chevron-down Created with Sketch Beta.
February 07, 2017 Articles

TC Heartland, the VENUE Act, and the Direction of Patent Law

The focus should be on strengthening patent rights—the legal incentives that drive innovation

By Benjamin J. Christoff

In recent years, the strength of the patent right has been diminished, largely through a combination of legislation and Supreme Court decisions. Currently there is a push—both before the Supreme Court and in Congress—to change the venue rules in favor of defendants in patent cases. This article provides an overview of TC Heartland LLC's (Heartland's) appeal to the Supreme Court following the issuance of In re TC Heartland, 821 F.3d 1338 (Fed. Cir. 2016), as well as the Venue Equity and Non-Uniformity Elimination Act of 2016 (VENUE Act) currently being considered by Congress. This article then suggests it is time to begin strengthening the patent right once again to preserve a robust incentive for innovation and disclosure of useful inventions for the public's benefit.

Amendments to Venue Laws and VE Holding

The legal history relevant to Heartland's appeal begins mainly with the predecessor to 28 U.S.C. section 1400(b), the Act of March 3, 1897 (1897 Act). The 1897 Act provided that a defendant could be sued for patent infringement "in the district of which the defendant is an inhabitant, or in any district in which the defendant . . . shall have committed acts of infringement and have a regular and established place of business" (emphasis added). Importantly, the Supreme Court understood "inhabitant" to mean a corporation's place of incorporation only. Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222, 226 (1957) (citing Shaw v. Quincy Mining Co., 145 U.S. 444, 450 (1892)). Congress later passed section 48 of the Judiciary Act of 1911 (1911 Act), which reenacted the 1897 Act with no significant change for present purposes.

In Stonite Products Co. v. Melvin Lloyd Co., 315 U.S. 561, 562 (1942), the Supreme Court addressed the question of whether section 48 of the 1911 Act was the sole provision governing patent venue, or rather whether section 48 could be supplemented by a separate section that "permit[ted] suits, not of a local nature, against two or more defendants, residing in different judicial districts within the same state, to be brought in either district." The Court held that section 48 of the 1911 Act was "the exclusive provision controlling venue in patent infringement proceedings." Stonite, 315 U.S. at 563 (emphasis added). Consequently, the result in Stonite was that the Western District of Pennsylvania was an improper venue for a particular defendant that inhabited the Eastern District of Pennsylvania but had no regular and established place of business in the Western District. See id. at 562–63.

In 1948, Congress codified section 48 of the 1911 Act as 28 U.S.C. section 1400(b) with certain insignificant modifications, including substituting the word term "inhabitant" with "resident" without any change in meaning. Fourco, 353 U.S. at 226. Nine years later, in Fourco, the Supreme Court again addressed the question of whether section 1400(b) was the sole provision governing patent venue such that a defendant's corporate "residence" meant only its place of incorporation, or rather whether the meaning of "reside" as used in section 1400(b) was dictated by section 1391(c)'s generally applicable, broader definition of corporate "residence." The Court noted that the legislative history behind the 1948 amendments was "uniformly clear" that no law or policy changes were intend by Congress when it enacted those amendments. Fourco, 353 U.S. at 227. The Court therefore rejected the respondent's argument that sections 1391(c) and 1400(b) must be "read together" to yield a broader scope of venue in patent cases, and the Court held instead, consistent with tradition, that the patent venue should remain narrow.

In 1988, Congress amended section 1391(c) to add the phrase, "For purposes of venue under this chapter," referring to chapter 87 of title 28, which included the patent venue provision section 1400. In VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990), the Federal Circuit considered whether this amendment abandoned the tradition of construing section 1400(b) as the exclusive provision governing patent venue, such that the general venue provision's broad definition for corporate "residence" would newly apply to patent venue under section 1400. The Federal Circuit explained that the language "under this chapter" was "classic language of incorporation," mandating the result that section 1391(c)'s broad definition of corporate residence—"any judicial district in which [the defendant] is subject to personal jurisdiction"—should apply to section 1400(b)'s use of the word "reside" for patent cases. VE Holding, 917 F.2d at 1578–79. The Supreme Court denied certiorari.

Congress again modified section 1391 in 2011, this time to define corporate residence "[f]or all venue purposes," "except as otherwise provided by law." But section 1391(c) maintained its broad definition of corporate residence. The legislative history to the 2011 amendments contained acknowledgments by Congress that the prevailing patent venue standard was defined by VE Holding. TC Heartland, 821 F.3d at 1343 (citing to H.R. Rep. No. 110-314, at 39–40 (2007); S. Rep. No. 110-259, at 25 (2008); H.R. Rep. No. 114-235, at 34 (2015)).

The TC Heartland Case

In TC Heartland, the Federal Circuit affirmed its interpretation of sections 1391(c) and 1400(b)—and thus affirmed broad patent venue—as set forth in VE Holding. Plaintiff Kraft Foods had filed its patent suit against defendant Heartland in the District of Delaware. Heartland was headquartered and incorporated in Indiana, and only about 2 percent of its products (worth about $331,000) found their way into Delaware, apparently only due to the "shipping instructions" of one customer. TC Heartland, 821 F.3d at 1340. Heartland moved to transfer venue to the Southern District of Indiana, arguing that it was unfair and improper for the "stream of commerce" theory of personal jurisdiction to define the scope of venue under sections 1391(c) and 1400(b). Instead, Heartland argued, under Fourco, a defendant's corporate "residence" as used in section 1400(b) should be construed as only Heartland's place of incorporation. TC Heartland, 821 F.3d at 1340–41. The District of Delaware denied Heartland's motion, citing VE Holding as the prevailing venue law rather than the Supreme Court's pre-1988 precedent.

Heartland petitioned the Federal Circuit for a writ of mandamus compelling the District of Delaware to transfer venue to the Southern District of Indiana. The Federal Circuit denied Heartland's petition and rejected its arguments that the 2011 amendments effectively overruled VE Holding and returned section 1391 to its pre-1988 form governed by Fourco.See TC Heartland, 821 F.3d at 1341–42. (The court also denied Heartland's petition for writ of mandamus on the grounds that it had not met the exacting standard that applies for mandamus, and that the panel was not permitted to reverse the well-established VE Holding precedent, which had firmly resolved the venue issue presented on appeal over 26 years earlier. See TC Heartland, 821 F.3d at 1341.) First, the 2011 amendment to section 1391 changing "for purposes of venue under this chapter" to "for all venue purposes" was a broadening amendment, not a narrowing amendment, and thus the amendment could not be read as somehow disjoining section 1400(b) from section 1391(c). TC Heartland, 821 F.3d at 1341. Second, the new language "except as otherwise provided by law" did not resurrect Fourco to once again narrowly define corporate residence. TC Heartland, 821 F.3d at 1341–42. Rather than outdated Supreme Court precedent, the specific patent venue provision itself must be the provision that "provides otherwise," as stated in section 1391. But the parties agreed that section 1400(b) contains no alternative definition of corporate residence. Heartland's argument that federal common law is the law that "provides otherwise," according to the Federal Circuit, is "utterly without merit or logic." TC Heartland, 821 F.3d at 1342. Finally, Heartland could present no evidence that Congress intended to return patent venue law to pre-VE Holding days or to incorporate federal common law through the language "as otherwise provided by law." TC Heartland, 821 F.3d at 1343.

Heartland's certiorari petition reiterates its arguments that section 1391(c)'s definition of corporate residence does not apply to section 1400(b). Specifically, Heartland argues that VE Holding was a legally erroneous decision in which the Federal Circuit improperly construed sections 1391(c) and 1400(b) to hide an "elephant in a mousehole" by enacting sweeping changes to patent venue based on a purportedly meaningless legislative amendment. The 1988 amendment to section 1391, simply adding the phrase "under this chapter," was ministerial in nature according to Heartland. Heartland submits that Congress could not have intended this minor addition to have the far-reaching consequences brought about by a significant increase in the scope of patent venue. Heartland also argued—seemingly out of the other side of its mouth—that the 2011 amendments to section 1391, another relatively minor change, did indeed return section 1391 to its pre-1988 form and therefore resurrected the defendant-friendly legal landscape that existed pre-1988.

The Supreme Court Should Affirm the Federal Circuit's Decision

Heartland seeks major patent policy changes through a stretched statutory interpretation rather than through legislative amendment. TC Heartland is a statutory interpretation case, and the canons of statutory construction do not seem to support Heartland's position. As an initial matter, the first step of statutory construction is to ask whether there is any statutory ambiguity that needs to be resolved. Conn. Nat'l Bank v. Germain, 503 U.S. 249, 254 (1992) ("When the words of a statute are unambiguous, then, this first canon is also the last: 'judicial inquiry is complete.'"). But there appears to be no ambiguity in sections 1391(c) and 1400(b) that would justify or warrant statutory construction, let alone the construction sought by Heartland. Section 1391(c) defines corporate residence "for all venue purposes," "except as otherwise provided by law." Section 1400(b), in turn, relies on the notion of corporate residence but provides no special definition for corporate residence for patent purposes that could supplant section 1391(c)'s definition. A natural reading of the plain language of sections 1391 and 1400 therefore simply yields the result that section 1391(c) defines corporate residence for purposes of section 1400(b).

Further, Heartland's argument that "Congress does not hide elephants in mouseholes" at best cuts both ways. On the one hand, Heartland argues that the 1988 amendment to section 1391 (adding the language of incorporation) was simply ministerial and not significant enough to overturn governing patent venue principles under Fourco. But on the other hand, Heartland also argues that the minor 2011 amendment to section 1391 (changing "for venue purposes under this chapter" to "for all venue purposes") was consequential enough to upend 26 years of patent venue practice established by VE Holding, which Congress recognized as the long-prevailing venue law during deliberations on the 2011 amendments. Contrary to Heartland's argument, the 1988 amendment to section 1391 was not ministerial; rather, it added language that clearly incorporated the broader definition of corporate venue under section 1391 into all sections within chapter 87 of title 28, which included the patent venue provision, absent any provision within that chapter stating otherwise. Further, the 2011 amendment is a far cry from a groundbreaking shift that severs the two provisions. Instead, as the Federal Circuit recognized, it was a broadening amendment in which section 1391(c)'s definition of corporate residence becomes the normal rule with even more clarity. On balance, Heartland's arguments conflict with each other, but Heartland does not provide any especially good reason—whether textual, based on legislative history, or otherwise—why the 1988 amendment should be considered "minor" while the 2011 amendment should be considered groundbreaking, rather than the reverse.

In addition, surplusage is unavoidable in this case. Amici argue, supporting Heartland, that section 1400(b) must stand alone because its incorporation of section 1391(c) would render the second half of section 1400(b) merely repetitive of the first half. But interpreting section 1400(b) as standing alone would nullify section 1391's language "for all venue purposes." So in either interpretation, sections 1391 and 1400(b) will have perhaps awkward, excess language, and neither Heartland nor the amici give clear reasons why their cherry-picked instance of surplusage is more egregious than its alternative.

In sum, Heartland has a relatively weak footing in arguing for an interpretation of sections 1391(c) and 1400(b) that segregates the two provisions. Heartland's Supreme Court appeal therefore seems to be either (1) a Hail Mary attempt to get the Supreme Court to enact a sweeping policy change through a clumsy interpretation of the patent venue law, or (2) an invitation for the Supreme Court to spotlight the issue and pressure Congress to pass the VENUE Act (or similar legislation narrowing patent venue).

Summary of the VENUE Act

The VENUE Act was introduced by Senators Jeff Flake (R-Ariz.), Cory Gardner (R-Colo.), and Michael Lee (R-Utah) on March 17, 2016. The bill has been read twice and sent to the Senate Judiciary Committee, where it presently remains. The VENUE Act would entirely replace section 1400(b) with a provision that first expressly denies applicability of section 1391(c) and then restricts patent venue by only allowing actions to be brought in a few locations determined largely by convenience to defendants, such as where defendants physically reside or were incorporated, or where the plaintiff invented or manufactured the patented invention at issue in the case. But given that the VENUE Act potentially provides for proper venue in several locations, it would be a somewhat less drastic restriction of patent venue than the Supreme Court's holding, sought by Heartland, that corporate residence under section 1400(b) means only the defendant's place of incorporation under Fourco.

Likely Effects of the VENUE Act on Litigants

The VENUE Act would largely benefit patent defendants and introduce obstacles for patent holders seeking to enforce patent rights. Below are some reasonably likely consequences of the VENUE Act's enactment that litigants may anticipate:

  • Additional burdens for plaintiffs at the outset of litigation, including adapting to unfamiliar local rules and customs of the courts in which venue is statutorily proper;
  • Shift in leverage in early settlement negotiations in favor of defendants;
  • Increased exposure to district courts that disfavor patent plaintiffs by virtue of their distaste for and/or unfamiliarity with patent law;
  • Longer delays before trial;
  • Less opportunity for early discovery;
  • More "home field advantage" potentially favoring defendants;
  • Weakened footing for plaintiffs and strengthened footing for defendants on motions to transfer;
  • Shift in travel and other logistical burdens in favor of defendants;
  • More frequent summary determinations;
  • Patent holders, under certain circumstances, may see the International Trade Commission as a relatively more attractive avenue for patent enforcement; and
  • Overall, it will become more expensive for plaintiffs to successfully assert their patent rights, and less expensive for defendants to defend against patent infringement claims

Likely Effects of the VENUE Act on the Public

Additional consequences that are largely adverse to patent rights are likely to be felt by others in the patent system, including patent owners, inventors, and technology consumers:

  • Patent portfolio values may tend to shrink;
  • Average returns on patent assertion could decrease;
  • Clients with international patent portfolios could choose to enforce patents in countries other than the United States;
  • Infringing activity could be incentivized within districts that gain a reputation as unfriendly to patent plaintiffs;
  • The incentive created by the patent system for investment in research and development may be reduced;
  • The incentive created by the patent system for disclosing inventions in exchange for the right to exclude, as opposed to protecting inventions as trade secrets, would decrease; and
  • The pursuit of patent protection in the United States could experience some chilling effect

The Direction of Patent Law

The United States seems to be over-correcting perceived abuses in the patent system. However noble our efforts have been to rein in "patent trolls," we seem to have collectively failed to appreciate that the patent system creates important incentives for investing in research and development, as well as incentives for disclosing technologies that could otherwise be protected as trade secrets.

The patent system has been an important institution since our country's founding. It exists based on the language of the Constitution itself. See U.S. Const. art. I, § 8, cl. 8. The Patent Act of 1790 was enacted at the urging of President George Washington shortly after the ratification of the Constitution. Edward C. Walterscheid, "Charting a Novel Course: The Creation of the Patent Act of 1790," 25 AIPLA Q.J. 445, 447 (Fall 1997). Abraham Lincoln famously praised the patent system because it "adds the fuel of interest to the fire of genius." During its lifetime, the United States has enjoyed one of the richest technological explosions in the history of the world. This likely would not have happened in a similar way, or to a similar degree, were it not for robust patent protection incentivizing entities of all shapes and sizes to take the risks of research and development, and to disclose the results of those efforts, through its offered reward of time-limited market exclusivity. And even if it were proven that America's countless technology advancements would have come about regardless of whether patent protection had been codified, there is no doubt that, without the patent system, inventors and their employers would not have received the same rewards for their discoveries and disclosures.

Given that innovation is becoming an ever more important aspect of the United States economy, it makes little sense to undercut the very legal incentives that drive innovation. Yet if the patent venue laws are narrowed as proposed by Heartland or the proponents of the VENUE Act, then patent holders are likely to face an unfortunate and unfavorable set of circumstances in patent litigation in the United States, characterized by numerous obstacles to patent enforcement.

There are many opportunities for strengthening patent rights. For instance, the STRONG Patents Act being considered by the Senate would, among other things, reinstate the presumption of validity in Patent Trial and Appeal Board (PTAB) proceedings, as well as require the PTAB to construe claim language as in district court litigation rather than under the "broadest reasonable construction" standard. These types of reasonable amendments would likely benefit not only patentees but the patent system as a whole, by enhancing predictability and simplicity. But restricting venue—shortly after the passage of the America Invents Act and several recent Supreme Court decisions that have been unfavorable to patent holders—would be barking up the wrong tree.

Copyright © 2017, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).