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The Supreme Court could fundamentally change America's broken patent system

The train station in Marshall, Texas. Credit: Adam Moss/Flickr

It was more than a decade ago that The New York Times exposed an anomaly that lawyers had been whispering about for some time. The sleepy, rural East Texas town of Marshall, Texas—“the self-proclaimed Pottery Capital of the World and home to the annual Fire Ant Festival”—had somehow become the nation’s hottest venue for filing high-tech patent suits.

At the time, a seemingly preposterous 9% of patent cases were being brought in the Eastern District of Texas, the federal judicial district encompassing Marshall. That was a bigger portion than any of the nation’s other 93 districts was attracting, even those that were home to major tech or commerce hubs like Silicon Valley, Chicago, Delaware, or New York.

Ten years later the situation has only deteriorated. According to legal analytics company Lex Machina, in 2015 a staggering 44.2% of new patent cases (2,541 suits) were filed in that notorious district, where defendants claim they are pressured to settle by atypical procedures and practices. Last year almost one quarter of all patent suits filed nationwide (1,119 of 4,537) were assigned to a single judge: U.S. District Judge Rodney Gilstrap, of Marshall.

To make matters worse, since 2014, according to a recent study in the Stanford Technology Law Review, more than 90% of the cases in that district have been filed by the most controversial category of patent plaintiff, those pejoratively referred to as patent trolls. These are the investment vehicles, more politely known also as “non-practicing entities” or “patent assertion entities,” that do not make or sell any products of their own, but that buy patents solely for the purpose of demanding royalties from companies that do.

Finally, there is little question that forum-shopping influences outcomes.  One academic study found that patent holders prevail 58% of the time when they select the forum, but only 44% of the time when the alleged infringer does.

The case that could put an end to forum shopping

Chief Justice John Roberts (L) and Supreme Court Justices (2NL-R) Anthony Kennedy, Stephen G. Breyer, Sonia Sotomayor and Elena Kagan arrive for U.S. President Donald Trump’s first address to a joint session of Congress, February 28, 2017. REUTERS/Jim Lo Scalzo/Pool

Yet all this forum shopping could finally come to a screeching halt this year due to a little-heralded case the Supreme Court hears on Monday, March 27.

Given what’s at stake, the suit, TC Heartland v. Kraft Foods Group Brands, is a bit atypical. It was not filed in the Eastern District of Texas, does not involve cutting-edge software or hardware, and does not involve a patent troll. It stems, rather, from a mundane dispute between a unit of Kraft Heinz Co. (KHC) and Heartland Food Products Group over a market segment called “liquid water enhancers,” which are flavored, sweetened, or vitamin-enriched mixes that the consumer adds to water and then drinks. Each company markets versions (under the MiO brand for Kraft, Splash for Heartland) and has pertinent patents.

In 2014 Kraft, based in Northfield, Illinois, sued Heartland, based in Carmel, Indiana, alleging infringement. Kraft chose to bring the suit in Delaware, which is the second most popular district for patent suit filings, with 10% of the total in 2016, per Lex Machina.

The law governing where you are can bring a suit is called venue. For more than a century there have been two federal venue statutes relevant to patent suits against corporate defendants. One of them, enacted in 1897, relates only to patent suits, while the other, which goes back further still, relates to “venue generally.” On its face, the latter appears to define where any federal suit against a corporation may be brought.

The patent-specific law is narrow, requiring that suits be brought where the company resides, which was long construed to mean where it was incorporated. The general statute, on the other hand, is more lax, allowing a corporation to be sued wherever it does business. Since big companies often do business nationwide, in practice the general provision permits them to be sued in nearly any judicial district.

Though Heartland was incorporated in Indiana, Kraft sued it in Delaware, citing the general venue statute and the fact that Heartland had sold some liquid water enhancers in Delaware. Heartland maintains that the patent-specific venue law requires that the suit be heard in Indiana, where it is incorporated. The district judge ruled against Heartland, as did the U.S. Court of Appeals for the Federal Circuit, the specialized appeals court set up in 1984 to handle all appeals from patent and trademark cases.

We could see a seismic upheaval to the patent landscape

The U.S. Supreme Court has twice grappled with the question of which of the two venue statutes should control in a patent case: first in 1942 and, again, in 1957. In each instance it found that the narrower, patent-specific law was the “exclusive” provision to be followed in patent cases, because it had been enacted later than the broader measure, and reflected Congress’s more considered judgment about that particular category of dispute. “Specific terms prevail over the general in the same or another statute which otherwise might be controlling,” the High Court wrote in the 1957 precedent, Fourco Glass Co. v. Transmirra Products Corp.

But in 1988 Congress amended the general venue statute, making minor tweaks in its wording.

Though there was nothing in the legislative history to suggest that Congress consciously intended to overrule the Supreme Court’s holding in Fourco, the Federal Circuit concluded two years later that, parsing the new text, Congress had effectively done just that. It now found that the tweaked version of the general venue statute modified the meaning of the more restrictive one, rendering its terms equally lenient. This new interpretation opened the doors to forum shopping, eventually leading to the transformation of Marshall, Texas, into a patent plaintiffs’ paradise.

In 2011 Congress tinkered with the text of the general venue law again. When it was sued in 2014, Heartland argued that the latest modification required a return to the Supreme Court’s approach in Fourco. But last April the Federal Circuit rebuffed that argument, finding that the lax general law was still available in patent cases.

Against this backdrop—the Federal Circuit reaching a result that looks to be at odds with one that the Supreme Court reached twice before—the Federal Circuit ruling looks to be in peril. And that would be so, even if the Federal Circuit weren’t already renowned, as it is, for its poor affirmance rate before the Supreme Court. A 2010 study found the Federal Circuit was the most reversed of the 13 federal appellate courts, with an 83.3% reversal rate when the Supreme Court reviewed one of its cases. Since October 2010, according to statistics kept by SCOTUSblog.com, the Supreme Court has reviewed 29 Federal Circuit cases, affirming 8 and reversing 21, for a 72% reversal rate.

A slew of companies and trade groups have filed amicus briefs urging the Supreme Court to reverse the Federal Circuit’s approach. Basically, these companies are sick and tired of being hauled into the Eastern District of Texas, mainly by patent trolls. These amicus briefs reflect the views of the software, computer, internet, banking, and retailing industries, including companies like Apple, eBay, IBM, Microsoft, Intel, and Walmart. Seventeen states, including Texas, are also urging reversal of the Federal Circuit’s venue interpretation, while no states have come forward to support it.

Though Marshall’s apologists claim that plaintiffs flock there because of the expert and efficient way the district moves cases along, the companies supporting Heartland smell a whiff of what lawyers sometimes refer to as “home cookin’.”

“The district does many things differently, creating a sort of East Texan version of the patent litigation law,” says Colleen Chien, a professor at Santa Clara University School of Law, who has signed a brief supporting Heartland. It’s far harder for defendants to get a case dismissed before trial there than in other districts, for instance, and likewise far harder to obtain a stay while the patent office reconsiders whether a patent was properly issued in the first place.

The biggest defenders of the status quo, on the other hand, are members of, and trade groups for, the pharmaceutical and biotech industry, including companies like Allergan, Merck, and Genentech.  Although such companies do not typically sue in Marshall, they do take advantage of the current lax venue laws in their skirmishes with generic manufacturers, seeking home-court advantage by suing in such places as Delaware or New Jersey, where many are incorporated or based.

Some individual inventors and their associations have also filed briefs seeking to keep the current rules, as have a number of older companies, including Ericsson, the telecom equipment manufacturer (which commands 37,000 patents), and Whirlpool Corp., the appliance maker. In its brief, Whirlpool touts the convenience of being able to sue scores of geographically disparate infringers in a single forum: the Eastern District of Texas.

A ruling for Heartland would likely bring seismic upheaval to the patent landscape. “It would have an enormous impact on patent litigation and on businesses throughout the nation,” says Robin Feldman, the director of the Institute for Innovation Law at the University of California Hastings Law School.

According to an analysis co-authored by Chien and Michael Risch, a professor at Villanova University School of Law, 58% of all patent cases filed in 2015 would have had to have been filed elsewhere if the venue rules had been what Heartland argues they should be.

“This case could change everything,” Chien tells Yahoo Finance in an email. “The Supreme Court could in effect, turn a very plaintiff-friendly rule into a very defendant-friendly one.”

At the same time, she notes, even if the Court does so, we may still see patent filings concentrated in a handful of districts—just different districts. “While the Eastern District of Texas’s share would shrink considerably,” she explains, “the District of Delaware and Northern District of California would grow.” (Delaware is where more than half of publicly traded companies are incorporated, and the Northern District of California covers Silicon Valley.) “The suits would better reflect where defendants are incorporated and operated.”

TC Heartland is one of seven Federal Circuit rulings that the shorthanded, eight-justice Court has decided to hear this term, a hefty number that almost certainly reflects the justices’ understanding that they can often reach consensus on intellectual property issues, where their perspectives aren’t politically polarized.

In light of the Federal Circuit’s dismal past record in Supreme Court appeals, the fact that its patent venue rule is in tension with two prior Supreme Court precedents, and the fact that that rule has spawned and perpetuated a longstanding scandal, the TC Heartland ruling could well bring some serious reform to the patent litigation landscape—possibly even by a unanimous vote.  

Roger Parloff writes about law and business.