May 9, 2016
Law360
By Lionel M. Lavenue; R. Benjamin Cassady; Michael Liu Su
Patent reform seemed inevitable in 2015 when many thought that legislation aiming to address perceived problems with the U.S. patent system would pass. The White House urged reform as did some justices on the U.S. Supreme Court and many members of Congress. In response to these perceived problems, legislators introduced several bills covering different issues. The two most comprehensive—the House’s Innovation Act and its Senate counterpart, the PATENT Act—focus on curbing "abusive" patent-litigation practices through a wide variety of means, many relating to procedural and evidentiary standards.
The House legislators introduced the original Innovation Act in October 2013 as "the solution to the problem of abusive patent litigation."1 It swiftly passed the House in December 2013, but its Democrat-run Senate counterpart at the time, the Patent Transparency and Improvements Act, stalled and died, many believed, because of partisanship. So when the House legislators reintroduced the Innovation Act in the current Republican-majority Congress, there was great optimism that the bill would pass.
Although the revived version of the Innovation Act started with the same provisions as its nearly approved predecessor, both the Innovation Act and the PATENT Act faced greater opposition this time around. Both bills were marked up and approved in June 2015 by the House and the Senate Judiciary Committees, respectively. But in July 2015 members of Congress from both parties strongly voiced opposition to the two bills.2 Interest groups similarly joined the dissatisfied opposition chorus, and thus, neither bill has been put to a vote.
Despite the stalling of these "omnibus" patent bills, which aim to provide comprehensive solutions to many of the perceived problems with the patent system, legislators are now hoping to make headway through incremental reform by introducing narrower bills. One such effort, the Targeting Rogue and Opaque Letters (TROL) Act, seeks to crack down on the alleged "abusive use" of demand letters practiced by some nonpracticing entities. The TROL Act includes provisions enabling courts to impose sanctions or reduced damages on those parties improperly sending demand letters. Further, the failure to comply with the provisions could even subject distributors of improper letters to penalties by the Federal Trade Commission.
As an additional alternative, the House legislators have also recently introduced the Trade Protection not Troll Protection (TPTP) Act in March 2016, which seeks to curb complaints by NPEs at the U.S. International Trade Commission (ITC). The bill includes a requirement that an ITC complainant—to show an affected industry—may not rely only on substantial investment in licensing the asserted patent, but must also show that the licenses led to the adoption and development of actual articles incorporating the claimed invention. The proposed legislation also seeks to allow the ITC to determine whether an investigation is within the public interest at any point during the case, as opposed to at the end of the proceeding, which is the current standard.
Most recently, and also in March 2016, the Senate legislators introduced yet another alternative, namely, the Venue Equity and Non-Uniformity Elimination (VENUE) Act, which seeks to limit which courts may have venue in a patent suit. By replacing 28 U.S.C. § 1400(b), which effectively allows a plaintiff to bring suit in any court that has personal jurisdiction over a defendant, the VENUE Act would allow the plaintiff to file suit in a district court only if enumerated circumstances are met. For example, in general, a plaintiff would have to show a stronger connection between the patent-related activities at issue and the judicial district, such as by showing an "established physical facility" in the judicial district—a term that excludes the mere presence of a teleworker and/or a P.O. box.
In this article, we review the VENUE Act, and in a subsequent article we will review the TPTP Act.
Courts have read two federal venue statues, 28 U.S.C. § 1391 and § 1400, together to essentially allow for venue over a defendant in patent cases whenever a court has personal jurisdiction over that defendant. The venue statute for patent cases, § 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." The general venue statute, § 1391(c)(2), clarifies the definition of "resides" by stating that "[f]or all venue purposes ... an entity ... 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." Although there are some potential exceptions regarding venue, in general, "[e]xcept as otherwise provided by law," § 1391 "shall govern the venue of all civil actions brought in district courts of the United States."3
In patent-infringement actions in particular, the Supreme Court once ruled that "§ 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c)."4 But Congress amended § 1391(c) in 1988, so that the definition of residency matches the limits of personal jurisdiction. The amendment clarified that the definition was "for purposes of venue under this chapter—the same chapter that includes § 1400. The Federal Circuit then ruled in VE Holdings Corp. v. Johnson Gas Appliance Co. that Congress’s 1988 amendment overruled the Supreme Court and that the expanded residency definition in § 1391(c) would now apply in patent cases.5
In 2011, Congress again amended § 1391. It repealed the language "for purposes of venue under this chapter" and provided that the statute applies in all civil cases "except as otherwise provided by law."6 This amendment was merely superficial, however. Indeed, the Federal Circuit in In re TC Heartland LLC recently rejected an argument that the 2011 amendment signaled any substantive change in the law as "utterly without merit or logic."7 The practical result of these provisions and amendments are simple—plaintiffs can allege that most patent infringement cases currently have potential venue anywhere in the country.
Under these broad venue rules, plaintiffs (patentees in patent infringement cases) have the benefit of choosing the most favorable venue to bring suit, a practice known as "forum shopping." As some scholars have pointed out, factors, such as summary-judgment grant rates, overall win rates, and adjudication speeds, are among the most important factors influencing a plaintiff’s (a patentee’s) decision to "shop" for a particular forum.8
Further, plaintiffs also know that recent statistics indicate that patentees win over 60 percent of trials—much higher than the rate for summary judgment.9 As a result, a court that allows most matters to go to trial, instead of disposing of them by summary judgment, is statistically more likely to favor the patentee.10 In the Eastern District of Texas, only 0.8 percent of patent cases get resolved through summary judgment.11 This trend corresponds to a higher trial rate: 8 percent of patent cases go to trial in the Eastern District of Texas, far above the national average of 2.8 percent.12 And at trial in the Eastern District, patentees win 72 percent of the time, compared to 61 percent nationwide.13 As for speed, from 2000 to 2007, the median time to trial there was 1.8 years, the fastest among the five busiest patent districts; from 2008 through the first half of 2015, the median time to trial in the Eastern District of Texas was 2.3 years, still the third fastest among the five busiest patent districts.14
These factors, in combination, have made the Eastern District of Texas one of the most attractive venues for plaintiffs (patentees) over the past years. In 2015, 44 percent of all new patent cases were filed there.15 And NPEs initiated 95 percent of them in the Eastern District.16 In comparison, the District of Delaware, the second most-popular patent venue, claimed only 9.3 percent of all patent cases in 2015.17
Given the high concentration of patent cases in a few district courts, primarily the Eastern District of Texas, some advocacy groups have pressed legislators to push for patent reform in the venue laws.18 Compared to the current law that provides a definition of residency that matches the limits of personal jurisdiction, the VENUE Act would allow a plaintiff to sue in a court only under certain enumerated circumstances, with most not easily met by NPEs that prefer to file in the Eastern District.
The act aims to specifically change the rules on venue by striking the provisions of § 1400(b) to state that, "[n]otwithstanding subsections (b) and (c) of section 1391," a patent case may be brought only in a judicial district that meets certain limitations, thus making clear that § 1391 and § 1400 are not to be read together.19 According to the VENUE Act, the goal is to "ensure that venue in patents cases is fair and proper by providing the following provisions to restrict venue in patent cases:20
1. Where the Defendant Has Its Principal Place of Business or Is Incorporated
First, under the VENUE Act, venue would be proper at a defendant’s principal place of business or place of incorporation.21 Since more than 50 percent of all publicly traded companies in the United States, including 64 percent of the Fortune 500, are incorporated in Delaware, the District of Delaware would very likely see a dramatic increase in patent litigation, if this bill passes.22
2. Where 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
Second, under the VENUE Act, venue would be proper when 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."23 In addition to requiring "a regular and established physical facility," the bill further specifies that “the dwelling or residence of an employee or contractor of a defendant ... shall not constitute a regular and established physical facility."24 Some, if not many, defendants involved in lawsuits in the Eastern District of Texas are unlikely to fall under this provision, as many have no regular or established physical facilities in the district, so this provision would dramatically reduce litigation in Texas.
3. Where the Defendant Has Agreed or Consented to Be Sued in the Instant Action
Third, under the VENUE Act, venue would be proper in any district where the defendant has agreed to be sued. This consent provision allows for the parties (based on the defendant’s choice) to agree on a venue for a case. Of note, even if the VENUE Act passes, it is still possible that some defendants may consent to the Eastern District of Texas, given the patent law experience of the judges and the predictability from this venue’s established patent rules.
4. Where an Inventor Named on the Patent-in-Suit Conducted Research or Development That Led to the Application for the Patent-in-Suit
Fourth, under the VENUE Act, venue would also be proper "where an inventor named on the patent in suit conducted research or development that led to the application for the patent in suit."25 This provision may provide a basis for some NPEs to file suit in the Eastern District of Texas, if they have a physical location there, or if a named inventor resides there, and it would allow universities to enforce most of their patents in venues where the universities are located. But under this provision NPEs that purchase patents for the purpose of enforcement will likely be tied to the venue where the patent was developed.
5. Where a Party Has a Regular and Established Physical Facility That Such Party Controls and Operates, Not Primarily for the Purpose of Creating Venue, and Has—
(A) engaged in management of significant research and development of an invention claimed in a patent in suit prior to the effective filing date of the patent;
(B) manufactured a tangible product that is alleged to embody an invention claimed in a patent in suit; or
(C) implemented a manufacturing process for a tangible good in which the process is alleged to embody an invention claimed in a patent in suit.
Fifth, under the VENUE Act, venue would also be proper "where a party has a regular and established physical facility that such party controls and operates, not primarily for the purpose of creating venue," where one of three subcriteria is met.26 Thus, the plaintiff has to have engaged in management of significant research and development of an invention claimed in the patent-in-suit, manufactured a tangible product that embodies the claimed invention, or implemented a manufacturing process for a tangible good where the process embodies the claimed invention."27Subcriteria (B) and (C) above are not easily met in most districts by NPEs, which generally do not manufacture products and by definition do not practice the patent. NPEs may attempt to use subcriterion (A) to establish venue, however, and district courts will likely need to clarify what qualifies as "management of significant research and development."
6. In the Case of a Foreign Defendant That Does Not Meet the Requirements of Paragraph (1) or (2), in Accordance with Section 1391(c)(3)
Sixth and finally, under the VENUE Act, and consistent with the current venue statutes, venue is appropriate over foreign defendants "in any judicial district."28 Thus, foreign defendants will not benefit directly from the protections of the VENUE Act. They may indirectly benefit, however, as the VENUE Act may practically limit suits against foreign defendants to districts where venue is also proper over their co-defendants or U.S. subsidiaries or U.S.-based affiliates. Also, the provisions of the VENUE Act may be applied such that venue would be proper over foreign defendants in a district where the foreign defendant agrees to be sued.
Last, the VENUE Act also lowers the burden for obtaining mandamus relief, when a district court fails to dismiss/transfer a case when the above requirements are not met. The bill states that, under such circumstances, "a clearly and indisputably erroneous denial of a motion ... to dismiss or transfer a case ... shall be deemed to cause irremediable interim harm."29 As a result of this proposed change alone, appeals to the Federal Circuit would certainly increase.
In contrast to the Innovation Act and the PATENT Act, which are designed to address a myriad of issues all at once, the VENUE Act is targeted to a single issue—venue, seeking to narrow and simplify where a plaintiff/patentee may sue for patent infringement. But despite the narrow scope of the VENUE Act, staunch opponents likely still exist. The briefs filed in TC Heartland, recently decided by the Federal Circuit, provide a glimpse of who would likely support and who would oppose this bill. Companies including Adobe Systems Inc., Dropbox Inc., eBay Inc., Google Inc., HP, HTC Corp., LinkedIn Corp., Newegg Inc. and SAP AG,30 who often find themselves as defendants in the Eastern District of Texas, voiced support for reforming the law on venue to prevent forum-shopping by overturning the VE Holdings ruling. On the other hand, amici consisting of "inventors, patent owners, and a non-profit organization representing inventors" have asked the Federal Circuit to keep the broad venue laws intact.31
The Federal Circuit panel, however, explicitly rejected the appellant’s challenge to the court’s VE Holdings ruling32 that § 1391 and § 1400 should be read together, dismissing arguments that the 2011 amendment to § 1391 overruled VE Holdings.33 Indeed, Judge Kimberly Moore capsulized the court’s deference to Congress’ lawmaking authority, questioning at oral argument that "doesn’t [changing the venue provisions] feel like something a legislature should do rather than something we should be asked to do?"34
Absent the unlikely scenario that the Supreme Court takes up the Heartland case, Congress remains the only avenue for venue reform, and it is likely that the same coalitions from the Heartland case will coalesce in support and opposition to the VENUE Act. While the Federal Circuit advanced the debate, the bill garnered some approval in Congress, with House Judiciary Chairman Bob Goodlatte, R-Va.—the congressman who twice introduced the Innovation Act—calling it "certainly a possibility that we are aware of and are not opposed to."35 But other legislators, such as Rep. Darrell Issa, R-Calif., still prefer more comprehensive patent reform and believe that the VENUE Act "may not be ready for prime time."36
Regardless of how the public and legislators perceive the VENUE Act, one thing has become increasingly clear: as comprehensive patent reform stalls, narrower, targeted bills like the VENUE Act and the TPTP Act may be the last, best chances for Congress to pass meaningful patent legislation this term.
Endnotes
1 Press Release: Goodlatte, Defazio, Issa, Nadler, Smith, Lofgren, Eshoo Introduce Patent Litigation Reform Bill (Feb. 5, 2015), http://judiciary.house.gov/index.cfm/2015/2/goodlattedefazio-issa-nadler-smith-lofgren-eshoo-introduce-patent-litigation-reform-bill (quoting Representative Eshoo).
2 Steve Brachmann, Innovation Act Delayed in House amid Bipartisan Bicameral Disapproval, IPWatchdog (July 15, 2015), http://www.ipwatchdog.com/2015/07/15/innovation-act-delayed-inhouse-amid-bipartisan-bicameral-disapproval/id=59858/.
3 28 U.S.C. § 1391(a)(1).
4 Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222, 229 (1957).
5 917 F.2d 1574, 1575 (Fed. Cir. 1990).
6 § 1391(a)(1).
7 In re TC Heartland LLC, No. 16-105, slip op. at 6 (Fed. Cir. Apr. 29, 2016).
8 Mark A. Lemley, Where to File Your Patent Case, 38 AIPLA Q.J., 401, 402-03 (2010).
9 John Allison, Mark A. Lemley, David L. Schwartz, Understanding the Realities of Modern Patent Litigation, 92 Tex. L. Rev. 1769, 1778, 1785-90 (2014).
10 Lemley, supra note 7, at 403.
11 Daniel Klerman & Greg Reilly, Forum Selling, __ S. Cal. L. Rev.__, 10-11, App’x 2 (forthcoming 2015).
12 Lemley, supra note 7, at 411, 413.
13 Allison, supra note 8, at 1793-94 (2014).
14 Klerman, supra note 10, at 21-22.
15 Unified Patents, 2015 Year End Report, http://unifiedpatents.com/2015-year-end-report/.
16 Id.
17 Id.
18 See, e.g., Electronic Frontier Foundation, Tell the Senate: Pass the VENUE Act (Mar. 18, 2016, https://www.eff.org/deeplinks/2016/03/tell-senate-pass-venue-act.)
19 The VENUE Act, § 2(a) (2016).
20 Id. at Preamble.
21 Id. at § 2(a) (2016).
22 Delaware Department of State, About Agency, http://www.corp.delaware.gov/aboutagency.shtml.
23 The VENUE Act, § 2(a) (emphasis added).
24 Id. at § 2(c).
25 Id. at § 2(a).
26 Id.
27 Id. at § 2(a).
28 § 1391(c)(3).
29 The VENUE Act, § 2(b).
30 TC Heartland, Brief of Amici Curiae Acushnet et al. at i.
31 TC Heartland, Brief of Amici Curiae Fielder et al. at 1.
32 VE Holdings, 917 F.2d at 1575.
33 In re TC Heartland LLC, No. 16-105, Appellant’s Opening Brief at 9 (Fed. Cir. 2016).
34 Ryan Davis, Fed. Circ. Refuses to Restrict Venue in Patent Cases, Law360 (Apr. 29, 2016), http://www.law360.com/articles/790753/fed-circ-refuses-to-restrict-venue-in-patent-cases.
35 Politico, Morning Tech—Goodlatte Open to Moving Venue Patent Bill (Mar. 23, 2016), http://www.politico.com/tipsheets/morning-tech/2016/03/timing-strategy-woes-mar-feds-applefight- judge-says-apple-wasnt-flouting-order-brussels-attack-could-spur-security-hawks-213365.
36 Politico, Morning Tech—Issa not Behind Venue-Only Bill Yet (Mar. 24, 2016), http://www.politico.com/tipsheets/morning-tech/2016/03/morning-tech-clinton-wants-silicon-valleyheld- on-online-extremism-the-fbis-third-party-revealed-maybe-at-t-mobile-chief-eyeing-fcc-beforesponsored- data-expansion-213388.
Originally printed in Law360 (www.law360.com). Reprinted with permission. This article is for informational purposes, is not intended to constitute legal advice, and may be considered advertising under applicable state laws. This article is only the opinion of the authors and is not attributable to Finnegan, Henderson, Farabow, Garrett & Dunner, LLP, or the firm's clients.
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