Setting up a major shift in patent litigation, the Supreme Court in T.C. Heartland LLC v. Kraft Foods Group Brands LLC, today rejected the long-standing Federal Circuit precedent of VE Holding Corp. v. Johnson Gas Appliance Co., 917 F. 2d 1574 (1990). The Supreme Court reaffirmed its decision in Fourco Glass Co. v. Transmirra Products Corp., 353 U. S. 222, 226 (1957) and held that "amendments to §1391 did not modify the meaning of §1400(b) as interpreted by Fourco." As a result of this decision, a domestic corporation will only be subject to patent litigation in the State where the defendant is incorporated or "where the defendant has committed acts of infringement and has a regular and established place of business." 28 U.S.C. §1400(b) (emphasis supplied). This should drastically reduce the number of patent litigation matters in perceived plaintiff-friendly venues like the Eastern District of Texas.
The issue in T.C. Heartland arises from the structure of the venue statutes and the amendments that have been made to them over the years. 28 U.S.C. §1391 addresses venue generally, and states that "[e]xcept as otherwise provided by law" it "shall govern the venue of all civil actions." 28 U.S.C. §1391(a). Separate and apart from that provision, 28 U.S.C. §1400(b) addresses venue in patent infringement actions. The structure of these statutes and their modifications first raised questions in Fourco, and the Fourco decision ultimately dictated the Court's decision in T.C. Heartland.
In reaching its decision, the T.C. Heartland Court traces the history of the statutory and decisional law that preceded its decision in Fourco. Prior to Fourco, the patent venue statute existed as a separate provision for determining venue in patent cases. In Fourco, the Supreme Court addressed a 1948 recodification of the venue statutes that changed the word "inhabit[s]" to "resides" in the patent venue statute, while simultaneously enacting the general venue statute that included a definition of "residence" for corporate defendants. Slip op. at 5. The lower court in Fourco had concluded that §1391(c) defined residence for §1400(b). The Supreme Court disagreed and reversed, holding that, in light of the statutory history, "§1400(b) 'is the sole and exclusive provision controlling venue in patent infringement actions, and . . . is not to be supplemented by . . . §1391(c).'" Slip op. at 5 citing 353 U. S. at 229. Focusing on Congressional intent, the Supreme Court noted that "nothing in the 1948 recodification evidenced an intent to alter [§1400(b)'s status as a standalone venue statute.]" Slip op. at 5. It further concluded that "reside" in §1400(b) carried the same meaning as "inhabit" in the pre-1948 statute and thus defendants were "subject to venue only in their State of incorporation." Id. at 6.
A similar recodification led to the Federal Circuit's decision in VE Holding. In 1988, Congress changed the general venue statute again to provide that "[f]or 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 commenced." Id. citing Judicial Improvements and Access to Justice Act, §1013(a), 102 Stat. 4669 (emphasis supplied). In VE Holding, the Federal Circuit distinguished Fourco and interpreted this language as "exact and classic language of incorporation" such that §1400(b) should be interpreted in accordance with the residency definition of §1391(c). Notably, the Federal Circuit was doing exactly what the Supreme Court had refused to do in Fourco: applying the definition of residency from the general venue statute into the definition of "resides" found in the patent venue statute.
Congress made additional changes to the venue law in 2011. T.C. Heartland, slip op. 7, citing Federal Courts Jurisdiction and Venue Clarification Act of 2011, §202, 125 Stat. 763. First, §1391(a) now provides that "[e]xcept as otherwise provided by law," "this section shall govern the venue of all civil actions brought in district courts of the United States." Id. In addition, §1391(c)(2) states that, "[f]or all venue purposes," certain entities, "whether or not incorporated, shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court's personal jurisdiction with respect to the civil action in question." Id. (emphasis supplied). The Federal Circuit in the T.C. Heartland case below found that these changes did not provide a basis to reconsider its prior decision in VE Holding.
The Supreme Court disagreed, noting first that it had "definitively and unambiguously held that the word 'reside[nce]' in §1400(b) has a particular meaning as applied to domestic corporations: It refers only to the State of incorporation." Since the Congress, even in changing the statute from "for venue purposes" to "for all venue purposes," had not provided any clear indication of intent to address patent litigation, §1400(b), or the Fourco decision, that interpretation stood. Indeed, the Supreme Court saw no "material difference" in the statute that it interpreted in Fourco including "for venue purposes" and the later statute's use of "for all venue purposes." Slip op. at 8.
The Supreme Court further concluded that the "savings clause" of the current 1391(c) – providing that it did not apply when "otherwise provided by law" – "makes explicit the qualification [the Supreme Court] previously found implicit in the law." Slip op. at 9. The Supreme Court also noted that the phrase "under this chapter" relied on by the Federal Circuit in VE Holding had been deleted as part of Congress's 2011 amendments to the venue statute.
At bottom, the holding of T.C. Heartland is the same as its holding in Fourco: "As applied to domestic corporations, 'reside[nce]' under 1400(b) refers only to the State of incorporation." Slip op. at 10.
This decision may deal a staggering blow to the patent assertion entities and practitioners that had built their business models around exacting settlement leverage over domestic corporations by forcing them to litigate in perceived plaintiff-friendly venues, such as the Eastern District of Texas. In contrast, the decision will be perceived as a huge victory by those companies who have spent years fighting so-called "trolls" in Texas. That said, in a rapidly changing technology economy, people will find plenty to fight about. However, those fights may occur in different places. An open question is whether we'll see greater use of multi-district litigation or MDL panels going forward. Regardless, it seems certain that, given the number of companies that are incorporated in Delaware, Delaware is going to need some more judges.
For now, courts in the Eastern District of Texas and elsewhere are likely to be inundated with venue challenges, with corporate defendants arguing for a retroactive application of the Supreme Court's interpretation of the venue statutes. As these litigants seek to move their cases elsewhere, they will certainly weigh the inevitable delay that will occur as well as the costs of having to redo certain aspects of the litigation against the benefits they believe might found in their "home" courts.
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