Supreme Court makes it much harder for patent trolls to sue in East Texas

The US Supreme Court ruled (PDF) today on how to interpret the patent venue laws, and the controversial business of "patent trolling" may never be the same.

In a unanimous decision, the justices held that the US Court of Appeals for the Federal Circuit, which handles all patent appeals, has been using the wrong standard to decide where a patent lawsuit can be brought. Today's Supreme Court ruling in TC Heartland v. Kraft Foods enforces a more strict standard for where cases can be filed. It overturns a looser rule that the Federal Circuit has used since 1990.

The ruling may well signal the demise of the Eastern District of Texas as a favorite venue for patent lawsuits, especially those brought by "patent trolls," which have no business outside of licensing and litigating patents.

The TC Heartland case will affect the entire tech sector, but the parties here are battling over patents on "liquid water enhancers" used in flavored drink mixes. TC Heartland, an Indiana-based food company, got sued by Kraft Foods in Delaware, then sought to move the case back to its home turf. Neither the district court judge nor the Federal Circuit would allow such a transfer.

Back to the Future

Congress last re-codified the patent venue law in 1948, and it updated the general venue laws at the same time. In that year, the general venue law was liberalized to allow a lawsuit to be filed where a defendant corporation "resides or is doing business."

Several years later, the US Supreme Court considered whether a more liberalized venue rule should apply to patent cases. In a 1956 decision called Transmirra Products v. Fourco Glass, the high court held that, in patent cases, the stricter rule, 28 U.S. Code § 1400, is the "sole and exclusive provision controlling venue" for patent infringement cases. Such lawsuits can only be filed "where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business."

In that clause, the word "resides" means only the state where the defendant company is incorporated. The Supreme Court rejected the opposing argument, which is that the patent laws should adopt the general venue statute's broader meaning of "resides." Patent and general venue laws were separate, just as they were the last time the Supreme Court considered the matter, a 1942 case called Stonite Products v. Melvin Lloyd.

In 1988, Congress changed the general venue laws again, granting yet broader leeway over where a defendant can be sued. In 1990, the same question came up through the courts again: should the patent venue rules be interpreted in light of the more general venue law, or should patent venue retain its own, more strict, guidelines?

This time, the question went to the Federal Circuit, a court which didn't exist in the days of Fourco. In a 1990 ruling called VE Holding v. Johnson Gas Appliance, the Federal Circuit said the general venue law controlled. When TC Heartland wanted to move its case to Indiana, it asked the Federal Circuit to reconsider VE Holding, but the appeals court stood by its 1990 precedent.

In today's opinion, the Supreme Court has essentially said that VE Holding is a 27-year-old mistake.

On behalf of a unanimous court, Justice Clarence Thomas wrote:

The only question we must answer is whether Congress changed the meaning of §1400(b) [the patent venue law] when it amended §1391 [the general venue law]. When Congress intends to effect a change of that kind, it ordinarily provides a relatively clear indication of its intent in the text of the amended provision.... The current version of §1391 does not contain any indication that Congress intended to alter the meaning of §1400(b) as interpreted in Fourco.

The argument for changing patent venue law to be aligned with the general law isn't any better than it was in the days of Fourco, Thomas wrote, and it may in fact be worse.

Now, the case has been reversed and remanded to the Federal Circuit. That court will have to reconsider TC Heartland's request for a transfer, bearing in mind today's Supreme Court decision.

Troll Control

Not a word about "patent trolls" appears in today's 13-page opinion, but it's no secret that do-nothing patent holders were the issue at the heart of the contentious debate over patent venue. Plenty of companies had reason to complain about the Federal Circuit's rule, and they let their concerns be known. A brief (PDF) signed by 48 Internet companies and retailers asked the Supreme Court to uphold the "restrictive patent venue statute" that Congress had approved, and to "stop forum shopping." Trade groups representing bankers, realtors, and big software companies also supported TC Heartland.

The Texas attorney general, joined by 16 other states, filed a brief (PDF) as well, noting the incredible concentration of patent cases in the Eastern District of Texas. The AGs sided with TC Heartland, writing that they "have an interest in protecting their citizens from abusive claims of patent infringement, which businesses and residents confirm are a drag on economic growth."

Finally, the Electronic Frontier Foundation, Public Knowledge (PDF), and Engine Advocacy (PDF) chimed in, complaining that the venue rules had empowered "patent assertion entities" to the detriment of small innovators.

Several briefs focused on East Texas' disproportionate share of cases, but that wasn't the only venue of concern. Generic pharmaceutical companies filed a brief (PDF) decrying an "undue and unhealthy concentration" of pharmaceutical patent cases in Delaware and New Jersey.

Today's ruling was a good result for defendants that have been getting roped into patent disputes in faraway venues for years now, said EFF attorney Vera Ranieri. (For more on why East Texas has been so attractive to patent trolls, see these two blog posts by Ranieri and her colleague Daniel Nazer.)