Feature

Patent Venue a Year after TC Heartland

By Howard I. Shin and Christopher T. Stidvent

Published in Landslide Vol. 11 No.2, ©2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

It has been a little over a year since the Supreme Court issued its decision in TC Heartland LLC v. Kraft Foods Group Brands LLC, interpreting the scope of the patent venue statute. Here we follow up on our earlier article1 to see what effects the decision has had. One of the things we found, unsurprisingly, is that there has been a fairly significant redistribution of where patent cases are now being filed. The Eastern District of Texas, the former leader by a long shot, now more or less shares a smaller proportion of initial patent filings with Delaware. Furthermore, cases are now being distributed over a number of core districts. We also take a look at why the Supreme Court reached the decision it did, and some questions that were raised as a result of the decision. Some of those issues include the reach of the “regular and established place of business” prong of the statute, and also why venue may not be proper in a district outside of the defendant’s principal place of business, even in the state of a defendant’s incorporation.

The Holding in TC Heartland

In TC Heartland LLC v. Kraft Foods Group Brands LLC, the Supreme Court considered where proper venue lies for a patent infringement lawsuit brought against a domestic corporation.2 As noted, it construed the patent venue statute, 28 U.S.C. § 1400(b), which 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.” The question before the Court was whether amendments to the general venue statute, 28 U.S.C. §1391(c), had increased the number of eligible judicial districts available to a plaintiff suing for patent infringement, considering that a corporation “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.” The Federal Circuit, in VE Holding Corp. v. Johnson Gas Appliance Co., previously held that the amendment to the general venue statute “clearly applies to § 1400(b), and thus redefines the meaning of the term ‘resides’ in that section.”3

The Supreme Court disagreed. In reversing the Federal Circuit, the Court ruled that the current version of § 1391 contained “no indication” that Congress intended to alter the meaning of § 1400(b). It therefore ruled that as applied to domestic corporations, § 1400(b) refers only to the state of incorporation.

Policy Considerations Underlying the Supreme Court’s Holding

When the Federal Circuit issued its decision in VE Holding and broadened the scope of venue for patent infringement actions, it admitted that its decision “would seem to fly in the face of thirty years of Supreme Court law.”4 Nevertheless, the Federal Circuit justified changing the scope of venue in patent cases, despite the lack of any congressional intent to do so, because of what it perceived to be “exact and classic language of incorporation” found in the separate general venue statute.5 Specifically, the new “under this chapter” language of § 1391(c) was interpreted to mean that its terms applied to the patent venue statute.6

The Federal Circuit relied on its “language of incorporation” determination to then conclude that the general venue statute “expressly reads itself into the specific statute,” supposedly neither conflicting with nor displacing the patent venue statute, because it “only operates to define a term in § 1400(b).”7 Notably, however, that argument was almost identical to the one raised in Fourco Glass Co. v. Transmirra Products Corp., where the Supreme Court noted that “[t]he main thrust of respondents’ argument is that § 1391(c) is clear and unambiguous and that its terms include all actions—including patent infringement actions.”8 The Supreme Court found that argument “not persuasive . . . [f]or it will be seen that § 1400(b) is equally clear and, also, that it deals specially and specifically with venue in patent infringement actions.”9

As the limits of the patent venue statute have been tested over time, legislative intent has been the critical factor in determining its boundaries. The Supreme Court has long counseled that “[i]t will not be inferred that the legislature, in revising and consolidating the laws, intended to change their policy, unless such intention be clearly expressed.”10 In its analysis, the Supreme Court in TC Heartland first addressed the underlying reason behind the patent venue statute. It started with the In re Hohorst decision, which had caused confusion regarding venue in patent cases by implying that the 1887 Act—limiting suits to the district where the defendant was an “inhabitant”—did not apply to patent cases.11 The subsequent uncertainty and conflicting decisions resulted in the Act of 1897, which was “adopted to define the exact jurisdiction of the federal courts in actions to enforce patent rights, and thus eliminate the uncertainty produced by the conflicting decisions on the applicability of the Act of 1887, as amended, to such litigation.”12

When the restrictive limits of the patent venue statute were first tested in Stonite Products Co. v. Melvin Lloyd Co., it was argued that section 52 of the Judicial Code modified the patent venue statute by permitting patent suits in districts (within a multidistrict state) outside of where the defendant was an inhabitant. After determining the scope of the patent venue statute “from an examination of the reasons for its enactment,” the Supreme Court held that the original legislative intent to limit a prior, broader venue statute gave “little reason to assume that Congress intended to authorize suits in districts other than those mentioned in that Act.”13 Furthermore, “[t]hat purpose indicates that Congress did not intend the Act of 1897 to dovetail with the general provisions relating to the venue of civil suits, but rather that it alone should control venue in patent infringement proceedings.”14

It was also argued that legislative intent to have the statutes complement each other could be inferred due to their simultaneous reenactment. That argument was rejected. “The reenactment of the Act of 1897 as § 48, and of R.S. § 740 as § 52 of the Judicial Code, by the Act of March 3, 1911, . . . is not indicative of any Congressional understanding that the two sections are complementary.”15 Here, without any indication that Congress intended otherwise, the patent venue statute would stand alone, and not be supplemented by other statutes.

The next test on the limits of the patent venue statute occurred in the landmark Fourco case.16 The patent venue statute had been recodified in 1948 to its current form as 28 U.S.C. § 1400(b) and, in the process, patent venue was changed from where the defendant “was an inhabitant” to where the defendant “resides.” The question in Fourco centered on a holding of the Second Circuit Court of Appeals finding that proper construction of the newly recodified statute required insertion of the definition of corporate residence found in the general venue statute (§ 1391) into the patent venue statute (§ 1400(b)), thereby allowing suit wherever the corporation was “doing business.”

After briefly revisiting the Stonite decision to refer to its analysis of the original policy underlying the patent venue statute, the Supreme Court rejected the argument that a corporation could be sued for patent infringement wherever it was doing business. The reason? “Statements made by several of the persons having importantly to do with the 1948 revision are uniformly clear that no changes of law or policy are to be presumed from changes of language in the revision unless an intent to make such changes is clearly expressed.”17 House and Senate reports provided no indication of an intent to substantively change the original scope and purpose of the patent venue statute. Instead, the revisers’ notes explained that the “[w]ords in [28 U.S.C. § 1400] subsection (b) ‘where the defendant resides’ were substituted for ‘of which the defendant is an inhabitant’” because the “[w]ords ‘inhabitant’ and ‘resident,’ as respects venue, are synonymous.”18 The Court noted that this change “seems to [negate] any intention to make corporations suable, in patent infringement cases, where they are merely ‘doing business,’ because those synonymous words mean domicile, and, in respect of corporations, mean the state of incorporation only.”19

In the absence of congressional intent to change the scope of the patent venue statute, “it is evident that that statute would still constitute ‘the exclusive provision controlling venue in patent infringement proceedings.’”20 As a result:

In the light of the fact that the Reviser’s Notes do not express any substantive change, and of the fact that several of those having importantly to do with the revision say no change is to be presumed unless clearly expressed, and no substantive change being otherwise apparent, we hold that 28 U.S.C. § 1400(b) made no substantive change from [section 48] as it stood and was dealt with in the Stonite case.21

Of note here is that the clarity of § 1391 was not questioned. Rather, the issue was whether § 1400(b) was intended to be supplemented by the terms of § 1391.

The question is not whether § 1391(c) is clear and general, but, rather, it is, pointedly, whether § 1391(c) supplements § 1400(b), or, in other words, whether the latter is complete, independent and alone controlling in its sphere as was held in Stonite, or is, in some measure, dependent for its force upon the former.22

Strict statutory interpretation alone would not suffice.

In sum, the Supreme Court found in both Stonite and Fourco an original policy intent by Congress to “place[] patent infringement cases in a class by themselves, outside the scope of general venue legislation.”23 Against the backdrop of this history, the question before the Court in TC Heartland again seemingly boiled down to whether the venue statute stood alone, or “whether Congress changed the meaning of § 1400(b) when it amended § 1391.”24 Once again, in the absence of any indication of legislative intent to change the scope of the patent venue statute, it was found that there was no justification for interpreting changes to the general venue statute as impacting the scope of the patent venue statute. “The current version of § 1391 does not contain any indication that Congress intended to alter the meaning of § 1400(b) as interpreted in Fourco.”25

The argument that the general venue statute was explicit in its application “for all venue purposes,” was noted to be “even weaker under the current version of § 1391 than it was under the provision in place at the time of Fourco, because the current provision includes a saving clause expressly stating that it does not apply when ‘otherwise provided by law.’”26 “On its face, the version of § 1391(c) at issue in Fourco included no exceptions, yet this Court still held that ‘resides’ in § 1400(b) retained its original meaning contrary to § 1391(c)’s default definition.”27

How Has TC Heartland Affected the Filing of Patent Cases?

In our earlier article, we noted that in 2015 close to half of all patent infringement cases were filed in the Eastern District of Texas. In the year following the TC Heartland decision, that number by rough count had dropped to 15 percent of the cases filed (see tbl. 1). Although the total number of patent cases filed had also dropped (from about 5,806 to 3,488, depending on the date range), the nationwide distribution of cases filed has clearly shifted, with Delaware now accounting for roughly 19.5 percent of patent cases. The Northern District of California, the Central District of California, and the Northern District of Illinois all saw significant spikes in the number of patent cases filed.

View table for this article.

But, before presuming the demise of patent litigation in the Eastern District of Texas, an important factor to remember is that the second prong of 28 U.S.C. § 1400(b) remains available to establish venue in patent cases. While the ability to establish venue based on nothing more than personal jurisdiction no longer exists, under the second prong, venue is proper where infringement has occurred and the defendant has a “regular and established place of business.” Undoubtedly, this constitutes a higher bar than proving personal jurisdiction. But consider that Texas has a gross domestic product equal to Brazil’s. As an important economic center for large corporations with a nationwide footprint, a regular and established place of business there is a necessity. On the other hand, smaller corporations or startups may be able to create at least one layer of insulation from far-flung patent suits through careful balancing of the reward of establishing a place of business in particular locations with the risk of creating a hook for a suit. As discussed further below, even distinctions between districts within a state may become a consideration. As a result, the effect of the TC Heartland decision for large corporations will likely be minimal, but significant for smaller, regional corporations.

The “Regular and Established Place of Business” Prong

TC Heartland did not settle all issues concerning venue for patent infringement actions once and for all. After the ruling, district courts around the country struggled to define what constitutes a corporate defendant’s “regular and established place of business,” within the meaning of 28 U.S.C. § 1400(b). In In re Cray Inc., the Federal Circuit addressed this issue, granting Cray’s petition for a writ of mandamus arising out of a patent infringement action filed against it by Raytheon in the Eastern District of Texas.28 Cray, a Washington corporation with no office or rental property in the Eastern District, had a few remote employees working from their Eastern District of Texas homes. In denying Cray’s motion to transfer the suit out of the Eastern District, the court set out four factors it would use to determine “what constitutes a regular and established place[] of business ‘in the modern era.’”29 These factors were (1) physical presence, (2) the defendant’s representations, (3) the benefits received, and (4) targeted interactions with the district.

The Federal Circuit rejected this new four-factor test for a number of reasons. It first held that a “regular and established place of business” required “a physical place in the district.”30 This had to be a “physical, geographical location in the district,” and not merely something existing only in cyberspace.31 The physical place of business also had to be stable in order to be “regular” and “established.” Conducting business routinely, not just sporadically, at the physical place of business made it more “regular” and “established.” Finally, the place of business had to be the defendant’s, not just its employees. “Employees change jobs. Thus, the defendant must establish or ratify the place of business. It is not enough that the employee does so on his or her own.”32 Because Cray’s contacts with the Eastern District were limited to the home offices of one or two of its employees, the petition was granted and the case ordered to be transferred.

Does a Defendant “Reside” in Every Judicial District of the State of Incorporation?

Although the Supreme Court held that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute,”33 does that mean that venue is proper in all districts of that state? By its terms, venue is proper under § 1400(b) “in the judicial district where the defendant resides,” not “where the defendant resides.” Looking again to the original reasons for enactment of the patent venue statute and the lack of subsequent legislative intent to change its scope, it would appear that venue in patent infringement cases is proper only in the judicial district where the corporation is located, within the state of incorporation.

The Supreme Court discussed this very issue shortly after its decision in Hohorst, the case that triggered the creation of the patent venue statute. The Court held:

[Cases such as Hohorst] must be regarded as establishing the doctrine that a domestic corporation is both a citizen and an inhabitant of the State in which it is incorporated; but in none of them is there any intimation that, where a State is divided into two districts, a corporation shall be treated as an inhabitant of every district of such State, or of every district in which it does business, or, indeed, of any district other than that in which it has its headquarters, or such offices as answer in the case of a corporation to the dwelling of an individual.34

The issue was raised again in Stonite, where “an inhabitant” of the Eastern District of Pennsylvania was sued jointly in the Western District with “an inhabitant” of the Western District. This appeared to be permissible under section 52 of the Judicial Code in multidistrict states, when “there are two or more defendants, residing in different districts of the State,”35 but not under the patent venue statute, which only permitted suits “in the district of which the defendant is an inhabitant.”36 This raised the question: was the patent venue statute “the sole provision governing the venue of patent infringement litigation,” or was it supplemented by section 52?37

As discussed, the Supreme Court found that the patent venue statute “alone should control venue in patent infringement proceedings,” allowing the defendant to be dismissed for improper venue.38 But, the holding of Stonite also indicated that venue in patent cases is only proper “in the judicial district” within the state where the defendant resides. “[T]here is little reason to assume that Congress intended to authorize suits in districts other than those mentioned in that Act.”39

Later, in cases from before VE Holding, such as Action Communication Systems, Inc. v. Datapoint Corp.,40 a number of district courts (but not all) also reached the same result. Such courts were “led to the inescapable conclusion that a corporation may be sued under the § 1400(b) residence provision only in the state of incorporation and, within that state, only in the judicial district where its principal place of business is located.”41

Post-TC Heartland, however, this argument was quickly rejected by the Eastern District of Texas. In Diem LLC v. BigCommerce, Inc., the court concluded that venue was proper in the Eastern District, even though the defendant did not have any business presence there, because “there is no dispute that Defendant is incorporated in the State of Texas. . . . [T]herefore, venue is proper in the Eastern District of Texas because Defendant resides in Texas.”42 The district court also stated, speaking somewhat broadly, that “[t]his Court holds that a domestic corporation resides in the state of its incorporation and if that state contains more than one judicial district, the corporate defendant resides in each such judicial district for venue purposes.”43

This unsupported conclusion, however, was more sweeping than even § 1391(d) of the general venue statute, which is the specific provision permitting venue in multiple districts. Under the general venue statute, a corporate defendant would not be considered to reside “in each such judicial district” in a multidistrict state unless “its contacts would be sufficient to subject it to personal jurisdiction if that district were a separate State.”44 The Diem holding had the improbable effect of broadening the scope of venue in patent cases to any district, even in cases where venue would not have been proper under the broader general venue statute. Such an outcome conflicts with the original legislative intent of the patent venue statute. “[T]he Act of 1897 was a restrictive measure, limiting a prior, broader venue.”45

The flaw with interpreting the patent venue statute to encompass all districts within a multidistrict state is that it constitutes improper supplementation of the patent venue statute. This type of conflict with the holdings of Stonite and Fourco was articulated long ago by the Northern District of Ohio:

If this Court would adopt by analogy the cases which interpret the general venue provisions and in turn, their holdings that a corporation can be sued in all of the judicial districts of the state of its incorporation, this Court would be proceeding contrary to the specific ruling of the United States Supreme Court, namely, that the venue provisions in connection with patent infringement cases should not be supplemented by other venue provisions of the Judicial Code.46

This appears to have been addressed in part when a petition for writ of mandamus was granted by the Federal Circuit in In re BigCommerce, Inc., vacating Diem and holding that “a corporation incorporated in a multi-district state is not a resident of every district in the state.”47

So, what is the proper district? One likely candidate is the business address as set forth in the certificate of formation. In Hydro-Clear v. Aer-O-Flo, the court found that the defendant was a resident of the district where the corporation had its principal office.48

Following the authorities which state that a corporation is prima facie a resident of the district in which it has its principal office as designated in its articles of incorporation in accordance with the requirement of the state law, the Court finds that the defendant resides in the Southern District of Ohio rather than in the Northern District of Ohio.49

Looking even further back, in Galveston, Harrisburg & San Antonio Railway v. Gonzales, the Supreme Court held that “if the corporation be created by the laws of a State in which there are two judicial districts, it should be considered an inhabitant of that district in which its general offices are situated, and in which its general business, as distinguished from its local business, is done.”50 Obviously, the exact parameters will have to be determined once presented for further debate.

Endnotes

1. Howard I. Shin & Christopher T. Stidvent, The Evolution of Nationwide Venue in Patent Infringement Suits, 9 Landslide, no. 2, Nov./Dec. 2016, at 11.

2. 137 S. Ct. 1514 (2017).

3. 917 F.2d 1574, 1578 (Fed. Cir. 1990).

4. Id. at 1578–79.

5. Id. at 1579, 1581 (noting that “Congress’ intention is simply not known”).

6. See Shin & Stidvent, supra note 1, at 13–14.

7. VE Holding, 917 F.2d at 1580.

8. 353 U.S. 222, 228 (1957).

9. Id.

10. United States v. Ryder, 110 U.S. 729, 740 (1884).

11. 150 U.S. 653, 661–62 (1893).

12. Stonite Prods. Co. v. Melvin Lloyd Co., 315 U.S. 561, 565 (1942).

13. Id. at 563, 567.

14. Id. at 565–66.

15. Id. at 567.

16. 353 U.S. 222 (1957).

17. Id. at 227 (emphasis added).

18. Id. at 226.

19. Id.

20. Id. at 225.

21. Id. at 227–28.

22. Id. at 228.

23. Brunette Mach. Works, Ltd. v. Kockum Indus., Inc., 406 U.S. 706, 713 (1972).

24. TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514, 1520 (2017).

25. Id.

26. Id. at 1521.

27. Id.

28. 871 F.3d 1355 (Fed. Cir. 2017).

29. Id. at 1358.

30. Id. at 1362.

31. Id.

32. Id. at 1363.

33. TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514, 1517 (2017).

34. Galveston, Harrisburg & San Antonio Ry. v. Gonzales, 151 U.S. 496, 503–04 (1894) (emphasis added).

35. 28 U.S.C. § 113 (1911).

36. Id. § 109.

37. Stonite Prods. Co. v. Melvin Lloyd Co., 315 U.S. 561, 561–62 (1942).

38. Id. at 566.

39. Id. at 567.

40. 426 F. Supp. 973 (N.D. Tex. 1977).

41. Id. at 974–75; see also Zin-Plas Corp. v. Plumbing Quality AGF. Co. Ltd., 622 F. Supp. 415, 423 (W.D. Mich. 1985) (“I find that the reasoning of Action Communication Systems best comports with the plain meaning of section 1400(b).”); “A” Co. v. Consyne Corp., 191 U.S.P.Q. 126 (S.D. Cal. 1975) (“[I]t is probably the better view that the mere fact of state incorporation by itself, especially absent any business contacts with the judicial District, is insufficient to establish patent venue.”).

42. No. 6:17-cv-00186, 2017 WL 3187473, at *2 (E.D. Tex. July 26, 2017).

43. Id.

44. 28 U.S.C. § 1391(d) (emphasis added).

45. Stonite Prods. Co. v. Melvin Lloyd Co., 315 U.S. 561, 566 (1942).

46. Hydro-Clear Corp. v. Aer-O-Flo Corp., 317 F. Supp. 1317, 1319 (N.D. Ohio 1970).

47. Nos. 2018-120, -122, 2018 WL 2207265 (Fed. Cir. May 15, 2018).

48. 317 F. Supp. 1317.

49. Id. at 1319 (footnote omitted); see also BigCommerce, 2018 WL 2207265 (“[T]he judicial district where the principal place of business is located would be the proper venue under the statute.”).

50. 151 U.S. 496, 504 (1894).

Howard I. Shin is a partner in Winston & Strawn LLP’s intellectual property group and has extensive experience representing companies in all areas of patent law.

Christopher T. Stidvent is vice president of commercial litigation at NTT DATA Services. He specializes in complex commercial and patent litigation.

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