The decision in TC Heartland v. Kraft was rendered on Monday. All eight justices (Justice Gorsuch did not take part as arguments were made before his appointment to the bench) ruled that patent lawsuits must be brought in the jurisdiction in which the defendant “resides.” That is, either the jurisdiction where the defendant’s head office is or the state in which the company was incorporated.
Heartland manufactures flavoured drinks and was sued by Kraft Foods for patent infringement. Kraft brought the suit in Maryland, a state that along with the Eastern District of Texas is considered the most favourable to companies that bring these types of lawsuits. Heartland applied to have the suit moved to Indiana where the company resides.
A lower appeals court followed what other courts have been doing since 1990 and refused Heartland’s application. That court applied the general venue rules that gives plaintiffs a wide latitude in choosing a jurisdiction in which to launch a suit. Those rules provide a plaintiff company can sue in any jurisdiction where the defendant sells its products or does business.
Before the U.S. Supreme Court, Heartland argued these general rules do not apply to patent cases and asked the court to follow a case that it decided in 1957. The 1957 case held there were special rules for patent cases and lawsuits could only be brought in the state in which the defendant was incorporated.
The court agreed. Justice Thomas, who wrote the opinion for the court, wrote that contrary to what the appeals court held, Congress did not change the rules determining where patent lawsuits can be brought.
Although Kraft is a legitimate company, the ruling in TC Heartland v. Kraft will have the most effect on patent trolls. Patent trolls are shell companies that are set up for the sole purpose of acquiring patents. These companies have no intention of producing or selling the products or ideas they hold patents on. All they do is demand royalties or licencing fees from other companies with similar products and threaten to sue them for patent infringement. By bringing suits in plaintiff-friendly jurisdictions, the trolls are in a position to win large settlements after a trial. And since defendants know this, they are under pressure to offer lucrative amounts to settle the case.
Tech companies have been hardest hit by the trolls. Lawsuits have been triggered after companies simply moved a business model to a computer application, something generally thought not requiring a patent. The Kansas City Star reports while there were less than 500 such cases brought in 2003, the number had ballooned to about 4,000 ten years later. Tech companies refer to this process as “legalized extortion.”
Juries in the Eastern District of Texas are known for their huge settlements. In a case last year, Apple was required to pay a shell company $625 million over a patent taken out in 1998. Last year, it was determined 36.4 percent of all patent cases in the United States were filed in Texas. Hotels and restaurants in Marshall and Tyler, Texas do a booming business from lawyers and business executives travelling there for patent trials.
Tech companies including Adobe, eBay, Oracle and HP had all filed briefs with the court urging the narrowing of the venues in which patent suits can be filed. As a result of Monday’s ruling, any company suing a Silicon Valley tech company will have to bring the lawsuit in the Northern District of California or in Delaware where many of these companies were incorporated.