Richard Lloyd

The Supreme Court weighed into another hot button issue for the patent market on Wednesday when it granted cert in TC Heartland LLC v Kraft Food Brands Group LLC, a case which could upend current thinking on where patent owners can file infringement lawsuits and bring an end to the Eastern District of Texas as the venue of choice for patent plaintiffs.

Assuming (as is their usual wont) that the Supreme Court over-turns the decision of the Court of Appeals for the Federal Circuit which ruled against TC Heartland’s petition to move its patent dispute with Kraft from Delaware to Indiana, then the implications for patent owners and for the patent reform debate are likely to be very significant.

For one thing, venue reform - which has been pushed recently by various parts of the patent community - would probably be taken off Congress’s agenda, most likely leaving legislators with an overhaul of inter partes reviews and addressing the uncertainty around patent eligible subject matter at the top of their patent to-do list.

For many, East Texas has become the bête noire of the patent market as patent owners have flocked to the district’s courtrooms. Its advantages are well known – the district court there has plenty of experience in hearing patent cases, judges tend to manage their dockets efficiently, there is a hostility to early judgments, judges have shown less of a willingness to stay cases while parallel IPRs play out and juries are perceived to be relatively plaintiff friendly. Last year 43.7% of all new patent cases in the US were filed in East Texas (the total jumped 78% year-on-year) with Delaware, the second busiest district for patent suits, accounting for just under 10%. That dominance of the patent litigation landscape has attracted a lot of criticism, as has the claim that East Texas is the preferred locale for NPEs asserting low-quality patents.

There is no doubt that the district has become the venue of choice for those filing a high volume of lawsuits, some of which maybe of questionable merit. According to research by Lex Machina, in 2015 high-volume plaintiffs – those that have filed at least 10 cases in a year – brought almost 2,000 new cases in the district, far higher than in Delaware.

But Eastern Texas also holds an appeal because as other venues in the US have become increasingly unfriendly to anyone asserting a patent, some view it as continuing to take a balanced approach. According to PwC’s most recent patent litigation study patent holders enjoyed a 55% success rate in Eastern Texas in cases that reached a decision between 1995 and 2014. That compared with other patent suit hotspots Delaware and the Northern District of California where the rates were 43% and 26% respectively.

Those rates are, of course, before the Court of Appeals for the Federal Circuit has had its say and many plaintiffs know how that can turn out. Winning patent cases in the US is tough, time consuming and expensive, so it’s not surprising that a big chunk of patent owners are looking for a forum that they think will give them a fair crack of the whip. Whether that continues now appears to be in the hands of the Supreme Court’s eight justices. If Eastern Texas does go down, the US is likely to be an even more difficult jurisdiction for all patent owners than it is now.

For a little more perspective on the cert grant from on the ground in Texas I contacted Michael Smith of Siebman, Burg, Phillips & Smith. Smith is an active blogger on all things to do with local patent litigation and, perhaps not surprisingly for someone who makes his living from disputes on his doorstep, he was disappointed by the Supreme Court’s decision to take the case. However he had some fairly strong and perhaps contrary opinions about what it means for patent owners and defendants. Here’s what he had to say: 

I don't know why they granted it –the statute is about as clear as it could be, and in the 25 years between VE and Heartland I never saw anyone ever raise the argument down here.  But it is troubling because we'd had a lot of success locally knocking out the bulk filer plaintiffs using 101, 285 and so forth.  Filings are down a third from last year, and that's by and large major NPE filers not filing.  The system is working culling out the bad filers, and letting us focus on real cases.

I think patent venue is an issue for Congress and I know they're looking at revising the statute - I don't know why the Court would be weighing in on the policy issues of where patent cases should be filed, and as I said I think the statutory interpretation issue is clear.  "For all venue purposes" is pretty clear, at least to me.  This is Congress' call, and both houses already have venue bills in various stages of consideration - all of which provide more evenhanded treatment to parties than this case would.

But here's my big concern - if the Court does what they want and eliminates "resides" as a basis for venue, I am afraid plaintiffs will shift to the "infringing plus regular place of business" prong of 1400. I'm afraid local filings will go up with plaintiffs suing retailers and smaller distributors and end users to hold venue instead of suing the real party in interest, which they usually do now.  

"Customer suits" have not been a significant problem locally, which is good because when a plaintiff goes after smaller defendants in the distribution chain it's a significant problem protecting them from shakedown suits.  I have some of those cases - I generally represent smaller accused infringers, and smaller clients are in a real bind defending patent suits, and this will make it worse. This eliminates venue against the real infringers and puts it on the innocent resellers or users.  Some may have indemnity agreements upstream, but this forces plaintiffs to keep them in.  And damages models are better against resellers, so there's already an incentive to choose them - this would make it a requirement.  The damages per defendant would not be large, but it's exactly those "smash and grab" cases that people don't like and our judges have had a lot of success eliminating in recent months. 

And I'm also concerned it's going to make transfers harder to get.  Right now the number of motions to transfer has dropped dramatically and the grant rate for those that are filed is almost 57%.  But if venue starts being predicated on "infringing acts plus regular place of business" defeating venue motions is, I am afraid, going to be a lot harder when mere "infringing acts" are enough to permit venue against a defendant will a local facility or store.

It spoiled my Christmas - I can tell you that!  Not because I think it's the end of the EDTX as a patent venue, but because I see it as opening the floodgates for another wave of bad cases.  Once was plenty!