June 9, 2017 – In a decision largely seen as beneficial to technology and medical device companies, the Supreme Court recently restricted the ability of companies to sue for patent infringement in plaintiff-friendly jurisdictions of their choosing. Prior to the Court’s May 22 decision in TC Heartland v. Kraft Foods, a patent holder could sue an alleged infringer in essentially any federal district court. Over the past 25 years, many patent holders have chosen to file suit in the very small Eastern District of Texas whose courts have dockets consisting predominantly of patent cases. This forum has become known for its plaintiff-friendly local rules that promote relatively fast trial schedules, and has resulted in significantly higher win rates for plaintiffs in patent cases compared to the national average. In 2015, 43% of all new patent cases were filed in the Eastern District of Texas. This number is expected to plummet after the TC Heartland ruling.
In the opinion authored by Justice Clarence Thomas, the Court unanimously held that the Court of Appeals for the Federal Circuit had been following the wrong legal standard for almost 30 years. Under the relevant statute, “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 Supreme Court interpreted the term “resides” to mean that corporations only reside in the state where they are incorporated. As such, corporate defendants may no longer be sued for patent infringement under the first prong of the statute in jurisdictions such as the Eastern District of Texas unless they happen to be incorporated in Texas. Many patent cases are now expected to move to the District of Delaware or the Northern District of California. Delaware’s district court has already borrowed four judges from the Eastern District of Pennsylvania to prepare for the expected influx of patent cases.
The TC Heartland ruling should make patent litigation more difficult for plaintiffs, particularly for non-practicing entities (NPEs) often referred to as patent trolls. NPEs do not develop and sell products of their own. Rather, they typically acquire patents from others and make their money by licensing to or suing companies who are producing products allegedly covered by the acquired patents. Because patent litigation is so costly and the stakes are typically so high, NPEs often file “nuisance suits” that defendants frequently settle rather than litigate. 67% of all new patent cases filed in 2015 were filed by NPEs, many of them in the Eastern District of Texas. When forced into jurisdictions that may be less friendly to patent holding plaintiffs, NPEs may no longer hold the strong positions to which they have become accustomed. It will also not be as easy for NPEs to sue a large number of companies in a single case in the forum of their choosing, but instead they will need to file multiple suits in various jurisdictions which can be much more costly. Going forward, NPEs will more often need to fight companies on their home turf, where judges and juries are more likely to be sympathetic to the company being attacked rather than to a potentially out of state NPE.
For startups facing the decision of where to incorporate, Delaware may now be less attractive since it is a state in which many companies are incorporated, and therefore a patent holder may find it easy to sue multiple Delaware defendants in a single suit there. Incorporating overseas also now has a significant downside, because patent suits against foreign corporations may still be brought in any US district. From a patent litigation perspective, being incorporated in the US or at least having a carefully placed subsidiary here will provide more control over where a company can get sued.
Read the full opinion here: https://www.supremecourt.gov/opinions/16pdf/16-341_8n59.pdf
If you have any questions regarding IP strategies, please feel free to discuss with me at email@example.com or (650) 212-1700 (but do not provide non-public information.) Further IP resources for early stage medical device companies may be found at www.medtechbriefs.com.
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