Intellectual Property Alert | May.23.2017
On May 22, 2017, the Supreme Court issued its long awaited opinion in T.C. Heartland L.L.C. v. Kraft Food Brands, L.L.C., No. 16-341 (U.S. May 22, 2017)—easily one of its most consequential rulings in patent law in several years. In an 8-0 decision authored by Justice Thomas, the High Court held that a domestic corporation "resides" only in its State of incorporation for purposes of 28 U.S.C. § 1400, the venue statute that specifically governs patent cases. The decision overturns nearly 30 years of Federal Circuit precedent, which applied the definition of "resides" in the general venue statute, 28 U.S.C. § 1391(c), to hold that a corporation "resides" anywhere it has sufficient contacts to subject it to personal jurisdiction (treating each district as a separate state for states with more than one district). In a terse 10-page opinion, the Court essentially confirmed that its 1957 decision in Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957), remains controlling law and that the Federal Circuit's reasoning is as flawed today as it was in 1957.
The Supreme Court first stepped through the history of venue statues, going back to 1789. It explained that prior to the first patent-specific venue statute in 1897, there was conflict in the district courts on whether to apply the general venue statute to patent cases. In 1897, Congress resolved that confusion by enacting a patent-specific statue. In doing so, it "placed patent infringement cases in a class by themselves, outside the scope of general venue legislation." At that time, the statute permitted suit in the district where the defendant was an "inhabitant" or the district where the infringement occurred and it had a "regular and established place of business." The Court explained that where a corporate defendant is an "inhabitant" has always been understood as only the State in which it is incorporated. Though the patent specific venue statute has been revised from "inhabitant" to "reside," the meaning remains the same. Further, the changes to the general venue statue (§ 1391) in 1988 and 2011 were never intended to alter the patent specific statute (e.g., because no amendments were made to § 1400 during that period). If anything, the Court determined that the amendments to § 1391 only strengthened the rationale in Fourco.
The case has broad implications for where plaintiffs will be able to file infringement suits. The Eastern District of Texas, where more than 40% of all patent cases have been filed over the last several years, is likely no longer a proper venue for many cases. Most of these suits will now probably be brought in Delaware or California with the rest of the cases dispersed among courts around the country, like Indiana, under the laws of which the defendant TC Heartland was organized, and which TC Heartland argued was the only proper venue in its case.
Even after TC Heartland, however, where a defendant resides is not the only proper venue for a patent infringement case. Section 1400(b) has two prongs: venue is proper where the defendant resides or where infringement occurs and the defendant has a "regular and established place of business." Going forward, when a plaintiff chooses to sue in a district that is not the defendant's place of incorporation, the focus of the venue inquiry will be on the second prong. The case law interpreting the second prong, which arose post-Fourco and pre-VE Holding, is from various circuit courts and includes cases before the Federal Circuit was created in 1982. We anticipate rapid development in this area of the law.
In the meantime, we will be guided by the existing interpretations of "regular and established place of business." For example, in In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985), the Federal Circuit held that "in determining whether a corporate defendant has a regular and established place of business in a district, the appropriate inquiry is whether the corporate defendant does its business in that district through a permanent and continuous presence there and not . . . whether it has a fixed physical presence in the sense of a formal office or store." Id. at 738.
What about pending cases? Many cases will likely remain in place, as plaintiffs will argue that a defendant who has not already filed a Rule 12(b)(3) motion has waived its objection to improper venue, which must be brought in a pre-answer motion or raised in the answer itself. Where a defendant's answer to the complaint was filed after the Supreme Court had granted certiorari in TC Heartland, an argument can be made that the defendant was on notice and waived improper venue by not raising it in its answer. However, until today's decision a 12(b)(3) motion premised on TC Heartland's interpretation of § 1400 would have been futile. This waiver issue will likely be resolved in the near term, as the courts grapple with the practical effect of a clear shift in what was widely accepted as settled law.
Finally, it is likely that TC Heartland will not apply to foreign defendants. The Supreme Court was clearly aware of this issue, and in footnote 2 of the decision declined to express any opinion on the subject. In the same footnote, however, the Court cited Brunette Machine Works, Ltd. v. Kockum Indus., Inc., 406 U.S. 706 (1972), which held that foreign corporations could be sued in any district, due to a "long-established rule that suits against aliens are wholly outside the operation of all the federal venue laws, general and special." Nonetheless, TC Heartland did not express any position on the continuing viability of Brunette. As a practical matter, foreign companies who have been sued in the Eastern District of Texas or some other place they don't want to be, will at least have an argument for transfer to the venue where other related actors can properly be sued. As a matter of strategy, foreign corporations should continue to reduce their risk by organizing any U.S. activities to occur through a U.S. subsidiary with a "regular and established place of business" outside of undesirable districts. Going forward, because that subsidiary will have a meaningful domicile and chosen place(s) of doing business, the foreign parent will have a stronger argument for transfer.
TC Heartland answered one question, but raised others that will have to play out in the courts over the next several years. A copy of the opinion can be found here.