US patent litigation: high noon for patents in Texas

In a small corner of Texas, the US state famed for cowboys and ‘western’ movies, thousands of companies are drawing their weapons and waging war against would-be enemies.

Armed with claims of patent infringement and demands for licensing deals or damages, they are clogging up the local district court, which is based in Tyler, Marshall and other little-known locations. The number of patent complaints has increased to the point where the court hears nearly half of all US patent-related disputes.

Those in the US will need no introduction, but for those who are not familiar: welcome to the US District Court for the Eastern District of Texas.

Its popularity with patent complainants can be put down to several factors: the case results are seen as ‘patent-friendly’; the court is relatively quick to reach judgments; and it is inclined to refuse stays even if a validity hearing is pending. The eastern district’s relatively small size compared to other districts also means plaintiffs are likely to get the same judge, possibly one who over the years they have come to know and like.

Last year, according to the “Patent Dispute Report”, which is published by Unified Patents, an organisation that attempts to limit the power of certain types of non-practising entities (NPEs) in the US, the number of cases filed at the court amounted to just under half of all US patent-related complaints.

A sign of how popular the court has become, the report said, is that 5,769 cases were filed at US district courts last year, with the Texas court being asked to handle 2,536.

The case against

The popularity of the venue, particularly with those that attract the unwelcome ‘patent troll’ label, is no secret, and practitioners and IP organisations have expressed concern about an ever-growing caseload for a relatively small forum.

It was the Electronic Frontier Foundation (EFF) that provided the most eye-catching assessment. The EFF called for the court to be shut down and for an end to ‘forum-shopping’—when litigants try to have their cases heard in a court that they think is most likely to provide a favourable judgment, even if the court is based in a completely different location from the alleged offence.

In an amicus brief filed at the US Court of Appeals for the Federal Circuit in October 2015, the EFF, along with non-profit organisation Public Knowledge, stepped into a dispute between Kraft Foods and TC Heartland.

Kraft sued Indiana-based TC Heartland, which creates water enhancers, for allegedly infringing three patents. Kraft sued TC at the US District Court for the District of Delaware. TC tried to transfer the case to another court, the US District Court for the Southern District of Indiana, for lack of jurisdiction but failed. TC has appealed against that decision to the federal circuit, prompting the EFF’s intervention.

In its brief the EFF said that Congress’s patent law, which states that cases should be brought only in the judicial district “where the defendant resides”, “has committed infringement”, or has a “regular place of business”, has been weakened, resulting in a surge of cases being heard at the same court.

Paul Devinsky, partner at law firm McDermott, Will & Emery, agrees.

He refers to VE Holding Corp v Johnson Gas Appliance, a 1990 decision from the federal circuit which concluded that a proper venue for action could be any district where a defendant “has sufficient contacts for personal jurisdiction”.

“The seeds were sown for a situation where a district court could present itself as the ‘go-to’ venue for patent owners,” Devinsky tells WIPR.

The EFF, in a media release accompanying its brief, said it wanted to see the VE Holding ruling relegated to a “footnote in history”.

“VE Holding has allowed patent owners to sue in practically any district in the country, no matter how tenuous the connection to the alleged infringement,” the EFF added.

Tim Malloy, partner at law firm McAndrews, Held & Malloy, says the case redefined the term “resided” so it could be construed as “anywhere a defendant did substantial business”.

“This has opened the floodgates on alternative venues,” he says.

Under VE Holding, corporations can be sued anywhere that they do business, even if they are not incorporated or do not have an established place of business there, hence the bulging caseload at the Texas court.

According to Shawn Ambwani, chief operating officer at Unified Patents, the biggest change allowing plaintiffs to pick and choose a venue has been the growth of the internet.

“When people have websites the question could come down to where you locate it. Is your residence where your servers are or where your actual tangible headquarters are? That’s where the difficulty comes with questions like a ‘primary place of business’.

“If you’re selling products everywhere in the US then the argument is that you can sue anywhere in the US.”

Current bills

While it is still available, using the Texas court is an option many companies will take, but whether the EFF’s wish of resigning VE Holding to a mere “footnote in history” will come true may depend on higher powers.

Devinsky points to patent reform currently taking place.

He refers to the two main bills making their way through Congress. The Innovation Act, stalled in the House of Representatives, and the Protecting American Talent and Entrepreneurship (PATENT) Act could potentially change things.

The Innovation Act, re-introduced by House Judiciary Chairman Bob Goodlatte in 2015, has faced opposition to some of its provisions.

But Devinsky says: “That bill includes a venue provision aimed at curtailing ‘unreasonable venue-shopping’, citing the high percentage of cases that are brought in Texas. The provision would ensure that lawsuits are only brought in judicial districts that ‘have some reasonable connection to the dispute’.

"A plaintiff could be told that unless there is a compelling reason why you have to sue in a certain venue, it will be randomly assigned.”

“That would effectively overrule the federal circuit’s VE Holding decision,” he adds.

Ambwani is not convinced that legislation would necessarily mark the end of ‘trolls’ clogging up courts.

“The real question here is whether this will reduce litigation, particularly the NPE kind that we are concerned about, but I’m not sure if it would.”

Ambwani, whose organisation’s report also revealed that some 94% of all cases filed at the Texas court in 2015 were from NPEs, likens forum-shopping to athletes trying to get a competitive edge.

“An athlete is going to use any advantage he or she can get to win the game or race. If they discover a way of gaining a 5% advantage in their favour, they are going to do it, particularly if everyone else doing it. Although it’s only 5%, it’s still worth it.

“If you took away that advantage would I decide not to sue? I’m not sure I would. You have already made a big investment and gamble by deciding to sue; the ability to forum-shop just creates that slight extra advantage.”

Ambwani says one way to deter forum-shoppers would be to address the small pool of judges at the court.

“The eastern district of Texas is a small court. Essentially there is one judge who is very likely to be assigned to your case. For a plaintiff, that gets rid of any uncertainty: you know who they are and will have a pretty good idea of how the case will be handled,” he says.

According to Unified Patents, Texas judge Rodney Gilstrap presided over 17% of all patent cases in the US last year.

“But what if that changes and your claim was randomly chosen between 100 judges?” asks Ambwani. “That changes everything because uncertainty goes up.

“Instead of eliminating forum-shopping, you could just make a broader net of judges to hear these cases.”

Ambwani also suggests restructuring the court setup.

US district courts are divided into circuits, with appeals from those district courts being heard at the circuit courts. The Texas court falls under the Fifth Circuit, which also includes Louisiana and Mississippi.

“You could make it so that any judge in the whole fifth circuit might be assigned a patent case. That way you wouldn’t know which judge you would get. A plaintiff could be told that unless there is a compelling reason why you have to sue in a certain venue, it will be randomly assigned,” Ambwani adds.

Malloy says the idea of tightening the venue requirements for patent cases has “much to be said” for it.

“Why should a single judge have a very substantial percentage of the nation’s patent cases on his/her docket?” he asks.

But, like Devinsky, he says Congress is best placed to implement any reforms.

“A venue statute for patent cases should be implemented which requires that the case be brought in one of the following places, and only there: the state of incorporation, the state of principal place of business, or the place where the defendant has a ‘regular and established place of business’,” he says.

The emergence of ‘trolls’ has undoubtedly increased litigation at courts and although we are seeing signs of a shift towards alternative methods of dispute-resolution, most notably the US Patent and Trademark Office’s Patent Trial and Appeal Board, the rising caseload in Texas is a problem that needs addressing.

With legislation showing no sign of being near completion and lawsuits continuing to pile up, it may be some time before the bullets and guns are laid to rest in the dusty Texan landscape.