For 27 years, most federal courts assumed that the same general venue law that applied to non-patent commercial disputes also applied to patent infringement cases, meaning that patent cases could be brought wherever jurisdiction was available over the defendant. However, on May 22, 2017, the United States Supreme Court, in a surprising unanimous decision, TC Heartland LLC v. Kraft Food Group Brands LLC, 197 L.Ed. 2d 816 (2017), held that the patent venue statute requires patent infringement suits to be brought only in the judicial district in which the allegedly infringing defendant is incorporated or, alternatively, where the defendant infringes and has a a place of business. This means that, unless the latter alternative patent venue provision applies, patent claims against the majority of U.S. corporations will now default to the U.S. District Court for the District of Delaware.
The Supreme Court’s decision is bound to re-establish the District of Delaware’s historic lead as the jurisdiction where the highest number of patent cases are filed. Historically, patent plaintiffs in Delaware have enjoyed shorter than median time to trial, higher than average success rates, and higher than median damage recoveries.[2] However, with Delaware serving as the home of many U.S. corporations, and the Heartland decision mandating that cases be filed in the District where those corporations are incorporated, Delaware will face an increased case load—and with this, a likely increase in the time to trial. Coupled with this is the fact that the District of Delaware is now facing a change on the bench with two of the four judges in Delaware announcing retirement and/or the taking of senior status.[3] All of this will lead to a great deal of pressure being placed on the Delaware bench.
With this increased pressure, the ability of the District of Delaware to juggle these cases could lead to some changes in the way the Delaware bench has managed patent infringement cases. For example, while the District of Delaware historically tended to deny stays of cases where a request was made to defer to defendants’ filings seeking invalidation of patents by the U.S. Patent and Trademark Office in Inter Partes Reviews (“IPR”), 3 U.S.C. § 311, already in 2016 (with a heavy patent load on the bench), the District of Delaware granted stays in two out of four cases for IPRs. A grant of a stay related to an IPR can increase the time to trial by 18 to 24 months. With the grant of a stay in favor of an IPR now becoming more of the norm, the bench in the District of Delaware may be more willing to grant stays in order to manage the case load.
While Delaware remains a desirable patent venue, its desirability may wane with an increased caseload and with more willingness to grant stays. The Heartland decision should spur potential plaintiffs to consider and maybe even reassess where to sue patent infringers. In certain cases, an attractive alternative to both the general venue and even the patent venue provisions may be the U.S. International Trade Commission in Washington D.C. The ITC has in rem jurisdiction over imported products that are charged with infringing U.S. patents in Section 337 Unfair Imports Investigations. The advantage of Section 337 is that it is speedy: most cases are decided within 12 months and the Commission has never, to date, granted a stay pending an IPR. One limitation of Section 337 is that a successful patentee obtains an exclusion order, by which the Customs Service is ordered to bar the entry of the infringing imports, rather than damages for infringement being ordered by a juridical body. Nevertheless, an exclusion order provides an opportunity for the patentee to negotiate a settlement by way of a royalty-bearing license or paid-up damages with infringers who want to stay in the market.
Regardless of the decision where to file, prospective plaintiffs should be aware of the sea-change elicited by the Heartland decision and options available.
Heartland’s Impact on Venue.
In Heartland, the Supreme Court considered 28 U.S.C. §1400(b), the patent venue statute, which provides that “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.” In 1957, the Supreme Court interpreted “resides” in the first prong of §1400(b) in the context of a corporate defendant as the state in which the corporation is incorporated. See Fourco Glass Co. v. Transmirra Products Corp, 353 U.S. 222, 226 (1957). However, for nearly three decades thereafter, numerous federal courts interpreted the term “resides” in §1400(b) as having the same expanded meaning of “residence” as is under 28 U.S.C. §1391, the general venue statute. Based on a 1988 amendment by Congress of the general venue provision of §1391, venue is appropriate in “any judicial district in which such defendant is subject to the court’s personal jurisdiction,” and a defendant that is a corporation is deemed to reside “in any judicial district in which it is subject to the court’s personal jurisdiction ….” In 1990 the Federal Circuit, the court with jurisdiction of appeals in patent cases, held that the amendment of the general venue statute also amended the patent venue statute. See VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).
Apparently relying on this authority, Kraft, a Delaware corporation, sued Heartland, an Indiana corporation, in the District of Delaware, and Heartland challenged, seeking to have the case transferred to the Southern District of Indiana. The District Court denied Heartland’s motion, and Heartland filed a petition for mandamus with the Federal Circuit. See Kraft Foods Grp. Brands LLC v. TC Heartland, LLC, 2015 U.S. Dist. LEXIS 127972 (D. Del. Sept. 24, 2015). The Federal Circuit denied Heartland’s petition for mandamus. In re TC Heartland LLC, 821 F.3d 1338 (Fed. Cir. 2016). Thereafter, the Supreme Court granted certiorari and, following argument in March 2017, reversed and remanded the prior decision in a May 22, 2017, opinion, holding that the 1988 amendment to the general venue statute did not amend the patent venue statute and “that a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.” TC Heartland LLC, 197 L.Ed.2d at 820 (2017).
Is Heartland a Swipe at “Patent Trolls”?
While the full impact of the Heartland decision for patent practitioners may not be fully known for years, a fair amount of speculation has already been raised in the media. For example, some media sources have claimed that Heartland is a rebuke of forum shopping by so-called “patent trolls”[4] and will be a boon for the tech industry.[5] San Jose’s Mercury News, under the headline “Supreme Court Ruling Puts Patent Trolls in their Place,” called the Heartland decision “a major win for the tech industry that should be celebrated throughout Silicon Valley.”[6] This in spite of the fact that Heartland was (a) brought not by a patent troll, but a Fortune 200 company; (b) brought not against a tech company, but a division of a food products company; and (c) brought not in a District that is a known magnet for “forum shoppers,” but in the District of Delaware, the forum of choice for many of the largest corporations in the world. Other factors show that certain characterizations of the impact may be off base.
First, any suggestion that the Heartland decision discloses anti-patent troll sentiments by the Supreme Court is misplaced. The decision, based on (candidly) dry statutory construction of the two venue provisions, returns the patent venue statute to the Supreme Court’s prior interpretation in its 1957 Fourco Glass decision.
Second, the idea that any setback for a patent troll (NPE) is a boon for the “tech industry” actually reflects a misunderstanding of the value that such NPEs bring to startups by providing a market for sale of IP when a startup fails. Startups expend substantial resources on developing and protecting potentially disruptive intellectual property. While some startups succeed, many others fail—and some before they enter the market with a viable product. Thus, NPEs prevent established tech companies from depriving investors in failed startups from the ability to recoup their investment in R&D and intellectual property by selling them to third parties (including other NPEs or in bankruptcy auctions) for use or resale to others for enforcement against free riders. Without the market for failed startups to sell this intellectual property, many angel investors may prefer to place their bets on only the “sure things” rather than the potential revolutionary “disrupters.”
Third, while Heartland will result in some changes in where infringement suits are brought, it will not eliminate forum shopping altogether. The Supreme Court did not disturb the second prong of the patent venue statute concerning where infringement cases can be filed: “where the defendant has committed acts of infringement and has a regular and established place of business.” §1400(b). Acts of infringement include “whoever without authority makes, uses, offers to sell, or sells any patented invention.” 35 U.S.C. §271(a). The only other requirement for venue under the second prong of the patent venue statute is that the defendant has a “regular and established place of business” in the District. Depending on the type of business and its business model this prong offers significant choice of venue.
The District of Delaware as the Default Forum.
What is clear from the Heartland decision is that it does set the default for venue for patent infringement suits in a defendant’s State of incorporation, if no alternative exists. Nearly 1.2 million business entities have their legal home in Delaware including more than half of all U.S. publicly-traded companies and 64-66% of the Fortune 500.[7] In short, Delaware is likely to be the “winner” of the venue sweepstakes triggered by Heartland.
The Delaware Court’s track record in patent infringement cases, in general, and in cases brought by putative “patent trolls” (NPEs), in particular, is instructive. In 2015 and 2016 the District of Delaware led the top 15 jurisdictions ranked for most “favorable venues for patent holders, with shorter time-to-trial, higher success rates and greater median damages awards.”[8] The District of Delaware is also not inhospitable to NPEs. The success rate for NPEs may suffer somewhat in Delaware, but recoveries could be double from recoveries in the Eastern District of Texas.[9]
The cited PWC Patent Studies show that the recoveries in Delaware for NPEs are close to the median recoveries overall in the 15 most active jurisdictions reviewed by PWC. Compare the 2016 PWC Study at page 11 (NPEs $13.2 million for corporate NPE plaintiffs and $16.3 million for university/nonprofit NPE plaintiffs) to overall Delaware median recoveries of $17 million (id. at p. 15), to 2017 PWC Study at page 17 (NPEs $13.0 million for corporate NPE plaintiffs and $16.3 million for university/ nonprofit NPE plaintiffs) to overall median recoveries in Delaware of $16.2 million in the following year (id. at 22). The median recoveries by individual NPE plaintiffs were substantially less than for corporate, university, and non-profit NPE plaintiffs in the 2016 PWC Study ($3.3 million) and the 2017 PWC study ($6.7 million).[10] In short, the Delaware Court has awarded remarkably consistent above or near median damages to plaintiffs and NPE plaintiffs alike.
One possible note of caution concerning the speedy trial finding with respect to the District of Delaware is that in the past the Delaware Court was unlikely to stay patent litigation pending determination by the PTO of whether to accept a petition for IPR of issued patents asserted in infringement litigation and pending the completion of such reviews. Prior to 2016 the District Court in Delaware was “likely to deny a stay.”[11] In 2016, however, the Delaware Court split 50-50 in considering four motions for stay.[12] As noted, granting a stay can double the time to trial.
While it is too early to draw any inference of a trend, were this to become a trend, such a development would strengthen the case for a lesser known alternative to District Court litigation in a subset of patent (and trademark) infringement cases that qualify for Section 337 Investigations by the U.S. International Trade Commission.
ITC Section 337 Investigations.
The International Trade Commission (“ITC”) enforces Section 337 of the Tariff Act of 1930, 19 U.S.C. § 1337, following tripartite administrative litigation that closely resembles litigation under the Federal Rules of Civil Procedure, albeit “on steroids” to meet abbreviated ITC deadlines. The three parties to these investigations are the patent holder or “Complainant,” the accused infringer(s) or “Respondents,” and a Commission Staff Attorney from the Office of Unfair Imports Investigations who is independent of the Complainant and Respondents. Multiple Respondent importers can be joined in a single in rem proceeding.
Section 337 affords remedies against imports that violate U.S. intellectual property rights, including patent infringement, copyright infringement, misappropriation of trade secrets, and other forms of unfair competition. Not all Respondents need to be charged with coextensive intellectual property violations.
Such investigations afford the parties full discovery and motions practice, including interrogatories, requests for production, requests for admission, depositions under oath, and means to enforce discovery requests. An evidentiary hearing is held within approximately six months of the institution of an investigation before an Administrative Law Judge (“ALJ”) who is experienced in intellectual property matters, complete with pre-hearing briefs, motions in limine, and post-hearing briefs.
Successful 337 cases can lead the full Commission to review the ALJ’s “Initial Determination” and issue general exclusion orders, limited exclusion orders, or cease and desist orders barring imports by product or specific foreign manufacturers and importers found to have violated the Complainants’ intellectual property rights. Exclusion orders operate as injunctions against the importation of the offending goods, enforced at their point of entry into the U.S. by the Customs Service, usually within one year of the institution of the investigation, or 18 months in more complex cases.
Two factors distinguish between District Court infringement litigation and ITC investigations—one procedural and the second remedial. First, the ITC has never stayed a Section 337 investigation pending a petition for, or completion of, an IPR during its pendency before the PTO. See In the Matter of Certain Laser-Driven Light Sources, Subsystems Containing Laser-Driven Light Sources, and Products Containing Same, 2016 ITC LEXIS 196 (Int’l Trade Comm. Mar. 3, 2016) (motion for stay denied).
Second, while the ITC lacks jurisdiction to award damages against Respondents,[13] the ITC requires settlement conference and mediation between the Complainant and individual Respondents that allow the parties to negotiate license and damage settlements. Some Complainants file District Court complaints, possibly to ward off looming statute of limitations issues or add the spectre of damages to pressure Respondents, expecting a stay of the District Court action either pending an IPR or pending the more expeditious ITC investigation.
In any event the ITC investigation can either lead to a faster settlement than a District Court proceeding or present an advance dry run by which to assess prospects in litigation. The choice of an ITC proceeding has as much as a three-year time advantage over taking the District Court route, if the District Court action is stayed pending an IPR.
Conclusion.
Far from being a victory against “patent trolls” on behalf of the “tech sector,” Heartland will effect a change for patent litigators. The decision will require greater pre-filing investigation of where patent infringers can be sued and a determination of other available options with respect to venue. The outcome of that investigation will likely result in nuanced decision-making on where to bring a patent infringement suit: Delaware or another State of incorporation; a State where infringement occurs and the defendant has an office or manufacturing facility; or potentially the ITC, particularly where infringement involves imported goods; multiple foreign infringers; the patentee is a domestic company (or a foreign company with a substantial U.S. presence); and the patentee is open to injunctive relief against, or licensing of, the infringers.
[1] L. Peter Farkas and Theodore A. Kittila are partners with Halloran Farkas + Kittila LLP (“HFK”), a law firm with offices in Washington, D.C., Wilmington, Delaware, Palo Alto, California, and Jackson, Wyoming. Mr. Farkas is a member of the Bars of the District of Columbia and the States of Maryland and New York and practices in HFK’s Washington, D.C. office. Mr. Kittila is a member of the Bars of the States of Delaware and New York and practices in HFK’s Wilmington, Delaware office. More information about HFK can be found at www.hfk.law.
[2] See 2016 PWC Study and 2017 PWC Study, discussed infra and cited at n.8.
[3] See https://www.law360.com/articles/930133/del-borrows-4-pa-judges-to-boost-bench-post-tc-heartland (last visited June 5, 2017) (noting that in response to the judge shortage, the District of Delaware will “borrow” four judges from the Eastern District of Pennsylvania).
[4] “Patent trolls” are known less pejoratively as Nonpracticing Entities (“NPEs”) or Patent Assertion Entities (“PAEs”).
[5] See, e.g., https://www.nytimes.com/2017/05/22/business/supreme-court-patent-lawsuit.html?_r=0 (last visited June 5, 2017).
[6] See http://www.mercurynews.com/2017/05/28/editorial-supreme-court-ruling-puts-patent-trolls-in-their-place/ (last visited June 3, 2017).
[7] See Delaware Division of Corporations website, http://sos.delaware.gov/business/ (last visited June 3, 2017). See also Delaware Division of Corporations 2015 Annual Report, available at http://corp.delaware.gov/Corporations_2015%20Annual%20Report.pdf (last visited June 5, 2017). The Delaware Secretary of State also noted in his 2015 Annual Report that “86 percent of U.S. based Initial Public Offerings in 2015 chose Delaware as their corporate home, including Box, Etsy, Go Daddy, Shake Shack, and Square.” Id. at p. 1.
[8] See PWC 2016 Patent Litigation Study (“2016 PWC Study”), available at https://www.pwc.com/us/en/forensic-services/public
actions/assets/2016-pwc-patent-litigation-study.pdf (last visited June 3, 2017), at p. 15. See also PWC 2017 Patent Litigation Study (“2017 PWC Study”), available at http://www.
pwc.com/us/en/forensic-services/publications/assets/2017-patent-litigation-study.pdf (last visited June 3, 2017), at p. 22.
[9] See id.
[10] The most striking finding of the PWC Patent Studies is that NPEs had a threefold advantage in the median amount of recovery in the 2016 PWC Report and nearly a four-fold advantage in median recovery in the 2017 PWC Report.
[11] D.H. Swanson, Esq., Staying Cases Pending PTAB’s Decision to Institute IPR or CBM Review: A Survey of 10 Jurisdictions with the Most Patent Litigation, at 1 (July 2015), available at http://media.mcguirewoods.com/publications/2015/staying-cases-pending-ptabs-decision.odf (last visited June 3, 2017). In 2014, grants of stays varied from 78 percent by the Northern District of Illinois to 20 Percent by the Eastern District of Texas. Jones Day Publications, Stay or Go! Tracking District Court Stays Pending Parallel USPTO Post-Grant Review Proceedings, at Conclusions (July 2014), available at http://www.jonesday.com/istay-or-goi-tracking-district-court-stays-pending-parallel-uspto-post-grant-review-proceedings-07-14-2014/ (last visited June 5, 2017).
[12] In 2016, the District of Delaware granted stays pending IPR in: (1) 454 Life Scis. Corp. v. Ion Torrent Sys., 2016 U.S. Dist. LEXIS 153978 (D. Del. Nov. 7, 2016); and (2) Sirona Dental Sys. GMBH v. Dental Wings, Inc., 2016 U.S. Dist. LEXIS 155706 (D. Del. Mar. 22, 2016). Stays pending IPR were denied by the Delaware Court in: (1) Toshiba Samsung Storage Tech. Korea Corp. v. LG Elecs., Inc., 193 F. Supp. 3d 345 (D. Del. June 17, 2016); and (2) Advanced Microscopy Inc. v. Carl Zeiss Microscopy, LLC, 2016 U.S. Dist. LEXIS 17363 (D. Del. Feb. 11, 2016).
[13] See http://www.itctla.org/resources/faqs (last visited June 3, 2017).
