Supreme Court Changes Where Patent Lawsuits Can Be Filed

On May 22, 2017, the United States Supreme Court overturned nearly 30 years of venue practice under Federal Circuit precedent. Prior to the Supreme Court’s decision, patent litigants could be dragged into court essentially anywhere an alleged infringing act occurred. In TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341, slip op. (U.S. May 22, 2017), the Supreme Court reversed the Federal Circuit and held that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute.” Id. at 2. Thus, a domestic corporation can only be sued for patent infringement in the state where it is incorporated, or where there has been an act of patent infringement and where the corporation has a regular and established place of business.

The patent venue statute provides that “[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.” 28 U.S.C. § 1400(b). The general venue statute, however, provides that “[f]or all venue purposes,” certain entities, “whether or not incorporated, shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” 28 U.S.C. § 1391(c)(2). The Federal Circuit in TC Heartland held that this language defines the meaning of the term “resides” in § 1400(b), relying on its prior decision in VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990), which had interpreted the version of the general venue statute enacted in 1988 to reach a similar conclusion. In re TC Heartland LLC, 821 F.3d 1338, 1342-43 (Fed. Cir. 2016).

The Supreme Court disagreed with the Federal Circuit. It found no material difference in the language of § 1391(c)(2) and the language of the general venue statute in effect when the Supreme Court issued its decision in Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957), where it held that the patent venue statute was “not to be supplemented by” the then-codified version § 1391(c). TC Heartland, slip op. at 5, 9. In fact, the Supreme Court in TC Heartland found the argument for incorporation of the current general venue statute’s definition of “resides” to be even weaker, noting that the statute now includes “a saving clause expressly stating that it does not apply when ‘otherwise provided by law.’” Id. at 9 (citing 28 U.S.C. § 1391(a)(1)). The Supreme Court also found that there was “no indication that Congress in 2011 ratified the Federal Circuit’s decision in VE Holding” when it enacted the current version of the general venue statute. Id. “If anything,” the Supreme Court observed, “the 2011 amendments undermine that decision’s rationale,” which relied heavily on Congress’ decision in 1988 to replace the language “for venue purposes” present in the statute at the time of the Supreme Court’s decision in Fourco with “[f]or purposes of venue under this chapter.” Id. at 9-10 (emphasis in original).

Though the Supreme Court limited its holding to domestic corporations, the decision is a dramatic change to the patent litigation landscape. The Court’s decision abruptly ends the practice of a domestic corporation being brought into a court which has little connection to the corporation. Frequently, these cases were brought in the Eastern District of Texas, as it was perceived to be “plaintiff friendly” to patent owners. Now, domestic corporations can only be sued for patent infringement in their state of incorporation or where they have a “regular and established place of business” and have committed acts of patent infringement. Oddly, this means that a patentee seeking to enforce its patent can be forced to sue in the defendant’s state, rather than its own home district court. While the Supreme Court’s decision significantly limits the practice of “forum shopping” in patent cases, it is possible that Congress will enact new venue legislation. In the meantime, however, plaintiffs must comport with the venue restrictions as interpreted by the Supreme Court, and defendants in pending cases will want to investigate moving the cases back to their home court.

This blog post was written by Kenneth M. Albridge, III and John C. Scheller of Michael Best.

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A Term Sheet is Not a Deal

First the good news. If you get a signed term sheet with a reputable angel or venture investor, there is a very good chance you will get a deal done. Unless, of course, you don’t.

Probably the most common element of every term sheet is the provision that states unequivocally that by signing the term sheet neither party is obligating itself to enter into an investment transaction, whether on the terms reflected in the term sheet or otherwise. Still, if the parties do reach agreement on a term sheet, there usually is a deal made, and usually on terms mostly consistent with the term sheet. That said, herewith a look at the most common reasons a “done term sheet” does not lead to a “done deal.”

  1. The investor can’t build a syndicate sufficient to close the deal out. As they teach you in entrepreneurship boot camp, getting a deal done is first about finding a lead investor. Someone credible who can put a stake in the ground and then help the entrepreneur close a syndicate around that stake. If your lead investor is a top tier fund, or even a second tier fund committed to invest 75% or more of the minimum closing amount, chances are somewhere between no-brainer (top tier fund) and highly likely (second tier fund) that you will get the deal done. On the other hand, if your lead investor is an anonymous angel committed to take only 35% of the minimum-closing amount, don’t hold your breath. The take home point here: your chances of turning a term sheet into a deal are pretty closely tied to the market credibility and relative capital commitment of the investor that signed the term sheet.
  2. Deal due diligence uncovers a major issue that either can’t be suitably resolved, or reflects badly on the entrepreneur’s competence. All-too-common issues that come up in due diligence include IP ownership issues (e.g. important IP was developed without appropriate work-for-hire or assignment documentation) and capitalization table issues (e.g. equity distribution is not well-documented; potential claims for significant equity outside of the cap table turn up; previous investors were unaccredited, or paid too high a price). The take home point here is get your due diligence ducks lined up (and shot, if they need shooting) before you sign the term sheet. Investors – good ones, at least – don’t like surprises, particularly when they suggest a careless, clueless or deceptive entrepreneur.
  3. In the rush to get the term sheet done, one of the parties punted on an important issue, figuring that she could take care of it in the fine print of the closing documents. For example, I once saw an investor leave the question of subjecting some of the founder’s stock to vesting for the closing documents. The very fact that the investor thought avoiding the issue at the term sheet stage was a good idea shows what a bad idea it was. A simple lesson: if an issue is material to either party, deal with it in the term sheet. It may kill the deal, but it will save a lot of time, distraction, energy and expense.
  4. The entrepreneur and the investor discover, under the pressure of getting the deal done, that they do not work very well together; or one or both of them loses confidence in the integrity of the other. Closing an early stage deal can put a lot of pressure on an entrepreneur (less so an experienced investor, who does a lot more deals). Pressure can bring out the best in a good entrepreneur. And the worst in a bad entrepreneur. Just as bad investors turn off good entrepreneurs, so bad entrepreneurs turn off good investors. Not that you can’t be an aggressive, take no prisoners entrepreneur and succeed, if that’s your style. But whatever your style, wear it well.
  5. Internal events at the investor’s shop derail the process. Say, for example, the partner leading your deal moves to another firm, or gets hit by a bus. Stuff happens, and when it does, deals often die. Being good is not enough in the high impact entrepreneurship world. You’ve got to be lucky too. Or at least not unlucky.
  6. A major external event shocks the market generally or the particular segment of the market the deal is in. Remember 9/11? I do. And so do several entrepreneurs I know who were trying to close deals at the time. More failed than succeeded. I’ve also seen deals blow up based on a shock to a particular market segment, as for example diagnostic deals in the aftermath of a major patent ruling that basically gutted the IP protection upon which the bulk of diagnostics companies were built. The take home lesson here: after you get the term sheet signed, close your deal with all deliberate speed. And stay lucky.

When an entrepreneur tells me they have a lead investor on board, my first reaction is to ask some questions. Who is it? Have they signed a term sheet? How much are they committing? How confident are you that all of your due diligence ducks are lined up? If the answers to these questions are satisfying, I’ll mentally note that the deal in question will most likely happen. Unless it doesn’t.

Jones: Alas, here is still not there

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Jones: Alas, here is still not there” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“‘Over the course of the past two years, the median pre-money valuation for seed-stage financings was $6 million and the median deal size was approximately $2 million.’

So reports Mark Suster, partner at Upfront Ventures, in a fourth quarter 2016 venture capital market report by Cooley, LLP, one of Silicon Valley’s leading law firms. (They also reported serving as counsel for 187 venture capital financing involving $2.7 billion in the fourth quarter: yes, Virginia, the rich really are different.)

Clearly, the seed deal market in Wisconsin – where my sense is that the median pre-money seed round valuation is something more like $1 million, and the median seed deal size more like $300k – is a bit of an outlier. As are most flyover country markets. That said, here are some things these numbers got me thinking about.”

Click here to read more.

Jones: Hard truth about angel investing

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Jones: Hard truths about angel investing” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Angel investing is a critical part of the high impact startup world, particularly outside of the big venture capital centers. A good portion of Wisconsin startup success stories achieved liftoff with critical assistance from angel investors and their capital.

But what about the angel investors themselves? How does angel investing work for them?

Well, you don’t have to look very hard to find blogs, books and speakers extolling the virtues of angel investing for the angels. And a lot of them make a pretty good case that the angel investing community makes a nice profit for its efforts. A good case, but also a misleading case.”

Click here to read more.

Montana’s Robust Startup Scene

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Montana’s Robust Startup Scene” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Folks at the Kauffman Foundation – one of the more credible of the various organizations that track entrepreneurship activities across America – recently ranked the various states in terms of the strength of their entrepreneurial sectors. As gener8tor’s Joe Kirgues wryly noted, “at least Wisconsin finished in the top 50.” Which is to say, 50th.

I must say I am not a huge fan of these kinds of rankings. Frankly any ranking of this sort that doesn’t have Northern California at the top of the list is more than a little suspect. Still, by chance I happened to be in Missoula Montana last week, working with several startups at Montana Technology Enterprise Center, or MonTEC, the University of Montana’s technology accelerator. That Montana. The Montana that Kauffman put at the top of its list of states ranked by the strength of their entrepreneurial sectors.

In a lot of ways, Montana is a lot like Wisconsin, only more so. It is hard to get to. The climate is challenging. Not a lot of people live there. And there are no big cities (in fact, there are no cities as “big” as Green Bay). There is just one institutional venture capital investor. It’s fair to say, I think, that Montana’s challenges, in terms of building a high impact entrepreneurship sector, are even more formidable than those facing Wisconsin.”

Click here to read more.

Those Who Do it All… Shouldn’t

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Those Who Do it All…Shouldn’t” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“In more than thirty years in and around the high impact entrepreneur and investing space, I’ve come to the conclusion that every entrepreneur, even and in fact particularly the most successful, has at least one serious personality flaw.

One of the more common flaws is the “I can do it all” personality: the entrepreneur who insists that they are not only good at, but the best at everything involved with making their business a success.

What really makes the “I can do it all” entrepreneur so frustrating is not so much that they are almost always wrong about their capabilities. Rather it is that even if an entrepreneur really is the best at everything actually doing everything is still a bad idea.”

Click here to read more.

Look Before You Leap

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Look Before You Leap” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

Being a high impact entrepreneur is kind of like being a sports star: everybody wants to be one; almost no one credits how much work is involved.

The time “in the spotlight” is like the shining tip of the iceberg: most of the actual work is below the surface, where the environment is mostly cold and dark.

My object here is not to discourage anyone from making the jump to high impact entrepreneurship: we need as many folks at the top of the funnel as we can get. Rather it is more of a “look before you leap” message.

Click here to read more.