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Silverstein and Meyer Author Article on Potential Ramifications of TC Heartland Decision

April 26, 2017

In “High Court May Shake Up 27 Years of Patent Venue Selection With 'TC Heartland,'” an article published in Delaware Business Court Insider, associates Alan Silverstein and Dominique Meyer weigh in on the potential ramifications of the U.S. Supreme Court’s anticipated ruling in TC Heartland v. Kraft Foods Group Brands. The decision, expected by summer 2017, will have substantial influence on the future of the dockets of the Eastern District of Texas and Delaware.

High Court May Shake Up 27 Years of Patent Venue Selection With TC Heartland

The U.S. Supreme Court will soon decide whether the plain language of the patent venue statute—or the Federal Circuit's 27-year-old deviation from it—will dictate the appropriate venue for patent infringement litigation. A decision to return to the patent venue statute would narrow the current standard, and undoubtedly lead to many new patent filings in the U.S. District Court for the District of Delaware, taking back a substantial portion of the docket of the current king of new patent infringement complaints, the Eastern District of Texas.

Currently, patent infringement plaintiffs may file suit in any federal district court where the accused infringer makes sales or is otherwise subject to personal jurisdiction. This broad standard was established by the U.S. Court of Appeals for the Federal Circuit in VE Holding v. Johnson Gas Appliance, 917 F.2d 1574 (Fed. Cir. 1990), and has been the prevailing rule for the past 27 years. Although commentators frequently lament that the VE Holding standard is overly broad because it allows plaintiffs to choose a venue that favors the plaintiff regardless of the place of business or formation of the defendant, the standard has largely gone unchallenged. Now, and following oral arguments held on March 27, the issue is ripe for the Supreme Court to decide in TC Heartland v. Kraft Foods Group Brands, No. 16-341 (S. Ct. argued Mar. 27, 2017).

Petitioner TC Heartland has asked the Supreme Court to overturn VE Holding in favor of a plain-language interpretation of 28 U.S.C. Section 1400(b), which states: "Any 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." The effect of such a decision would be to change the effective standard so that alleged patent infringers could only be sued in their place of incorporation or place of business, rather than anywhere such defendants make sales.

A look back at the evolution of the standard for determining venue in the patent litigation context is illuminating on how this issue came before the Supreme Court for review in TC Heartland. The Supreme Court first interpreted the patent venue statute in 1957 in Fourco Glass v. Transmirra Products, 353 U.S. 222 (1957). In Fourco, the U.S. Supreme Court relied on the plain language of 28 U.S.C. Section 1400(b) to find that the broader, general venue statute, 28 U.S.C. 1391(c), did not trump the patent infringement-specific venue provision of Section 1400. At the time of that decision, Section 1391 allowed a defendant to be "sued in any judicial district in which it is incorporated or licensed to do business or is doing business, and such judicial district shall be regarded as the residence of such corporation for venue purposes."

In 1988, Congress amended Section 1391 in two relevant ways. First, the 1988 amendment to Section 1391 added: "for the purposes of venue under this chapter"—referring to Chapter 87 of Title 28 of the U.S. Code to which both Section 1391 and Section 1400 belong. Second, Section 1391 was amended to define a corporation's residence as "any judicial district in which it is subject to personal jurisdiction."

Over 30 years after Fourco, the Federal Circuit held that those amendments to Section 1391 clearly evinced Congress' intent to have Section 1391 apply to all of Chapter 87 of Title 28, including Section 1400, with respect to the meaning of where a defendant "resides." The net result of this decision is that alleged infringers became subject to suit anywhere that personal jurisdiction was satisfied.

TC Heartland now asks the Supreme Court to reverse 27 years of VE Holding controlling patent litigation venue as inconsistent with the patent venue statute and Fourco. The petitioner is not alone—16 amicus briefs have been filed in support of TC Heartland's position. Conversely, 11 amicus briefs have been filed in favor of respondent Kraft Foods.

The ramifications for Delaware patent litigation are evident. Although not necessarily an issue for the Supreme Court to decide, the story told in the amicus briefs is that patentees, particularly nonpracticing entities, overwhelmingly prefer to file suit in the Eastern District of Texas. That district has local patent rules that practitioners generally agree are favorable to patentees compared to other jurisdictions. As a result, 37 percent of all patent cases were filed in the Eastern District of Texas in 2016. The next four most popular districts, including Delaware at number two, total 25 percent. All of the remaining districts outside the top five make up the remaining 37 percent of patent cases filed in 2016. This represents a significant shift from just five years before, when, in 2011, amidst of the nonpracticing entity litigation boom, Delaware had the most new patent cases filed with 14 percent of the total, compared to the Eastern District of Texas at 12 percent.

In the event that the Supreme Court decides that the patent venue statute should control, there will be a large shift to the U.S. District Court for the District Delaware for new patent filings. Delaware is the place of incorporation of over 50 percent of publicly traded companies and 60 percent of the Fortune 500. With such an overwhelming percentage of companies incorporated in Delaware, it would not be surprising to see Delaware return to, or even surpass, its peak of over 1,400 new patent case filings that the court saw in 2013.

Whether the Supreme Court will force that shift when deciding TC Heartland is less clear. At oral argument, Justice Ruth Bader Ginsburg asked counsel for TC Heartland whether there is any other venue provision, like Section 1400, that limits venue to a single location—the party's place of incorporation. After counsel could not identify a similar venue provision, Ginsburg commented that such a narrow venue provision excludes a party's principal place of business—a fact that counts for diversity purposes. Ginsburg returned to this idea later in the argument, stating: "Well, maybe the Federal Circuit was wrong in not following Fourco, but the question is now before us, and you are asking us to say that venue in a patent infringement case is only where the entity is incorporated or comparable to that, and you have to acknowledged that there is no other venue provision for any other kind of claim that is so limited to just the place of incorporation."

Although Ginsburg appeared to doubt the viability of such a narrow patent venue statute, she and Justice Elena Kagan pointed out that Congress has not repealed Section 1400 despite the American Law Institute's recommendation for it to do so. Congress' failure to repeal Section 1400 tends to suggest that it intends for the patent venue statute to remain in effect and have a scope different from Section 1391.

Returning to the elephant in the room—the impact that this change would have on individual federal districts—the justices did not seem very interested in how this change could affect the patent docket in the Eastern District of Texas. Although the justices asked questions relating to forum shopping, they did not focus on those arguments. Justice Anthony Kennedy asked whether "generous jury verdicts" favoring nonpracticing entities emerging from the Eastern District of Texas, and the tendency of such verdicts to induce forum shopping, is something the justices should consider. However, the tenor of the justices' inquiry into the issue suggested that they will not be focusing on arguments related to forum shopping. At one point in the discussion, Justice Stephen Breyer asked, "what's this [the Eastern District of Texas] got to do with this"?

Although the Eastern District of Texas' docket does not appear to factor heavily into the Supreme Court's decision, the justices will still have to decide whether Fourco remains the settled law despite the Federal Circuit's adherence to its later VE Holdings decision. Either way, that decision will have substantial influence on the future of the dockets of the Eastern District of Texas—and Delaware.

A decision is expected by this summer.

This article was originally published in the Delaware Business Court Insider.