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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Entrepreneur’s Guide to Litigation – Blog Series: Complaints and Answers

By: John C. Scheller

A.  The Complaint

Litigation begins with a Complaint. “Complaint” is capitalized because it is a specific legal document, rather than a garden-variety complaint about something. The Complaint lays out the plaintiff’s specific legal claims against the defendant. It needs to contain enough facts that, if everything stated is true and there are no extenuating circumstances, a judge and jury could find in favor of the plaintiff.

As an example, Paul Plaintiff is suing Diana Defendant for violating a contract. Paul files a Complaint with a court claiming several facts: 1) Diana signed a contract to buy widgets; 2) Paul delivered the widgets; and 3) Diana did not pay the agreed-upon amount. If the court finds that these facts are true, then, unless there were extenuating circumstances, Diana probably breached a contract with Paul and should pay damages.

Paul’s Complaint also needs to allege facts showing that he has a right to be in that court. For example, if Paul wants to sue Diana in Texas, he has to show that the case and the parties have some connection to Texas. If he wants to sue her in a federal court, he has to meet a number of other criteria. (Federal court is generally only available if the parties are based in different states and the damages are relatively substantial or if the legal question is one of federal law.)

B.  Response to a Complaint

Once the defendant officially learns of the Complaint, she has a certain limited time to file some sort of response with the court. The time to respond, however, does not run from when the plaintiff filed the lawsuit, but generally when he officially delivered notice of the Complaint to the defendant. There is a timeline that starts ticking when the defendant becomes aware of a state court lawsuit she wants to “remove” to federal court. The amount of time for the defendant to respond varies by what court the case is in, but is generally a short period of time.

After receiving the complaint, the defendant has three options: 1) Ignore the Complaint and have the court grant judgment in favor of the plaintiff; 2) Tell the court that the Complaint is defective and ask for dismissal; or 3) Answer the Complaint. Option one is usually not a good plan; courts do not look favorably on defendants who ignore the legal process, and this option prevents a defendant from fighting the plaintiff’s claims.

Option two does not deal with the merits of the plaintiff’s issue. It is simply telling the court that the Complaint is defective for a variety of reasons including, for instance, how it was served, who the parties are (or are not), which court the case is in, or simply that, even if everything is true, the plaintiff cannot win. For example, if Paul sues Diana, but never tells Diana about the suit, Diana can then ask the court to dismiss the case. Also, if Diana works for DefendCo and Paul’s contract was actually with DefendCo and not with Diana, personally, she may be able to have the case dismissed because Paul sued the wrong party. If Paul sued Diana in a federal court in Texaswhen both parties are residents of California and neither has ever been to or done business in Texas, then Diana may be able to get the case dismissed, at least from the Texas court.

Finally, there is the “So, what?” defense. If the Complaint doesn’t actually allege a cause of action, the defendant can ask the court to dismiss it. This usually happens because the plaintiff simply assumes a fact, but does not include it in the Complaint. If, for example, Paul alleges only that Diana failed to pay him a certain amount of money, but does not allege that a contract existed between them, then Diana can essentially say “So, what?” and ask the court to dismiss the case. She would ask the court to dismiss the case because, even if true (she really did not pay him any money), he did not plead any facts showing that she was supposed to pay him money. The defendant is not admitting the truth of the allegation; she is just saying that even if true, the plaintiff cannot win.

Finally, a defendant can file an Answer. Again, “Answer” is capitalized because it is a specific legal document. In an Answer, the defendant responds, paragraph by paragraph, to each of the plaintiff’s allegations. The defendant must admit, deny, or say that she does not know the answer to each specific allegation. Saying “I don’t know” functions as a denial.

For example, Paul’s Complaint probably alleges that Diana lives at a certain address. Assuming Diana actually lives there, she has to admit that fact. Paul may allege that he delivered the correct number of working widgets to Diana. If the widgets were not what she actually ordered or did not work, Diana would deny that allegation. Finally, Paul may claim that those widgets cost him a certain amount of money. Diana likely has no way to know how much Paul paid for the widgets, so she would say she does not know – thus leaving Paul to prove that allegation.

Also in the Answer, the defendant can claim affirmative defenses. Those tell the court that there were extenuating circumstances so that, even if everything the plaintiff says is true, the court should not find in favor of the plaintiff.

For example, if Paul told Diana not to worry about paying him for the widgets for six months but then turned around and immediately sued her, she would claim that as an affirmative defense.

Finally, the Answer may contain counterclaims. These claims are the defendant counter-suing the plaintiff for something. The counterclaims may be related to the original suit or not. Usually they are related, but they do not have to be. This section follows the same rules as if the defendant were filing a complaint.

For example, Diana may counterclaim against Paul because he sent her the wrong widgets and, perhaps, add a claim that when Paul delivered the widgets to her warehouse, he backed his truck into her building and caused damage. She would then counterclaim for breach of contract and property damage. The court would then sort out the whole mess to decide who owed whom how much.

To view the next blog in this series, click here.

Entrepreneur’s Guide to Litigation – Blog Series: Introduction

By: John C. Scheller

The words “lawsuit” and “trial” usually conjure up images based upon either media coverage of recent, significant cases or trials depicted on television and in movies. A real lawsuit and trial are significantly different than what we see on television or in the movies. Media coverage of a trial does not delve into the frequent reality of a lawsuit – the months and possibly years of pre-trial “discovery” and motion practice that occur before a case can even go to trial.

This upcoming blog series is aimed at removing some of the mystery of a lawsuit and a trial, and also at informing entrepreneurs what really happens prior to and during all those trials you see on television. The next seven blogs cover the basics on a lawsuit, from filing of a “Complaint” through trial and, ultimately, the appeal process. It can provide a complete picture of the litigation process to alert the entrepreneur what to expect as a potential party to a lawsuit.

There are other, important considerations to litigation not addressed in this series, such as insurance coverage, if any, and confidentiality agreements (known as protective orders) between the parties to a lawsuit. Additionally, a corporation usually cannot appear by one of its owners, but must be represented by counsel. Certainly, anyone that is sued or is thinking about suing another, should consult with a lawyer as soon as possible. We hope this blog series helps entrepreneurs develop a better understanding of the litigation process.

To view the next blog in this series, click here.

The Patent Monopoly – More Than The Right To Exclude

By: John C. Scheller & Kenneth M. Albridge

Many entrepreneurs often associate the value of patent rights with the ability to protect the patent owner’s position in a given market by demanding royalties from others in the market or excluding them from the market altogether. However, the value of a patent can also be found in its prospective ability to open up doors to other markets and facilitate movement within a given market. This is best exemplified by Google’s recent $900 million acquisition of a family of Nortel patents out of bankruptcy.

For the last several years, Google has been attempting, with some success, to make in-roads into the mobile telecom market. However, in highly contested and patent-cluttered markets such as this, companies, even as large and formidable as Google, are often faced with significant barriers to entry. These barriers include the potential of ending up on the receiving end of a patent infringement lawsuit or paying exorbitant royalties to use a competitor’s patented technology. As Google has realized, though, while patent rights may act as a barrier to entry, they can also hold the key to entry and, once acquired, offer a certain level of freedom to move within the market. In a blog post on April 4, 2011 regarding the acquisition of the Nortel patents, Google explained: “one of a company’s best defenses against . . . litigation is (ironically) to have a formidable patent portfolio, as this helps maintain your freedom to develop new products and services.”

The Nortel patents recently purchased by Google cover two important technologies related to Long Term Evolution networking, which underlies the “4G” technology that many mobile telecom operators are deploying. Holding the patents for this underlying technology provides Google with more than the ability to demand royalties for its use or to exclude competitors from the marketplace. It will also allow Google to gain broader influence in the mobile telecom market through cross-licensing opportunities.

A cross-license is simply a license given to another to use a patent or invention in return for a similar license. Given the importance of the technology covered by the Nortel patents, Google is certain to find some takers willing to license their own patent rights in exchange for the right to use Google’s newly acquired technology. These cross-licenses will provide Google with substantial freedom to develop new products and services in the patent-cluttered mobile telecom market, which it would otherwise be unable to do without the threat of litigation.

Google’s recent acquisition of the Nortel patents demonstrates that patent rights often have value beyond the ability to protect the patent owner’s position in a given market. It is important for entrepreneurs to keep in mind both the potential offensive and defensive uses of patents and to think about what patents they should file or acquire in both contexts.

United States Patent Reform Act

By: John C. Scheller and Matt Brown

On March 8, 2011, the Senate passed the America Invents Act. The Act’s most significant change to U.S. patent law would be to implement a “first-to-file” system, which gives patent rights to the first inventor who files a patent application for an invention, even if another inventor conceived of the invention prior to the inventor that filed first. This would create greater pressure to file an application for an invention as soon as possible.

Many think a first-to-file system would give bigger companies, such as Apple and Google, a competitive advantage over smaller companies, start ups, and entrepreneurs, because bigger companies inherently have more resources to file patents quicker and with more frequency. Thus, if the Act becomes law, it will be critical for smaller entities, many of which drive innovation in certain technology areas, to ensure they have quick and responsive patent counsel that can file patent applications for inventions as soon as possible.

Recognizing the potential disadvantage for smaller businesses, the Act also includes several provisions that would create new advantages for smaller businesses, start ups, and entrepreneurs. First, the Act would make it more difficult for large patent infringers to harass small business patent owners through continuous administrative challenges of a patent, or through challenges that have no likelihood of success, tactics commonly used to avoid license fees or to discourage an infringement suit. Second, the Act would eliminate interference proceedings as the method for determining the right to a patent between competing inventors, a costly proceeding which is almost always won by larger corporations. Third, because the Act will improve patent quality overall, it will be easier for start ups and entrepreneurs to raise capital from inventors, who would be more confident that an eventual patent would be less likely to be invalidated. Finally, the Act will require the PTO to provide a 50 percent reduction in fees for small businesses and will create a new “micro-entity” designation for truly small and independent inventors. This new micro-entity class will receive a 75 percent reduction in fees, which will greatly benefit start-ups and new inventors.

The America Invents Act, which passed in a bipartisan 95-5 vote in the Senate, still must make its way through the House to become law. Although the House is expected to vote in support of a compromise bill, final passage could be blocked by a late-stage “hold” in the Senate.