Tag Archives: Personal Jurisdiction

WHAT YOU NEED TO KNOW ABOUT THE AMENDED DEFEND TRADE SECRETS ACT

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Guest post by James Pooley.  Pooley is the former Deputy Director General of WIPO. He recently testified at the Senate Judiciary Committee in favor of the Defend Trade Secrets Act. See his earlier Patently-O guest posts . He wishes to thank Prof. Peter Menell for contributing to this post.

Last Thursday the Senate Judiciary Committee favorably voted out the Defend Trade Secrets Act (“DTSA”), which would amend the Economic Espionage Act (“EEA”) to give trade secret plaintiffs the option of filing civil claims for misappropriation directly in federal court. The vote reflected broad bipartisan support (there are now 27 cosponsors in the Senate) and followed a substantive hearing on December 2 at which I had the privilege to testify. Since that time a number of senators engaged in discussions about how to improve the legislation. The result was a series of amendments, all of which have been adopted. Because the bill is likely to proceed quickly at this point, it would be useful to describe what has changed and what those changes could mean for practitioners and companies.

The notable amendments generally fall into four categories: (1) harmonizing with existing standards under the Uniform Trade Secrets Act (“UTSA”); (2) tightening up the process for preventive seizure of secrets; (3) ensuring that injunctions do not unreasonably restrain employee mobility; and (4) providing an exception for whistleblowers who disclose confidential information in order to report a crime to the authorities. The first three of these are laid out in a “Substitute” for S.1890, and the fourth is described in a separate amendment proposed by Senators Patrick Leahy and Chuck Grassley.

HARMONIZING WITH THE UTSA

Bringing the DTSA in closer alignment with familiar provisions of the UTSA, the amendments have slightly changed the definition of a trade secret. The EEA had previously required that qualifying information not be known or readily ascertainable to “the public,” while the UTSA had used the phrase “persons who can obtain economic value from its disclosure or use.” While it was never clear whether this difference would actually matter when applied in litigation, the UTSA formulation has now been adopted, so that the two laws are congruent. (Some still point to the different list of examples of protectable information in the UTSA and EEA definitions, but this has never been shown to make any difference in the broad meaning of the common basic term “information.”)

The amendments have also changed the term of the statute of limitations from five years to three. Although a number of states have designated longer periods (from four to six years), this brings the DTSA into line with the UTSA as it was originally proposed. In the same vein, the enhanced damages provision, which had allowed a punitive assessment up to three times the compensatory award, has been adjusted to match the provisions of the UTSA at twice the amount of compensatory damages.

SEIZURE PROVISIONS

The ex parte seizure provisions have been substantially tightened, providing more assurance that this remedy will not be abused. First, the bill now expressly refers to seizure as available only in “extraordinary circumstances.” Second, an ambiguity identified by Senator Whitehouse at the December hearing has been resolved by clarifying that the target of the seizure must be in “actual” possession of the trade secret and property to be seized. Third, access to the seized material is more limited: only federal law enforcement can perform the seizure, with assistance as necessary from state authorities and an independent technical expert, but the applicant is barred. And following the seizure, the court may have the material sorted by a special master who, like the technical expert, must be under confidentiality restrictions. Fourth, in issuing its order the court must direct when the seizure may be carried out, and whether force may be used to access locked areas. Finally, in a new section the bill requires the Federal Judicial Center to develop “best practices” for seizure and handling of electronically stored information.

MOVING ON FROM “INEVITABLE DISCLOSURE”

One of the most interesting and potentially impactful provisions of the amendments concerns the preservation of employee mobility. Recognizing the critical importance of preventive relief to a right that can be so easily destroyed, the UTSA has always permitted injunctions against “threatened misappropriation,” and the same language is used in the DTSA. But because the DTSA would establish a national standard, some expressed fears that the “inevitable disclosure doctrine,” which has been expressly rejected in some states, might be used by federal judges to block an employee from taking a new job. The draft bill had tried to address this concern with a proviso that no injunction could “prevent a person from accepting an offer of employment under conditions that avoid actual or threatened misappropriation,” but this did not quiet the controversy.

To understand the nature of the dispute we need to wind back the clock to 1995, when the Seventh Circuit issued its decision in Pepsico v. Redmond, 54 F.3d 1262 (7th Cir. 1995), affirming a five-month injunction against a former marketing executive who had lied about his plans to take an identical position with another company that was about to launch a directly competitive product. Although the court had emphasized the executive’s bad behavior, it also summarized that “defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Commentators promptly wrenched this phrase from its context and warned that Pepsico could be used to justify enjoining someone from taking a job just because of what he or she knew. This is how the so-called “inevitable disclosure doctrine” was born.

Having (mis)construed Pepsico this way, it was easy for some to make it a target, raising the alarm that “inevitable disclosure” was the equivalent of a post-hoc judicially-imposed non-compete agreement. Perhaps unsurprisingly, the backlash was particularly strong in California, where employees are protected by a robust public policy against restrictive covenants. In Whyte v. Schlage Lock, 101 Cal. App. 4th (2002), an intermediate appellate court issued a blistering condemnation of the doctrine and flatly declared it unacceptable under California law. It did this in response to the plaintiff’s argument that the doctrine should be available as an “alternative” to proving “threatened misappropriation.” Just what kind of evidence might be enough to establish a threat under the UTSA was not addressed. However, that question was answered several years later in another appellate decision, Central Valley General Hospital v. Smith, 162 Cal. App. 4th 501 (2008). The court said that evidence of bad behavior, like a prior misappropriation, an intention to misappropriate, or a refusal to return confidential material, would be enough to supply the inference.

In the meantime, however, the ideological battle lines had been drawn, and the forces mustering against inevitable disclosure, reinforced by many academic and popular articles, were determined to stamp it out if possible, or at least to protect their own jurisdiction from infection. The fervor of the debate apparently distracted everyone from critically examining what “inevitable disclosure” meant, or how it was actually being applied in places that didn’t have a reflexive opposition to it. It turns out that the doctrine was almost never used as the opponents assumed, that is where the only threat indicator was how much the employee knew. In fact, in those cases judges typically explained their denials by reminding the plaintiff that if all this information had been so critically important they could have demanded that the employee sign a non-compete agreement.

Following last December’s hearing, and in the wake of continuing concerns over the relevant DTSA language, I reached out to my friend Mark Lemley, professor at Stanford Law School. Mark and I had worked together before on issues relating to California’s “high velocity” labor market, and after some discussion about what appeared to be this false conflict over the inevitable disclosure doctrine, we suggested to Senate staff that the issue could better be reframed around the kind and quality of evidence that should be required – under the UTSA or the DTSA – to prove “threatened misappropriation,” and that the inquiry should focus on the employee’s behavior, not merely on how much they knew.

Ultimately, Senator Dianne Feinstein proposed the relevant portion of the DTSA amendments, which now allows an order against threatened misappropriation, provided that it not “prevent a person from entering into an employment relationship, and that conditions placed on such employment shall be based on evidence of threatened misappropriation and not merely on the information the person knows.” (In a belt-and-suspenders approach, the DTSA also includes a directly related amendment proposed by Senator John Cornyn that the order may not “otherwise conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”)

The new language on threatened misappropriation has at least two very positive effects. First, it makes express the apparent consensus from the courts that “threatened” misappropriation may not be established merely by the importance of the information that someone knows. This makes sense not only as a matter of public policy but also of evidence law. Second, it relieves us from the energy-draining debate over “inevitable disclosure,” which was pretty much a straw man that people loved to punch. Courts will not have to consider whether a jurisdiction accepts or rejects this abstract “doctrine,” but instead will ask: what is the actual evidence from which we should conclude that this person (or their new employer) can’t be trusted to honor the integrity of the plaintiff’s trade secrets? Outcomes in particular cases should not be substantially different.

WHISTLEBLOWER PROTECTION

A second major amendment was offered separately by Senators Leahy and Grassley, addressing a new, and in my opinion long neglected, question: how do we assure that employees and contractors who come upon evidence of illegal activity, but who are constrained by nondisclosure agreements from communicating those facts, can safely speak to their lawyers and to law enforcement officials? One might think that this question would already have been reliably answered by now, but it hasn’t been. In a wide-ranging and thoughtful on the subject, Tailoring a Public Policy Exception to Trade Secret Protection, Professor Peter Menell of the UC Berkeley School of Law explores not only the sparse, murky, and sometimes contradictory legal authority, but also the psychology of whistleblowing and the importance of a clear “safe harbor” for those who are thinking of reporting wrongdoing. As he notes, “[t]he same routine non-disclosure agreements that are essential to safeguarding trade secrets can be and are used to chill those in the best position to reveal illegal activity.”  As a practical matter, employees and contractors face a stark dilemma, where the upside is a clear conscience (and possibly a reward for uncovering fraud) but the downside can involve painful and relentless retaliation as well as personal, financial, legal, and professional risk. Insulating the whistleblower from costly trade secret exposure serves larger societal interests in law enforcement, tax compliance, and surfacing and deterring securities fraud and fraud against the government..

Yet because of the difficulty of enforcing trade secrets once they leak, companies risk potentially significant losses if employees or contractors mistakenly disclose legitimate trade secrets—i.e., those that do not reveal illegal conduct. Peter’s article provided a balanced and effective solution to this dilemma that protects whistleblowers without jeopardizing disclosure of legitimate trade secrets. The proposed safe harbor insulates whistleblowers and their counsel from trade secret liability for disclosing trade secret information in confidence to government officials or as part of a lawsuit alleging retaliation by an employer provided that the information is filed under seal. (The federal Trade Secrets Act, 18 U.S.C. § 1905, generally prohibits governmental employees from disclosing trade secrets.) The proposed statutory exception to trade secret liability provides clear assurance to potential whistleblowers that they do not violate their NDAs merely by consulting legal counsel regarding reporting allegedly illegal conduct to a responsible government official through a confidential channel. In addition, this safe harbor insulates lawyers advising potential whistleblowers about their options and serving as conduits for presenting evidence of allegedly illegal conduct to the government. The efficacy of the safe harbor is enhanced by requiring that NDAs prominently include notice of the law reporting safe harbor to ensure that those with knowledge of illegal conduct are aware of this important public policy limitation on NDAs and exercise due care with trade secrets in reporting such activity.

After Peter’s article appeared just as the DTSA was gaining momentum in the fall, the Senate staff reached out to him to help craft appropriate language. The Leahy/Grassley amendment provides immunity under federal or state law against any claim for violation of an individual’s nondisclosure obligations for disclosure, made in confidence, to (a) an attorney or government official, for the purpose of reporting or investigating a violation of law, or (b) a filing made under seal in a lawsuit “or other proceeding.” In order to ensure that employees (a term that also includes contractors) know about their rights, employers are required to give an appropriate notice in the nondisclosure agreement (as is often done now with state inventor statutes), although this can be a reference to the company’s separate policy document. A failure to comply with the notice provision would block any award of attorneys’ fees or enhanced damages against an employee under the DTSA. Significantly – and this point was emphasized by Senator Feinstein at the hearing on January 28 – the whistleblower protection would not extend to any otherwise improper acts by the employee, such as hacking information in violation of the Computer Fraud and Abuse Act.

CONCLUSION

The DTSA in its current form is a strong bill, meeting its original objective of giving plaintiffs access to federal courts, which are better equipped to handle cases of interstate or international misappropriation of trade secrets. In my opinion, all reasonable objections have been adequately addressed, and there are sufficient protections built in against abuse. Moreover, passage of this bill would substantially improve the environment for both plaintiffs and defendants, by making trade secret litigation more predictable, establishing a national standard for issues like “threatened misappropriation,” and striking the right balance of interests to promote responsible efforts by whistleblowers to report possible violations of law.

TC Heartland: Next Step in Limiting Patent Venue and Jurisdiction

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In the pending mandamus action of TC Heartland, the merits panel has taken one step forward by ordering oral arguments – set for March 11, 2016.  Although the order was a per curiam decision by the Merits Panel, it does not, on its face, reveal the identity of the three judge panel. The petition asks the Federal Circuit to change its rule on patent venue and personal jurisdiction.  If the petitioner here wins, we could see a dramatic shift in the geographic distribution of patent cases.  In other words, it would become much more difficult to bring an infringement action in the ongoing hot-spot of the Eastern District of Texas.

More on the case from Patently-O: https://patentlyo.com/?s=Heartland

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As I’ve written before, the actual venue and jurisdiction issues in the case are both important and fascinating.  My question on this ruling stems from the secrecy — that the merits panel issued an order without revealing the identity of the panel members.  [OK – a couple of folks have convinced me that this secrecy is proper (or at least SOP) since the court did not make any substantive decisions but only provided notice of oral arguments.]

 

 

Patent Venue: Limits on Venue in Patent Infringement Litigation

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The pending Federal Circuit mandamus action of In re TC Heartland involves an interesting legal question that has now been fully briefed.  The Federal Circuit has not yet announced whether it will hold oral arguments in the patent venue debate.

In the dispute, Heartland has asked the court to reconsider its interpretation of the patent venue statute 28 U.S.C. § 1400(b) and order that the limiting elements of the provision be given effect.  Under the proposed interpretation, a patent infringement case could only be filed in districts either (1) the defendant resides or (2) the defendant has both committed acts of infringement and has a regular and established place of business. This proposal stems directly from the language of 28 U.S.C. § 1400(b) which requires either (1) residency or (2)  a combination of infringing acts plus a regular-place-of-business as a prerequisite to proper patent venue.[1] For the past several decades the limits of § 1400(b) have been given essentially no weight after being undermined by 28 U.S.C. § 1391(c). This broadened provision undermines § 1400(b) by providing a very broad definition of the term “resides” — indicating that that “except as otherwise provided by law,” a defendant will be deemed to “reside” in any venue where the defendant is subject to that court’s personal jurisdiction in the action at hand.[2]  When § 1400(b) and § 1391(c) are read together, it appears that patent cases can be filed in any venue with personal jurisdiction over the defendant.  The point of the TC Heartland mandamus action is that those two provisions should not be read together, but instead, the more traditional and limited definition of “residency” should apply when interpreting 1400(b).  If the Federal Circuit (or Supreme Court) were to flip on this, we would see a major impact on the current concentration of venue in the Eastern District of Texas.

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Party Briefs:

Briefs Amici:

  1. Heartland.Acushnet (Supporting petitioner)
  2. Heartland.EFF (Supporting petitioner)
  3. Heartland.USInventors (Supporting respondent)

Discussions of the Case.

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The history of the issues here have gone back-and-forth.  The key Supreme Court case is Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957).  In that case, the Supreme Court ruled that “28 U.S.C. § 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).”  This statement was reiterated by the Supreme Court in Brunette Mach. Works Ltd. v. Kockum Indus., Inc., 406 U.S. 706 (1972) (“Congress placed patent infringement cases in a class by them-selves, outside the scope of general venue legislation.”) However, in 1988 Section § 1391(c) was amended to greatly expand the residency definition to the limits of personal jurisdiction and included a statement that its residency definition in § 1391(c) was “for purposes of venue under this chapter.” Subsequently, the Federal Circuit ruled in VE Holdings that the 1988 statutory amendments overruled Fourco and that the expanded residency definition §1391(c) now applies in patent cases. (§ 1400 (the patent jurisdiction provision) is in the same chapter as §1391.) In 2011, Congress again changed its statute – this time repealing the “for purposes of venue under this chapter” and instead added in that the statute applies in all civil cases “except as otherwise provided by law.”

The petition also argues for a recognition of limits on personal jurisdiction. In particular, the petition argues that a court should not automatically have jurisdiction to rule on acts of infringement that occurred in another state when the court’s personal jurisdiction over the defendant is derived from the specific alleged acts of infringement in the forum state (specific jurisdiction vs general jurisdiction).   The logical key to the argument here is the legal fiction that each infringing act is a separate and distinct infringement – as such, sales in Delaware should not automatically give the Delaware courts jurisdiction to rule on whether sales in New York or California were infringing.

This case is certainly one to watch.

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[1] Section 1400(b) states that “Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”

[2] Section 1391(c) states that “an entity … shall be deemed to reside, if a defendant, in any judicial district in which such defendant is subject to the court’s personal jurisdiction with respect to the civil action in question.”

THE MYTH OF THE TRADE SECRET TROLL

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Why We Need a Federal Civil Claim for Trade Secret Misappropriation

Guest Post by James Pooley, former Deputy Director General of the World Intellectual Property Organization.  Pooley makes his full argument in a forthcoming George Mason Law Review article available here.

Trade secret theft has been a federal crime since 1996, covered by the Economic Espionage Act (“EEA”). But civil misappropriation claims remain limited to state court filings under common law or local variants of the Uniform Trade Secrets Act (“UTSA”). Calls for federal jurisdiction have grown with the increasing importance of information as a business asset and with the emergence of technology that makes theft of these assets almost infinitely easier. Recent examples involving international actors have galvanized the business community to request a straightforward solution: amend the EEA to provide a federal option for private claims.

Several bills were introduced in the 113th Congress to accomplish this, and to authorize provisional remedies for seizure of relevant property to prevent secret technology from being transferred out of the jurisdiction. The 2014 legislation was not acted on before Congress adjourned.  A revised version is pending now, the Defend Trade Secrets Act of 2015 (“DTSA”), reflected in identical House (H.R.3326) and Senate (S.1890) bills.

The approach of the DTSA is fairly simple: use existing language of the EEA where appropriate, such as the definition of a trade secret, and where other language is required to define the civil aspects, such as misappropriation and damages, use language taken from the UTSA. Indeed, the only meaningful departure from the UTSA is to add a section allowing ex parte seizures of the misappropriated property. But even that portion draws from established provisions of the Lanham Act, tightened up considerably from the 2014 bills in order to discourage abuse.

The DTSA has received virtually unanimous support from industry, and also enjoys unusually bipartisan political sponsorship, with 65 cosponsors in the House (45 Republican and 20 Democrat) and ten in the Senate (six Republican and four Democrat). The only organized opposition has come from a group of law professors who published an “open letter” in 2014 criticizing the previous draft legislation, and who have recently released another letter describing their concerns. Mainly, they argue that we don’t need federal legislation because state laws are uniform enough; that the seizure provisions are too broad; and that the DTSA would limit labor mobility by approving the so-called “inevitable disclosure doctrine.”

As I will explain below, on each of these points the professors are wrong, misled by incorrect assumptions or unjustified speculation. Indeed, in a recent journal article two of them have predicted that the legislation would unleash a never-seen-before class of commercial predator, the “trade secret troll,” who they claim would “roam free in a confused and unsettled environment, threatening or initiating lawsuits for the sole purpose of exacting settlement payments, just like patent trolls.”

This apocalyptic scenario is not only fanciful; it is absurd. While patents are exclusive rights that operate against the world, trade secrets provide no exclusivity and depend on a confidential relationship. The image of a “trade secret troll” may help draw attention to a political argument, but it is a myth, and deserves no serious consideration.

The reality of this legislation is simple and compelling. Giving trade secret owners the option to sue in federal court would fill a critical gap in effective enforcement of private rights against cross-border misappropriation that in the digital age has become too stealthy and quick to be dealt with predictably in state courts. The bills would accomplish this by effecting only very modest changes, relying heavily on existing laws and rules. The seizure provisions in particular are so narrowly drawn that only the most clearly aggrieved plaintiffs would risk invoking the procedure. Having no pre-emptive effect, the federal law would leave in place all relevant state laws and policies, including those relating to mobility of labor.

U.S. trade secret law emerged in the nineteenth century to accommodate the shift from agrarian and cottage production to larger-scale industry, in which the secrets of production would have to be shared with workers or with business partners. Court decisions sought to enforce the confidence placed in those who were given access to valuable information about machines, recipes and processes. At the core of every case was a confidential relationship. Protecting this trust, the courts explained, was a simple matter of enforcing morality in the marketplace.

The common law origins of trade secrets – in contrast to the federal patent statute – meant that the majority of cases were heard in state court. Even when a federal court took diversity or supplemental jurisdiction over a trade secret dispute, it applied the law of the state in which it sat. And at first there was little variation, with most states looking to the Restatement of Torts § 757 as a guide. But as industrial development continued through the middle of the twentieth century, legal foundations shifted, and the reporters of the Second Restatement dropped the subject completely.

Meanwhile, a school of thought had developed among commentators that trade secret law should be abolished altogether because it was inconsistent with, and therefore preempted by, federal patent law. This argument was famously rejected by the U.S. Supreme Court in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974). Two important public interests, the Court explained, were served by trade secret law: the “maintenance of standards of commercial ethics and the encouragement of invention.” Without guaranteed secrecy, businesses would be left to expensive self-help security measures that would disadvantage smaller competitors and discourage dissemination of information through sharing. And as a practical matter, there was no conflict between the two systems because they operate so differently: patent law is strong, providing an exclusive right “against the world;” while trade secret rights are “far weaker,” because they do not protect against reverse engineering or independent development.

With the Second Restatement’s decision not to treat the issue, some were concerned that trade secret law would become too fractured and inconsistent for companies which had been increasingly doing business across state lines. Therefore, in 1979 the National Conference of Commissioners on Uniform State Laws issued the first of two versions of the UTSA, proposing harmonized rules on establishing and enforcing trade secret rights. Measured by adoption rates, the UTSA has been a great success, with 47 of the 50 states so far embracing it (New York is the leading holdout). However, measured by its objective of uniformity, the law has been a disappointment. Unlike the UCC, the UTSA has frequently been enacted with customized features.

A few examples will help illustrate the scope of the problem. California dropped the language requiring that a trade secret be not “readily ascertainable,” with the result that the defendant is required to specially plead that circumstance as an affirmative defense. Illinois also eliminated the “readily ascertainable” language, and it prohibits royalty injunction orders, sets a different limitations period and allows permanent injunctions. Idaho requires that computer programs carry a “copyright or other proprietary or confidential marking” to qualify for protection.  Georgia limits protection of customer lists to physical embodiments, in effect allowing employees to appropriate such information in (human) memory. South Carolina’s version of the UTSA requires a court hearing an injunction request to consider “average rate of business growth” in determining a head start period, and prescribes very particular rules for discovery of trade secret information, even for local discovery in aid of an action pending in another jurisdiction.

When Congress considered the EEA in 1996, there was some discussion of adding a civil right of action, but this was deemed impractical in view of the need for swift legislative action. In the years since its enactment, the EEA has had a mixed record of success. As reported by one veteran prosecutor, the average of about eight prosecutions per year is a “languid pace” that probably has done little to create a deterrent effect. In part this may be due to a reluctance of victims to bring cases to the prosecutor, either because of a loss of control or Fifth Amendment effects on civil claims, or it may be due to a lack of resources or interest within the various offices of the U.S. Attorneys, who have discretion whether to accept qualifying cases.

Calls for a federal trade secret law with a private right of action had already begun before the EEA was passed. After it became law, a number of scholars noted the anomaly and suggested that, because the national economy had become primarily knowledge-based, and because even with the UTSA state law was far from uniform, a federal civil law should be enacted. More recent commentary, while continuing to emphasize the drawbacks of variations in state law, also has pointed out the economic advantages of federalization, particularly for small businesses, which rely more heavily on secrecy than on patenting, as well as the procedural advantages for trade secret owners, including national service of process.

The highly-publicized cyberattacks of recent years have exposed not only the precarious security of personal financial and health information, but also the vulnerability of American corporate secrets. Thirty years ago information security consisted mainly of guarding the photocopier and watching who went in and out the front door. Now, with the Internet connected to millions of smartphones, and with electronic storage devices the size of a coin, information assets (which account for over 80% of the value of U.S. public companies) can be moved quickly and silently across state and international borders. In that context, existing procedures at the state level seem impossibly quaint. If a case in Illinois requires testimony of a witness in California, the plaintiff has to petition its home court to authorize a deposition, and then file an action in California based on the Illinois order, to secure the required subpoena. During the weeks or months of this process, the witness could easily have left the country, with the secrets in her pocket.

In other words, the time-critical nature of interstate and international misappropriation of valuable digitized data requires an immediate and sophisticated response mechanism, and neither state law nor the EEA criminal framework provides a satisfactory solution. Federal courts, however, can provide the necessary resource. First, they will be operating under a single, national standard for trade secret misappropriation and a transparent set of procedural rules, offering predictability and ease of use. Second, they will provide nationwide service of process and a unified approach to discovery, enabling quick action by trade secret owners even when confronted with actors in multiple jurisdictions. Third, as a result of their extensive experience with complex cross-border litigation involving intellectual property, they will be able to resolve ex parte matters fairly and jurisdictional issues quickly and efficiently. Fourth, their generally more predictable discovery procedures will serve the legitimate needs of trade secret plaintiffs, who typically must develop most of the facts to prove their case through defendants and third parties.

In this context, the objections raised by the law professors are not convincing. First, it is not fair to describe existing state law as “coherent,” “robust and uniform,” so that U.S. businesses already enjoy “a high level of predictability.” The rhetoric does not obscure the reality of a patchwork of differing standards and rules – in some ways more divergent than before enactment of the UTSA – that necessarily creates friction and inefficiency for companies with interstate operations.

Second, while admitting that the current language on ex parte seizure is “more limited in scope” than the 2014 legislation (for example, only property “necessary to prevent the propagation or dissemination of the trade secret” can be seized), the professors think this tightening is not enough and that the provision “may still result in significant harm.” No evidence is provided, but only speculation that mere invocation of the procedure might cause small businesses to “capitulate,” and that the “chilling effect on innovation and job growth . . . could be profound.” Again, the reality could hardly be more different. The DTSA is loaded with limitations making seizure very difficult to achieve, and with liabilities making it prohibitively expensive to be wrong in asking for it. In the unusual case where the plaintiff has no substantial basis for the claim, the defendant will simply file an opposition, the seizure will be dissolved, and the plaintiff will pay for the harm. Surely the benefits of the DTSA are worth that occasional risk.

Third, the professors assert that new language, added to the DTSA to ensure that mobility of labor is respected, embraces the so-called “inevitable disclosure doctrine,” which they view as the equivalent of a judge-made noncompetition agreement. In fact, that “doctrine” is nothing more than a method of analysis under the common-sense UTSA provision allowing injunctions against “threatened misappropriation.” This method has been applied thoughtfully in a majority of jurisdictions, resulting in a wide range of conditional remedies, and has only rarely been applied in a way that stops anyone from taking a new job.

The DTSA is sorely needed to fill a gap in remedies available to U.S. businesses that now operate in an information-based, globalized economy. This is one of those instances where federal structures are required to address a critical set of interstate and international problems. The DTSA has been carefully constructed to deter and punish abuse. Using well-established definitions and norms, it provides a choice to file a familiar claim in an effective forum. And there is absolutely no danger that enacting this statute will generate some new form of “troll” behavior to this point unknown in trade secret law.

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James Pooley was most recently Deputy Director General of the World Intellectual Property Organization in Geneva, where he was responsible for managing the international patent system. For 37 years before that he was a trial lawyer in California, handling primarily trade secret and patent disputes. He taught trade law and litigation as an adjunct professor at the University of California, Berkeley, and at Santa Clara University. He is the author of the treatise “Trade Secrets” (Law Journal Press, updated 2014) and a co-author of the Patent Case Management Judicial Guide (Federal Judicial Center 2009, 2015). His most recent business book is Secrets: Managing Information Assets in the Age of Cyberespionage (Verus Press 2015).  Mr. Pooley currently serves as Chairman of the Board of the National Inventors Hall of Fame.

Support for Mandamus Action to Limit Patent Forum Shopping

Patent,

Last week I discussed the TC Heartland mandamus petition here and here. Two amicus briefs have now been filed in support of the petition.

The basic issue is whether the particular limits on patent venue spelled out in 28 U.S.C. 1400(b) should be given effect in the face of broader venue allowances in the more generalized Section 1391(c).

1400(b) reads:

(b) Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.

 

For the past several decades, the court has applied the broader statute 1391(c), and permitted venue so long as the district court has personal jurisdiction over the defendant.  That application has opened the door to venue in E.D. Texas even when the defendant has no place of business there.

John Vandenberg’s team at Klarquist has filed a brief on behalf 24 companies many of which are oft-sued in the E.D. Texas, including Asus, Google, eBay, LinkedIn, NewEgg, SAP, SAS, etc.

The analysis … must start by asking whether this special patent venue statute, standing alone, limits a domestic corporation’s residence to its state of incorporation. The answer is yes: “where the defendant resides” in § 1400(b) “mean[s] the state of incorporation only” for a corporation. (quoting the Supreme Court Fourco decision). . . .

The analysis turns next to the current general venue statute. The question is whether it supersedes this restrictive definition of domestic corporation residence in the special patent venue statute. The answer is that it does not [because the]  current general venue statute expressly subordinates itself to the special venue provisions.

On the policy side, the Amici first highlight the recent John Oliver show ridiculing the E.D. of Texas patent litigation.  The amici then make the argument that forum shopping should not be allowed because it “allows patent owners to choose the forum least likely in our country to allow a speedy or low-cost determination of invalidity or non-infringement. . . . This does not merely disadvantage individual defendants. It undermines the public policy favoring strict scrutiny of issued patents. . . . [H]aving 40% of patent suits in a single district not only burdens individual defendants, it also defeats core public policies of our patent system.”

The Electronic Frontier Foundation (EFF) and Public Knowledge also filed a joint brief in support of mandamus. EFF highlights Judge Moore’s earlier work (then as Professor Moore) where she wrote that extensive forum shopping “conjures negative images of a manipulable legal system in which justice is not imparted fairly or predictably.” Kimberly A. Moore, Forum Shopping in Patent Cases: Does Geographic Choice Affect Innovation?, 79 N.C. L. Rev. 889 (2001).  The brief also highlights a new work by Daniel Klerman & Greg Reilly entitled Forum Selling that argues “judges in the Eastern District have consciously sought to attract patentees and have done so by departing from mainstream doctrine in a variety of procedural areas in a pro-patentee (pro-plaintiff) way.” Neither Moore nor Klerman/Reilly make the 1400(b) argument, but both suggest that forum shopping – when taken too far – is a problem.

Documents:

Kraft’s brief in opposition is due November 9.

Choosing a District for Patent Infringement Filing and Giving Meaning to Section 1400(b)

Patent,

by Dennis Crouch

Back in 2008, I remember speaking with Judge Rader about the court’s recent jurisprudence.  My thought was that In re TS Tech (Fed. Cir. 2008) was the most important of the year thus far. In that case, the Federal Circuit started the trend of mandamus actions for venue change that had an important (although not conclusive) impact on venue in patent cases.  Following TS Tech, patent plaintiffs learned ways to shape their behavior to better ensure venue by, for example, incorporating in Texas and creating a headquarters in Marshall.  At that time, we also saw a rise in patent infringement filings in Delaware – the corporate home for many companies, plaintiffs and defendants alike.

The new pending mandamus petition of  In re TC Heartland (Fed. Cir. 2015) has the potential of even more dramatically shaking-up patent litigation filing strategy and limiting the extensive forum shopping available under current Federal Circuit doctrine.   In particular, the E.D. Texas filings might be brought-back into the norm.

The Federal Circuit has taken its first step toward hearing the mandamus action by ordering Kraft to provide a response to Heartland’s petition.  The per curiam order requires Kraft to respond within seven days. 10-26-15Order.

In the case, Heartland proposes a reinterpretation of the more powerful doctrine of jurisdiction rather than the venue requirements of TS Tech.

Under Heartland’s proposed statutory interpretation, a patent case could only be filed in districts (1) where the defendant resides or (2) where the defendant has both committed acts of infringement and has a regular and established place of business. This stems directly from the language of 28 U.S.C. 1400(b).

Further, in cases where a court’s personal jurisdiction over the defendant is based on acts of infringement in the forum (specific jurisdiction rather than general jurisdiction), Heartland argues that the courts don’t have jurisdiction to adjudge the alleged out-of-state infringement.

Susan Decker provides more perspective in Bloomberg.

 

 

Where does a Defendant “Reside” for Jurisdictional Purposes in Patent Infringement Cases?

Patent, , ,

By Dennis Crouch

In re TC Heartland LLC (on mandamus to the Fed Cir. 2015) (read-it: Heartland Mand)

An interesting mandamus action was recently filed by the Prof John Duffy and Jim Dabney (both now with Hughes Hubbard) raising the following: Whether 28 U.S.C. § 1400(b) precludes the district court from hearing this action.

Section 1400(b) is the jurisdiction statute for patent cases indicates two mechanisms for jurisdiction: (1) the district where the defendant resides or (2) the district where the defendant infringed and has a regular place of business.

Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.

28 U.S.C. § 1400(b). Section 1391(c) further provides for a broad definition of residency, broadly including both (1) the district of domicile and (2) any district where the defendant is subject to the court’s personal jurisdiction on the issue of the case.

The question ultimately raised by the case is whether the broad residency definition of §1391(c) applies to modify and expand the “resides” language of 1400(b).

The history goes back-and-forth: In Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957), the Supreme Court ruled that “28 U.S.C. § 1400(b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).” Then in 1988, §1391(c) was amended to expand the definition of residency and also to include a statement that its residency definition was “for purposes of venue under this chapter.” Subsequently, the Federal Circuit in VE Holdings held that the 1988 amendment overruled Fourco and that the expanded residency definition §1391(c) now applies in patent cases since §1400 (the patent jurisdiction provision) is in the same chapter as §1391. In 2011, Congress again changed its statute – this time repealing the “for purposes of venue under this chapter” and instead added in that the statute applies in all civil cases “except as otherwise provided by law.”

The petition argues that VM Holdings was wrongly decided in the first place and basically led to the reality known as the Eastern District of Texas. In the alternative, the petition also argues that the 2011 amendment overruled VM Holdings.

VE Holding has produced enormous venue shopping opportunities in patent infringement actions to the point where, in the most recent year, one district (E.D. Tex.) has 50% more patent filings than the next most popular district (D. Del.) and more than four times as many filings as the district with the third most patent case filings. . . . “The abuses engendered by this extensive venue,” Stonite Products Co. v. Melvin Lloyd Co., 315 US 561 (1942), are precisely the sort of abuses that were prevented by the Supreme Court’s decisions on § 1400(b) and that would be prevented once again with a return to those controlling precedents.

What isn’t clear to me is whether a mandamus panel has authority to overrule the prior precedent. Of course, an en banc panel will have that authority and in their petition Duffy & Dabney particularly request en banc consideration.

Personal Jurisdiction: The petitioner here also argues an additional personal jurisdiction question that begins with the standard notion that each act of infringement is a separate act of infringement. Their argument then is that the court only has specific personal jurisdiction with reference to allegedly infringing Delaware sales and not the sales in other jurisdictions. The usual practice in patent cases is that once the court has specific personal jurisdiction based upon one alleged act of infringement directed to the state that the court can then adjudge infringement allegations arising nationwide. Of course, that result contravenes the usual rule that “specific personal jurisdiction is limited to claims that arise from “an ‘activity or an occurrence that takes place in the forum state.'” Walden (2014). In its brief, the petitioner does a fine job of distinguishing Keeton v. Hustler (1984) that allowed for nationwide damages for defamation. The difference from patent law is that the substantive single publication rule for defamation means that the nationwide damages all stemmed from the same tortious act that led to the specific personal jurisdiction in NH; in the patent context sales in one state that might create personal jurisdiction in that state are separate acts of infringement than sales in another state. Thus, the petitioner explains: “The district court here plainly lacks personal jurisdiction to adjudicate the merits of claims arising from non-Delaware transactions or events.”

At first glance, you might think that petitioner’s rule would lead to a patentee having to sue a defendant separately in each state across the nation. That would only be true if there was no location with general jurisdiction over the defendant – nationwide claims would still be available in any state with general jurisdiction over a defendant. In addition, the availability of multi-district litigation would streamline cases where multiple parallel lawsuits are filed.

= = = = = =

about_energy_black_cherry_bottle[1]The case below is Kraft Foods v. TC Heartland (D.Del.) and alleges infringement of three patents covering the packaging and contents of a flavored liquid beverage concentrate such as Kraft’s MiO water enhancer. U.S. Patent Nos. 8,293,299; 8,511,472; and 8,603,557.  TC Heartland makes its competing “Splash” water enhancers from its Carmel, Indiana HQ.

= = = = = =

Additional Docs:

 

Federal Circuit: We don’t Decide Claim Construction in the Abstract

Patent,

Personalized User Model, LLP v. Google Inc. (Fed. Cir. 2015) (Part II).

In Part I, I discussed the aspect of this decision dealing with the statute-of-limitations for dealing with an inventor who had (allegedly) breached his employment agreement by failing to assign patent rights. In Part II here I focus on the second important portion of the decision – a holding that the appellate court has no jurisdiction to address a claim construction appeal unless the result would impact the outcome of the case at hand.

At the district court, Google won the case based upon a finding of invalidity and non-infringement. The patentee (PUP) did not appeal those holdings, but did ask the court to review the lower court’s claim construction – arguing that the district court misconstrued the term “document” and that mis-construction may well impact future litigation of other claims in the patent family in the form of collateral estoppel (issue preclusion)

On appeal, the Federal Circuit refused to consider the claim construction appeal – finding that the appellate panel would be in violation of the US Constitution if it heard the case. In particular, the Federal Circuit panel held that the dispute over claim construction offered no case or controversy as required by Article III of the US Constitution.

Despite PUM’s concerns that the construction might be given preclusive effect in future litigation involving its related patents, we may not provide an advisory opinion on the meaning of a claim term that does not affect the merits of this appeal and thus is not properly before us.

Although it lost the appeal, asking the question may be good strategy on the part of the patentee here since the appellate court’s refusal to hear the appeal is potentially sufficient to negate the presumption that the patentee had a full and fair opportunity to litigate the issue. Thus, the result may be no issue preclusion.

– Dennis

A Patent on the Internet

Patent, , ,

Guest Post by Professor Marketa Trimble (UNLV). 

Imagine that someone had a patent on the internet and only those who had a license from the patent holder could, for example, do business on the internet. This internet patent would not need to concern the internet protocol, the domain name system, or any other technical features of the network; the patent could, in fact, cover something else – a technology that everyone, or almost everyone, who wants to do business on the internet needs, a technology that is not, however, a technical standard. There might be one such patent application – the patent application discussed below – that could be approaching this scenario.

We must accept, however reluctantly, that activities on the internet will not be governed by a single internet-specific legal regime or by the legal regime of a single country. Although countries might agree on an internet-specific regime for the technical features of the internet, and might even adopt some uniform laws, countries want to maintain some of their country-specific national laws. People and nations around the world are different, and they will always have diverse views on a variety of matters – for example, online gambling. Online gambling might be completely acceptable in some countries, completely unacceptable in others, or somewhere in between; likewise, countries have different understandings of privacy and requirements for the protection of personal data. Therefore, countries now have and likely always will have different national laws on online gambling and different national laws on privacy and personal data protection. Compliance with multiple countries’ laws regarding the internet is nonnegotiable, certainly for those private parties who wish to conduct their activities on the internet transnationally and legally. Nevertheless, in practice and for some matters, the number of countries whose laws are likely to be raised against an actor on the internet may be limited, as I discussed recently.

For some time the major excuse for noncompliance with the laws of multiple countries on the internet was the ubiquitousness of the network. The network’s technical characteristics seemed to make it impossible for actors to both limit their activity on the internet territorially, and also to identify with a sufficient degree of reliability the location of parties and events on the internet, such as customers and their place of consumption. However, as geolocation and geoblocking tools developed, location identification and territorial limitation of access became feasible. Of course the increase in the use of geolocation tools generated more interest in the evasion of geolocation, and increased evasion has prompted even further improvements of the tools. The argument that we cannot limit or target our activity territorially because we don’t know where our content is accessed or consumed no longer seems valid. (Also – at least in some countries – courts and agencies have permitted internet actors to employ low-tech solutions as sufficient territorial barriers, for example, disclaimers and specific language versions.)

The multiplicity of applicable laws that originate in different countries and apply to activities on the internet is more troubling in some areas of law than in others. One area of law that permeates most internet activity is data privacy and personal data protection. Any internet actor who has customers and users (and therefore probably has user and traffic analytics) will likely encounter national data protection laws, which vary country-by-country (even in the EU countries, which have harmonized their personal data protection laws, national implementing regulations may impose country-specific obligations). Therefore, compliance with the varying national data protection laws will become one of the essential components of conducting business and other activities transnationally. If someone could patent a method for complying simultaneously with multiple countries’ data privacy laws on the internet and claim the method broadly enough to cover all possible methods of achieving compliance with the national privacy laws, that patent owner might just as well own a patent on the internet, or at least on a very large percentage of internet activity.

A U.S. patent application that seeks a patent on simultaneous compliance with multiple countries’ data privacy laws on the internet through broad method claims is application No. 14/266,525, which concerns “Systems and Methods of Automated Compliance with Data Privacy Laws,” meaning “laws of varying jurisdictions” (the title and the “Abstract”). The invention is designed to facilitate an automatic method of complying with the data privacy laws of various jurisdictions, which are, as the “Introduction” notes, “complicated, diverse, and jurisdiction specific.” The method envisions that once “person-related data” are requested from a data provider, a “filter is the [sic] automatically applied to the person-related data to restrict transfer of person-related data [that] does [sic] not meet the data privacy regulations applicable to the jurisdiction” (the “Introduction”); the filter also checks for any consents by the data subject if the particular regulations require them. The method also foresees, for example, the possibility of “identif[ying] different origins of the person-related data sources” in terms of their geographical location (“Trust Object and Trust Data”).

The patent application still must be prosecuted, and the – undeniably useful – invention will be subject to scrutiny as to its compliance with the requirements of statutory subject matter, novelty, and non-obviousness. A patent on the application may not issue at all, or the language of the application may be amended and the claims narrowed. Whatever the future might bring for the claimed invention, this patent application serves as a useful prompt for thinking about the components that have been or are becoming essential to conducting business and other activities on the internet.

Guest Post: The Case Against Federalizing Trade Secrecy

Patent, , , , , ,

Guest post by Christopher B. Seaman, Assistant Professor of Law at Washington and Lee University School of Law. 

As Dennis recently discussed, the idea of creating a private cause of action for trade secret misappropriation under federal law appears to be gaining traction. Bipartisan legislation has been introduced in both the House and the Senate, and congressional action on these bills may occur as early as this fall. A number of influential actors in the intellectual property world, including the AIPLA, former USPTO Director David Kappos, and a coalition of large manufacturing and technology firms, have publicly supported federalizing trade secrecy. And several legal academics have advocated adoption of a federal trade secrets act.[1]

In a forthcoming article in the Virginia Law Review, I contend there are several important reasons why trade secrecy should remain primarily the province of state law. First, despite claims by proponents, the adoption of a federal civil cause of action would not create greater uniformity for trade secret protection. Currently, there is widespread agreement regarding the basic principles of trade secrecy under state law.   For instance, to establish the existence of a trade secret, both the UTSA (adopted by 47 states) and the Restatement of Torts (largely followed by the remaining jurisdictions) require the trade secret holder to prove that the allege secret has value because it is not generally known or used, and that the holder of the trade secret took sufficient efforts to keep the information secret from others. Similarly, the UTSA and Restatement largely agree on what conduct qualifies as “improper means” of acquiring a trade secret, and both recognize that reverse engineering and independent invention cannot create liability for misappropriation. While there are some variations between states regarding the particular details of trade secret protection, these differences are relatively minor, as the Federal Circuit has recognized.[2]

In fact, adopting federal legislation likely would result in less uniformity by creating two parallel regimes—federal and state—with overlapping authority over trade secret claims. As noted in the recent letter signed by 31 law professors, none of the current bills pending Congress would preempt state law, thus permitting a federal cause of action to exist in parallel with existing state remedies. Notably, there are important differences between the Economic Espionage Act (“EEA”), which would be amended to create a private cause of action, and current state law, such as the EEA’s mens rea (intent) requirements and its lack of express protection for reverse engineering. Moreover because trade secret claims frequently turn on the resolution of related state law issues—such as the scope and enforceability of nondisclosure agreements, or the fiduciary duties of an employee to a current or former employer—courts would either have to borrow from existing state law or create a new body of federal law in these areas to supplement the statutory text.

Second, proponents claim that federal legislation is needed to secure access to a federal forum, which they argue is imperative to adequately protect vital trade secret information. However, a substantial number of trade secret claims are already litigated in federal courts under diversity and/or supplemental jurisdiction, with the number of reported trade secret decisions increasing at least fourfold since the late 1980s.[3] In particular, acts of misappropriation by foreign actors and entities—which feature prominently in proponents’ arguments for federalization—generally would fall within the scope of district courts’ so-called alienage jurisdiction.[4] Others claim that additional federal remedies, like the ex parte seizure provisions in the House and Senate bills, are necessary to prevent irreparable harm after a trade secret has been stolen. However, they fail to explain why existing procedures, such as temporary restraining orders,[5] preliminary injunctions,[6] and civil seizures pursuant to state law under Federal Rule of Civil Procedure 64, are inadequate to protect trade secret holders.

Third, and perhaps most significantly, the proposed federalization of trade secrecy may negatively impact innovation by undermining a key objective of patent law: the disclosure of patentable inventions. Innovators who develop a potentially patentable invention often face the dilemma of whether to incur the cost, delay, and uncertainty of seeking patent protection, or instead maintaining the invention as a trade secret. Stronger trade secret protection via federalization will likely cause more inventors to opt out of the patent system in favor of trade secrecy. This, in turn, will reduce the amount of public disclosure regarding patentable inventions that can be used by others to improve upon the invention and to practice it after the patent’s expiration. In contrast to patenting, trade secret protection is “theoretically unlimited in duration, lasting so long as the information remains a trade secret.”[7]

As an alternative to federalization, my article instead proposes a modest expansion of federal courts’ jurisdiction over state law trade secret claims that could be achieved by tweaking some existing jurisdictional rules. For instance, Congress could adopt a so-called “minimal diversity” standard in trade secret cases that would make a federal forum available whenever at least one party is a citizen of another state from the other parties. Congress also could adopt a “national contacts” standard that would allow a U.S. company to rely on a foreign misappropriator’s contacts with the United States a whole, rather than just the forum state, to establish personal jurisdiction over foreign defendants. This proposal would offer the benefits of a federal forum for more trade secret claims, while at the same time avoiding the potential drawbacks of creating a new federal private cause of action for trade secret misappropriation.

[1] David L. Almeling, Four Reasons to Enact a Federal Trade Secrets Act, 19 Fordham Intell. Prop. Media & Ent. L.J. 769, 770 (2009); Marina Lao, Federalizing Trade Secrets Law in an Information Economy, 59 Ohio St. L.J. 1633, 1653 (1998); Christopher Rebel J. Pace, The Case for a Federal Trade Secrets Act, 8 Harv. J.L. & Tech. 427, 433-34 (1995).

[2] See TianRui Grp. Co. v. U.S. Int’l Trade Comm’n, 661 F.3d 1322, 1327-28 (Fed. Cir. 2011) (noting that “trade secret law varies little from state to state”).

[3] David S. Almeling et al., A Statistical Analysis of Trade Secret Litigation in Federal Court, 45 Gonzaga L. Rev. 291, 293, 302 tbl.1 (2010).

[4] See 28 U.S.C. § 1332(a)(2) (granting the district courts original jurisdiction over civil actions between “citizen of a State and citizens or subjects of a foreign state”).

[5] See, e.g., V’Guara Inc. v. Dec, 925 F. Supp. 2d 1120 (D. Nev. 2013) (granting a TRO to prevent trade secret misappropriation).

[6] See, e.g., Core Labs v. Spectrum Tracer Servs., 532 Fed. Appx. 904 (Fed. Cir. 2013) (granting preliminary injunctive relief for a trade secret misappropriation claim).

[7] Nova Chems., Inc. v. Sekisui Plastics Co., 579 F.3d 319, 327 (3d Cir. 2009).

Spouses of Inventors as Co-Owners

Ethics, , , , , ,

I’ve written about this issue:  in a community property state, does the spouse of an inventor own the patent?  The answer every “family law” expert I know of says yes; every patent lawyer says “no.”  It’s come up in at least one CAFC opinion, and now came up tangentially in a non-prec opinion that did not decide the issue.  That case, Taylor v. Taylor Made Plastics, Inc., is here. (Why does the opinion call James Taylor “James T.” and his wife “Mary T.”?)

Here’s my article on this, which I think I posted a few months ago somewhere. Someday this is going to matter, big time, or not!

DRAFT

A Fifty-Fifty Split:  What if the Spouse of Every Inventor in a Community Property State has an Undivided Interest in an Invention?

By David Hricik*

I. Introduction

If you think the title raises a wild possibility, consider what happened in a recent case appealed to the Federal Circuit.  After being sued for infringement, the defendant had the ex-wife of the inventor effectively grant to it any interest she had in the patent-in-suit.  As a result, the defendant argued that there could be no infringement, both because lack of standing and because it had acquired an undivided interest in the patent.

It almost worked.

The Federal Circuit recognized that under California law the patent was “presumptively community property in which [the wife] had an undivided half interest.”  Fortunately for the accused infringer, the wife had not listed the patent as community property when she was divorcing, and so the court held that res judicata precluded her from arguing that she in fact had an interest in the patent.

But, the odd facts of that case should not give great comfort.  It is important to recognize that if something is community property, it means it belongs to both spouses.  If the spouse of every inventor in a community property state has an undivided equal interest in every patent granted during marriage to the other spouse, then employers of inventors may need to obtain assignment of both spouse’s interests for the employer to have full title. If that is the law, then many patent infringement suits can proceed only if the spouse of the inventor is joined as a party.  If that is the law, many companies do not own, outright, the patents that they believe they do.

This article shows, first, that every court that has addressed the issue has held that a patent issued during marriage to one spouse is community property.  Second, many states hold that property rights can arise prior to issuance, and sometimes even at the time of conception.  Third, it shows that the general rule appears to allow just one spouse to alienate personal community property, but with some exceptions.  Finally, it describes the implications for this body of law on patent practitioners.

2. Basic Community Property Law

No federal statute addresses ownership of a patent application, let alone an “idea” that has simply been conceived: state law would apply. Likewise, the question of who has title to even an issued patent is a question of state law.

Eleven states currently follow community property law:  Alaska, Arizona, California, Hawaii, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin. Obviously, the laws of these states likely vary significantly on some issues, but a few basic points seem true among them all:

The statutes of several community property states provide that each spouse has a present, vested, one-half ownership interest in community property with equal management…. The equal management statutes give each spouse managerial rights over community property.  A spouse may prevent the disposition of certain community assets by the other spouse. Further, either spouse may contract debts during the marriage that may be satisfied with community property.

The concept expressed in the first sentence is worth repeating, since those unfamiliar with community property law often think of it as mattering only upon divorce. This is dangerously incorrect: when something is community property, each spouse owns it – then and there, not just in divorce court.  Also, it is important to emphasize that the community presumptively owns all property acquired during marriage, each spouse holding an undivided equal interest.[6]

With these basic principles in mind, the first question is what is “property” under these statutes, and does it include intellectual property and, most particularly, inventions, patent applications, and patents?

2. “Property” Includes Patents, and Sometimes Applications and Even Intangible Intellectual Property. 

As one would expect, “property” is construed very broadly.[7]  As one court stated:

The word “property” is in law a generic term of extensive application. It is not confined to tangible or corporeal objects, but is a word of unusually broad meaning. It is a general term to designate the right of ownership and includes every subject of whatever nature, upon which such a right can legally attach. It includes choses in action and is employed to signify any valuable right or interest protected by law and the subject matter or things in which rights or interests exists.[8]

An issued patent is, of course, by federal statute to be treated as personal property under state law.[9]  Thus, presumptively a patent acquired by one spouse during marriage belongs to the community, not separately to the inventor.[10]

Numerous divorce courts have divided patents issued during marriage as “property” under community property statutes[11]  Typically these courts assume a patent issued during marriage is community property and do not analyze whether that assumption is correct.[12]   Occasionally a court engages in at least a minor amount of analysis.  For example, a Florida appellate court stated that “[c]ourts outside Florida have reached the same logical conclusion — a patent is personal property that may be the subject of equitable distribution when the inventor and his or her spouse dissolve their marriage.”[13] The Kansas Supreme Court is the only court to have engaged in a lengthy analysis of the question, stating in part:

Vincent believes that the interest in the patents does not have the qualities listed [in the definition of property.] This is not self-evident….

[I]ntellectual property, once it has been created, is less inextricably related to its creditor than other assets now characterized as marital property, such as pensions and professional goodwill. Unlike pensions and professional goodwill, rights in intellectual property are highly transferable, and title may be placed in the name of one who did not originally produce them.[14]

The point here is that state courts either assume or readily conclude that patents issued during marriage are community property.

In some states, a spouse has interests even before the patent issues, depending on which approach to the “inception of title” doctrine the jurisdiction takes:

Arguably, inception [of title] may occur at any of three times:  (1) when the concept is sufficiently developed to generate a plan to build the invention [i.e., conception]; (2) when the invention is actually built [i.e., actual reduction to practice]; or (3) on the effective date of the patent [i.e., constructive reduction to practice].[15]

Courts have applied each view, though often not using the bracketed terms of art that patent practitioners would find comforting.

As an example of the first view, a California court divided patents that had been “perfected” during marriage but issued afterward.[16]  In addition, in a rare case that provided somewhat extended discussion, a Florida appellate court reasoned that a patent application was property that was subject to equitable division because it had been “deemed sufficiently well developed to submit to the federal patent authorities on a non-provisional basis.”[17]

As an example of the third view, a Washington appellate court held that a patent issued during the marriage was community property even though the invention had been conceived prior to marriage.[18]

Some courts adopt a muddled view that seems to reflect both the third and first views.  For example, the Supreme Court of Hawaii stated that “a patent does not exist until it is granted,” and so there was no property right “unless and until the patent issues.”[19] Nonetheless, it recognized that in making equitable division trial courts should determine “whether there was value in the pre-patent intangible intellectual property and the patent itself.”[20]

This shows that patents, and in some states applications and even merely conceived inventions, are “property.” All property acquired during marriage is presumptively community property, belonging to both spouses, not just the inventor.

The approach of state courts and state divorce lawyers to this question stands in stark contrast to common patent practice, at least as I know it.  In my experience patent practitioners do not obtain assignments from an inventor’s spouse.  Similarly, a key treatise on acquisitions makes no mention of spousal rights even as a part of due diligence during acquisition of patents.  I have never seen litigated the question of whether an inventor’s spouse must be joined as an indispensable party to a patent infringement brought by the inventor’s assignee.

The incongruity between how patent lawyers and divorce lawyers look at spousal rights is significant:  if the state courts are right, then spouses may have rights in patents that assignees may think they own outright.  If the spouse has an undivided equal interest in the patent, then they have the unfettered right to do exactly what the assignee can: sue, license, or otherwise enforce the patent.  Either state divorce courts or patent lawyers have it wrong.

Whether those rights exist means turns on the myriad facts that can arise, as well as application of particular state law. This article cannot examine all the permutations, but instead next includes several scenarios that may commonly arise where state courts have found that the spouse holds an ownership interest.  It concludes by describing potential avenues to reduce the uncertainty that may face assignees, attorneys, inventors, and spouses.

II. Federal Statutes Governing Ownership of Patents and Common Practice

The Constitution of the United States rejects the proposition that inventions should at least initially belong to anyone other than their creator.  In light of this, federal statutes provide that a patent must be applied for in the name of the inventor.  If nothing further is done, the patent will issue in the inventor’s name.  At that point, state law determines ownership.  “It is important to note that only inventorship, the question of who actually invented the subject matter claimed in a patent,’ is a question of federal patent law.  ‘Ownership, however, is a question of who owns legal title to the subject matter claimed in the patent, patents having attributes of personal property.’”  Consequently, for example, absent written assignment, an inventor’s employer will not own any patent naming the employee as the inventor.  This is true even if the employee uses only the employer’s equipment to make the invention and is paid a general salary while conceiving of or reducing to practice the patented invention.

State law determines whether there is an obligation of assignment and its scope.  By federal statute, assignments are to be construed under state law.  Thus, the Supreme Court has held that state courts “may try questions of title, and may construe an enforce contracts relating to patents.”  Similarly, state intestacy laws govern ownership of patents of deceased inventors, and foreign intestacy laws govern patents owned by foreign individuals.

There are other circumstances where state law determines ownership of an invention.  The point here is that nothing in the Patent Act, at least,  indicates that state marital property law should not also apply.  Thus, absent operation of state law to the contrary, the inventor owns the patent.

As a result, it is routine for corporations and other entities that employ those likely to invent patents to require that employees assign any ownership rights to the entity. The assumption is that because the inventor has assigned his invention to the entity, the entity holds full legal title, and thus is the not just the only party with standing to enforce the patent, but also the only party necessary to enforce the patent. All rights, lawyers and assignees believe, belong to the assignee.

Consistent with this practice and beliefs, in my experience no patent lawyer seeks assignment of any right from any inventor’s spouse.  The form assignment used by patent practitioners that originated with the USPTO does not do so. Thus, if the spouse has an interest, then on its face the typical form and practice do not accomplish assignment of the spouse’s interest, especially – for reasons that will become clear —  if the assignment is obtained after the patent has issued.  The next question is: does the spouse have an interest?

III. State Court Application of Community Property Laws to Patent Ownership

The precise contours of each particular community property state are beyond the scope of this article.  No doubt in particular circumstances those facts will matter greatly.  However, three basic principles seem to apply across the jurisdictions, with no doubt differences at their margins but not at their core.

First, the community presumptively owns all property acquired during marriage, each spouse holding an undivided equal interest in the whole.   While it is just that – a presumption – nonetheless it is the starting point.

Second, with narrow exceptions addressed below, one spouse cannot alienate community property; only both spouses can.  For example, a Louisiana statute provides:

A spouse may not alienate, encumber, or lease to a third person his undivided interest in the community or in particular things of the community prior to the termination of the regime.

Under this statute, any contract not signed by both spouses to alienate community property is void.

Again, the statutes and case law do vary.  Washington has a similar statute, but requires that both parties sign any agreement conveying community property only if it is real property.  Thus, it may be that in some community property states patents may be alienable by only the inventor.

Third, with respect to personalty, “property” is construed very broadly.  As one court stated:

The word “property” is in law a generic term of extensive application. It is not confined to tangible or corporeal objects, but is a word of unusually broad meaning. It is a general term to designate the right of ownership and includes every subject of whatever nature, upon which such a right can legally attach. It includes choses in action and is employed to signify any valuable right or interest protected by law and the subject matter or things in which rights or interests exists.

Patents are, of course, by federal statute to be treated as personal property under state law.  Thus, presumptively a patent acquired by one spouse during marriage belongs to the community, not separately to the inventor.  As next shown, that is in fact the result that the courts have uniformly reached in the family law context, when addressing divorce, alimony, or child support.

While patents are personal property and treated as such by state courts, there is less agreement on whether intangible intellectual property that leads to or could lead to a patent is community property.  The “inception of title” doctrine is a critical concept in community property states, and perhaps should be to patent lawyers, because if title is obtained prior to marriage, that property is separately owned. Thus, for example, if a husband conceives of an invention during marriage, and then gets divorced, the spouse may have an interest in any resulting patent.  Conversely, if title only arises when the patent issues, then the spouse would have no interest in patents issued after divorce from an employed inventor.

The state courts have recognized that inception of title to patent rights can occur before a patent issues:

 Arguably, inception [of title] may occur at any of three times:  (1) when the concept is sufficiently developed to generate a plan to build the invention [i.e., conception]; (2) when the invention is actually built [i.e., actual reduction to practice]; or (3) on the effective date of the patent [i.e., constructive reduction to practice].

Courts have adopted the second view.  For example, a Washington appellate court held that a patent issued during the marriage was community property even though the invention had been conceived prior to marriage.  A California court likewise divided patents which had been “perfected” during marriage.  In a rare case that provided somewhat extended discussion, a Florida appellate court reasoned that a patent application was subject to equitable division because it had been “deemed sufficiently well developed to submit to the federal patent authorities on a non-provisional basis.”  Thus, a spouse can have an interest in patent applications filed during marriage, not just patents issued during marriage.

Some courts adopt a muddled view that seems to reflect both the third and first views.  For example, the Supreme Court of Hawaii stated that “a patent does not exist until it is granted,” and so there was no right protected “unless and until the patent issues.” Nonetheless, it recognized that in making equitable division trial courts should determine “whether there was value in the pre-patent intangible intellectual property and the patent itself.”  Further, it held that a trade secret became community property when the trade secret had presently existing value.  “[O]ne ‘owns’ a trade secret when one knows of it….”  This holding could, of course, create a conflict between the spouses over whether to file for a patent application or to maintain protection of the invention only as a trade secret. The employer’s interests may conflict with the spouse’s.

Numerous courts have divided patents issued during marriage as “property” under community property without needing to address whether inception of title could have occurred earlier.  Several cases have simply assumed that patents are community property subject to division by just dividing them.

Typically these courts assume a patent issued during marriage is community property and do not analyze whether that assumption is correct.   Occasionally a court engages in at least a minor amount of analysis.  For example, a Florida appellate court stated that “[c]ourts outside Florida have reached the same logical conclusion — a patent is personal property that may be the subject of equitable distribution when the inventor and his or her spouse dissolve their marriage.”  The point here is that frequently state courts either assume or readily conclude that patents issued during marriage are community property.

The Kansas Supreme Court is the only court to have engaged in a lengthy analysis of the question, stating:

Vincent believes that the interest in the patents does not have the qualities listed [in the definition of property.] This is not self-evident. The business plan, which is built on the patented concept, undoubtedly will be used in an effort to raise capital for the enterprise. Thus, there is a sense in which the patents may be said to have loan value. Another, perhaps more typical, arrangement is for a patent holder to enter into a licensing agreement with a manufacturer/distributor for use of a patent. Consideration under the licensing agreement might be a lump sum. An initial fee and royalties is another likely form for consideration to take.

The court went on to state that:

  [I]ntellectual property, once it has been created, is less inextricably related to its creditor than other assets now characterized as marital property, such as pensions and professional goodwill. Unlike pensions and professional goodwill, rights in intellectual property are highly transferable, and title may be placed in the name of one who did not originally produce them.

Thus, state courts either assume, conclude, or have held that patents issued during marriage are community property.  The most-cited treatise by these courts as indicating that patents are community property does not aggressively take that position, instead discussing the cases and stating among other things that “a spouse would expect to share as fully in intellectual property acquired during marriage as in any other variety of property.”

Finally, while obviously income from patents that are community property belongs to the community, the majority of courts that have addressed the issue have also held that income received during a marriage from even separately owned patents is community property.

III. Federal Law Allowing for Prosecution by Persons With a Proprietary Interest in the Application May Permit Spouses to Control or Interfere with Prosecution.

While it is clear that an assignee of the entire interest in application may prosecute it, federal law sometimes permits even those with merely a “proprietary interest” to continue and even undertake prosecution, at least where the inventor refuses to do so. Specifically, Section 118 of the Patent Act states:

Whenever an inventor refuses to execute an application for patent, or cannot be found or reached after diligent effort, [1] a person to whom the inventor has assigned or agreed in writing to assign the invention or [2] who otherwise shows sufficient proprietary interest in the matter justifying such action, may make application for patent on behalf of and as agent for the inventor on proof of the pertinent facts and a showing that such action is necessary to preserve the rights of the parties or to prevent irreparable damage; and the Director may grant a patent to such inventor upon such notice to him as the Director deems sufficient, and on compliance with such regulations as he prescribes.

The PTO has interpreted this statute to permit heirs, for example, to not only continue prosecution upon the death of an inventor, but to file an application for an inventor who dies prior to filing the application.  The heirs thus must have a proprietary interest in the application or patent.

Does a spouse in a community property state?  The meaning of “proprietary interest” would seem to encompass rights of a spouse in a community property state.  “A ‘proprietary’ interest at the very least suggests some element of ownership or dominion….”  Given, as shown above, that a spouse in a community property state may have an undivided equal interest in the patent, that interest would clearly qualify as “ownership or dominion.”  Thus, federal law would seem to permit spouse to control prosecution if the inventor dies.

IV. Possible Ways to Defeat a Spouse’s Interest

A. Federal Preemption of State Community Property Law

Courts have uniformly held that state law determines ownership of patents – in every context in which the issue has arisen.  Federal law thus is held to apply, and so there is no conflict, and nothing to preempt state law.

In fact, the few courts that have analyzed whether federal law preempts state law have each rejected preemption, though without rigorous analysis.   Divorce lawyers believe there is no conflict between state and federal law.  As a leading commentator wrote:

The federal statute on the transfer of patents, 35 U.S.C. § 261, states generally that patents constitute property and that they are subject to assignment. Courts considering the issue have held that an inventor’s creditors can reach the inventor’s patents, although with somewhat more difficulty than other types of assets. 60 Am. Jur. 2d Patents § 1168 (1987). Given these points, there is general agreement that federal law does not prevent a court from treating a patent as divisible property in a divorce case.

Significantly, state courts have not analyzed this question at length, but instead seem to accept the proposition that patent law does not preempt state community property law.  State courts regularly divide patents among divorcing spouses — despite federal statutes and the Constitution and the obvious federal source of patent rights.

There is a distinction between the cases that apply state law relied upon by these courts and applying state law in this context:  in the other instances, the state law determines who owns a patent or application from the inventor, while application of community property law divests sole ownership from the inventor.

B. The Exception for Sole Management Community Property

Some states allow one spouse to alienate certain property, even if community property.  The Washington Statute quoted above, for example, requires both spouses to consent to alienation of real, but not personal, property.

Other states recognize similar doctrines, including recognizing that some community property is, nonetheless, subject to the “sole management” of one spouse.  Under this doctrine, it may be that an invention qualifies as “sole management” community property, and so assignment by the spouse is not required

C. Estoppel

Estoppel likely would not be a useful tool at least in those states that require that both spouses engage in the conduct that gives rise to the estoppel.  So, for example, in an Arizona case the fact that the husband engaged in conduct that might have estopped him from denying an agreement to sell property did not mean that the wife, or the community was estopped.  While facts could of course give rise to an estoppel against both, in routine transactions that seems unlikely.

IV. Application of State Law to Common Fact Patterns

As explained in the introduction, accused infringers have raised ownership interests in spouses as a defense to standing in a few cases, but have lost due to procedural issues.  The case law suggests that there may be more opportunities for this defense, and some thorny issues concerning ownership of existing patents that lawyers and owners of intellectual property need to consider.

Suppose, for example, that an inventor acquires a patent while married.  If the buyer fails to obtain assignment from the spouse, then the buyer may acquire merely an undivided equal interest with the inventor’s spouse.

Or, suppose that the employee is subject to an obligation to assign any patent issued during assignment.  The spouse may have an interest in a patent application filed on that invention before the obligation to assign the patent arises.  Again, the purported assignor may own only an equal undivided interest in the patent.

There are myriad fact patterns that could arise.  State law may provide the answer to some of them, indicating that the spouse has no interest, or that the inventor alone can alienate the property.  But where state law indicates that the spouse has an interest, then only if state law is preempted or the spouse assigns its interest can the assignee feel comfortable in believing it owns full and clear title.

V. Conclusion: What to Do?

As noted at the outset, this article was intended to raise the issues arising from the conflicting approaches of divorce lawyers and patent lawyers to patent ownership.  It may be that state laws will need to be reformed to exclude patents from community property, or to allow for the inventor to alienate all rights without its spouse’s consent.  It may be that a condition of employment must be that the spouse either relinquish any community property rights or to permit the inventor to alienate any intellectual property rights without permission.

In pending cases, there may be standing defenses that can be raised, since the plaintiff may not have full title.  Further, particularly thorny issues may face corporations that have acquired intellectual property from inventors or from small companies in bulk without due diligence on these issues.

 

Over on the main page…

Ethics

They’re having a, um, heated discussion about whether academics, particularly Mark Lemley, is qualified to talk about patent law and policy.

My own view is that I think teaching doesn’t qualify you to do what your subject matter relates to.  I would never hire a professor to draft a patent simply because he’s taught patent law for years (even if he were registered).  I’d never hire a professor to represent me in a personal injury case simply because he’s taught torts.  I’d hire an experienced patent prosecutor and PI attorney, respectively, to do those things.

But the sniping over there on the main page seems to suggest that by teaching patent law or teaching torts, one does not gain knowledge and insight to the subject matter.  There, I have to disagree, and strongly.  I’ll give a personal example to explain why.  As a lawyer (litigated complex commercial litigation, etc., for 15 years before starting to teach 11 years ago) I knew about federal subject matter jurisdiction, and for example dealt with far too many efforts by plaintiffs to fraudulently join defendants, etc.  I was “good” at procedure.

But I have no doubt that, in the twelve years of teaching that subject (and writing a book on it; you should buy Mastering Civil Procedure or recommend it to law students everywhere so I can retire!), I’ve learned far more about procedure than I would have as a lawyer in that same time.  I get hired sometimes in cases to simply fix procedural problems, which confirms my belief.

I think I know more about civil procedure than the vast majority of lawyers with 25 years of experience, in other words.  To say that one only learns about procedure by doing it, in other words, is way wide of the mark.

It also in my view shows that the criticisms of Mark are also off the mark.  I honestly don’t read even half of what he writes (sorry, Mark), but to say that because he is not registered to file an application means he can’t write about and have a valued opinion about patent law is silly.

Finally, I think it is beyond absurd to suggest — as Mr. Wegner does — that clerking at the CAFC makes you qualified to teach patent law.  That in my opinion simply doesn’t jibe with my own actual experience there last year, clerking for Chief.

Anyhow, a Thursday afternoon rant over. I’m going to get a beer and some wings with a fellow Arizona Wildcat alum.  We’ll talk about “next year,” like UA fans always do.

Retailer Lawsuit May be Severed and Stayed Pending Outcome Against Manufacturer

Patent,

By Dennis Crouch

In re Toyota Motor Corp (Fed. Cir. 2014)

AVS – an Acacia company – sued Toyota for patent infringement in the Eastern District of Texas. As part of the litigation strategy, AVS included Gulf States Toyota – a large Texas-based dealer/distributor as a co-defendant. The AIA limited joinder of multiple unrelated defendants in a single infringement action. However, here joinder of these defendants appears proper because the manufacturer and distributor are both dealing in the same infringing products – Toyota vehicles.

Although venue is “proper”, Toyota argues that E.D. Texas is an inconvenient forum under 28 U.S.C. §1404(a) and that a better venue is E.D. Michigan, both because of the location of witnesses and because that court has previously adjudged the patent in question. That proposal wouldn’t exactly work because the Michigan court apparently has no personal jurisdiction over Gulf States. Thus, Toyota and Gulf States collectively argued that the case against the franchisee (Gulf States) should be severed and stayed pending outcome of the Toyota case. District Court judge Schneider rejected those proposals – finding that the case would not be moved to Michigan even if Gulf States were not a defendant and that therefore there was no cause to either transfer or sever.

On Mandamus, the Federal Circuit has vacated the district court denial – holding instead that (1) absent Gulf States as a defendant, the case against Toyota should be transferred to Michigan; and (2) therefore the district court should reconsider the request for severance-and-stay on remand.

This decision seemingly serves as the Federal Circuit’s first pass at addressing retailer/customer lawsuit concerns that are at the heart of legislative patent reform initiatives. The proposed legislation would provide a right to stay customer lawsuits while the current law seemingly only provides that such a stay can occur at a district court’s discretion. The provision most on point is likely Fed. R. Civ. Proc. 42(b) that calls for a district court to hold separate trials on various issues or claims “for convenience, to avoid prejudice, or to expedite and economize.”

 

Guest Post by Prof. La Belle: Demand Letters, DJ Actions, and Personal Jurisdiction

Patent

Demand Letters, DJ Actions, and Personal Jurisdiction

Guest Post by Megan La Belle, Associate Professor, Catholic University of America, Columbus School of Law

For more than fifteen years now, accused infringers have faced substantial personal jurisdiction obstacles in patent declaratory judgment (DJ) actions.  In Red Wing Shoe Co. v. Hockerson-Halberstadt, Inc., 148 F.3d 1355 (Fed. Cir. 1998), the Federal Circuit held that patent owners are not subject to personal jurisdiction in DJ actions based exclusively on the sending of demand letters to accused infringers in the forum state.  Red Wing Shoe was a purely policy-driven decision: if demand letters could create jurisdiction, patent owners would hesitate to send them and fewer patent disputes would settle out of court.  Because the policy favoring settlement is “manifest,” the Federal Circuit reasoned,  personal jurisdiction doctrine should facilitate—not discourage—the use of demand letters to settle patent disputes.  Since Red Wing Shoe, the Federal Circuit has reaffirmed this holding repeatedly, and other courts have extended it to the copyright and trademark contexts.  See, e.g., Integrity Mgmt. of Fla., LLC. v. Dental Websmith, Inc., 2008 WL 4372878, *5 (D. Neb. Sept. 19, 2008); Lab. Corp. of Am. Holdings, Inc. v. Schumann, 474 F.Supp.2d 758, 762 (M.D.N.C. 2006).  Indeed, the Federal Circuit’s rule has gone virtually unchallenged, as I’ve discussed in other writings.

Recently, however, the use of demand letters by patent owners has come under attack.  Both federal and state lawmakers have criticized patent owners who send demand letters to multiple alleged infringers looking for quick settlements.  Some states have already passed laws aimed at curbing this practice, and the Senate is currently considering various bills that would make the sending of certain types of demand letters an unfair or deceptive act or practice under the Federal Trade Commission Act.  The Executive, likewise, is taking a stand against patent demand letters.  In February, the White House launched a website at http://www.uspto.gov/patents/litigation/index.jsp  “to empower those who have received a demand letter or may be threatened with a patent lawsuit with information about their options.”  The website provides, among other things, that a DJ action may be an option for an accused infringer.

Yet, these legislative and executive efforts to curtail patent demand letters are undermined by the Federal Circuit’s rule in Red Wing Shoe.  Not only does the rule encourage the use of demand letters, but it often insulates patent owners from a DJ suit in the accused infringer’s home state.  Arguably, this special jurisdictional rule for patent DJ actions never made much sense.  As I suggest in this recent article, however, the current debate surrounding demand letters signifies that the time has come for Congress—or perhaps the Federal Circuit itself—to take a hard look at this jurisdictional rule.

Ed.: You can read the full text of Prof. La Belle’s article at http://www.vanderbiltlawreview.org/2014/03/against-settlement-of-some-patent-cases/  

Federal Circuit: Patent Case May be Transferred to Court with No Personal Jurisdiction over Plaintiff

Patent,

By Dennis Crouch

elcommerce.com v. SAP (Fed. Cir. 2014)

In a prior post, I discussed the important means-plus-function issues arising from this case. Here, I focus on the separate issues of jurisdiction and venue.

Elcommerce first filed its lawsuit in the Eastern District of Texas (TX Court). Subsequently, SAP moved for a transfer of venue to the Eastern District of Pennsylvania (PA Court). SAP’s headquarters is located within the EDPA and the district court granted the § 1404 transfer motion. On particular concern raised by elcommerce was that it had no ties with Pennsylvania and that, as a consequence, PA Court had no jurisdiction over it as plaintiff. Both the district court and the Federal Circuit rejected that argument.

The statute provides that “For the convenience of parties and witnesses, in the interest of justice, a district court may transfer any civil action to any other district or division where it might have been brought.” 28 U.S.C. § 1404(a). Here, it is clear that the case could have been brought in PA Court since that is SAP’s headquarters and, according to the Federal Court, that settles the matter.

Here, in the first-filed Texas case there was personal jurisdiction over both the plaintiff elcommerce and the defendant SAP, and elcommerce as plaintiff was subject to the declaratory counterclaims filed by SAP in Texas. This jurisdiction was preserved when the entire action was transferred to Pennsylvania under §1404(a).

The court previously found this same result in the case of In re Genentech (Fed. Cir. 2009). There, the court stated that “[t]here is no requirement under §1404(a) that a transferee court have jurisdiction over the plaintiff or that there be sufficient minimum contacts with the plaintiff.”

Federal Circuit Claims Jurisdiction over Regulatory Decision but Denies Nationwide Injunction for State Law Infraction

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By Dennis Crouch

For many innovative new products, regulatory approval is a much greater hurdle than patent protection. And, unlike patent rights, regulatory approval is often a necessity. The present case is interesting in that the mascara product straddles the border between a lightly regulated beauty aide and a medical drug treatment.

Allergan, Duke University, and Dr. Murray Johnstone v. Athena Cosmetics (Fed. Cir. 2013) (CaseText)

Duke & Dr. Johnstone each hold several patents that are apparently embodied by Allergan's eyelash growth medicine Latisse and exclusively licensed by Allergan. In 2009, these partners collectively sued Athena Cosmetics for selling RevitaLash mascara in a way that infringes the patents. In addition, Allergan alleged violation of state (California) unfair competition law by selling drugs (i.e., medicated mascara) without regulatory approval.

Following some amount of pretrial litigation (including a claim construction and summary judgment of non-infringement), the district court dismissed all of the patent claims without prejudice (stipulated dismissal). A dismissal without prejudice means that the patentee to can re-file those claims at a later date. The district court then found summary judgment for the plaintiffs — holding that Athena violated California's unfair competition law (UCL) by marketing, distributing and selling the mascara without regulatory approval. The district court then ordered a nationwide injunction against the sales.

Federal Circuit Jurisdiction. On appeal, the Federal Circuit first focused on the question of appellate jurisdiction. Under the law, the Federal Circuit has appellate jurisdiction over "any civil action arising under, or in any civil action in which a party has asserted a compulsory counterclaim arising under, any Act of Congress relating to patents."

Although the original complaint clearly raised substantial issues of patent law, Allergan argued that the stipulated dismissal without prejudice removed the arising under jurisdiction. See Gronholz v. Sears, Roebuck & Co., 836 F.2d 515 (Fed. Cir. 1987) (dismissal of patent claims without prejudice operated as an amendment of the complaint and thus eliminated arising under jurisdiction); Rothe Dev. Corp. v. Dep't of Def., 545 F.3d 1023 (Fed. Cir. 2008) ("the basis of a district court's jurisdiction—and thus the path of appeal—may change over time in a case, for example, if certain claims are dismissed without prejudice").

On appeal, the Federal Circuit determined that the non-prejudicial dismissal did not eliminate the court's arising-under appellate jurisdiction. The court agreed that a non-prejudicial dismissal can eliminate its appellate jurisdiction, but distinguished this case because the prior patent rulings in the case indelibly altered the parties legal rights. In particular, the district court's prior claim construction ruling and summary judgment of non-infringement.

In the decision, the Federal Circuit did not discuss either the importance of amendments to the jurisdictional law found in the AIA or the recent Minton v. Gunn decision. By ignoring Minton, the Federal Circuit skipped over the more holistic interests-based approach to arising-under jurisdiction required there in favor of a more bright-line analysis that has been previously rejected by the Supreme Court.

= = = = =

No Nationwide Injunction for Violating California Law: The Federal Circuit agreed that the district court correctly found Athena liable for violating California law, but the Appellate Panel rejected that court's nationwide injunction order as an abuse-of-discretion. The Federal Circuit wrote:

The injunction impermissibly imposes the UCL on entirely extraterritorial conduct regardless of whether the conduct in other states causes harm to California. This injunction is so broad that it would bar Athena from making its product in Idaho, distributing it from a facility in Nevada, and selling it to Connecticut consumers.

Interestingly, because the cause of action here was based on California law, the Federal Circuit looked to see whether California courts would have imposed a nationwide injunction and found that the "[t]he conduct enjoined here is exactly the sort of purely extraterritorial conduct that the California Court of Appeals expressly held could not be regulated by the UCL."

In addition, the Federal Circuit held that such extraterritorial application of California would be a violation of the U.S. Constitution's dormant Commerce Clause.

In short, California may, as it has in this case, conclude that its own unfair competition law has been violated, and it may prohibit any future conduct within its borders that would cause continued violation of its law. California is not permitted, however, to extend its unfair competition law to other states.

The upshot then is that RevitaLash is back on the market, but not in California (as shown in the image above).

= = = = =

Professor Shubha Ghosh has written a number of important and interesting academic works. One is his recent book titled Identity, Invention, and the Culture of Personalized Medicine Patenting (2012 Cambridge Press). That book relates here because Ghosh identifies the '105 patent as a "race specific patent." The patent made Ghosh's book because identifies the race and gender of study subjects: e.g., "[study included] 38 Caucasian, 3 African-American, 1 Asian, 1 Hispanic; 13 male, 30 female." Ghosh argues that race-specific categories should not be allowed to be particularly claimed (they were not in this particular patent).

President Obama Nominates Two to Serve on the US Court of Appeals for the Federal Circuit

Patent,

   

The following is the press release:

 

WASHINGTON, DC – Today, President Obama nominated Raymond T. Chen and Todd M. Hughes to the United States Court of Appeals for the Federal Circuit.

   

“ Raymond T. Chen and Todd M. Hughes have displayed exceptional dedication to public service throughout their careers,” President Obama said. “I am honored to nominate them today to serve the American people on the United States Court of Appeals. I am confident that they will be judicious and esteemed additions to the Federal Circuit.”

   

Raymond T. Chen:  Nominee for the United States Court of Appeals for the Federal Circuit

Raymond T. Chen currently serves as the Deputy General Counsel for Intellectual Property Law and Solicitor for the United States Patent and Trademark Office (USPTO), a position he has held since 2008. 

   

Chen received his B.S. in electrical engineering in 1990 from the University of California, Los Angeles, and his J.D. in 1994 from the New York University School of Law.  After graduating from law school, he joined Knobbe, Martens, Olson & Bear, a boutique intellectual property law firm in Irvine, California, where he prosecuted patents and represented clients in intellectual property litigation.  From 1996 to 1998, Chen served as a Technical Assistant at the United States Court of Appeals for the Federal Circuit, performing the functions of a staff attorney.  At the end of his two-year term, he joined the USPTO as Associate Solicitor and remained in that role until his promotion to Solicitor in 2008.   Since joining the USPTO, Chen has represented the agency in numerous appeals before the Federal Circuit and personally argued over 20 cases, issued guidance to patent examiners to ensure consistency with developing law, advised the agency on legal and policy issues, and helped promulgate regulations.  He has co-chaired the Patent and Trademark Office Committee of the Federal Circuit Bar Association and is a member of the Advisory Council for the United States Court of Appeals for the Federal Circuit. 

   

Todd M. Hughes:  Nominee for the United States Court of Appeals for the Federal Circuit

Todd M. Hughes is Deputy Director of the Commercial Litigation Branch of the Civil Division at the United States Department of Justice, a position he has held since 2007.  He also has served as an adjunct lecturer in law with the Cleveland-Marshall College of Law and as an instructor for Duke University’s writing program. 

   

Hughes received his A.B. from Harvard College in 1989 and completed a joint degree program with Duke University, earning both his J.D. with honors and his M.A. in English in 1992.  After graduating from law school, Hughes clerked for the Honorable Robert B. Krupansky of the United States Court of Appeals for the Sixth Circuit.  In 1994, he joined the Commercial Litigation Branch as a trial attorney.  Five years later, he was appointed to be Assistant Director for Commercial Litigation, a role he held until assuming the title of Deputy Director in 2007.  Throughout his career with the Department of Justice, Hughes’s practice has been devoted to matters of federal personnel law, veterans’ benefits, international trade, government contracts, and jurisdictional issues regarding the United States Court of Federal Claims.  He has extensive experience before the United States Court of Appeals for the Federal Circuit, the United States Court of International Trade, and the United States Court of Federal Claims, and he has garnered a number of special commendations from the Department of Justice and a special contribution award from the Department of Veterans Affairs.

Moving Away from Beauty as a Factor in Design Patent Validity

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Guest Post by Professor Andrew W. Torrance. This post is a shortened version of Professor Torrance’s recently published article titled Beauty Fades: An Experimental Study of Federal Court Design Patent Aesthetics, Journal of Intellectual Property, Volume 19, Issue 2 (2012) available at http://ssrn.com/abstract=2156943.

Introduction    

Courts are rarely asked to judge beauty. Such a subjective practice would normally be anathema to the ideal of objective legal standards. However, one area of federal law has a long tradition of explicitly requiring courts to make aesthetic decisions: the law of design. Examination of design patent law offers unique insight into how aesthetic considerations have been, and are currently, employed by courts to make legal decisions.

In the United States, patent law offers protection for inventions originating within diverse fields of endeavor. In addition to utility and plant patents, design patents represent a third category of patent rights, which are available to inventors of "any new, original and ornamental design for an article of manufacture . . . ." (35 U.S.C. §171). Since they were first made available in 1842, more than 630,000 design patents have issued in the United States. The very first design patent was issued to George Bruce in 1842 to protect a new "Type" font (U.S. Patent No. D1). Later design patents issued to protect such iconic designs as the Statue of Liberty (D11,023, granted to Auguste Bartholdi) and the Coca-Cola bottle (D48,160, granted to H. Samuelson). Over the past several years, design patents have enjoyed a resurgence in popularity, with applications to the United States Patent and Trademark Office increasing markedly (Steven L. Oberholtzer, The Basic Principles Of Intellectual Property Law 6, 2d ed. 2009).

Not unsurprisingly, many courts have interpreted U.S. design patent law to require an element of artistry. Although no such requirement was explicitly present in the original design patent statute, the Patent Act of August 29, 1842 (ch. 263, 5 Stat. 543), judicial interpretations of the ornamentality requirement often appeared to necessitate that designs possess features that were aesthetically pleasing to the human eye. In Blisscraft of Hollywood v. United Plastics Co., 294 F.2d 694, 696 (2d Cir. 1961), the court mandated that "[a patented design must] be the product of aesthetic skill and artistic conception." As recently as 1989, in dicta from Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 148, the U.S. Supreme Court echoed the view that, to be patentable, designs must be visually attractive, explaining that, "[t]o qualify for protection, a design must present an aesthetically pleasing appearance that is not dictated by function alone, and must satisfy the other criteria of patentability." Thus, the legal requirement that a design patent be "ornamental" was long interpreted to necessitate artistry or an aesthetically pleasing effect.

Roughly coincident with the creation of the Court of Appeals for the Federal Circuit ("CAFC") in 1982, design patent law doctrine appeared to change direction, as aesthetic considerations were deemphasized in deciding the validity of designs claimed in patents. This shift was decisively heralded a decade later, in Seiko Epson v. Nu-Kote International, 190 F.3d 1360, 1368 (1999), when the CAFC stated "the 'ornamental' requirement of the design statute means that the design must not be governed solely by function. . . ." So well accepted has the non-artistic interpretation of the law become that law firms now generally counsel their clients that aesthetic considerations hold little relevance for design patents. To illustrate how well accepted this principle is, consider the following statement about design patent law on page 7 of The Basic Principles of Intellectual Property Law (Second Edition, 2009), a primer of intellectual property law freely distributed to potential clients by the venerable law firm, Brinks Hofer Gilson & Lione: "There is no requirement that the design be artistic or pleasing to the eye." The trend away from aesthetic interpretations of the ornamentality requirement has brought U.S. design patent law closer to that in other jurisdictions, such as the European Union and Canada, where aesthetic considerations appear to play little role in determining the validity of design patents or registrations.

Experiment and Results

An experimental approach was used to test the hypothesis that aesthetic considerations in design patent law have, indeed, diminished over the last thirty years. All design patents from 1982 (that is, the creation of the CAFC) to 2010 in which a court made a final determination of validity or infringement were identified, and each design patent therein scored for validity and infringement. Then, in a controlled experiment, human subjects were asked to score the attractiveness of all the patented designs at issue in these cases.

The experimental results indicate that, at the beginning of the time period considered, patents claiming the least attractive designs were most likely to be found invalid, those claiming designs of intermediate attractiveness fared better in terms of validity, but were found to have been infringed relatively less often, and patents claiming the most attractive designs were most likely to be found both valid and infringed. In other words, aesthetically pleasing designs claimed in patents tended to fare better in court than did less attractive designs. However, the results also indicate that, while the attractiveness of patented designs found valid, whether infringed or not, has changed little since 1982, the average attractiveness of patented designs found invalid has risen markedly over time. In fact, in contradistinction to the situation early in the time period surveyed, the attractiveness of a design claimed in a patent has now become a poor predictor of judicial outcome. Design beauty appears to have ceased to be a useful predictor of judicial outcome in design patent litigation.

A few of the experimental results of this study are illustrated below. Complete results for all litigated design patents, by type of court (that is, all federal courts, federal district courts, and the CAFC), and litigation outcome (that is, validity, invalidity, infringement, and non-infringement) can be found in the full version the article, available as a free download at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2156943.

FIGURE 1 is a scatterplot graph that depicts the mean attractiveness of all design patents according to the year in which a court ruled on their validity or infringement. FIGURE 1 also shows the results of a linear regression of these data. The regression analysis shows very little change (y = 0.0132x – 21.511, R² = 0.0146) in the attractiveness of patented designs from 1982 to 2010.

FIGURE 2 is a scatterplot graph that depicts the mean attractiveness of all design patents found invalid by a court by year of court ruling. FIGURE 2 also shows the results of a linear regression of these data. The regression analysis shows a more substantial rise (y = 0.0495x – 93.82, R² = 0.2183) in the attractiveness of patented designs found invalid from 1982 to 2010.


Discussion

a. Overall stability in attractiveness

For most of the categories of outcome and types of courts considered there was little change in the measured attractiveness of patented designs from 1982 to 2010. These results apply to patented designs found to be (1) valid but not infringed and (2) both valid and infringed, and pertain to results from both federal district courts and the CAFC. These data show little evidence that the attractiveness of patented designs held valid (whether infringed or not) changed from 1982 to 2010 across most categories of outcome and types of court.

b. Rise in attractiveness of PATENTED designs HELD INVALID

The most striking pattern in the data involves patented designs finally found invalid by a court. The data indicate a marked rise in measured attractiveness of these patented designs from 1982 to 2010. This pattern is remarkably consistent whether considered across all federal courts (y = 0.0495x – 93.82, R² = 0.2183), in federal district courts (y = 0.0442x – 83.227, R² = 0.213), or in the CAFC (y = 0.0968x – 188.48, R² = 0.2363). These results roughly match an observed shift in design patent doctrine away from an aesthetics requirement occurring since the advent of the CAFC. From 1982 to 2010 courts became increasingly likely to find attractive patented designs invalid. By contrast, the data suggest that, during the early years of the time period studied, less aesthetically attractive patented designs were more likely to be found invalid while more aesthetically attractive patented designs were more likely to found valid. This trend away from aesthetics as a factor in invalidity is mirrored in both the doctrine and the data.

c. Policy implications

There may be policy advantages to dropping the requirement for aesthetics, chief among which may be improved consistency in making decisions about design patent validity. Judgments about attractiveness are inherently subjective, depending as they do on the personal aesthetic sensibilities of the judges who determine design patent validity. Relying, instead, on a more objective test of ornamentality, such as lack of functionality, is likely to lead to improved consistency in validity determinations, not only in court and at the USPTO, but also among design patent owners considering infringement litigation and defendants attempting to avoid such actions.

A second salutary implication for policy involves the harmonization of U.S. design patent law with standards of intellectual property law prevailing internationally. The weakening of the aesthetics requirement in its design patent law has moved the United States towards the design protection laws that predominate in most other jurisdictions, such as the European Union and Canada. Access to a similar test of design patent (or design registration) validity across jurisdictions may afford design patent owners advantages of efficiency, since determinations of validity in one jurisdiction would be more likely to hold true in others.

Conclusions

Coinciding approximately with the inception of the CAFC, design patent doctrine appears to have begun to shift away from an aesthetic interpretation of the statutory ornamentality requirement. In particular, the measured attractiveness of patented designs finally found invalid by courts has increased substantially over the last three decades. Both legal doctrine and experimental results agree that beauty appears to have faded as a requirement for design patent validity.

Andrew Torrance is a Professor at the University of Kansas School of Law, a Visiting Scholar at MIT Sloan School of Management, and a Research Fellow at the Gruter Institute.

Technology Patents LLC. v. T-Mobile (UK) Ltd.

Patent, ,

By Jason Rantanen

Technology Patents LLC. v. T-Mobile (UK) Ltd. (Fed. Cir. 2012) Download 11-1581
Panel: Bryson (author), Prost, Reyna

This case involves a suit brought by prolific inventor Aris Mardirossian's company Technology Patents LLC against more than 100 domestic and foreign defendants that TPL accused of infringing US Reissue Patent No. RE39870.  While the primary subjects addressed by the court are those of claim construction and infringement , there are several additional noteworthy issues discussed at the end of the post.

The '870 patent relates to a global paging system.  According to the patent, the prior art was deficient because "it did not fulfill the need for a cheap and efficient global paging system that allows users who expect to receive messages or pages abroad to 'remotely input country designations in which they are to be paged.'"  Slip Op. at 13, quoting '870 patent.  The '870 patent sought to cure the deficiencies of the prior art: "The ’870 Patent solved this problem by claiming a system which allows for paging of the receiving user (“RU”) in countries where the RU “may be located,” as per a list input by the RU." Id., quoting district court.  Claim 4, the primary claim addressed on appeal, recites  (claim terms at issue in the appeal are in bold):

4. A system for paging a receiving user in a country-selective paging system, comprising:

a paging system spanning a plurality of different countries of the world, the paging system including a plurality of servers, and wireless transmitters in different countries for transmitting paging messages to receiving users;

interconnecting servers so as to permit digital communication of signals between the plurality of servers via at least the packet-switched digital data network;

a first website or server located in a first country for allowing an originating user to page the receiving user who may be located in a second country different from the first country, the originating user not necessarily knowing what country the receiving user is located in;

wherein the paging system determines if the second country is currently designated by the receiving user as a designated country in which the paging system is to attempt to page the receiving user;

when the paging system determines that the second country has been designated by the receiving user, means for sending a paging communication via at least the packet-switched digital data network to a second website or server, the second website or server being in communication with a wireless transmitter located in the second country, and wherein the paging communication causes the second website or server to initiate paging the receiving user via the wireless transmitter in the second country; and

when the paging system determines that the second country has not been designated by the receiving user, the paging system initiates paging operations in another country in a predetermined order in an attempt to page the receiving user.

The over 100 companies companies that TPL sued roughly fell into three categories: (1) domestic carriers and handset companies, (2) software providers, and (3) foreign carriers.  Following claim construction, the district court granted summary judgment of noninfringement to the domestic carriers.  On appeal, TPL challenged the district court's claim construction and noninfringement rulings. 

Claim Construction: Much of the claim construction dispute revolved around the meaning of "receiving user."  The district court construed this term to mean a "person or party," while TPL contended that it means "the combination of the person and the handset."

Applying what has often been described as a holistic approach to claim construction, the Federal Circuit affirmed the district court's construction.  In other words, the court applied a flexible, relatively unstructured approach to construing the claim terms as opposed to a rigid rules-based approach.  In this particular case, that meant looking closely at the intrinsic evidence.  "The text of the patent makes clear that the term “receiving user” does not refer to a person-pager combination."  Slip Op. at 19. The court applied a similar approach to the two remaining claim terms.

Holistic Infringement Analysis: TPL also argued that, even if the CAFC affirmed the district court's claim constructions, it nevertheless erred in its grant of summary judgment of noninfringement.  On this point, too, the Federal Circuit affirmed.  While much of the CAFC's conclusion was based on the "receiving user" limitation, the court's overall approach bore many similarities to its holistic claim construction: the court made frequent reference back to the specification even as it assessed the question of infringement, rather than rigidly applying its claim construction. 

For example, in responding to TPL's argument that because the accused systems permitted users to select the carrier when traveling abroad, some of which contained country information (see below figure), the court pointed out that "The specification and the claims make clear that the invention is concerned with the country in which the receiving user is located, not with the receiving user’s carrier." Slip Op. at 29.  This carried through to the assessment of infringement under the doctrine of equivalents, as the court concluded that "the distinction betwen selecting a carrier and selecting a country is not insignificant in the context of the patent….That is a fundamental difference between the accused systems and the claimed invention that goes to the heart of the claimed invention."  Slip Op. at 34.  Figure 1

 

Additional notes:

  • This lawsuit was filed in 2007 – well before the September 16, 2011 enactment of the America Invents Act, which substantially altered the rules for joining multiple unrelated defendants within a single infringement lawsuit. 
  • The district court granted summary judgment of noninfringement to the software providers as well, in part on the ground that it concluded that certain claims required mutiple actors and TPL failed to show that the defendants have discretion or control over the end users.  The Federal Circuit concluded that it was unnecessary to consider the recent en banc decision in Akamai Technologies v. Limelight addressing divided infringement because the claimed software system could be "used" by a single actor even if the user did not have physical control over all elements of a system. Slip Op. at 36 (citing Centillion Data Sys. v. Qwest Communications, 631 F.3d 1279, 1284 (Fed. Cir. 2011).
  • The district court found that it lacked jurisdiction over the foreign carriers.  On appeal, the Federal Circuit did not address the jurisdictional question, instead concluding that "Our ruling sustaining the district court’s decision in favor of the domestic carriers thus dooms TPL’s claim of infringement against the foreign carriers as well. For that reason, it is unnecessary for us to decide whether the district court was correct in dismissing the case against the foreign carriers for lack of personal jurisdiction."  Slip Op. at 39.

Guest Post: The Problematic Origins of Nationwide Patent Venue.

Patent, ,

Guest Post by Professor Tun-Jen Chiang of George Mason University.

Patent litigators are all familiar with the Eastern District of Texas. The reason that this otherwise-unexceptional district is able to dominate patent litigation comes down to a little known case, VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990), which created nationwide venue for virtually every patent case.

Some background is in order. 28 U.S.C. § 1400(b) allows a patent infringement action to be brought, inter alia, where the defendant "resides." Intuitively, one would think that residence refers to the state of incorporation or principal place of business, and under that version few defendants reside in East Texas.

28 U.S.C. § 1391(c) adds a wrinkle. It states: "For purposes of venue under this chapter, a defendant that is a corporation shall be deemed to reside in any judicial district in which it is subject to personal jurisdiction." By the plain language of the statute, a corporation that makes any sales in East Texas is then deemed to reside there. This is the basic analysis of VE Holdings.

But the Supreme Court decision in Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957) is very much to the contrary. Fourco dealt with the prior version of § 1391(c), which stated: "A corporation may be sued in any judicial district in which it . . . is doing business, and such judicial district shall be regarded as the residence of such corporation for venue purposes." The respondent in Fourco specifically argued that old § 1391(c) was clear and deemed a corporation to "reside" wherever it did business. The Supreme Court nonetheless held it did not apply to § 1400(b):

We think it is clear that § 1391 (c) is a general corporation venue statute, whereas § 1400(b) is a special venue statute applicable, specifically, to all defendants in a particular type of actions, i.e., patent infringement actions. In these circumstances the law is settled that [h]owever inclusive may be the general language of a statute, it will not be held to apply to a matter specifically dealt with in another part of the same enactment. . . .

We hold that 28 U.S.C. § 1400 (b) is the sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).

The Federal Circuit in VE Holdings distinguished Fourco because the statutory language had changed. See 917 F.2d at 1579. But the change in language was immaterial to the underlying rationale of Fourco: the new § 1391(c) was and is still a "general corporation venue statute," and § 1400(b) was and is still a "special venue statute applicable, specifically, to . . . patent infringement actions."

What we have is the familiar situation where the Federal Circuit tosses aside a Supreme Court decision by invoking a slim excuse. See KSR Int'l Co. v. Teleflex Inc., 550 U.S. 398 (2007). Until very recently the Supreme Court indulged this. But the Court seems to have changed, and this would be a good time to revisit VE Holdings.

I should add one thing, which is that one can very much question whether Fourco itself is correctly decided. But this is, of course, not a question the Federal Circuit should arrogate upon itself to decide.