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Back to “Normal”?: Patent Venue After TC Heartland

On May 22, 2017, in TC Heartland LLC v. Kraft Foods Group Brands LLC, the Supreme Court reversed decades of expansive patent venue interpretation by the Federal Circuit.[1] A succinct 10-page opinion by Justice Thomas established that the term “resides” refers only to the state of incorporation under the patent venue statute, 28 U.S.C. § 1400(b).[2] The ruling in TC Heartland immediately overturns long-standing “forum-shopping” practices and introduces a longer-term issue of defining “a regular and established place of business.”

Under § 1400(b), “[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.”[3] In 1957, the Supreme Court held in Fourco Glass Co. v. Transmirra Products Corp. that a domestic corporation “resides” only in its state of incorporation.[4] However, starting with its 1990 decision in VE Holding Corp. v. Johnson Gas Appliance Co., the Federal Circuit has held that “resides” is instead defined under the general venue statute of 28 U.S.C. § 1391(c) to include where the corporation is subject to personal jurisdiction. [5] The Federal Circuit based this divergence from the Supreme Court’s holding in Fourco on intervening amendments to that statute.

The tension between these two interpretations came to a head when Kraft Foods Group Brands LLC asserted its patent on liquid water enhancers against TC Heartland LLC.[6] Kraft, being incorporated in Delaware and headquartered in Illinois, filed the complaint in Delaware; TC Heartland, incorporated and headquartered in Indiana, sought to transfer the case to the Southern District of Indiana.[7]

In its motion to transfer venue, TC Heartland argued that venue in Delaware was improper because TC Heartland 1) resided only in Indiana, 2) was not registered to do business in Delaware, and 3) did not have a regular and established place of business in that state.[8] TC Heartland asserted that it had only shipped the accused products to Delaware and had no other presence in the state.[9] The Magistrate Judge recommended denying TC Heartland’s motion in full, reasoning that TC Heartland had minimum contacts in Delaware sufficient for personal jurisdiction, thus satisfying “residence” for an entity in the District of Delaware, and accordingly venue was proper under 28 U.S.C. § 1391(c).[10]

TC Heartland sought a writ of mandamus from the Federal Circuit, which was denied.[11] It then sought a writ of certiorari with the support of seven amicus briefs from amici ranging from 32 internet companies to 56 professors of law and economics. The Supreme Court granted TC Heartland’s petition for certiorari on December 14, 2016, leading to the decision on May 22, 2017.

The Supreme Court overturned VE Holding’s reliance on § 1391 for its definition of “resides,” holding that “resides” in the patent venue statute, § 1400(b), refers only to the state of incorporation.[12] The Court reasoned that none of the intervening changes in § 1391 contained any indication that Congress intended to alter the meaning of § 1400(b) as interpreted in Fourco Glass, which the Court found controlling.[13] Furthermore, the decision by Congress to add a savings clause in the current version of § 1391 (i.e., “Except as otherwise provided by law”) “makes explicit the qualification that the Court previously found implicit in the statute.”[14] Thus, the Court made clear that “resides” is defined by the defendant’s state of incorporation only, and “resides” for the purposes of patent venue cannot be construed based on the broader definition set out in § 1391(c).[15]

Impact on Patent Litigation Filings

Prior to TC Heartland, the Federal Circuit’s decision in VE Holding allowed plaintiffs to file patent infringement actions in substantially any district where products had been sold.[16] This promoted forum-shopping, which gradually led to substantial increases in patent filings in districts perceived to be plaintiff-friendly, such as the Eastern District of Texas.[17] In that district, the extraordinary win-rate for patent plaintiffs – 72% of all jury trials[18] – brought a huge influx of patent litigation; filings there rose from about 9% in 2005[19] to over 40% of all US patent suits in 2015.[20]

Newly-Filed Cases and Likely Forums

In the wake of TC Heartland, many defendants will no longer be subject to suit in forums where they lack a regular and established “place of business.”[21] Going forward, patent filings will reflect practices under Fourco Glass, rather than VE Holding, and result in shifting litigation away from the Eastern District of Texas. Some studies suggest that the Eastern District of Texas will see a drop in patent filings, down to perhaps 15% of all patent infringement cases.[22]

Substantial impacts from the TC Heartland decision will be felt in districts where companies are incorporated or headquartered. For example, the District of Delaware is the legal home for more than 66% of Fortune 500 companies and the Northern District of California is the home to many companies headquartered in Silicon Valley.[23] Some studies predict that the District of Delaware will serve as a forum for almost 20% of patent infringement cases.[24] Other studies suggest that the District of Delaware and the Northern District of California could collectively experience an uptick to perhaps 37% of all cases filed.[25]

Pending Cases

For those parties with established, pending patent cases where no venue motions were filed or objections were not clearly preserved, it remains to be seen whether such cases can be transferred out of their existing districts or dismissed for lack of venue.[26] Two lower court decisions from the Eastern District of Virginia and the Eastern District of Texas suggest that TC Heartland may not be treated as intervening law for the purpose of venue transfer in pending cases.[27] In both cases, however, the litigation was within weeks or months of trial, and at least one of the defendants had answered without attempting to preserve any venue objections. And although the Federal Circuit denied a request for a writ of mandamus in one of those decisions, noting the heightened standard required for mandamus (“to correct a ‘clear abuse of discretion or usurpation of judicial power’ by a trial court”),[28] Judge Newman’s dissent suggests that the result may have been different under slightly different facts.[29]

Indeed, a recent Western District of Washington case suggests that failing to challenge venue prior to TC Heartland does not necessarily waive the improper venue defense if the challenge is brought earlier during the pleading stage.[30] The district court held that the defendants had not waived their defense of improper venue under § 1400(b) by not including it in the original motion to dismiss.[31] Instead, the defendants were allowed to add the argument to their second, pending motion to dismiss, because the defense was unavailable to them at the time the original motion was made, and because the defendants raised the defense as soon as it became available following TC Heartland.[32] Furthermore, the new improper venue defense did not result in unnecessary delay and did not unduly prejudice the plaintiff.[33]

Multiple Defendants

In future patent cases, TC Heartland will likely make it much more difficult to join multiple defendants in a single action when they are not all amenable to the same venue. For example,
§ 1400 does not include the “where any defendant resides” provision like § 1391 or any supplemental venue provision that would extend venue over additional defendants or additional claims. This is likely to force a shift to multidistrict litigations under 28 U.S.C. § 1407.[34] Namely, under less permissive venue rules, multidistrict litigations may become more costly for plaintiffs, thereby decreasing the frequency of such cases.

Regular and Established Place of Business

TC Heartland brings a new focus on the second prong of § 1400(b), regarding the interpretation of “a regular and established place of business.” The Federal Circuit in In re Cordis Corp. defined the appropriate inquiry as, “whether the corporate defendant does its business in that district through a permanent and continuous presence there and not . . . whether it has a fixed physical presence in the sense of a formal office or store.”[35] For instance, having sales representatives alone is not enough to establish such a presence if they do not also maintain samples or at least sell the products at issue.[36] Also, as e-commerce becomes ever more prevalent, an increasingly common challenge will be to pinpoint where such companies have a regular and established place of business. Under TC Heartland, patent venue would at least be proper for domestic internet company defendants in the district where they are incorporated. [37] Although, recent cases suggest that mere communications, sales and shipments to a state, and visitations are not sufficient to establish patent venue. [38]

 Conclusion

The impact of TC Heartland will be substantial and wide-ranging. Practitioners will almost certainly see a shift in patent litigation filings away from the Eastern District of Texas in favor of the District of Delaware and the Northern District of California. Joining multiple defendants in a single action will also be more difficult. Furthermore, while Justice Thomas makes clear the meaning of “resides” under 28 U.S.C. § 1400(b), further case law will be needed to provide guidance on the bounds of a “regular and established place of business” for companies, especially those that are internet-based.



[1] TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct. 1514 (2017).

[2] See id. at 3.

[3] 28 U.S.C. § 1400(b) (2017).

[4] Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222, 226 (1957).

[5] VE Holding Corp. v. Johnson Gas Appliance Co., 917 F. 2d 1574 (Fed. Cir. 1990).

[6] Kraft Foods Group Brands LLC v. TC Heartland, LLC, No. 14-28-LPS, 2015 WL 4778828, at *1 (D. Del. Aug 13, 2015).

[7] See TC Heartland, 137 S. Ct. at 2-3.

[8] Id.

[9] Brief for the Respondent at 9, TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341 (U.S. May 22, 2017).

[10] Id. at 10.

[11] Id.

[12] See TC Heartland, 137 S. Ct. at 1.

[13] Id. at 8.

[14] Id. at 9.

[15] Id.

[16] Jeff Mordock, U.S. Supreme Court Ruling Could be Economic Boon for Delaware, delawareonline (May 26, 2017, 10:23 AM), http://www.delawareonline.com/story/money/2017/05/26/
u-s-supreme-court-ruling-could-economic-boom-delaware/339852001/.

[17] Brief of Amici Curiae 32 Internet Companies, Retailers, and Associations in Support of Petition for Writ of Certiorari, TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341, slip op. at 3 (U.S. May 22, 2017) [hereinafter Brief of 32 Internet Companies].

[18] Brief of 32 Internet Companies, supra note 17, at 5. Generally, a plaintiff’s chances of winning in patent litigation drop from 58% to 29% of cases when there is a transfer of venue.

[19] Brian Howard, Lex Machina 2015 End-of-Year Trends, Lex Machina (Jan. 17, 2016), https://lexmachina.com/lex-machina-2015-end-of-year-trends):/.

[20] Id.

[21] Ryan Davis, ‘Place of Business’ to be New Patent Venue Battleground, Law360 (May 26, 2017, 8:57 PM), https://www.law360.com/ip/articles/928713.

[22] Brief of 22 Law, Economics and Business Professors as Amici Curiae in Support of Respondent at 2, TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341 (U.S. May 22, 2017).

[23] Brief for the Respondent, supra note 9, at 53.

[24] Brief of 32 Internet Companies, supra note 17, at 5.

[25] Brief of 22 Law, Economics and Business Professors as Amici Curiae in Support of Respondent, supra note 22, at 2.

[26] Mordock, supra note 16.

[27] Cobalt Boats, LLC v. Sea Ray Boats, Inc., No. 2:15cv21, (E.D. Va. June 7, 2017); Elbit Systems Land and C4I Ltd. et al. v. Hughes Network Systems LLC et al., No. 2-15-cv-00037, (E.D. Tex. June 20, 2017) (another advanced-stage litigation case explaining that TC Heartland does not qualify for intervening law exception because it merely affirms the viability of Fourco).

[28] In re Sea Ray Boats, Inc., No. 17-124, Dkt. No. 4 at 3 (Fed. Cir. June 8, 2017) (Newman, J., dissenting).

[29] Id. at 4 (“where the change of law brings the propriety of the current venue directly into question, this defendant is entitled to consideration of its request.”).

[30] Westech Aerosol Corp. v. 3M Co., No. 3-17-cv-05067, (W.D. Wash. June 21, 2017)

[31] Id. at 2; Realtime Data LLC d/b/a IXO v. Barracuda Networks, Inc., No. 6-17-cv-00120 (E.D. Tex. July 14, 2017) (if a defendant previously waived its venue objection, the defense cannot be revived through a request to amend the pleading).

[32] Westech Aerosol at *3.

[33] Id.

[34] 28 U.S.C. § 1407 (2017). “When civil actions involving one or more common questions of fact are pending in different districts, such actions may be transferred to any district for coordinated or consolidated pretrial proceedings.”

[35] In re Cordis Corp., 769 F.2d 733, 737 (Fed. Cir. 1985).

[36] Id.

[37] Davis, supra note 21.

[38] See, e.g., Stuebing Automatic Machine Co. v. Gavronsky d/b/a Matamoros Machine Shop, No. 1-16-cv-00576 (S.D. Ohio June 12, 2017) (confirming that communicating by email or telephone with customers, shipping product to customers, or physically visiting or otherwise being in the district is not sufficient to establish patent venue); LoganTree v. Garmin International, Inc., No. 5-17-cv-00098 (W.D. Tex. June 22, 2017) (confirming that an authorization to conduct business in a state, a website allowing access to a list of local distributors, and product sales in Texas were not sufficient to establish patent venue).

 

Eric A. Liu is an MBHB 2017 summer associate.

 

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