United States: Intellectual Property Newsletter Jun 21st 2017

More Trouble Brewing in the Heartland: Foreign Corporation Immunity and Other Issues Arising from the Supreme Court's Venue Decision

The patent venue statute, 28 U.S.C. § 1400(b), provides that patent infringement actions "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." For over 25 years, since Congress amended the general venue statute and the United States Court of Appeals for the Federal Circuit issued its decision in VE Holding v. Johnson Gas, 917 F.2d 1574 (1990), courts have looked to § 1391(c), the "residency" part of the general venue statute, for the definition of the word "resides" to be used in § 1400(b) venue analyses, and as a result have found venue to be proper for a patent-defendant corporation in any district where the corporation is subject to personal jurisdiction. But in May of this year, the Supreme Court overruled VE Holding and held that the definition in § 1391 is not applicable to § 1400(b).1 Thus, the Supreme Court returned patent venue jurisprudence to its previous state, as set by Fourco Glass Co. v. Transmirra Prods. Corp., 353 U.S. 222 (1957), in which the Supreme Court held that, as used in § 1400(b), a domestic corporation "resides" only in its state of incorporation, as understood in the 19th century, and thus can be sued for patent infringement only in the state of its incorporation or in a state where it both has allegedly infringed and has an established place of business.

While TC Heartland was ostensibly about moving the litigation from the improper venue of Delaware to TC Heartland's home court of Indiana, this case was so eagerly awaited primarily because it might serve to limit the amount of patent litigation that may permissibly be filed in the United States District Court for the Eastern District of Texas (the "EDTX"), the current situs of 43% of all U.S. patent litigation. Of course, given that more than half of publicly traded U.S. companies are incorporated in Delaware, due in part to its pro-business state laws, this Supreme Court ruling might simply move the logjam to another court that some consider to be fairly pro-patent.

The Court did leave some doubt about the reach of its holding. Left unanswered by TC Heartland is what effect the ruling will have on a patentee's ability to sue foreign corporations for infringement. The Court, in a footnote, noted but did not opine on this issue. The Court further noted that it was not, at this time, opining on its decades-old ruling in Brunette Machine Works, Ltd. v. Kockum Indus., Inc., 406 U.S. 706 (1972), in which the Court held that—given personal jurisdiction over the defendant—a foreign patent infringer may be sued anywhere.2

The logic of the earlier Brunette case is now in some doubt. The Brunette court held that venue in patent infringement actions against alien corporations is not governed by the patent venue statute, because of "the longstanding rule that suits against alien defendants are outside [venue] statutes."3 However, to support this holding, the Court pointed to the then- current portion of the general venue statute governing venue of actions against aliens—at the time, § 1391(d)—which provided that "[a]n alien may be sued in any district." However, in 2011, Congress revised the venue statute, moving the rule governing alien defendants from § 1391(d) into the "residency" section of § 1391, at § 1391(c)(3), and rewording it to refer to "defendants not resident in the United States." This presents a problem, because § 1391(c)(2) makes corporate residency co-extensive with personal jurisdiction, and if that definition applies in section (c)(3), then section (c)(3) provides nationwide venue only for alien corporate defendants who are not subject to personal jurisdiction in any district and thus are immune from suit regardless of venue.

Courts may attempt to resolve this issue by ruling, per the general reasoning of the 1972 Brunette opinion, that while the patent venue statute is exclusive and is not supplemented by anything in the general venue statute, alien corporations are by longstanding rule simply not subject to it, and thus can be sued for patent infringement in any district.

However, in view of the statutory amendments described above, that may be too big a leap to be defensible by the Supreme Court. Despite a natural reluctance to find that, in its 2011 amendments, Congress accidentally immunized alien corporations with no U.S. place of business from suit in patent cases, that outcome does seem to be the necessary result of the language of the amended statutes.

If such companies are indeed immune from suit, at least until Congress amends the venue statutes to fill the gap, then patent owners will naturally respond by suing downstream U.S. entities who either sell or use the accused products. They might, for example, sue a U.S. distributor. That suit would need to be brought in one of the perhaps limited set of districts where the distributor has offices or is incorporated, and thus in many cases could not be filed in the Eastern District of Texas.

However, patent owners might instead be driven to sue retailers (who in many cases will have places of business nationwide), or even users of the accused products, who are subject to venue in the patent-owner's preferred forum. This would lead to some complicated choices for the upstream supplier, whether that supplier is located elsewhere in the United States or overseas, and for the district court. The retailer defendant in the case in the preferred forum could identify the upstream supplier as a required party under Fed. R. Civ. P. Rule 19. The supplier would object that, as to itself, venue is not proper in the preferred forum. And following Rule 19, the court would then have to dismiss the supplier and decide, "in equity and good conscience," whether to (i) proceed without the required party, or (ii) dismiss the entire case, forcing the patent owner to sue in one of the supplier's preferred venues.

The same kind of complication could result from TC Heartland even if venue for alien corporations is found to be proper in every district, per Brunette. For example, in a situation in which the accused infringers include both a U.S. entity and a foreign one (such as a foreign parent corporation), a patentee could choose to sue only the foreign corporation and bring the case anywhere, including the EDTX. Then the foreign entity could seek to join the U.S. entity to the lawsuit under Rule 19. And once again, the court would have to decide whether to have the case go forward without the U.S. entity, or to dismiss the case and force the suit to one of the defendants' preferred venues.

No matter how this all shakes out, the EDTX will likely still see a significant number of newly filed patent cases because venue is proper there if both acts of infringement were committed and the defendant has a regularly established place of business in the district. And, there are many companies with significant facilities located there, which—depending on the Supreme Court's future view of the applicability of § 1391(c)(3)—could even serve to make venue proper there for customers of those local companies. The biggest change wrought by TC Heartland likely is the benefit to California-based software companies, especially those with only insignificant facilities in the rest of the country, who now will much more likely face suit in their home court of the Northern District of California or—if their views of the significance of the benefits of forum shopping to non-practicing entities is correct—perhaps not at all.

Oil States: The Constitutionality of the Current Patent Regime

On June 12, 2017, the Supreme Court granted certiorari in the case of Oil States Energy Servs., LLC v. Greene's Energy Grp., LLC, with respect to the first question presented:

Whether inter partes review—an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents—violates the Constitution by extinguishing private property rights through a non-Article

In 2012, patent owner Oil States filed an infringement suit against Greene's Energy Group in the United States District Court for the Eastern District of Texas. During the Markman proceedings, the court construed the claims of the asserted patent in a manner so as to be distinct from one of the inventor's own prior art published applications. After Markman, the defendant filed an inter partes review ("IPR") petition arguing that the aforementioned published application anticipated the asserted claims. The Patent Trial and Appeal Board (the "PTAB") applied the "broadest reasonable interpretation" claim construction standard, granted the petition, and instituted the IPR. Oil States attempted to amend the claims both to align their scope with the disclosure of the patent specification and to more clearly distinguish the prior art application. But the PTAB denied the motion, stating that Oil States had not "demonstrated" or sufficiently "explained" where and how each new claim element was disclosed in the specification. The PTAB then, in a final written decision, found the patent claims unpatentable.

Oil States appealed the PTAB's decision to the United States Court of Appeals for the Federal Circuit (the "CAFC") on various bases, including arguing that the IPR process is violative of Article III of the U.S. Constitution and the Seventh Amendment, especially as they protect the right to trial by jury. During briefing and before oral argument, the CAFC issued its decision in MCM Portfolio LLC v. Hewlett-Packard Co.,4 which rejected a similar constitutionality argument. The CAFC affirmed the result in the Oil States IPR, and denied requests for panel rehearing and rehearing en banc.

In its successful petition for certiorari, Oil States argued that the Supreme Court and predecessor English courts have always required jury trials for infringement suits, and that invalidity is a defense made in such suits that also must be the province of the jury. Congress's attempt to "streamline" patent litigation by permitting the PTAB to resolve invalidity defenses, according to Oil States, supplants the jury trial and renders "Markman a dead letter." Oil States further argued that patent rights are more than "public" property rights that may arise out of, and be taken away by, agency hearings. Rather, patent rights are "complete with the most important characteristic of private ownership—the right of exclusion"—and exist wholly apart from the government once granted. In this regard, Oil States pointed out in its briefing that patents are not closely tied to a regulatory scheme, as the PTO is not responsible for violations of a patent.

Oil States also asserted that it had a right to an Article III forum for invalidation proceedings, citing Supreme Court precedent for the proposition that—once a patent is granted—it "is not subject to be revoked or canceled by the president, or any other officer of the Government" because "it has become the property of the patentee, and as such is entitled to the same legal protection as other property."5

Greene's Energy Group responded to the petition by disputing Oil States' characterization of historical English practice, and asserting that invalidation proceedings were traditionally reserved for chancery courts. Greene's Energy Group also argued that patents are public property rights, deriving from an extensive federal regulatory scheme, and that Oil States therefore has no right to have invalidation proceedings heard in an Article III court. Needless to say, this case has the potential to completely upend the current balance of power in patent litigation. IPR petitions are on pace to exceed 2,000 in number this year (compared to 4,500 new patent lawsuits),6 and have become the knee-jerk first response to most patent suits. They have been so successful that those bringing infringement suits have reduced the expected value of their cases, that patent-holders have marked down the value of their portfolios, that patent auctions have resulted in less money changing hands, and that clients are paying their patent prosecutors and litigators less. A Supreme Court reversal in Oil States might even affect other post-grant proceedings, including the long-standing ex parte reexamination proceedings and the relatively new derivation proceedings—although, until TC Heartland, one might have thought that the three-decade-plus history of ex parte reexaminations would itself foreclose the possibility of reversal here. A reversal would mean that, for at least a period of time, patent litigation practice would be in a state of chaos as the PTAB and Federal Circuit would be forced to terminate all existing proceedings, litigation defendants would have to scramble for new defense strategies, and Congress would be confronted with the prospect of sorting out alternative, Constitutional ways to achieve the results sought in the AIA.

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Footnotes

1 TC Heartland, LLC v. Kraft Foods Grp. Brands LLC, No. 16-341 slip op. at 1 (2017).

2 TC Heartland, No. 16-341 slip op. at 7 n.2.

3 Brunette, 406 U.S. at 713.

4 812 F.3d 1284 (Fed. Cir. 2015).

5 Citing McCormick Harvesting Mach. Co. v. C. Aultman & Co., 169 U.S. 606, 608–09 (1898).

6 Statistics from Docket Navigator.

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