United States: Forum Shopping Tactics After TC Heartland

The U.S. Supreme Court's May 2017 decision in TC Heartland v. Kraft Foods Group Brands is widely seen as sharply limiting where patent infringement lawsuits may be filed. For nearly 27 years, the U.S. Court of Appeals for the Federal Circuit applied a broad test for venue—finding venue proper where an alleged infringer is subject to general or specific personal jurisdiction. Instead, the Supreme Court rejected this longstanding precedent by ruling that venue in a patent infringement case is only proper if the defendant (1) "resides" in the district (for a domestic corporation, its state of incorporation only); or (2) both has committed "acts of infringement" and has a "regular and established place of business" in the district.

While TC Heartland does raise new obstacles for patent plaintiffs, it remains to be seen whether the limiting effect it has on forum shopping will be as significant as many predict. In fact, non-practicing entities will likely engage in a variety of litigation strategies to minimize the impact of the Supreme Court's decision. This article explores litigation strategies—new and old—that will likely play a role in the post-TC Heartland regime.

Gaming Residence

Many commentators have interpreted TC Heartland to mean that a corporate defendant's "reside[nce]" under 28 U.S.C. § 1400(b) is the company's home district (assuming the company's headquarters is located in its state of incorporation). This is far from settled, however. In TC Heartland, the Court wrote that "residence" means "the State of incorporation" only. Even the notion of incorporating in a specific judicial district does not have much legal grounding. In the eyes of the states (at least the few examined for this article: California, New York and Texas), the process of incorporation does not lend itself to being limited to particular judicial districts in a given state. As such, a question remains as to whether a suit can be filed in any district within the party's state of incorporation, or whether it must be filed in only one of the districts within the state of incorporation. At least one circuit has held that, for multidistrict states, venue is proper in all districts within that state of incorporation. See Davis v. Hill Engineering, Inc. (interpreting 28 U.S.C. § 1391(c)), overruled on other grounds.

In states with only a single judicial district—such as Delaware, where many companies elect to incorporate—this open question will not be of concern. But approximately half of the states—including California, New York and Texas—are divided into multiple judicial districts. In these states, the opportunity for forum shopping still presents itself. A California corporation with its headquarters in San Francisco, for example, would still be subject to venue in the U.S. District Court for the Central District of California—generally considered more plaintiff-friendly than the Northern District of California—or even in the Eastern District of California. Likewise, the U.S. District Court for the Eastern District of Texas potentially remains a proper venue for patent cases against any Texas corporation, irrespective of where it maintains offices.

Suits Against Foreign Parents

A second implication of TC Heartland is its potential to drive increased litigation against a domestic corporation's foreign parents as means to obtain favorable venue. In 1972, a unanimous Supreme Court held in Brunette Machine Works, Ltd. v. Kockum Industries, Inc. that patent venue as to foreign entities is not limited by § 1400(b). Instead, as to foreign parent entities, venue was governed by then-existing § 1391(d), providing that "[a]n alien may be sued in any district." In TC Heartland, the Court expressly declined to "express any opinion" on Brunette Machine Works or the implications of its holding on foreign corporations.

TC Heartland thus provides no guidance as to whether the venue limitations of § 1400(b) can be avoided by simply filing suit against a foreign parent. This is particularly true given that the then-existing venue statute discussed in Brunette Machine Works, § 1391(d), was replaced in 2011. The parallel provision in § 1391(c) now reads that "a defendant not resident in the United States may be used in any judicial district...."

Patent plaintiffs may avoid the new, more restrictive reading of § 1400(b) by suing a foreign parent entity rather than its domestic counterparts. This strategy would place the onus on the foreign defendant to challenge the plaintiff's complaint and seek a stay or transfer to a different district. In many districts, that burden is not easily overcome. Moreover, many district courts require litigation to move forward even if the defendant timely challenges jurisdiction, venue or the sufficiency of a pleading. Patent plaintiffs, therefore, may file a complaint against a foreign parent (or related entity) in an unfavorable venue as a means of forcing the domestic entity to intervene, or possibly just to create enough hassle to force a nuisance settlement.

Customer Suits

Another method of forum shopping post-TC Heartland is a suit against a customer or distributor of the ultimate target. While TC Heartland limits suits against a corporate defendant to the state of incorporation, and districts in which the defendant has committed acts of infringement and has a regular and established place of business, a plaintiff set on securing a particular venue may simply find downstream targets to sue in its chosen venue. In the case of an allegedly infringing device, for example, a plaintiff might simply choose to sue the brick-and-mortar retailer in any given district where the retailer sells the device.

This is not to say that the manufacturer-defendant is left with no options. For example, it could still seek a stay or transfer under the judicially created "customer suit" doctrine. Under that rule, "[w]hen a patent owner files an infringement suit against a manufacturer's customer and the manufacturer then files an action of noninfringement or patent invalidity, the suit by the manufacturer generally takes precedence." See In re Nintendo of America, Inc.. However, even the customer suit exception has its limits. The exception is not mandatory, and district courts have taken markedly different approaches in determining whether a customer-suit should be stayed in view of a suit involving the manufacturer. In any case, the onus is once again on the defendant to seek a stay and to litigate the case (even in an improper venue) pending the district court's decision.

Remote Employees

The second prong of § 1400(b) could also be used to forum shop. Aside from the obvious case in which a defendant maintains a brick-and-mortar location where it also has committed acts of alleged infringement, work-from-home employees will increasingly become a means to establish venue. The Eastern District of Texas has taken the lead in addressing this issue. In a recent decision, Judge Rodney Glistrap created a new multi-factor test to evaluate whether the residences of remote employees may be deemed a "regular and established place of business" of their employers. (Full disclosure: The authors represent the party challenging venue in that case). Memorandum Opinion and Order, Raytheon Co. v. Cray, Inc., Case No. 15-cv-1554 (E.D. Tex. June 29, 2017), ECF No. 289. If Judge Gilstrap's approach is adopted and endorsed, corporations with remote employees for which business expenses are reimbursed (e.g., expenses for telephone and internet use, as well as auto mileage) may be subject to venue in any district where its remote employees reside.

TC Heartland's Effect on Forum Shopping Remains to Be Seen

Many defendants see TC Heartland as having eliminated their exposure to being sued in far-away districts used by non-practicing entities extract small value settlements. Unfortunately, however, that practice may be far from over.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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