U.S. Markets closed

A widely praised Supreme Court decision still doesn't fix the broken patent system

Rob Pegoraro
Contributing Editor
U.S. Supreme Court Justices listen as U.S. President Donald Trump addresses Congress. REUTERS/Kevin Lamarque

A small town in East Texas should see a lot fewer visitors in suits and ties, thanks to a Supreme Court ruling that you can’t file a patent lawsuit anywhere you please in America.

Instead, the court ruled that you must sue the allegedly infringing company in the state of its incorporation. That tosses a wrench into a key part of the business-model machinery behind “patent trolling”:

1) Get or buy a overly-broad patent for an “invention” that may have been around for decades;

2) Threaten to sue random companies (and sometimes their customers) for infringing this patent. Then offer to let them settle for a fee calculated to fall below the cost of litigation;  

3) If the targets don’t pay up in advance, sue them in the most patent-friendly court in America;

4) Profit!

That’s a nice living if you can get it. But for companies that have to pay lawyers, a plaintiff or both, it adds up to huge costs—$29 billion in 2011, according to a Cornell Law Review paperthat get passed on to society at large. And while the Supreme Court’s ruling breaks up one part of this scheme, it leaves patent trolls with another friend in the court system.

A vexing venue

The 8-0 ruling in TC Heartland LLC v. Kraft Foods Group Brands LLC settled an argument between two food companies over where Kraft (KHC) could sue Heartland for patent infringement: Delaware or Indiana, where Heartland is based.

The court ruled the case had to be tried in Indiana, where TC Heartland was incorporated. But that opinion could have a massive effect on a venue unmentioned in the ruling, the U.S. District Court for the Eastern District of Texas.

That docket in Marshall, Texas, drew 36% of the patent cases filed in 2016, according to a breakdown by the legal-analytics firm Lex Machina. And you can’t credit that to East Texas being an unheralded hotspot of technology.

As Brian J. Love and James Yoon observed in a recent paper for the Stanford Technology Law Review, “less than 2% of patent suits brought in the Eastern District were filed to enforce patented technology invented in East Texas, and that less than 8% were filed against defendants with a corporate office located in the district.”

The Eastern District of Texas began emerging as the capital of patent litigation back in 2006. Love and Yoon credited that to a combination of factors such as how fast it hands down decisions, how rarely it transfers cases elsewhere, and how often judges let cases go to jury trials.

Often, it’s only one judge in that district, Rodney Gilstrap, who holds the most sway; in 2015 he saw a quarter of the nation’s patent cases.

Companies set up only to collect patents and monetize them through licensing agreements or lawsuits are often scorned as “patent trolls” among tech firms with actual products and customers. Legal experts are more likely to use the clinical phrase “patent assertion entities.”

By either name, they’re a common sight in East Texas—although many exist as little more than papers in filing cabinets there.

Love and Yoon found that over 90% of the patent lawsuits filed there came from trolls saying somebody had infringed a tech patent.

They concluded: “Restricting patentees’ ability to file suit in East Texas in the first place may be the single most effective reform available to Congress and the courts.”

One problem solved, others linger

Enter the Supreme Court—after years of inaction in Congress.

Justice Clarence Thomas’s opinion that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute” should make it drastically harder to catapult a case into East Texas. That has advocates of patent reform uncharacteristically optimistic.

“For a lot of smaller startups, this is really encouraging news,” said Julie Samuels, executive director of Tech.NYC. She noted that the court’s ruling went further than a stalled bill, the VENUE Act, meant to curb the migration of patent lawsuits to this one district court among the 94 in the U.S.

Consumer Technology Association CEO Gary Shapiro had a similar reaction. “Small and medium-sized businesses have a fairer chance of fighting against bogus patent extortion attempts,” he said in an e-mailed statement.

The court ruling serves as a sequel to 2014’s Alice Corporation Pty. Ltd. v. CLS Bank International et al. ruling, also adopted unanimously. In that case, the court held that you can’t make an existing idea patent-worthy by saying you’ve added a computer with its working. That’s a trick that had been used to claim patents on things as generic as providing online estimates for when a delivery or vehicle will arrive.

Samuels, who has been working on patent issues for most of this decade (earlier, she served as the Electronic Frontier Foundation’s first Mark Cuban Chair to Eliminate Stupid Patents), gave the court credit for acting where Congress did not.

“In light of what the Supreme Court has done, I don’t think that the need for comprehensive reform exists like it used to,” she said.

But the high court can’t do much about one fixed obstacle to patent reform: the allegedly expert appeals court it reversed when issuing this ruling. The U.S. Court of Appeals for the Federal Circuit (CAFC), set up in 1982 to specialize in patent cases, has long since developed a habit of reading intellectual-property laws as generously as possible.

The CAFC gave birth to the entire category of “business method” patents for abstract processes with a 1998 ruling. CAFC rulings helped to put Marshall, Tex., on the map as a patent-litigation hub. And this Washington court essentially invented a new form of intellectual property when it held that Google (GOOG, GOOGL) infringed Oracle (ORCL) patents by writing software to plug into standard interfaces in Oracle’s Java software—an incredibly common programming practice.

The Supreme Court has reversed this appeals court’s rulings more than any other’s, according to a 2010 study published by the American Bar Association. But while that 83.33% reversal rate from 1998 to 2009 sounds high, it hides the fact that this appeals court’s rulings—like that Oracle opinion—don’t get taken up by the Supreme Court at all.

Unless and until this appeals court takes the hints coming from the other side of the capital, we’re probably going to see more dubious patent rulings, only some of which the Supreme Court will have time to deal with.

More from Rob:

  Email Rob at rob@robpegoraro.com; follow him on Twitter at @robpegoraro .