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Supreme Court to Mess With Texas Over Patents

Dec 16, 2016

In a move that may shake-up U.S. patent law, the Supreme Court this week decided to hear a case about where patent owners can file lawsuits—a case that will likely put an end to a special Texas cottage industry that has been a thorn in the side of big business.

The case will affect a judicial region known as the Eastern District of Texas, which for years has been a hothouse of patent lawsuits thanks to plaintiff-friendly laws and juries that have a reputation for handing out outsize damages awards. In Texas towns like Marshall and Tyler, hotels, restaurants, and local law firms have done a booming business thanks to planeloads of lawyers showing up to litigate patent cases.

The venue is especially popular with so-called patent trolls, which are firms that don't make or produce anything, but amass old patents in order to sue companies that do. The trolls have enjoyed roaring success in East Texas, in part because the cost of litigating there makes it cheaper for many firms to just pay the trolls to go away. When firms do decide to fight the trolls, the outcome can be harsh — such as when a jury in February ordered Apple to pay a shell company $625 million over patents related to FaceTime and iMessage.

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But now the Supreme Court's scrutiny is set to put a stop to all that. In deciding to take the venue case, which pits food producer TC Heartland against Kraft, the top court appears set to revisit a law that requires patent owners to sue companies where they "reside" or where their business is located and where the infringement occurred.

For decades, that requirement meant patent owners would have had to show that defendants had some sort of connection to a place like Tyler, Tex. before they could begin lawsuits there. But in 1990, an appeals court reinterpreted the law to mean even a minimum contact, such as a web presence, would suffice for patent owners to establish a venue. As a result, the Eastern District of Texas saw an eye-popping 44% of all patent cases in the country land on its docket.

According to Dennis Crouch, a well-known patent law professor, the Supreme Court will almost surely reverse the lower court, and reinstate the original meaning of the law. In a blog post titled "Goodbye E.D. Texas as a Major Venue," Crouch writes:

An 8-0 reversal of the Federal Circuit is quite likely [...] Under any normal interpretation of the provision, very few cases would be amenable to proper venue in the Eastern District of Texas because almost none of the accused infringers “reside” in that district or even have a place of business in that district.

If the Supreme Court does indeed restore the old venue rules, it will be left to determine where many of these patent cases take place instead.

Doug Kline, who leads an intellectual property team at the law firm Goodwin, predicts a lot of the cases will end up in Delaware instead, where many firms are incorporated, and where a lot of the country's commercial litigation already occurs.

In an interview with Fortune, Kline also said it is likely the Supreme Court will change the venue rules, partly because it decided to hear the case in the first place, and because it regularly overturns the appeals court in question.

For the Texas towns that have grown accustomed to a steady stream of out-of-town patent lawyers, a change in ruling would be a blow. But it would not be a surprising one given how the Eastern District of Texas has been under fire for years, not least because one of the judges who helped make it a hotbed of patent lawsuits stepped down from the bench to join his son's law firm—a firm that specialized in patent troll lawsuits. The towns have also benefited from lavish gifts, such a new ice-skating rink paid for by Samsung, as companies with cases before the courts sought to ingratiate themselves with local juries.

The Supreme Court's decision to take the Kraft case comes after members of Congress unsuccessfully sought to pass a law earlier this year titled the Venue Act, which would have likewise curtailed the role of East Texas in patent cases.

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