Supreme Court Messes With Texas 'Patent Troll' Hotbed in Win for Tech Industry

The Supreme Court on Monday delivered a major blow to so-called patent trolls—shell companies whose business revolves around acquiring patents and then suing others for infringing on them—by making it much harder to bring lawsuits in friendly venues like East Texas.

In a unanimous ruling written by Justice Clarence Thomas, the court overturned a lower court’s interpretation of federal venue rules and said that patent owners must sue companies in the districts where they are incorporated or have a regular place of business.

The 13-page ruling, which sided with beverage company TC Heartland over Kraft, is terse and technical, explaining how the specific venue rules in the Patent Act trump the more general ones set out in a federal venue law. But its impact on companies, particularly those in the tech sector, will be significant.

While the Kraft case involved a dispute in Delaware, the Supreme Court’s decision is also likely shut down what critics say is a cottage industry in East Texas. That district has acquired a reputation for patent friendly juries and judges, who helped small towns like Marshall and Tyler keep their restaurants and hotels bustling with out-of-town lawyers and executives attending patent trials.

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The reputation of East Texas juries for handing down mind-boggling verdicts (one jury last year ordered Apple to pay $625 million to a shell company over patents from 1998) led many companies to simply pay the trolls to go away even if the patents in question appeared to be of dubious quality.

Now, though, the East Texas lawsuit mill appears to be set for a shutdown since defendants dragged down there will be able invoke today’s ruling to demand a change of venue.

“This Supreme Court ruling can help curb decades of misuse of the patent system by restricting a common tactic used by patent trolls — forum shopping. For too long patent trolls have relied on a combination of case load back up, high upfront legal costs, [and] favorable rules in courts like the Eastern District,” said Ed Black, President of the Computer & Communications Industry Association, which represents many tech companies, in a statement.

Black added that, despite Monday’s ruling, the CCIA believes a legislative solution is needed to curb abuse of the patent system.

Numerous other parties, including intellectual property scholars and companies like FedEx and Oracle, had earlier filed friend-of-the-court briefs to argue in favor of limiting forum shopping.

Those in favor of upholding the lower court’s ruling had argued that patent owners should have the freedom to enforce their patents wherever they like.

In its ruling, the Supreme Court stated it was upholding one of its earlier patent decision from 1957 known as Fourco. In that decision, the top court had found the specific rules of the Patent Act, which require a plaintiff to sue companies where they are incorporated, applied despite rules to the contrary in the general venue law.

The court also concluded that later changes to the general venue law by Congress actually made the special rules for patent cases clearer than ever. For legal types, here is a key paragraph from the decision (§1391 refers to the general venue law and “saving clause” refers to language that makes an exception to the general rule):

“Fourco’s holding rests on even firmer footing now that §1391’s saving clause expressly contemplates that certain venue statutes may retain definitions of “resides” that conflict with its default definition. In short, the saving clause makes explicit the qualification that this Court previously found implicit in the statute,” Justice Thomas wrote.