 Nautilus, Inc. v. Biosig Instruments, Inc., 572 U.S. ___ (2014) requires reasonable certainty.

5 Exxon Chemical Patents, Inc. v. Lubrizol Corp., 64 F.3d 1553 (Fed. Cir. 1995).

6 Octane Fitness v. ICON Health & Fitness, Inc., 572 U.S. ___ (2014).

Originally printed in Law360 on August 7, 2017.

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