6 Months After TC Heartland, Adjusting To A New Landscape

November 21, 2017

Nathan R. Speed, Stuart V.C. Duncan Smith

(as published by Law360)

The U.S. Supreme Court's May 22, 2017, decision in TC Heartland, which overturned decades of accepted practice on how to evaluate the proper venue for patent litigation, has been lauded by some as ushering in a new era in patent litigation. Others — including some federal district court judges who have been applying TC Heartland — have found the decision to be much less significant, or do not see that it has had any legal effect. Though six months have passed since the Supreme Court’s decision, we still do not know with certainty which understanding of the decision is correct.

We do know that since the TC Heartland decision, there has been a shift in where patent litigation occurs. In July 2016, when TC Heartland first indicated its intent to appeal its case to the Supreme Court, the Eastern District of Texas received roughly 45 percent of new patent cases. By October 2017, its share was down to about 14 percent of new patent cases. While that change is dramatic, it is still too early to define the legacy of TC Heartland, since many of the big questions about what the decision will mean for patent litigation remain unanswered.

The Shifting Landscape?

One measure of the effect of TC Heartland is where plaintiffs are filing new cases, and by that measure, the change since TC Heartland is clear. The Eastern District of Texas, the forum of choice for many plaintiffs from around the country, no longer reigns as the most popular venue for patent litigation. In the six months since TC Heartland, 14 percent of new patent cases have been filed in that district. In the same period in 2016, 37 percent of new patent cases were filed there. Thus, the Eastern District of Texas’ patent cases, measured as a percentage of new patent cases, has fallen by over 60 percent.

The District of Delaware has seen its fraction of new patent cases increase the most. In the six months since TC Heartland, plaintiffs have filed 23 percent of new patent cases in the District of Delaware, compared with 11 percent of cases during the same period in 2016. Other district courts have also seen increases. In the same time period, the Northern District of California’s share of new patent cases grew from 3 percent to 7 percent, the Northern District of Illinois grew from 3 percent to 6 percent, the Central District of California grew from 7 percent to 9 percent, and the District of New Jersey grew from 4 percent to 5 percent. Other districts collectively increased from 32 percent to 36 percent of new patent cases.

This shift does not, however, tell the whole story of the effect of TC Heartland. Uncertainty created by the case may have affected plaintiffs’ choice of forum as much as the Supreme Court decision itself. Even before the decision, the case created uncertainty that coincided with, and may have driven, a large shift away from the Eastern District of Texas. In the six months before the decision, which roughly corresponds with the period during which the parties briefed and argued the case at the Supreme Court, the Eastern District of Texas’ share of new patent cases fell to 35 percent from 41 percent during the same period one year prior.

The effect of uncertainty is further illustrated by the effect of one interpretation of the TC Heartland decision by one judge in the Eastern District of Texas. That judge is Judge Rodney Gilstrap, who personally handles as much as a quarter of all patent cases in the United States. That district’s share of new patent cases fell from 30 percent in May 2017, the month that TC Heartland was decided, to 15 percent in June 2017. However, near the end of June 2017, Judge Gilstrap interpreted TC Heartland’s effect narrowly. The following month, the district share of new patent cases rebounded to 24 percent. But the bounce was short-lived: The Federal Circuit rejected Judge Gilstrap’s interpretation in September 2017, and in October 2017, the district’s share of new cases was down to 14 percent.

This data illustrates two points. First, the landscape has clearly shifted and knocked the Eastern District of Texas off its perch as the most popular venue for patent litigation. To be sure, it remains a popular place to file—behind only the District of Delaware, according to the latest statistics. Second, uncertainty about how TC Heartland will apply appears to drive at least some of the shift. As we learn more about how the Federal Circuit will interpret the decision, the distribution of new patent cases may change. Until the meaning of TC Heartland is more fully understood, it is too early to say whether the shift away from the Eastern District of Texas to the District of Delaware is an overreaction, underreaction, or just right.

A Regular and Established Place of Business?

Under the governing statute, venue in a patent case is proper wherever the defendant (1) resides or (2) “committed acts of infringement and has a regular and established place of business.” For the past several decades, the Federal Circuit interpreted “resides” to include essentially anywhere that alleged infringing products or services reached. For most large companies doing business in the United States, that was often everywhere. TC Heartland constrained “resides” to just the state where a company is incorporated, which is often Delaware or the defendant’s home state. For plaintiffs that want to litigate elsewhere, the question then is whether the defendant has “a regular and established place of business” there. As of right now, how to make that determination remains unclear.

The Federal Circuit has only twice addressed the meaning of the requirement that the defendant “has a regular and established place of business.” Both cases concerned companies with salespeople living in the forum district. First, In re Cordis Corp. held in 1985 that having salespeople in the forum district whose homes were used by the company to store inventory and who were supported by a secretarial service could be sufficient. The court reasoned that “a fixed physical presence in the sense of a formal office or store” is not required so long as the “defendant does its business in that district through a permanent and continuous presence there.”

The second time that the Federal Circuit addressed this question was just last September in In re Cray Inc. The court did not overrule its earlier decision in Cordis, and affirmed that the defendant need not have a “formal office or store.” However, it held that the salespeople’s homes in the forum district were not used by the defendant to service customers in the district, nor was company literature or product stored in those home offices, and so they were not the defendant’s “place of business.” On this basis, the court distinguished the case from Cordis and ordered the district court to transfer it.

Thus, while those cases provide some insight into whether having salespeople living in the district means that the defendant “has a regular and established place of business,” they only scratch the surface of whether other situations will be sufficient. What about companies with other kinds of activities in the forum district, such as franchises, distributors, or seasonal work? The Cray decision expounded on the meaning of the statute, but did not fully clarify the meaning of terms like “regular and established.” Until the Federal Circuit addresses more cases on this issue, the full scope of the TC Heartland decision will continue to be uncertain.

Waiver of the Venue Defense?

While the data on new patent cases shows a shift away from the Eastern District of Texas, cases that were already pending when the Supreme Court decided TC Heartland face a unique challenge. In many instances, given the pre-TC Heartland standard, the defendants did not contest venue at the start of the case. Though failing to raise the defense of venue typically waives it, defendants may be able to avoid that by arguing that TC Heartland was an unanticipated change in the law that made the defense available where it previously was not. Currently, litigants do not have a clear answer whether that argument will work.

The Federal Circuit recently decided in In re Micron that TC Heartland was a change in the law, because for many defendants the defense of venue was not available under the Federal Circuit’s pre-TC Heartland case law. However, given the facts of Micron, the decision does not necessarily resolve whether all defendants who arguably waived the venue defense are now free to raise it. The defendant in this particular case waived the venue defense before the Supreme Court decided to review TC Heartland and moved to dismiss directly after the Supreme Court issued its decision. Plaintiffs may argue that Micron does not apply to defendants that waived the defense while the case was pending in the Supreme Court or waited to move until after Micron.

A further hurdle may exist for defendants in the Fifth Circuit, which includes the Eastern District of Texas. Though Micron declined to consider differences between the regional circuits, whether a change of law excuses waiver of a defense is an issue presently being litigated in the Fifth Circuit. Some plaintiffs have argued that the Fifth Circuit does not excuse the failure to raise a defense, even when a change of the law makes that defense available. Up until Micron, district courts in the Fifth Circuit could avoid the issue by concluding that TC Heartland did not change the law. However, after Micron, the question of the Fifth Circuit’s treatment of waiver is front and center. The same day as the decision in Micron, Judge Gilstrap ruled that a change of law would not excuse waiver of the venue defense. Appeal of this case, or others like it, is likely.

These issues demonstrate that many questions remain for defendants in cases that were pending in potentially improper venues when TC Heartland was decided. The ways that the Federal Circuit resolves these issues will have a huge impact on how TC Heartland applies to the parties in these cases.

Will Congress Act?

During the lead-up to TC Heartland, momentum had been building for legislative reform to venue requirements. Venue is a statutory requirement, unlike the constitutionally underpinned personal jurisdiction requirement, and so Congress is free to amend those rules. Sen. Orrin Hatch, R-Utah, chairman of the Senate Republican High-Tech Task Force, identified patent venue reform as among the legislative priorities for the current Congress in February 2017. In his statement, Sen. Hatch noted the then-pending TC Heartland appeal in the Supreme Court and suggested that legislative reform would be needed regardless of the outcome.

Nevertheless, legislative efforts to reform patent venue stalled after TC Heartland. The prior Congress had considered the VENUE Act (S.2733) and the Innovation Act (H.R.9). Both acts would have restricted patent venue relative to the pre-TC Heartland rule — though not to the extent that TC Heartland has. Thus, both bills appear motivated, at least in part, by a desire to combat the perceived problem of patent owners dragging defendants into court in a district with no connection to the parties. Now that the Supreme Court has restricted venue beyond even what Congress was contemplating, it is not clear that Congress has any appetite to expand patent owners’ options. If application of TC Heartland reveals practical problems with the current rule, especially among influential patent plaintiffs, interest in reform may return.

Where Do We Go From Here?

The full consequences of TC Heartland remain unclear. It has caused a major shift in where plaintiffs choose to file new patent cases. However, whether the new distribution will continue as we learn more about how TC Heartland will be applied is uncertain. As with previous instances when the Supreme Court has stirred the pot of patent litigation, the effect of its intervention cannot be fully understood until litigants and courts have time to apply the new rules to a range of cases. Litigants making decisions involving venue must stay informed about the courts’ application of TC Heartland so that they can properly manage the risks associated with the choice of where to litigate.