Patent Reform is the politically correct name the lobbyists and other advocates give to their efforts to change the law to favor their clients’ special interests or what they perceive is the greater good. Not surprisingly, some of the ideas on the reformers’ wish lists advance the constitutional purpose of the patent system, while others do no harm, at best.
Congress is, of course, the ultimate source of patent reform but this is the kind of subject that is driven by the lobbyists for the special interests, both good and not so good that divide the stakeholder community. Today, there are eight bills before Congress that propose to change U.S. patent law in one way or another.
With the 114th Congress now ending, the progress clock for legislation will stop temporarily and it is far from clear which special interests will be the squeaky wheels that get greased in the 115th Congress. We will make some educated guesses on this in another post shortly.
Apart from what Congress may or may not do, the Supreme Court has agreed to hear the case of TC Heartland v. Kraft Foods which involves one of the items high on the reform agenda, namely, venue for patent infringement litigation. In this case, the Court will consider if the Court of Appeals for the Federal Circuit (the “CAFC”) is correctly interpreting the statute governing where a corporate defendant can be sued for patent infringement.
Heartland is a limited liability company organized and existing under the laws of the State of Indiana. Its headquarters are in Carmel, Indiana. On January 14, 2014, Kraft sued Heartland for infringement of three patents related to liquid water enhancer products in the U.S. District Court for the district of Delaware.
Heartland responded by filing a motion to dismiss for lack of personal jurisdiction based on 28 U.S.C. 1400, the section of the U.S. Judicial Code that governs patent infringement litigation or in the alternative, to have the case transferred to the Southern District of Indiana.
In its motion, Heartland asserted that it has no legal contacts or presence in Delaware and does not solicit business there. It does, however, ship orders of the accused products to Delaware under contracts with two national accounts that are headquartered outside of Delaware. In 2013, these shipments amounted to approximately 2% of Heartland’s total sales of the accused products.
On the basis of what he perceived as controlling CAFC authority, the Magistrate Judge who heard the motion recommended that it be denied. The court adopted his recommendation.
Heartland then filed a petition for a writ of mandamus seeking to have the CAFC direct the District Court to either dismiss or transfer the case to Indiana. The court denied the writ, relying on its prior decisions, which it said “foreclosed” Heartland’s arguments. Heartland filed a petition for certiorari with the Supreme Court, and on 14 December, the petition was granted.
Venue is one of the hot button patent reform topics. Among the pending reform bills is S.2733, the Venue Equity and Non-Uniformity Elimination Act of 2016 (the “VENUE Act). It was introduced last March and referred to the Committee on the Judiciary. No action has been taken on this bill as of now.
As stated by the Congressional Research Service:
This bill amends the federal judicial code to allow patent actions to be brought only in judicial districts where:
- the defendant has its principal place of business or is incorporated;
- the defendant has committed an act of infringement of a patent in suit and has a regular and established physical facility that gives rise to the act of infringement;
- the defendant has agreed or consented to be sued; an inventor named on the patent conducted research or development that led to the application for the patent in suit; or
- a party has a regular and established physical facility and has managed significant research and development for the invention claimed in the patent, has manufactured a tangible product alleged to embody that invention, or has implemented a manufacturing process for a tangible good in which the process is alleged to embody the invention.
The supposed villains, whose bad behavior the bill is intended to curtail, are the so-called Non-practicing Entities (NPEs) or Patent Assertion Entities (PAEs) often referred to as “patent trolls”. At their worst, NPEs are scavengers who buy up unused patents, often of no technological or economic value to their owners. The ill repute of the NPEs arises, in part, from the fact that they assert their patents, often, with no factual basis, hoping that their targets will take a license for a fee that will be less than the cost of litigation.
One class of targets for the NPE business model is small, still weak entrepreneurs to whom the prospect of patent litigation is an existential threat. Critics regard this NPE tactic as a major deterrent to innovation.
The tech giants are also juicy targets for the patent trolls, but their hearts aren’t that pure either. Critics accuse them of practicing “efficient infringement”, i.e., stealing innovations from weaker competitors on the theory that the cost of litigation will discourage weak patent owners from suing. And for those who do have the temerity to take them on, they will plan to litigate their tormentors into submission.
Even factoring in cost of an occasional full-blown defense, the mega-defendants are said to view the benefits of efficient infringement as greater than paying royalties. Their aggressive strategy is strengthened by the fact that their worst fear, namely an injunction against further infringement, is becoming harder and harder to get.
The NPEs presently have a major tactical advantage: under current CAFC law, a corporation can be sued virtually anywhere for patent infringement. Even the tech giants don’t want to be subject to suit far from home. So, strange bedfellows that they may be, they and the champions of the entrepreneurs are pressing for a change in the patent venue law. To this observer, such a change would significantly improve the U.S. patent system.
Problems under the present law as stated in Heartland’s petition for certiorari and a supporting brief signed by more than 50 law and economics professors make the case for reversal compellingly. For those interested in the details, Heartland’s petition and the supporting brief may be found here and here.
Not surprisingly, the Heartland case is being watched closely by virtually all patent system stakeholders.
But how did the law on patent venue get the way it is in the first place? In 1957, in the case of Fourco Glass Co. v. Transmirra Prods. Corp., the Supreme Court held that Section 1400(b) of the U.S. Judiciary Code, 28 U.S.C. 1400(b), exclusively defines venue in patent cases, and is not altered by 28 U.S.C. 1391(c), the General Venue Statute.
28 U.S.C. 1400(b) 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.
That does not sound too complex, and certainly does not on its face permit unlimited venue in patent cases.
The problem is that the CAFC evidently did not feel bound by Fourco, and in 1990, in the case of VE Holding Corp. v. Johnson Gas Appliance Co., it held that 1988 amendments to Section 1391(c)(2) of Title 28 overrides Section 1400(b) and permits a patent infringement suit to be brought in any judicial district in which the accused infringer is subject to the court’s personal jurisdiction.
The CAFC based its decision on a 1988 change in the first sentence of 28 U.S.C. 1391(c), which it held to have overruled Fourco.
In 1957, when Fourco was decided, the first sentence of 28 U.S.C. 1391(c) read:
A corporation may 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 contrast, the first sentence of the 1988 revision states:
For 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.
In its petition for certiorari, Heartland pointed out that “[T]he section of the 1988 Act which amended § 1391(c) was located in a “Miscellaneous Amendments” title and characterized in a contemporaneous House Report as being one of a series of “miscellaneous provisions dealing with relatively minor discrete proposals.” It is difficult to understand how a statutory amendment intended to overrule a decision of such significance as Fourco would have been characterized as “relatively minor” or why its intent to overrule Fourco would not have even been suggested in the legislative history.
In 2011, as part of the Federal Courts Jurisdiction and Clarification Act, Section 1391 was again revised by addition of a new subparagraph, entitled “Applicability of Section” which begins “[E]xcept as otherwise provided by law . . . (1) this section shall govern the venue of all civil actions brought in district courts of the United States . . . .” Thus, the language relied on by the CAFC in VE Holding (“[f]or purposes of venue under this chapter”), was no longer in Section 1391 at the time of the present case. The CAFC seems to have totally ignored this fact.
Interestingly, Heartland’s petition also refers to a 2013 Supreme Court decision in Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas which characterized the 2012 wording of 28 U.S.C. 1391 as governing venue generally, “that is, in cases where a more specific venue provision does not apply,” and referred to 28 U.S.C. 1400 as “identifying proper venue for copyright and patent suits.”
Heartland argues in its petition that “[E]ven though the 2011 Act eliminated from § 1391(c) the very phrase that VE Holding had relied on to justify its rejection of Fourco, the Federal Circuit has remained adamant in its view that this Court’s interpretation of § 1400(b) in Fourco purportedly is “no longer the law because in the 1988 amendments Congress had made the definition of corporate residence applicable to patent cases.”
Stated succinctly, the CAFC has completely ignored the 2012 change which seemingly undercuts completely the court’s basis for the VE Holding decision.
Looking back, it appears that the CAFC decision in VE Holdings created an open season for forum shopping in patent litigation. One particularly attractive jurisdiction is the U.S. District Court for the Eastern District of Texas. Judges and juries here are unaccountably very pro-patent, and have developed a reputation for generous awards in patent cases. This has not been lost on the attorneys for patent owners; a study (here) cited in Heartland’s petition for certiorari indicates that in 2015 more than 43% of patent infringement cases nation-wide were brought in that court.
The consensus of opinion is that VE Holdings will be reversed to rein in the epidemic of forum shopping. But even apart from that, the enormous impact on the resources of the Eastern District of Texas court, is sufficient justification for the Supreme Court to act to correct what some have called the CAFC’s 26 year old mistake.