In an unanimous 8-0 decision, the Supreme Court struck down nearly 30 years of Federal Circuit patent venue jurisprudence that built on the view that the general venue statute (28 U.S.C. § 1391) controlled the patent venue statute (28 U.S.C. § 1400(b)) in the context of domestic corporate patent infringement defendants. TC Heartland LLC v. Kraft Foods Group Brands LLC, (U.S. May 22, 2017) (No. 16-341).
Background for the Decision
TC Heartland is a limited liability company organized and headquartered in the state of Indiana, and it directly competes with Kraft in the field of flavored drink enhancer products. Important for this case, TC Heartland is not incorporated in, it does not have a regular and established place of business in, and it is not registered to conduct business in Delaware. Kraft is incorporated in Delaware, but has its principal place of business in Illinois. Kraft brought a patent infringement action against TC Heartland in Delaware relying on personal jurisdiction in that state as the basis for venue under the general venue statute, which provides in relevant part, that a corporation “shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.” § 1391(c) (emphasis added). TC Heartland challenged venue as improper under the Supreme Court’s previous decision in Fourco Glass Co. v. Transmirra Products Corp. (U.S. 1957).
The Fourco decision held that § 1400(b) is the “sole and exclusive provision controlling venue in patent infringement actions,” and that it is not supplemented in any way by § 1391(c). § 1400(b) lays venue where the “defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business”. In 1990, the Federal Circuit held in VE Holding that Congress’s additions (underlined) in the phrase “[f]or all venue purposes under this chapter” of § 1391 provided the definition of “resides” in § 1400(b) for corporate defendants, thereby effectively superseding the Fourco decision. The Supreme Court denied the Petition for Certiorari in VE Holding, and the rule we are all familiar with took root. Congress amended § 1391 once again in 2011, now inserting in § 1391(a) the phrase “[e]xcept as otherwise provided by law” while also removing the phrase “under this chapter.” Importantly, the text of § 1400(b) has remained unchanged since 1948, and Congress has made no explicit indication of superseding Fourco or adopting the rule in VE Holding. The district court and Federal Circuit both rejected TC Heartland’s venue challenge, citing to VE Holding Corp. v. Johnson Gas Appliance Co. (Fed. Cir. 1990). The Supreme Court granted TC Heartland’s Petition for Certiorari with a question presented nearly identical to that reviewed in Fourco.
Holding: A domestic corporation “resides” only in its state of incorporation for purposes of the patent venue statute.
In what may appear to be routine to many an observer, the Supreme Court has reversed another long-standing Federal Circuit decision. Justice Thomas, writing for the Court, rather forcefully reminded the Federal Circuit that the decision in Fourco “definitively and unambiguously” defined the word “reside” in § 1400(b) as having a particular meaning as the state of incorporation of a corporation. Later decisions would whittle this down to only “domestic corporations,” but the Court’s holding remained the foundation for interpretation of the patent venue statute until 1990. Justice Thomas then quoted the late Justice Scalia for the principle that “clear, authoritative judicial holding[s]” should not be “cast in doubt” merely because a related or unrelated statute is amended and Congress gives no “clear indication” of an intent to supersede those judicial holdings.
While Kraft argued that the history of amendments to § 1391 supported the federal Circuit’s rule in VE Holding, the Court rejected this position based on the very language of the amendments relied upon by Kraft and the Federal Circuit. First, and importantly, Congress never amended § 1400(b). Second, § 1391’s “default provision” (i.e., “for all venue purposes”) is nearly identical to the one it contained in 1957 at the time Fourco was decided, where only “all” has been added. Justice Thomas opined that “all” does not render the phrase materially different. Third, the 2011 amendments to § 1391 includes a “savings clause” that explicitly qualifies the application of that entire section where “otherwise provided by law.” Finally, the Court found that the deletion of the phrase “under this chapter,” the primary language relied upon by the Federal Circuit in the VE Holding decision, further undermined Kraft’s argument that Congress had superseded Fourco.
In summary, the Court looked to statutory construction principles, and ruled that the Federal Circuit had yet again erred and led the bar astray. Interestingly, the decision mentions nothing of the political climate of 1990 and majority of amici that the VE Holding appeal was the proper vehicle for the Federal Circuit to correct the then perceived “patent venue problem.” Fast forward 30 years, and the amici briefs all blame the Federal Circuit for creating a patent venue problem. Ultimately, the Supreme Court has the sole prerogative in the judicial branch to overturn its own precedent, and the Federal Circuit may now be slow to read any implicit action by Congress in patent matters that it, arguably, has expertise.
Venue challenges in currently pending cases – What can/should I do now?
That depends. Many practitioners had their eyes on TC Heartland for months and have included objections to venue in their responsive pleadings or filed motions to dismiss on that basis. If you are among this group, immediate action to move to dismiss if you have not done so, or renew and supplement a previously filed motion, is the obvious course of action. However, if venue has not been challenged or preserved prior to the decision, or if the original objection has not been pursued despite the passage of significant time, the road forward is less clear. Federal Rule of Civil Procedure 12(h)(1) provides that a defendant waives the right to challenge venue if the objection is not raised in a responsive pleading or preserved in a Rule 12 motion to dismiss. If the case falls into this category, one might consider moving to amend the response to assert the affirmative defense of lack of venue pursuant to Federal Rule of Civil Procedure 15. In these circumstances, Rule 15 allows amendment 21 days after service of the pleading, or “with the opposing party’s written consent or the court’s leave.” Notably, Rule 15 provides that the “court should freely give leave when justice so requires.” Fed.R.Civ.Pro. 15(a)(2). The Supreme Court’s recent reversal of nearly thirty years of Federal Circuit precedent in TC Heartland might just provide a suitable basis for invoking such relief. That decision will turn on the relevant jurisprudence within the circuit, but care should be taken in framing the issue. Notably, the Court’s opinion makes clear that its Fourco decision, decided in 1957, was and remains good law – the Federal Circuit has had it wrong for nearly three decades. Arguably then, TC Heartland did not create new law but rather affirmed long-standing precedent that had been misapplied by the Federal Circuit. Any argument for invoking a district court’s discretion to allow an amendment, should focus on the Court’s discussion of the 2012 amendments to § 1391 while also emphasizing the decades of Federal Circuit law that would have made an objection to venue seemingly impractical and legally unsound.
Patent Infringement Venue Going Forward
In the wake of the Federal Circuit’s 1990 decision in VE Holding, patentees could obtain venue against domestic corporations in any district where the defendant had minimum contacts. Due to its perception as a particularly patentee-friendly venue, the Eastern District of Texas has captured the majority of recent patent litigation filings in the U.S., seeing between 35% to 44% of the total volume per year. The District of Delaware consistently remained a distant second with slightly over 10% of the cases. The Court’s decision in TC Heartland will unavoidably shift those percentages substantially.
For domestic corporations, patent infringement cases must now be filed only where defendant is incorporated, or “where the defendant has committed acts of infringement and has a regular and established place of business.” According to the Delaware Division of Corporations 2015 Annual Report, well over 1 million entities are incorporated there, including more than 50 percent of publically traded companies in the U.S. and more than 60 percent of Fortune 500 companies. Venue will be proper in Delaware for each of these entities. While Delaware is generally not perceived as an overly patentee-friendly jurisdiction, the district maintains a strong and experienced judicial bench with well-developed patent jurisprudence, as well as a number of patentee-verdicts that rival those of the Eastern District of Texas. Thus, it will remain a solid option for patent litigation, and will likely to see a significant increase in cases going forward.
Venue for defendants other than “domestic corporations” – What about the rest of us?
While not discussed in the opinion, venue in patent infringement actions involving “foreign corporations” are still subject to § 1391 by virtue of the Supreme Court’s opinion in Brunette Machine Works, Ltd. v. Kochum Industries, Inc. (U.S. 1972). Therefore, any foreign defendants, who necessarily do not “reside” in any district of the U.S., will not see much difference in strategy as a result of TC Heartland. Where a U.S. subsidiary is also named in a patent infringement suit, the foreign defendant may be able to join a motion for transfer of venue for convenience if venue is originally set outside of the subsidiaries “residence” venue.
Another issue that was not addressed by the Court in TC Heartland is whether § 1400 or § 1391 applies to domestic non-corporate commercial entities, such as LLCs and partnerships. During oral arguments, the issue was raised as a means for the Court to stand on improvidently granting certiorari in the case due to TC Heartland not actually being a “domestic corporation;” it is in fact a limited liability company. The Court punts on this issue in footnote 1, notably because Kraft pleaded that TC Heartland was a corporation in its Complaint and TC Heartland did not deny this fact. TC Heartland argued to the Court that LLCs are organized under the laws of its “resident” state, the same as a domestic corporation, so the Fourco rule meant for corporations should apply. However, the remand to the district court, which is set for trial, will now have to determine whether a non-corporate commercial entity is even subject to the holding as a matter of first impression on facts that were not developed to address this issue. With so many operating companies organized as LLCs, the remand and subsequent litigation in this space will be very important, and could potentially set patent venue for this subset of defendants back in the realm of § 1391.
Venue and Declaratory Judgment actions – What does TC Heartland mean for forum shopping by the accused infringer?
After the AIA was implemented, declaratory judgment actions filed by accused infringers noticeably dropped. This is largely due to the AIA bar on post-grant review proceedings in the USPTO if a petitioner first files a declaratory judgment action seeking to invalidate a patent in court. While there may be instances where an IPR or other post-grant review procedure is not good strategy at the outset of a dispute, many practitioners have resorted to filing declaratory judgment actions that only seek a ruling of non-infringement. Technically, this would leave the door open to a later IPR, even where the declaratory judgment pleads invalidity as affirmative defenses in answer to a counterclaim of infringement by the patentee. Of course, one of the primary reasons given for filing a declaratory judgment is forum shopping: either to strike first to get in the home forum, or to at least not end up in a forum they perceive to be a liability. With the TC Heartland decision, at least for domestic corporations in nascent patent disputes, the likelihood of being in a forum of their state of incorporation just got a lot smaller. Thus, the TC Heartland decision may lead to even fewer declaratory judgment actions as patentee’s choices of proper venue has been dramatically reduced.
It is important to note that § 1400(b) does have a second clause not at issue in the TC Heartland decision that provides for venue to lie where a defendant has a regular and established place of business and has committed acts of infringement. Due to the expansive personal jurisdiction equals venue holding of VE Holding, this clause has become stale, but it may soon be the primarily litigated statutory language concerning venue as NPEs and patentees strive for a way to maintain cases in their favorite courts.
Authored by Amy M. Pepke and Clifford Ragsdale Lamar II
Amy M. Pepke focuses her practice on commercial and intellectual property litigation. She currently serves by appointment to the Standing Local Rules Committee for the Western District of Tennessee, and serves as Chair of its Local Patent Rules Sub-Committee.