Guest Post: Recalibrating Patent Venue

In the following guest post, Professors Colleen V. Chien (Santa Clara) and Michael Risch (Villanova) follow up on their earlier work calling for patent venue reform. They have written a full article on the topic available on SSRN: http://ssrn.com/abstract=2834130. — DC

Earlier this year, we presented some initial results of our study of what might happen if patent venue reform took place. Since then, Senator Flake (R-Az) introduced the VENUE Act of 2016, and last month, petitioners, led by a group including James Dabney and John Duffy, filed a petition for writ of certiori in the TC Heartland case in the Supreme Court. Amicus briefs are due October 17, 2016 and Kraft’s brief is due on November 16, 2016.

To support these deliberations, we examined the history of the patent venue law and presented some statistics about plaintiff venue preferences for the Eastern District (for even more statistics on this point see the new paper by Brian Love and James Yoon). Additionally, we empirically modeled both reforms by randomly selecting 939 cases from 2015, and making our best guess as to where cases would have been filed under the proposed rules, assuming they would have been filed at all. Since 2015, the overall number of patent cases has declined, about 20% YTD based on data from Lex Machina (4,216 cases by this time last year vs. 3,369 today). The Eastern District of Texas has made a number of changes and its share is also down from 44% in 2015, to 35% 2016 YTD (30% in 1Q, 36% in 2Q, and 38% in 3Q); the next closest district (Delaware) has seen about 9% of filings, based on data from Lex Machina.

In modeling different venue reform choices, we do not purport to claim that any venue reform would be, on balance, welfare enhancing, nor can we know with certainty where or if cases would be filed. However, we do make one thing clear: a patent system in which so much rides on where a lawsuit is filed is deeply flawed, and, as we have said before, we hope that policymakers will take the opportunity to clarify what has been a complicated area of law.

A draft of the complete paper is available here. In brief, however, TC Heartland reform would require cases to be filed either where the defendant is incorporated or where the defendant has a place of business and is infringing. VENUE Act would add the location of the original inventors as well as anywhere the patent owner performed R&D on the patent (patent assertion entities are, by definition, excluded). To model these provisions we gathered relevant case and location information; we also gathered information on industries, plaintiffs, and defendants of different sizes to understand the differential impacts of reform.

In brief, we looked to see the following under the conditions of each reform: 1) could the plaintiff have filed in the district that the case is already in? 2) if not, could the plaintiff have sued in a district in which it has sued in the last two years? 3) if not, could the plaintiff have sued in a district popular among plaintiffs like it in the last five years? 4) if not, we assume that the plaintiff would sue at the defendant’s primary place of business. Option 1 means “no change” – the case would stay put. Options 2, 3, and 4 mean, “change”—the case would have been filed in another district and the model where the suit would end up based on the proposed venue rules. Note that the 2nd and 3rd assumptions bias our model towards the currently concentrated status quo. Patentees might well pick other favorite districts if they can find a basis for venue there.

Applying this methodology, we found a few interesting things.

First, 86% of cases were filed outside the defendant’s primary place of business,[1] including 80% of cases brought by operating companies and  90% of cases brought by NPEs. When we considered any of defendant’s place of business, cases were filed outside of where the defendant had a location 83% of the time. This suggests that, in general, permissive venue leads to plaintiffs filing where it is convenient or advantageous, which is usually not where the defendant is located.

Second, we find that if TC Heartland reform had been in effect, 52% of operating companies would have to pick a different district than they had originally chosen. For NPEs, 60% would have to pick a different district. If the VENUE Act were passed, however, the change from the status quo would be a lot less dramatic for operating company plaintiffs – only 18% would have to move their case while the rest could have been filed as is. NPE plaintiffs would have been impacted differently, particularly under the VENUE Act, with PAEs most impacted. The reason for this is relatively straightforward: the VENUE Act allows operating companies (and failed companies or individuals) to sue where they do research and development, but does not allow PAEs to do the same. Furthermore, operating companies are more likely to sue where they do research and development, while NPEs are more likely to sue in the Eastern District of Texas.

Third, we find that cases would be more geographically distributed, but our reported distributions are likely in the eye of the beholder and sensitive to our assumptions particularly about the prioritization of familiar districts by plaintiffs, which might not hold in practice. That said, we believe that one thing is clear: cases would leave the Eastern District of Texas. The following table shows the top 5 districts before and after reform as we modeled it:

Final Districts – OpCo π Final Districts – NPE π
District Actual Case Prediction Heartland Prediction VENUE Act Actual Case Prediction Heartland Prediction VENUE Act
E.D.Tex. 7.8% 4.6% 5.0% 64.1% 19.0% 19.1%
D.Del. 10.0% 18.9% 11.0% 7.3% 25.8% 23.1%
D.N.J. 10.3% 12.1% 10.7% 0.9% 2.4% 2.0%
C.D.Cal. 7.5% 14.2% 9.6% 2.1% 2.6% 2.4%
N.D.Cal. 5.0% 2.8% 3.9% 3.0% 17.3% 16.6%

Fourth, Heartland and VENUE Act reform would affect companies of different sizes differently. In general, Heartland would require suits to be filed where the defendant is located much more often than the VENUE Act (on the order of ~65% to ~45% depending on company size). Smaller defendants would benefit more from TC Heartland venue reform than would larger defendants, because of their relatively smaller footprints.

Fifth, we found that manufacturing and biopharma defendants would benefit the least from venue reform. For biopharma, the result is complicated. Contrary to conventional wisdom, all of the cases are not in New Jersey, though as shown in the table above, many of them are. Instead, because reform allows for suit where parties are incorporated, many cases would remain in Delaware, where they are already located. Industries that would see the most benefit from Heartland reform would be in high tech and consumer/durable goods manufacturing. These are often companies with only one place of business, which limits where they could be sued. High tech, especially, is a sector that is often sued by NPEs, so their cases would be relocated under either Heartland or the VENUE Act. On the other hand, manufacturing industries are often sued by operating companies and thus, they would see much less benefit under VENUE Act reform than they would under Heartland.

Despite its limitations, we believe that this study provides valuable insight into patent venue. Examination of venue by industry, comparison of the differences between the options (including who wins and who loses), and analysis about where cases might wind up will hopefully provide fruitful information for anyone involved in patent practice and policy. The full paper has much, much more analysis, with a representative sample of the types and sizes of companies being sued in addition to detailed discussion of how each reform proposal will affect parties by plaintiff type, geography, and defendant industry and size.

 

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[1] We found that, for a random sample of 99 of our defendants’ other litigations, 80% were filed outside the defendant’s primary place of business

9 thoughts on “Guest Post: Recalibrating Patent Venue

  1. Is there a reason venue in patent cases should be treated differently than venue in non-patent federal question cases? If venue would be proper in a non-patent federal question case, why shouldn’t it also be proper in a patent case?

    Other than the fact that the Supreme Court said so in Fourco (arguably abrogated by subsequent amendments to the venue statute), is there a reason “reside” should mean one thing under 1400(b) and something else in other non-patent federal question cases?

    1. Well, that’s the question of the day, now isn’t it. The TC Heartland supporters would say that there is such a reason – because we have a statute that says so….just like the reason we have the Federal Circuit. We take no position on this in the article, but if you are interested, we do cover the long history of the statute and patent venue exceptionalism.

      1. Recognizing this as a tangent, but the reason why we have the Federal Circuit has been emasculated by the Supreme Court imposing its will (and its own desired ends) on the statutory law and on the Federal Circuit.

        The “reason” for the Federal Circuit – and the actual practice of that same Federal Circuit have diverged, and I would posit that that divergence is irreparable.

        It is time for Congress to step in and redo what it once attempted to do with the reason for the Federal Circuit.

        The Supreme Court upped its efforts and now the Congress needs to up theirs.

        The entirely permissible and Constitutionally granted power of jurisdiction stripping should be employed to remove the non-original jurisdiction of hearing patent cases from the Supreme Court.

        In order to maintain the (actual) holding of Marbury, there needs to be judicial review provided for, so a new Article III court needs to be fashioned – one that does not have to fear being brow-beaten by the Supreme Court (or HAS been brow beaten, as in the sense of the psychological experiment of hosing simians in a cage whenever they climb a ladder and reach for bananas).

        Now, back to the thread…

  2. Of interest for many other reasons is the report above that:
    “..the overall number of patent cases has declined about 20% YTD based on data from Lex Machina (4,216 cases by this time last year [2015] vs. 3,369 today).”
    This 20% patent suit reduction is inconsistent with allegations made in some articles posted this year in IPWatchdog and elsewhere.
    What % of this patent suit reduction is attributable to IPRs, Alice-101, increased attorney fee sanctions, elimination of Form 18, or some combinations thereof, would make for an interesting study. But it is not one for which valid statistics, rather than personal opinions, could be obtained.

  3. Any law that would result in even more patent suits in Delaware would need an increase in the number of district judges. As it stands, they are already overloaded and things move very slow because of their loaded calendar.

  4. Why don’t we have all patent cases filed in one court, e.g., in DC, and then have that court transfer the cases to the most convenient forum to conserve both judicial resources and those of the parties?

  5. However, we do make one thing clear: a patent system in which so much rides on where a lawsuit is filed is deeply flawed

    This mirrors my previous comment about whether or not the one court itself was out of line, if so fixing it, and then making sure that fix was implemented everywhere.

    If instead that one court was NOT out of line and acting within its discretion, then an entirely different action is needed (and not the action that the group of professors had advocated, which did not address this diversity/discretion issue).

    1. Right. We take no position on whether E.D. Tex. is doing things right or wrong in our article, though we do present statistics about why plaintiffs might prefer E.D. Tex. (although not all statistics favor that district).

      1. Thanks Michael – the reason for my post is to contrast your contribution here with the contribution previously made that seems to want to solve the wrong problem (and not address what may – or may not – be a more fundamental issue, and an issue that appears that the Supreme Court wants to AUGMENT with their anti-brightline views.

        IF anti-brightline means that divergence way below is a natural result, and IF the “divergence” of one particular district creates a natural affinity, then the answer cannot be an artificial constraint on the symptom of what the Supreme Court itself is instigating. ALL that that does is put band-aids on top of band-aids and does not address “the wound” at the bottom.

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