Opposition to Venue Reform Misses Target

Note: The original version of this post first appeared at IPWatchdog.

Tyler, Texas welcomes patent ownersA group of 28 law professors just sent a letter to Congress opposing patent venue reform. As I’ll explain below, however, their points really don’t justify delaying venue reform.

As you probably know, more patent cases are brought in the Eastern District of Texas than any other judicial district in the country. Businesses in Tyler, Texas even advertise that fact. While the situation may be profitable for Tyler and Marshall, Texas, the Eastern District has a number of rules that make cases unnecessarily expensive for defendants and give patent trolls a huge amount of leverage.

Senators Flake, Gardner, and Lee introduced the VENUE Act to try to address this problem. The bill would modify the venue rules so that a defendant could only be sued in a district where the defendant is incorporated or has a principal place of business, or a district which has a real connection to the patent. Collen Chien and Mike Risch found that the bill would work with respect to ending the Eastern District’s dominance, although cases would end up concentrated in the Districts of Delaware and Northern California.

A few weeks ago, a group of 45 law professors wrote a letter describing the problems with having so many patent cases in the Eastern District of Texas. They argued that:

One reason for the disproportionate number of patent filings in the Eastern District of Texas is that the district employs procedural rules and practices that attract plaintiffs, including by delaying or denying the ability of defendants to obtain summary judgment to terminate meritless cases early.  For example, the district requires parties seeking summary judgment in patent cases to first seek permission before filing any summary judgment motion, the effect of which is to delay and deter early resolution of cases.

While parties can seek transfer out of the district, some NPEs have opened offices in the district simply for the purpose of bolstering their arguments to stay in their preferred venue.  The average grant of transfer in this venue took over a year (490 days), and the average denial of a transfer motion took 340 days, meaning that even cases that are ultimately transferred remain pending in the district for nearly a year.  Local discovery rules permit discovery to go forward even while a motion for transfer is pending, so even successfully moving to transfer only partially relieves the expense of litigating in a distant venue and the burden on the court.

The disproportionate number of patent plaintiffs—and NPEs in particular—bringing cases in a single venue ultimately results in wasted judicial resources, as more of those cases are overturned on appeal.  For accused infringers, the costs of innovation are increased when they have little or no connection to the venue and are forced to litigate from a distance.  The harm caused by abuse of the system and the resulting loss of trust in the uniformity and justness of the U.S. patent law system is unmeasurable.

A dueling group of professors responded with their own letter opposing venue reform. The points they make really don’t hold up, however.  

Proponents for the VENUE Act argue that “[t]he staggering concentration of patent cases in just a few federal district courts is bad for the patent system.”[4] As an initial matter, data indicates that filings of patent lawsuits in the Eastern District of Texas have dropped substantially this year—suggesting a cautious approach until trends have stabilized.[5]

First, the original group of 45 professors did not endorse any particular bill; they wrote to endorse patent venue reform.

It is true that filings in the Eastern District have dropped quite a bit for the first half of 2016 compared to the same period last year. That sounds meaningful, except that 2015 seems to have been anomalously high for patent filings in the Eastern District of Texas.  2015 had 78% more patent cases filed than 2014. A drop from such a large increase isn’t surprising; it’s a regression toward the mean. And a number of cases seem to have been filed in November 2015, just before major changes in the Federal Rules of Civil Procedure took effect; these may have been time-shifted from early 2016. There were 467 patent cases filed in the Eastern District of Texas in November 2015. That’s almost a fifth of all cases filed in 2015.

The fact is, the Eastern District of Texas still accounts for nearly 40% of all patent filings. No other district comes close. There’s nothing suggesting caution in those numbers.

Moreover, what difference does it make if filings have dropped? The rules in the Eastern District of Texas heavily favor patent owners and place large pressures on defendants to settle quickly. There are still hundreds of cases a year being filed there that have no real ties to the district.

Contrary to claims by its proponents, legislative proposals like the VENUE Act would not spread lawsuits throughout the country. In fact, these same proponents have found that restricting venue in a manner similar to the VENUE Act would likely result in concentrating more than 50% of patent lawsuits in just two districts: the District of Delaware (where most publicly traded corporations are incorporated) and the Northern District of California (where many patent defendants are headquartered).[6] Instead of widely distributing patent cases across numerous districts in order to promote procedural “fairness,” the VENUE Act would primarily channel cases into only two districts, which happen to be districts where it is considered much more difficult to enforce patent rights.[7]

The districts where cases would end up aren’t “districts where it is considered much more difficult to enforce patent rights.” They happen to be districts with some actual relation to the particular case, instead of being a one-stop shop for patent trolls. As the letter admits, the concentration of cases would be in districts where most public companies are incorporated (Delaware) and where many tech companies are headquartered (Northern District of California). They’re also districts that aren’t so biased that they literally advertise how “friendly” they are to patent owners.

Proponents for the VENUE Act have argued that the Eastern District of Texas is reversed more often by the Federal Circuit than other jurisdictions, claiming that in 2015 the Federal Circuit affirmed only 39% of the Eastern District of Texas’s decisions but affirmed over 70% of decisions from the Northern District of California and District of Delaware.[8] These figures are misleading: they represent only one year of data, mix trials and summary judgment orders, and fail to take into account differences in technology types and appeals rates in each district. In fact, a more complete study over a longer time period by Price Waterhouse Coopers found that the Eastern District of Texas affirmance rate is only slightly below the national average for all districts.[9]

The complaint about a small sample size is not unreasonable, but the PWC study has the same alleged flaws with respect to the data itself. And in the PWC study, the Eastern District of Texas was affirmed 42% of the time, while Delaware was affirmed nearly 60% of the time; that’s still not good. The Eastern District of Texas was the worst in terms of affirmance among districts shown in the PWC study.

The Federal Circuit recently confirmed in In re TC Heartland (Fed. Cir. Apr. 29, 2016) that 28 U.S.C. § 1400(b) provides that a corporate defendant in a patent case—like corporate defendants in nearly all other types of cases—may be sued in any district in which personal jurisdiction lies. Constitutional due process requires a “substantial connection” between the defendant and forum.[10] Thus, contrary to its title and the claims of its proponents, the VENUE Act does not re-establish a “uniform” litigation system for patent rights by requiring substantial ties to the forum. Instead, the Act thwarts the well-established rule that plaintiffs can bring suit in any jurisdiction in which a corporate defendant has committed substantial violations of the law.[11]

These are non sequiturs. Whether the current venue statute (as interpreted by the Federal Circuit) comports with due process is not the question. The question is whether the case is in an appropriate forum.

The last footnote in the paragraph cites the case Gulf Oil Corp. v. Gilbert, 330 U.S. 501 (1947), which is an interesting choice. Gulf Oil was a dispute about a fire in a warehouse in Virginia, brought by a citizen of Virginia in a New York court. The district court in New York declined to take the case and transferred it to Virginia. The Supreme Court agreed with the district court that New York was a forum chosen in order to inconvenience the defendant, and therefore transfer was proper.

The VENUE Act would raise costs for many patent owners by requiring them to litigate the same patent against multiple defendants in multiple jurisdictions, increasing patent litigation overall. In recent years, the America Invents Act’s prohibition on joinder of multiple defendants in a single lawsuit for violating the same patent has directly resulted in increased lawsuits and increased costs for patent owners.[12] Moreover, the VENUE Act would also result in potentially conflicting decisions in these multiple lawsuits, increasing uncertainty and administration costs in the patent system.

The complaint here is that under the VENUE Act, a patent owner might not be able to cost-effectively sue a lot of companies. That’s not a bug, it’s a feature. Why should defendants have to litigate in a court in the middle of nowhere just to make it more affordable to file dozens of complaints?

The VENUE Act encourages the manipulation of well-settled venue rules across all areas of law by the self-serving efforts of large corporate defendants who seek to insulate themselves from the consequences of violating the law. By enacting the VENUE Act, Congress would send a strong signal to corporate defendants that they can tilt the substantive playing field by simply shifting cases to defendant-friendly jurisdictions.

The alternative is the status quo, where patent owners can file suit in a court so biased towards plaintiffs that the locals advertise that fact.

There is simply no reason for so many patent cases to wind up in a district with so little relation to those cases. Basic principles of equity and justice don’t vanish just because a patent is involved. The court hearing a patent case should have a real interest in the case, just like any tort or contract case.

The Eastern District of Texas has literally created a local industry of patent litigation, intentionally or not. Even local businesses acknowledge it and exploit it.

Patent venue reform is long overdue, and it’s something that Congress can and should get done.