Should You Take Your Startup To Silicon Valley?

I’ve advised many flyover country entrepreneurs that if their sole goal in life is to raise the most money for their startup, at the best price and in the shortest period of time, they should move to Silicon Valley. That is where good entrepreneurs raise the most money in the shortest order and at the best price on a pretty consistent basis.

Lately, I’ve been thinking more about that advice, and while I generally stand by it, I’ve come to the conclusion that there is an important exception: a class of startup entrepreneur that, in fact, is usually better off launching in flyover country than Silicon Valley. The idea of an exception to the “move to Silicon Valley to get the best deal” advice came to me as I started thinking more closely about a corollary to that advice, to wit that if, having moved to Silicon Valley you can’t raise capital, at least you will have found out faster that your startup is not VC-worthy.

It’s that last word, “worthy,” that hit me as needing more thought. Over the last couple of days, it gelled that some entrepreneurs might fail to raise capital in Silicon Valley – not because their startup is not worthy of investment, but because they are not ready to play on that particular stage. In which case, going to Silicon Valley may result in failing to get a startup financed not because it was a bad idea, but because venture capital’s Broadway was not where it should have started out.

Here’s the deal. For entrepreneurs that know how the venture capital business works (in reality, not just in theory); have a track record that suggests real knowledge of what makes the best startups tick; and have meaningful entrepreneur, investor, and service provider networks that include a few solid Silicon Valley contacts, taking their startup to Silicon Valley makes sense. (Again, with the qualification that getting the best deal as fast as possible is the only factor in the decision.) For other flyover country entrepreneurs, maybe not so much.

My thinking in this area was kick started a couple of weeks back when I met with a 20 years-old-ish Northeast Wisconsin entrepreneur who had what seemed like a pretty good idea for an app. With less than $50k, he had taken it as far as 10,000+ users and some very good press. He had pretty much everything you look for in an entrepreneur: vision, passion, integrity, flexibility, an ability to make things happen with minimal resources, and a desire to learn. But, when we talked about the possibility that he should pick up and move to Silicon Valley, it occurred to me that if he did he would most likely be eaten alive.

What this entrepreneur lacks that would be a huge problem for him in Silicon Valley won’t be hard for him to learn here in Wisconsin if (as I am sure he will) he puts his mind to it. He doesn’t know either the substance of the venture capital business or the lingo (which is surprisingly important, particularly when a VC knows you are from the sticks). While he has great entrepreneurial instincts, he has not lived, even vicariously, in the high impact entrepreneurship world. Right now, the number of folks in his network who do have that knowledge and experience, and those connections, can be counted on the fingers of one hand.

These may seem like small things, but they are important things and things that pretty much every entrepreneur who gets funded in Silicon Valley has. They are things that folks like gener8tor have made a business out of providing to their portfolio entrepreneurs (and in fact lots of other entrepreneurs). And things that a small but real cadre of Badger folks with that kind of experience and those kinds of networks are eager to share with folks who are otherwise as compelling as the young man I met with several weeks back.

So, if you are an otherwise Silicon Valley-worthy high impact entrepreneur in flyover country, but don’t have a solid understanding of the ways and lingo of the venture capital business, a well-grounded understanding of what separates the startup winners from the losers, and a decent network of folks that have those things that you can leverage all the way to Silicon Valley – don’t go to Silicon Valley. At least not yet. Learn what you need to learn here, connect with the right folks, and when you are ready to play on the Silicon Valley stage, well, decide what your priorities are then.

 

 

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Ways Entrepreneurs Spook Investors

The perceived quality of the entrepreneur is, for most venture investors, the single most important factor in evaluating a startup investment opportunity. As they say, an “A” team with a “B” opportunity usually wins out over a “B” team with an “A” opportunity.

One way to approach the “what makes for an “A” entrepreneur” question is to look at what makes a good entrepreneur. Today, though, I am going to take the opposite approach. What traits can make even an otherwise compelling entrepreneur come up short in a venture capitalist’s eye. Here are some too-common entrepreneurial qualities that spook investors.

  1. The “No Competition” Entrepreneur. Few things turn off more venture investors faster than an entrepreneur who insists she has no competitors. If you are convinced you don’t have any competitors, you are wrong. Every dollar that a customer spends on your product is a dollar they didn’t spend on something else. Maybe that something else is very well defined (say, an alternative dog walking app for smart phones) or maybe it is very amorphous (say, personal entertainment). More likely closer to the former than the later, but you get the idea. If you are one of those entrepreneurs who just can’t find any competition, don’t expect to find any investors, either.
  2. The Defensive Entrepreneur. My personal (least) favorite. Ask any question and these folks perceive a personal attack on their integrity, competence or both. Most investors just don’t want to give their capital to entrepreneurs who can’t put their ego and insecurity aside to answer questions directly. Even – probably particularly – when the answer is “I don’t know.” Defensive entrepreneurs send an all-too-clear message that when the going really does get tough, they will look for excuses, not answers.
  3. The Big Business Entrepreneur. This one bit me big time fairly early in my career. Going into the second round of a deal where I was the “suit” for the seed and A rounds, we needed an industry pro to take the CEO role at the B round. We figured someone who could run a billion dollar division of a Fortune 500 competitor could surely run our little startup. Huge mistake. While there are examples of folks who have transitioned from managing big businesses to the startup world, they are outnumbered by folks who took the leap and cratered. If you are a “Big Business” manager transitioning to the entrepreneurial world, you need to make it crystal clear that you understand how managing a startup is different than managing a big established business, and that you are the kind of person who can do both. (If you don’t know the difference, you are not that person.)
  4. The “God Complex” Entrepreneur. Typically, but not always, an academic. Most often, someone in the life sciences, who has figuratively (if not literally) held life in her hands. Alas, the skills associated with saving lives, whether via brilliant surgical technique or cutting edge research, just don’t have much in common with running a high impact startup business. The few folks who have made the transition prove the rule. Pretty much the way Michael Jordan proved that exceptional basketball players don’t make even adequate minor league baseball players.
  5. The “I Can Do It All” Entrepreneur. These entrepreneurs – and they are a dime a dozen, I’m afraid – missed out on Econ 101, or at least the day they explained the law of comparative advantage. I’ve yet to find a good entrepreneur who was not better at some things than others, and who did not also know that focusing their personal efforts on the tasks where they add the most value is the best thing they can do to make their startup prosper. On the off chance that you in fact can do it all – don’t.
  6. The “It’s All About Me” Entrepreneur. I’ve followed this one down one too many rat holes. They can be hard to spot, but as soon as you conclude that an entrepreneur’s worst nightmare is not failure, but success with someone else at the helm, run, do not walk, to the nearest exit.
  7. The Uneducable Entrepreneur. Look, I get it. Entrepreneurs are often wrong, but never in doubt. But the good ones, even when reluctant to acknowledge their mistakes, are very good at learning from them. Good investors don’t generally rub their entrepreneurs’ noses in their mistakes, but they don’t write many checks for entrepreneurs who don’t learn from those mistakes.

I am sure there are other spooky entrepreneur traits, but this list covers a big piece of the territory. If you see yourself here, you might want to think about making some changes in your entrepreneurial profile. It will likely make raising capital easier. Even more to the point, it will likely improve the outlook for making something good happen with any capital you raise.

Raising Capital for Your Startup: It’s About More Than Money

Most of the time for most entrepreneurs, raising money for a startup is not a lot of fun. Absent some combination of a hot deal and a hot market, fundraising is a real chore, too often full of demoralizing turndowns and even more demoralizing walls of silence. Still, as bad as it can be, the process almost always includes some important opportunities that good entrepreneurs will seize and use to their advantage.

The first opportunity the capital chasing process offers is self-reflection. Asking other folks for risk capital forces you (at least if you expect any success) to think about your business objectively, from the perspective of an outsider. And not just any outsider, but a jaded professional investor. Vision and passion are certainly appreciated by most of these folks, but as table stakes, not closing arguments. To seal a deal, you will need to get back to the cold hard realities of your value proposition, your business model, your evolving competition, your financing plan, and your exit strategy. Mission critical stuff that can get lost in the fire drill of day-to-day startup life.

Another opportunity worth grabbing on to in the fundraising process is the learning opportunity. If you have been at all careful about qualifying your investors, you will be talking to folks who very likely know a lot about the environment – technology, competitive, financing, exit, etc. – your startup is living in. If you listen carefully, and ask good questions (you should, in all events, be vetting potential investors as much as they are vetting you), you will almost certainly learn a lot of valuable information from the fundraising process, as much or even more so from investors who turn you down.

Finally, the fundraising process will give you valuable feedback on your teams’ capabilities, collectively and independently, in an area – raising capital – that will only become more important as your capital needs grow on the road to your exit. Raising capital is a skill in its own right – indeed as mission critical a skill as there is. Getting a periodic handle on where your team measures up in that regard may not be worth the trouble in and of itself, but when you need the money you might as well get as much besides money as you can out of the process.

Approaching the fundraising process as a learning opportunity, as well as a way to generate needed capital, may not make the effort any more fun. But it can make it a lot more rewarding.

Building Your Startup Team: Complementarity and Chemistry

Most professional venture investors believe the best predictor of startup success is the quality of the team. Good teams can and do fail, but as team quality drops below “awesome,” the chances for success drop very fast. Thus the cliché that most investors will gravitate to an “A” team with a “B” opportunity over a “B” team with an “A” opportunity.

There are a lot of reasons team quality is so critical to startup success. The incredibly stressful startup environment is the biggest. Startup teams need to accomplish difficult goals with minimal resources in terms of time, capital, and people. Additional stress accrues as outside forces – competitors, markets, technologies, etc. – evolve and force teams to make significant adjustments, often including basic “pivots” (business model, for example) on the fly.

If the extraordinary stresses of the startup environment explain the importance of getting the team right, they also offer a clue to what makes a superior startup team. At the foundational level, what separates the superior startup team from the merely good startup team is complementarity and chemistry.

Complementarity is pretty straightforward in concept, if not always in execution. Within the confines of available resources (financial) and the constraints of team chemistry (more later), you need to make sure the team includes top-tier players at the mission critical startup tasks (i.e. the tasks that need accomplishing in the current round of funding), as well as the flexibility to successfully “wing it” with respect to important ancillary functions.

The trick to building a complimentary team lies in recognition of, and dealing with, the well-established HR principle that when people get to choose who they work with – or who works for them – they tend to choose people like themselves. Now, if you are a founder, and thus most likely very confident of your own near-perfection, that might not seem like a problem. If you’ve got perfection, why not clone it if you can?

Consider if Apple had been founded not by Jobs and Woz, but by Jobs and … Jobs. If you know the Apple story, you know what a catastrophe a Jobs/Jobs founding Apple team would likely have been.

The bottom line is that however perfectly suited you may be for leading your startup to fame and fortune, building a team of clones is seldom the best way to go about it. Instead, look for people with different skill sets. And as much or even more so, different personalities and perspectives on business, technology, and life. The most successful startups – even those like Apple in the years after Jobs returned from exile that were dominated by a leading personality – build leadership teams with diverse skills, experiences, perspectives, and personalities. Just ask Tim Cook.

And that leads to the second, and harder to execute, aspect of assembling a superior startup team: chemistry.

It’s not enough to assemble a team that “covers the waterfront” in terms of skills, experience and personality. You need to make sure those folks can also form very strong bonds with each other (thus the “chemistry” analogy). Because in the constantly changing world of the startup, relationships between key players on the team are going to be under almost constant stress as company circumstances evolve and people have to adjust to changing opportunities and challenges. As anyone who studies morale in the military will tell you, folks in foxholes are motivated more by their loyalty to the folks around them than to “the cause” as such.

On that last point, one of my favorite quotes from an entrepreneur came when he was asked what he would tell his team at the beginning of his next startup journey. He replied: “Folks, we are going on a very long and difficult journey. On this journey, we will carry our wounded – and shoot the deserters.”

The quality of the team has long been the most important factor for most venture capital investors, for good reasons. As you think about assembling your team, particularly in the early days, don’t make the mistake of hiring folks because they look like you, or because they are a perfect skills fit. Look more for folks who compliment your skills and personality – and that look like the kind of people you want on your side when the going gets very tough. Because it almost certainly will, likely many times.

Back to the Future? Venture Investing in Flyover Country

The term “Venture Capital” covers a lot of ground, even when confined to the traditional institutional funds at the heart of the industry. Funds come in many flavors based on factors including stage of investment, industry focus, geography, and propensity to lead or follow in deals.

I’d like to suggest another basis for classifying venture investors, one that I think is absolutely critical when considering the unique opportunities – and challenges – of investing in places outside of the major established centers of venture capital investing. Places like where I grew up, and after twenty years in Silicon Valley and North Carolina, returned to some years back: Wisconsin.

My classification is based on two alternative paradigms for investing capital and managing investments: Nurturing and Managing.

The Manager Venture Investing Paradigm

The Manager paradigm dominates the venture business today (certainly in terms of capital deployed and public mindshare). It is characterized by large funds, many in the billions of dollars (see Softbank’s $100 Billion fund for the current outer limits of the industry) with multiple levels of investment professionals, many of which do not have early stage operating experience or even STEM educational credentials. The “value add” Manager investors provide is largely in terms of the later stages of expansion and exit planning and execution.

The Manager paradigm is ideally-suited to the contemporary Silicon Valley venture capital scene and in terms of number of deals and capital deployed the large majority of Manager paradigm investing occurs in Silicon Valley and a handful of other major venture capital hubs. Today’s large funds simply can’t efficiently make and manage smaller deals. Even those that operate affiliated “seed” funds typically make larger initial investments than their traditional seed fund peers, and limit those investments to deals that they perceive as having mega deal potential (and capital needs) going forward. As a result, the Manager paradigm funds are much less likely to invest in raw entrepreneurs who need a lot of hand-holding on basic operational blocking and tackling. Their deep pockets also make them more likely to focus on capital intensive growth/brand-driven exit metrics than profitability.

Now, the Manager paradigm may get all the headlines, and skew the statistics such that Silicon Valley round deal sizes and valuations or as much as an order of magnitude or even more than the comparable figures in flyover country markets, but it is not the only venture investing paradigm. In fact, it was preceded by a very different and still important, if no longer as publicly prominent, paradigm.

The Nurture Venture Investing Paradigm

The modern venture capital era began in the late 1940s and hit its stride in the 1970s.  Throughout that period, and into the 1980s, even the largest venture capital funds seldom exceeded $100 million and most were only a fraction of that. The prototypical Nurture VC was someone with industry operating experience as well as a STEM education. Further, these smaller funds had minimal junior staff compared to the layers of analysts, directors, junior partners, etc. that make up the bulk of the investment professionals at today’s larger venture funds.

The early decades of the venture business were characterized by something else, besides smaller funds: less experienced entrepreneurial teams. With the industry’s small size, and even with fairly rapid growth in the 1970s, it took awhile for the “serial” entrepreneur to emerge as a regular part of the deal flow. It was probably not until well into the 1990s that most venture-backed Silicon Valley startups included founders and senior managers well-versed in the art of building a high impact company from experience at prior venture backed emerging companies.

When you put all of these factors into a pot and stirred them up, you came up with the Nurture venture investing paradigm. An investment model based on VCs focusing on startups where they could add a lot of value to the deal in terms of the basic nuts and bolts of defining and building the business. Indeed it was a time where the venture investor was often involved – as for example Brook Byers and Genentech – in the actual conception of the business, recruitment of the founding team and formulation of the business plan. Sometimes well before it was even clear there would be any resulting investable deal.

The industry’s structure during the ascendancy of the Nurture paradigm had other implications, among the most prominent of which was the emphasis on profitability as an exit metric. This was not because Nurture investors were any smarter than today’s Manager investors, who by comparison are far less concerned with early profitability. Profitability was part of the Nurture paradigm simply because the typical Nurture fund – even when factoring in syndication of investments – simply did not have sufficient capital to support a portfolio company burning tens or hundreds of millions (or as per Uber recently billions) of dollars of capital a quarter.

The Nurture paradigm led to venture capital’s first golden age in the 1980s. It also sowed the seeds of the Manager paradigm which arrived on the scene in the later half of that decade. The Manager paradigm was launched, ironically enough, when some of the great Nurture firms started raising the first wave of mega funds with hundreds of millions of dollars and, before long, even billions of dollars to deploy.

Implications for Flyover Country Venture Investing

If there is still a meaningful role for Nurture funds in Silicon Valley, there is very little room – today – for Manager-modeled funds outside of Silicon Valley and a handful of other of the larger venture investing centers. And that is something that too many folks in flyover country just don’t understand. And something that is making it even more challenging than it needs to be to foster the emergence of a meaningful high impact entrepreneurship and investing sector in still nascent and emerging flyover markets.

I saw the problem in North Carolina circa 1990, and I see the problem in Wisconsin, today. Regional folks who want to foster a vibrant high impact entrepreneurship and investing community look to Silicon Valley and, seeing how the Manager venture investing model dominates the headlines, conclude that we should be doing the same thing here. That we should invest as if our entrepreneurs had the same kind of “been there, done that” startup experience and networks that their Silicon Valley counterparts enjoy.

Well, they don’t. The opportunities and challenges of venture investing in Wisconsin in 2017 are indeed comparable to the opportunities and challenges of venture investing in Silicon Valley. But Silicon Valley circa 1975, not 2017.

What places like Wisconsin need, in terms of venture investors, is Nurture VCs, not Manager VCs. We need small funds, run by hands-on partners who bring their own “been there, done that” high impact startup operating and investing experience to the game. People who are willing to get down in the trenches with entrepreneurs to help shape raw talent and ideas into fundable deals; and who are willing and able to start doing that even before making an investment. Venture investors who can proactively help their portfolio entrepreneurs achieve profitable operations supporting attractive exit opportunities with lifetime risk capital needs that don’t exceed even the average A round in today’s Silicon Valley.

Unfortunately, instead of Nurture funds led by experienced startup entrepreneurs and hands-on investing professionals helping raw entrepreneurs with good ideas build modest companies that offer solid investment returns with limited capital, what I’ve seen here in Wisconsin is mostly investors with little or no venture backed startup operational or seed/early stage risk capital investing experience casting about for the kind of startup teams and capital-ready deals that fit the Manager venture investing paradigm.  Teams and deals that we just don’t yet have enough of in Wisconsin to support a sustainable high impact venture-driven startup community.

Don’t get me wrong. I think – know – that Wisconsin and places like it have the raw entrepreneurial talent and capital to become small but important and sustainable centers of high impact entrepreneurship and investing. But getting there is not going to happen unless and until the folks who want that to happen understand that right now we need Nurture venture investors, the kind that built Silicon Valley, not Manager venture investors in the mold of those who get the headlines in Silicon Valley today.

Consumer Product or Medical Device? (Or Maybe Toy?)

By Paul A. Jones and Joel E. Henry, Ph.D. (Managing Partner, Michael Best’s Missoula Office)

So when is a consumer product – say a little matchbook-sized box you wear on your wrist that keeps track of your pulse over the course of the day –a medical device?

“What difference does it make?” you might ask. Well, if you are developing that little box for market, quite possibly tens of millions of dollars of added development and testing expenses, a couple of years more development and testing time, and millions of dollars of legal fees, regulatory expenses, insurance premiums, and misc. other costs both before market introduction and after. Not to mention likely a different distribution model, a higher price point, and lower volumes.

Alas, having perused FDA Guidance on distinguishing consumer products from medical devices (including some recent draft Guidance), and talking about the matter with some of my colleagues who spend substantial time practicing in the medical device regulation space, my take is that there is a lot of gray area around this question. Which is to say, there are a lot of current and soon-to-appear products out there for which good arguments could be made that they are consumer products – and good arguments could be made that they are medical devices. And that in some cases, the answer might even hinge on whether the manufacturer labels the product a toy. And that’s a problem.

While it takes pages and pages of regulation and guidance to get there, basically the distinction between a consumer product and a medical device – according to the FDA, which is to say the people that matter here – is pretty simple: the application of the distinction, less so.

First, the distinction. If the purpose of a product is to process inputs which are collected by the product from a person (a substance, for example sweat or blood, or data, for example a pulse) and use that to diagnose or suggest treatment for a medical condition, you have a medical device. Thus, for example, a personal ECG consumers can purchase without a prescription for the purpose of determining if they should see a doctor about an arrhythmia is a medical device, and is regulated as such. And that is true regardless of the intended use (well, I think so: more later).

Now, on the above logic, you would think that a product you wear on your wrist that keeps track of your pulse would be a medical device. I mean, the only real reason to have such a device – beyond a gee whiz sort of curiosity – is to monitor your physical activity for purposes of improving (or at least monitoring) your health. Clearly a medical device, right?

Well, no. The FDA has said, in its guidance on medical devices, that it will not deem a product a medical device if it’s only intended use is to encourage or maintain a general state of health or healthy activity, and the use of the product does not entail any significant risk to the user or third parties. Thus, your smartphone app for keeping track of your pulse isn’t in fact a medical device according to the FDA. This class of products would include (among many others) things that monitor calories burned or suggest healthy menus to control weight.

On the other hand, if your exercise monitor claims it can help you manage your Type II Diabetes, you’ve got something that is a medical device and that the FDA will consider to be a medical device. (You can see, I think, how this could get confusing.)

It gets more confusing. Our exercise monitor that is marketed as a tool for helping manage Type II Diabetes is in fact a medical device according to the FDA, and thus subject to regulation as such by the FDA. But the FDA, as a matter of policy, has indicated that it will not enforce those regulations with respect to such a medical device. That’s not a regulation but a policy. Which means it can be changed pretty much any time for pretty much any reason, without going through any rule making process or seeking industry or consumer input.

The thinking, here, is not to enforce the medical device regulations in the case of medical devices that present a low risk and are aimed at helping the consumer better manage a particular medical condition where the use of the device conforms to a generally accepted medical consensus. In this case, getting more exercise is a generally accepted mechanism for managing Type II diabetes. Another example of this kind of medical device would be a device that “coaches breathing techniques and relaxation skills, which, as part of a healthy lifestyle, may help living well with migraine headaches.” But, then again, FDA guidance says that it would regulate a medical device that listened to someone’s breathing to diagnose bronchitis (and yes, there is technology that does just that).

You can see, I think, how all of this can get pretty confusing. And we have not even talked about what “low risk” means (basically, if a product is invasive – that is it involves puncturing the skin or otherwise inserting something in the body as opposed to on it, or if it involves applying something (a laser, for example) to the body that could harm the user or a third party if not used correctly, you have a product that is not low risk).

If you think you can figure all this out on your own, here is a final twist; admittedly a pretty strange twist, but I think a valid one for purposes of illustrating how much uncertainty there is as the FDA struggles to adapt to a rapidly changing technological environment.

If you’ve ever had kids, you know that you can buy toy stethoscopes. These products, at least some of which are as functional as low end “real” stethoscopes, are not regulated as medical devices. They are marketed and intended to be used as toys, and include labels that they are not to be used for medical purposes.

On the other hand, traditional stethoscopes intended for medical use are medical devices (albeit regulated with a light touch). And “smart” stethoscopes – devices that enhance, manipulate, or interpret information generated by the stethoscope – are in fact regulated as medical devices (which, given the initial example of the personal ECG product, isn’t surprising).

So, what about a “toy” smart stethoscope? Before you say that labeling it a toy doesn’t work because it is clearly capable of performing a medical function, remember that so can a dumb toy stethoscope.

The answer? I am not sure. But there is, in fact, a “business card toy ECG” on the market. At least there is as this blog goes to press. You figure it out. And if you are smart, talk to your lawyer about your thinking before you run too far with it.

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.