January 21, 2016

Taking On Patent Reform by Messing with Texas

ACSblog Symposium on Patent Law Reform, Colleen V. Chien, Michael Risch

by Colleen V. Chien, Associate Professor of Law, Santa Clara University School of Law, former White House Senior Advisor on intellectual property and innovation; and Michael Risch, Professor of Law, Villanova University School of Law

*This post is part of the ACSblog Symposium on Patent Law Reform.

Although patent reform is not a partisan issue, it has divided those who write and think about the patent system for a living. Earlier this year, 51 law and economics professors wrote a letter to Congress pointing to the “large and increasing body of evidence” supporting legislative patent reform. Weeks later, 40 professors shot back, expressing “deep concerns with the many flawed studies.” We aren’t saying who was right, because one of us signed the second letter and the other authored a number of the contested studies. One of us joined the Obama administration to support patent reform, the other opposes it.

But there is one issue upon which we — and most stakeholders — agree: The staggering concentration of patent cases in just a few federal district courts is bad for the patent system. We believe that changing where patent lawsuits can be filed will solve many of the problems in the debate.

Last year, more patent cases (44 percent to be exact) were initiated in the Eastern District of Texas than anywhere else, as the following chart shows.


Under a 1990 federal circuit court ruling, defendants can be sued in any district where they sell their products, which is basically anywhere. According to a forthcoming paper by Professors John Allison (University of Texas at Austin), Mark Lemley (Stanford) and David Schwartz (Northwestern), non-practicing entities — pejoratively referred to as “patent trolls” — bring a majority of the patent cases decided in the Eastern District of Texas. The issue is not limited to trolls, however: Kraft Foods is a plaintiff in Delaware in a current case on this issue.

The reasons patentees flock to Eastern Texas — and a few other district courts — is debated. Patentees say they get a fairer hearing, while defendants argue that procedural hurdles are stacked against them. Regardless of who is right, if plaintiffs favor a particular venue over another, it shows that there’s a problem with the system.

Even assuming courts resolve disputes with maximum efficiency and fairness, being sued in an otherwise distant location can dramatically increase the costs for defendants. For parties with limited funds, it often makes more sense to settle than to fight, even in weak cases.

Granted, the situation is good for local businesses in Texas. The Fairfield Inn even reportedly bought a subscription to PACER, the docket system for federal courts, so it can market its rooms to lawyers. But it’s doubtful that a situation in which litigators spend a disproportionate amount of time and money worrying about the location, rather than the merits, of a dispute is best for the patent system as a whole.

To be clear, having a choice of where to file lawsuits is not a bad thing — it creates competition in the court system, and allows time and experience to be leveraged. Furthermore, forcing patentees to file suit where defendants are located can also be costly, especially for small patent holders. However, national media stories — such as the empty Texas offices rented by patentees and the skating rink sponsored by Samsung just outside the courthouse to curry favor with local juries — are evidence of the waste and damage done to the reputation of the U.S. patent system.

In some sense, however, the situation we are in is an anomaly. As one of us has recounted, for nearly 90 years it was settled law that special rules limiting venue governed patent lawsuits. Congress changed the general venue law in 1988, and the Federal Circuit interpreted this ― rightly or wrongly ― as removing the special rule’s restrictions.

Congress changed the general venue law again in 2011 to language similar to, but not exactly like, the pre-1988 law. What these changes mean are being questioned in a mandamus petition filed by Professor John Duffy (Virginia) in a case in Delaware — Kraft Foods Group Brands v. TC Heartland. This is a complex issue and an excellent opportunity to address where patent lawsuits can be filed, and we are pleased that the court will be hearing the matter in March.

Depending on how parties respond, reverting to the old patent statute could create its own headaches. Under the old system, plaintiffs could file where the defendant was incorporated or where there was infringement and the defendant had a place of business. The District of Delaware could become the new default place to be sued by virtue of its popularity as an incorporating state. It already is the second most popular district for patent litigation, though its share has been on the wane recently. Further, many retailers and large businesses could still be sued all over the country.

On the one hand, it shouldn’t matter to outcomes where suits are filed. On the other hand, the current trend of patent filings shows that both plaintiffs and defendants seem to think venue matters. Congress can, in theory, tweak either the current or old rule. However, the political process is treacherous and subject to lobbying by special interests. The unitary nature of our patent system — not only across industries but also business models — makes it legitimately challenging to determine the best package of reforms for all.

Our survey of proposals reveals several possibilities with no obvious right answer. Limiting venue to principal place of business may be too limited; the state(s) where the defendant has the most sales is hard for a plaintiff to know ahead of time. The language proposed by the House last year would give plaintiffs the option of suing where defendants had consented and where plaintiffs had regular and established facilities, but the specific requirements may be too stringent to provide the desired flexibility. Allowing individuals, universities, and nonprofits more leeway could invite game-playing. Some proposals are at odds, such as ensuring random judicial assignment within a district versus selection of judges dedicated to patents. And still others must deal with the complex reality of modern litigation, such as whether exceptions should be made to avoid the inefficiencies associated with a single plaintiff suing multiple defendants in multiple states on the same patent, although multi-district litigation (MDL) consolidation could avoid some of them.

While we do not presume to know which proposal is the right one, we believe that effort should be directed to finding the right combination. We plan to further engage on this issue, such as by considering where actual cases would have been filed under different rules.