The city of Marshall was a political and production center for the Confederacy, a status that came to an end with the Union’s victory in the Civil War. Now the town is known for something else – as a hotbed for patent lawsuits where it’s not unusual to see Silicon Valley lawyers walking into the federal courthouse – but a Supreme Court case may change that.
Where a limited liability corporation (LLC) resides emerged as a point of contention in oral arguments presented to the U.S. Supreme Court on March 27, 2017, in TC Heartland vs. Kraft Foods. Filed in Delaware District Court on Jan. 14, 2014, the case calls into question whether it’s appropriate for a patent-infringement claim to be resolved in the Eastern District of Texas located in the sleepy town of Marshall when a defendant does not maintain a business there.
Marshall and other towns in the Eastern District of Texas are favorite filing venues for patent trolls — individuals who holds patents but do not actually practice their patented inventions — who are looking for big payouts.
“This Court has six patent cases this term,” stated Kraft Foods Counsel William M. Jay in a transcript that detailed oral arguments. “Four of them have LLC defendants in them and we think understanding where an LLC resides is a very important issue.”
Currently, under 28 U.S.C. § 1400(b), a defendant can be sued for patent infringement in any venue that has personal jurisdiction over the defendant.
“The Court in this case is presented with an historic choice,” TC Heartland Counsel James Dabney told the Supreme Court Justices. “That choice is between upholding or destroying venue protections that Congress provided in 28 U.S.C. 1400(b).”
In recent years, tech companies like Apple and Google have had to travel in order to fend off patent trolls who file a claim of ownership of their technologies in Marshall, Texas, because juries in the Eastern District of Texas are known to award sizeable monetary damages to successful plaintiffs in patent infringement actions.
“There’s been a boom in hotel and restaurant openings in Marshall because lawyers and internet CEOs are flying in to defend the patent on their technologies,” said Douglas Sorocco, an intellectual property attorney in Oklahoma City.
Business has reportedly even spilled over into neighboring cities like Beaumont, Lufkin, Sherman, Texarkana and Tyler. But the cottage industry could come to a screeching halt depending on whether the U.S. Supreme Court decides to restrict where patent lawsuits can be litigated.
“Although the case originates out of Delaware, it will have its most significant impact in the Eastern District of Texas if the Supreme Court rules in favor of TC Heartland because the Eastern District has at least 40% of all patent cases but few defendants actually maintain a place of business in that district,” said Jordan Sigale, an intellectual property litigator in Chicago. “Still, whatever the Supreme Court decides for this Delaware case will affect the entirety of the United States.”
TC Heartland argues that 28 U.S.C. § 1400(b) should be more narrowly read to allow venue in patent infringement cases only where the defendant maintains a regular place of business.
“A decision in favor of TC Heartland could potentially limit a plaintiff only to those jurisdictions either where an alleged infringer is incorporated or has a regular place of business and has committed acts of infringement,” said Michael Cannata, an intellectual property attorney in Long Island, N.Y.
Kraft Food’s position is that patent infringement lawsuits can be filed in any judicial district where the court can fairly exercise personal jurisdiction over the accused patent infringer.
“The correct choice, we submit, is to adhere to this Court’s existing, long-established interpretation of Section 1400(b) and to reject the call for a new revisionist interpretation that would render Section 1400(b) nugatory in this case,” Dabney said at last month’s hearing.
According to the Internal Revenue Service, an LLC must designate a resident agent in any state in which it does business who is charged with specific responsibilities and liabilities.
“Typically what we’re seeing now are special purpose LLCs or corporations that are set up and the only thing that they own is a patent,” Mr. Sorocco told PacerMonitor. “They’ve bought it or they’ve been assigned it. Then, what they do is assert it against different companies, suing companies or sending out cease-and-desist letters to technology companies claiming infringement.”
If, in fact, a stricter venue standard applies for patent infringement, the adjudication of Heartland vs. Kraft Foods could severely diminish the financial threat of patent trolls.
That’s because the Eastern District of Texas has always been a favorite for patent trolls in part due to its judiciary’s reluctance to deprive parties of their 7th Amendment Right to a jury trial, which often results in higher litigation costs.
As a result, these so-called patent trolls have emerged in recent years seeking to enforce their patents, filed in Marshall, through aggressive litigation.
“Companies don’t want to pay the added expense of litigating a jury trial so they settle if only to avoid the cost,” Mr. Sigale told PacerMonitor in a telephone interview.
Dubbed a rocket docket, another attraction to the U.S. District Court of the Eastern District of Texas is not the potential for a jury trial but also the speed at which cases are disposed of. “Defendants may settle early in the case to avoid defense costs,” Mr. Cannata told PacerMonitor by email.
However, if patent cases are no longer allowed to be lodged in Marshall due to a favorable ruling for TC Heartland, these cases will be brought in other districts where either party are less likely to settle.
“It may tend to drag the litigation out and drive the cost up,” said Mr. Sorocco. “There’s a bit of balancing of all the different interests here, which is what makes the case interesting on multiple levels.”
An opinion from the Supreme Court is expected no later than the end of June, according to Mr. Sigale.