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Supreme Court Reinstates Venue Limitations in Patent Cases

On Tuesday (May 30, 2017), the U.S. Supreme Court curtailed the after-market reach of patent rights. The decision in Impression Products, Inc. v. Lexmark International, Inc., No. 15-1189 (S. Ct. May 30, 2017) (8-0; 7-1), reversed two longstanding rules by holding that there can be no patent infringement liability for using a patented item after
1.an authorized sale of the item, even if the downstream user violates terms and conditions embedded in the sale of the patented item, or
2.an authorized sale of the item outside the United States, even if the downstream user imports the patented item into the United States.
This decision may incentivize companies selling patented goods with a significant secondary (resale) market to re-structure their sales relationships as a license or lease instead of a sale.
The Supreme Court’s Decision
Under the doctrine of patent exhaustion, the first sale of a patented product cuts off the patent owner’s rights in the product sold, hence there can be no infringement for repair or resale of a patented article. In Impression Products, the patent owner, Lexmark, was relying on two exceptions to patent exhaustion established by the U.S. Court of Appeals for the Federal Circuit. First, since at least 1992, the Federal Circuit has ruled that a patent owner can avoid exhaustion by selling the patented article with a reservation of rights. Lexmark sold its patented ink cartridges at a discount if the purchaser promised to return the used cartridges to Lexmark, but some customers violated the agreement and gave used cartridges to Impression Products to refill and resell at a lower cost. Second, since at least 2001, the Federal Circuit has found that U.S. patent rights are not exhausted by an authorized sale of a patented article outside the United States. Lexmark sold its patented ink cartridges at a lower cost outside the United States, and Impression Products acquired those cartridges overseas, refilled them, and imported them into the United States. On both counts, the Federal Circuit held that Impression Products infringed Lexmark’s ink cartridge patents.
In reversing the Federal Circuit, the Supreme Court held that Lexmark’s patent rights were exhausted at the initial sale, both for domestic sales with a return condition and for international sales. For domestic sales, the decision distinguishes between a “sale” and a “license”: the former exhausting patent rights by releasing a product into the market, and the former retaining patent rights by “exchanging rights, not goods.” Slip op. at 11. With respect to international sales, the decision relies on Kirtsaeng v. John Wiley & Sons, 568 U.S. 519 (2013), which held that an authorized first sale of a copyrighted product anywhere on the globe bars a subsequent claim of U.S. copyright infringement against that copyright product. Slip op. at 13-14.
Key Implications
This decision impacts pricing, and many companies should consequently review their distribution model. Companies that discount patented products in foreign markets have lost patent protection against foreign buyers who sell product back into the United States and undercut domestic prices. Companies that sell patented products with post-sale conditions have lost patent protection against violations of those conditions. By contrast, companies that “license” their products (such as software-as-a-service and product leasing) will retain their patent rights because the lease or service is an exchange of “rights, not goods.”
 
Supreme Court Reinstates Venue Limitations in Patent Cases
Jeff C. Dodd, Tonya Gray, Ben Setnick, John R. Hutchins, Rose Cordero Prey and Mark A. Chapman
May 24, 2017
This week, in TC Heartland LLC v. Kraft Foods Group Brands LLC, the Supreme Court undid the settled practice of virtually nationwide venue for patent infringement cases, based on the interpretation of the patentinfringement venue statute, 28 U.S.C. § 1400(b), that the Federal Circuit crafted 27 years ago. In so doing, the Supreme Court has made a significant change in the calculus plaintiffs will employ in determining the venue for patentinfringement litigation.
The patent venue statute, 28 U.S.C. § 1400(b), has two independent prongs for determining proper venue: "Any civil action for patent infringement may be brought in the judicial district [(1)] where the defendant resides, or [(2)] where the defendant has committed acts of infringement and has a regular and established place of business." TC Heartland addresses the "residence" prong. For 27 years the Federal Circuit applied the rule in VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990), which read the general venue statute’s residency definition into the patent venue statute in § 1400(b). The current version of the general venue statute, 28 U.S.C. § 1391(c)(2), states that "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." Thus, reading the general venue provision's residency test into the patent venue provision meant that a corporation "resided," and so could be sued, anywhere it was subject to personal jurisdiction. The Federal Circuit followed this precedent in TC Heartland.
The Supreme Court reversed in the latest in a growing string of cases overturning Federal Circuit patent decisions. Relying on the text and history of § 1400, Justice Thomas, writing for a unanimous Court, rejected the Federal Circuit's holding and—implicitly—twenty-seven years of Federal Circuit precedent. In reversing, the Supreme Court reiterated its 1957 holding in Fourco Glass Co. v. Transmirra Products Corp., 353 U. S. 222 (1957) that "28 U.S.C. § 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)." Fourco, 395 U.S. at 229. Accordingly, the Court held "that a domestic corporation 'resides' only in its State of incorporation for purposes of the patent venue statute." TC Heartland, slip op. 2.
The TC Heartland case began three years ago when Kraft Food Group Brands sued competitor TC Heartland in Delaware for patent infringement. TC Heartland moved to dismiss the case based on its theory that Delaware was not the proper venue under § 1400(b). Since TC Heartland was organized under Indiana law, it alleged that it resided in Indiana for the purpose of § 1400(b). And since it did not have any place of business in Delaware, it argued that there was no basis under either prong of § 1400(b) for venue there. Applying VE Holding, the district court held that venue was proper because TC Heartland was subject to personal jurisdiction in Delaware. On an application for writ of mandamus, the Federal Circuit found that 2011 amendments to the general venue statute had not overturned VE Holding, and that § 1391's definition of an entity's residence still applied to patent cases. (We included a more detailed history of the case and the statute in a prior client alert).
As noted above, in reversing, the Supreme Court reiterated that, under Fourco, "resides" in § 1400(b) "refers only to the State of incorporation." The Court found that Fourco's holding was definitive and unambiguous. It also observed that Congress has not amended § 1400 since Fourco. Justice Thomas rejected the VE Holding court’s reasoning that changes to § 1391 forced application of that section’s residency definition in § 1400, invoking not only United States v. Madigan, 300 U.S. 500, 506 (1937), but also the late Justice Scalia and Bryan Garner’s Reading Law: "A clear, authoritative judicial holding on the meaning of a particular provision should not be cast in doubt and subjected to challenge whenever a related though not utterly inconsistent provision is adopted in the same statute or even in an affiliated statute." So, writing for the Court, Justice Thomas found that the clear, authoritative holding in Fourco should never had been called into doubt by the Federal Circuit when Congress made related, though not inconsistent, amendments to § 1391.
The immediate impact of the Court’s decision will likely be a flurry of motions to transfer cases out of venues unpopular with defendants. Section 1406(a) states that "[t]he district court of a district in which is filed a case laying venue in the wrong division or district shall dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought." Section 1406(b) is explicit that it does not impair a court's jurisdiction where a defendant "does not interpose timely and sufficient objection to the venue," but it is an open question whether a § 1406 motion brought now in an ongoing case—where a defendant's answer might have included a perfunctory venue objection—will be considered timely if the defendant had not previously moved because of the "settled" law. We expect to see litigation related to this issue and to the question of timing of transfer after a court grants a § 1406(a) motion. Professor Janicke of the University of Houston Law Center examined the immediate effect of such motions in the Eastern District of Texas, which has been a popular venue for plaintiffs in patent cases, and estimated that:
[o]f the 1,200 or so patent cases pending at any given time in the Eastern District, at least 70 cases are ones where a multinational defendant has a regular and established place of business in the district, mostly in Plano, and would be properly suable in the district under either the old or the new venue rule. The same is true for local merchants sued in the district as a device to get at the source defendant. Of the remainder, probably about half have inadvertently waived the defense of improper venue by failing to assert it in their answers or by a motion under Rule 12(b). Amendment of their answers to include this defense seems unlikely to be granted, because, unlike most other pleading amendments, it would disrupt and nullify the waiver rule specified by Rule 12 and would tend to undo the judicial work done when the waiver was in effect.
Janicke, Imminent Outpouring, 2017 Patently-O Patent L.J. 1, p. 13.
Going forward, plaintiffs will look for new venues in which to sue large groups of defendants. We expect that the District of Delaware—already a popular venue for patent cases—will see an increase in filings due to the large number of entities that are organized in Delaware, the history of patent litigation there, and the resulting expertise of the Delaware bench. However, plaintiffs will take into account that Delaware has only four full-time judgeships, and this may dissuade plaintiffs from filing there because docket jams may slow the pace of proceeding to resolution, by settlement or otherwise. We may also see an increase in filings, and rapid development of patent dockets, in other popular organization states such as Nevada and New York. Venues such as the California districts, where many technology companies have a presence, may see some impact, but have not historically been viewed as plaintiff-friendly. Other jurisdictions with patent pilot programs, such as the Northern District of Texas, may also draw cases.
However, while TC Heartland has been widely reported as having the potential to "kill" the Eastern District of Texas as a patent venue (unlike Delaware, Texas is not a particularly popular state of incorporation), we are taking a wait and see attitude. Section 1400(b) still allows venue in a district "where the defendant has committed acts of infringement and has a regular and established place of business." For many large, frequent patent defendants—especially those with nationwide retail stores or distribution centers—this will still include the Eastern District of Texas. But smaller entities, and those with fewer brick-and-mortar locations, may get a reprieve from appearing in Texas.
Finally, we should note that TC Heartland’s holding applies only to U.S. corporations. The Court expressly states that it takes no position on its prior holding in Brunette Machine Works, Ltd. v. Kockum Industries, Inc., 406 U.S. 706 (1972), which held—based on a long-standing rule that venue restrictions do not apply to foreign defendants—that a foreign corporation may be sued for patent infringement in any judicial district. In Brunette, the Supreme Court wrestled with distinguishing Fourco, noting that "in [Fourco], the Court asserted that '28 U.S.C. § 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions,' emphasizing its character as 'a special venue statute applicable, specifically, to all defendants in a particular type of actions,'" and that "Fourco held that venue in patent cases is not affected by § 1391(c), which expands for general venue purposes the definition of the residence of a corporation." Brunette Machine Works, 406 U.S. at 711 (citation omitted). Brunette ultimately distinguished Fourco and reached back down to Section 1391(d), which the Court held was not "derived from the general venue statutes that § 1400(b) was intended to replace," but rather reflected "the longstanding rule that suits against alien defendants are outside those statutes." Id. at 713. Given the dramatic increase in international trade and development of intricate webs of distribution, and the Court’s firm embrace of Fourco in TC Heartland, future litigation on patentvenue involving foreign companies is possible.
Stay tuned for more litigation.
On Monday (May 22, 2017), the U.S. Supreme Court dealt a significant win to companies accused of patent infringement. The decision in TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341 (S. Ct. May 22, 2017) (8-0) reversed a longstanding rule that effectively permitted a patent owner to sue in any jurisdiction where the accused products were made or sold. Under the new rule, a patent owner may only sue in a state where the alleged infringer is incorporated or maintains a regular and established place of business.
The Supreme Court’s Decision
Federal law provides specific instructions for patent litigation venue. The statute permits a patent owner to sue “where the defendant resides . . . or has committed acts of infringement and has a regular and established place of business.” 28 U.S.C. § 1400(b). In 1990, the U.S. Court of Appeals for the Federal Circuit held that Congress changed the meaning of “resides” in 1988, by defining “resides” in a different statute (28 U.S.C. § 1391) to include any state where the defendant is subject to personal jurisdiction. As a general matter, the law of personal jurisdiction provides that a court has personal jurisdiction over a company accused of infringement in any state where an act of infringement (such as making, using, importing, or selling the accused product or method) has occurred.
In reversing this rule, the Supreme Court found that the meaning of “resides” was not changed by Congress in 1988. Rather, it retained its meaning of “state of incorporation” (as to U.S. corporations), as held by the Supreme Court in Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957). As a result, mere personal jurisdiction over a domestic defendant is no longer adequate to comply with the patent venue statute. The patent owner must sue the defendant where it resides (state of incorporation) or where it maintains a regular and established place of business.
Key Implications
This decision severely constricts forum shopping by patent owners. As a consequence, the filing of patent cases in jurisdictions long-favored by patent owners is likely to drop off significantly as defendants challenge venue under the TC Heartland decision. Such districts include the Eastern District of Texas (a popular choice due to its high win rate for patent owners), and the Eastern District of Virginia and the Western District of Wisconsin (both known for fast-paced dockets, reaching trial in 12 to 13 months on average). See 2016 study by PWC, page 15. The District of Delaware, on the other hand, will likely see a sharp increase in patent cases due to the high proportion of companies incorporated in that state.
TC Heartland will force patent assertion entities to litigate in many and more diverse venues, increasing their costs. It will also reduce the risk of out-of-state litigation for alleged infringers, especially those that incorporate and have an established place of business in one state. Finally, it will increase the burden on certain district courts, for instance Delaware, the Western District of Washington, and the Northern District of California, where popular infringement targets are incorporated and doing business.