On the morning of Tuesday, June 13th, the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet held a hearing titled Examining the Supreme Court’s TC Heartland Decision. The day’s hearing focused on whether Congress needed a legislative solution in response to the U.S. Supreme Court’s recent decision in TC Heartland LLC v. Kraft Foods Group Brands LLC on the statute governing venue in patent infringement cases. Small players in the U.S. patent system and individual patent owners will likely be discouraged to note that much of the day’s debate focused on the patent troll narrative despite the lack of a substantive connection between that narrative and the TC Heartland case.
Rep. Darrell Issa (R-CA), chairman of the House IP subcommittee, started his remarks by asking to what degree the Supreme Court’s decision in TC Heartland fixed a decade-old problem. Noting that new lawsuits have hit consumer electronics giant Apple (NASDAQ:AAPL) in the Eastern District of Texas (E.D. Tex.), Issa went on to say that “patent trolls, in my opinion, are the scourge of the patent world. We have time and time again attempted to stop patent trolls while in fact being objected to by genuine innovators who feel that they will be trampled in our effort to stop the worst of the worst.” Issa also opined that the TC Heartland decision now likely makes businesses of all kinds avoid the jurisdiction of E.D. Tex. “Why set up shop in Eastern Texas if it creates venue for patent infringement,” he said.
As ranking member Rep. Jerrold Nadler (D-NY) would note, the day’s discussion was not to examine the court’s analysis but rather to determine the effects the decision will have in curbing abusive litigation, adding that E.D. Tex. has “developed a cottage industry of patent litigation.” “Patent trolls use the courts as a weapon to extract settlements from the innocent,” Nadler said. Comments made by Nadler and others reflected the notion that the impact of TC Heartland might only serve to take some cases out of E.D. Tex. and maintain a heavy concentration in the Northern District of California (N.D. Cal.) and the District of Delaware (D. Del.). “Will it be a panacea that puts patent trolls out of business, will it be business as usual, or something in between?” Nadler asked.
The House IP subcommittee was joined by both the chairman of the full judiciary committee, Rep. Bob Goodlatte (R-VA), and ranking Democrat member Rep. John Conyers (D-MI). Goodlatte decried patent trolling behaviors, including the use of what he called “loopholes in procedural rules [to bring] lawsuits in districts favorable to questionable claims,” noting that E.D. Tex. was one such court favorable to those claims. (It’s interesting to see how much conversation about E.D. Tex. has sprung from SCOTUS’ TC Heartland decision when even Justice Stephen Breyer asked why that district was even discussed as an issue during the oral hearing.) Conyers said that one of the most effective steps in preventing litigation abuses was to make sure that poor quality patents weren’t issued in the first place. “Patent examiners must have the resources to review and analyze the hundreds of thousands of complex, interrelated patent applications they receive every year,” Conyers said, adding that these resources would help protect the U.S. Patent and Trademark Office from the annual appropriations cycle. Conyers went on to say that he supported reasonable changes to the patent system but that he couldn’t support changes that would undermine the country’s patent system as a whole, encouraging a cautious approach to any legislative changes to the system.
Steven Anderson, VP and general counsel for Culver Franchising System, Inc., owner of the Culver’s restaurant brand, and a representative of Unified for Patent Reform and the National Restaurant Association, was the first panelist to offer testimony. He decried the fact that Culver’s, as a Wisconsin entity, could be brought to Eastern Texas in a patent infringement action in which the plaintiff could claim venue because it owned an office within the jurisdiction which appeared to never be in use. “It’s nothing but an address from which to sue other companies,” Anderson said. He urged Congress to move swiftly to correct an inequity in the TC Heartland decision; namely, that large retail and restaurant chains have brick-and-mortar locations across the country and the three franchised Culver’s in Eastern Texas, which generate one-third of 1 percent of the parent company’s revenues, could be used as a basis for venue in E.D. Tex. under the second part of the relevant 1400(b) statute, “where the defendant has committed acts of infringement and has a regular and established place of business.” Anderson praised the Supreme Court’s 2014 decision in Alice Corporation v. CLS Bank International as a tool which gives Culver’s a reasonable opportunity to find patents, such as one covering a nutritional calculator system, invalid prior to litigation. “Culver’s fully supports the ability for legitimate inventors to bring claims, but we also believe that appropriate reform can protect innovators while reducing the exploitation that stifles innovation,” Anderson said.
Colleen Chien, professor at Santa Clara University School of Law, argued that the TC Heartland decision “in effect restored the longstanding rule” regarding proper venue in patent infringement litigation which the U.S. Court of Appeals for the Federal Circuit (Fed. Cir.) overturned in its 1990 decision in VE Holding Corporation v. Johnson Gas Appliance Company. Chien cited statistics from a paper she co-wrote which found that TC Heartland would likely have an even effect on all plaintiffs in patent infringement cases. For example, 60 percent of “patent trolls” would have to move cases, as would 60 percent of plaintiffs who are operating companies. Just the fact that those lawsuits would have to move to a different venue meant that many of those cases wouldn’t survive, Chien noted, as many cases leaving E.D. Tex. would go to districts which were less friendly to the plaintiff. Despite this, she opined that one effect of the TC Heartland case would simply be that “patent trolls” may adapt their behavior to focus more on nationwide brick-and-mortar chains or customers, making a customer stay provision more important in her eyes.
Speaking in his personal capacity as a law professor was Adam Mossoff, professor at George Mason University Antonin Scalia Law School. While Mossoff said it was undeniable that there are “a handful of bad actors in the patent system,” the important question to ask was whether there was a systemic problem which warranted the restricted the rights of all patent owners, including individual inventors, business startups, universities and others. “The decision in TC Heartland is very concerning given the erosion of patent rights” in the United States, noting the recent IP index released by the U.S. Chamber of Commerce which ranked the U.S. patent system as the 10th-strongest system in the world, tied with Hungary. “Adding TC Heartland to this mix further contributes to this deeply disturbing decline of what was once a gold standard patent system,” Mossoff said. “The advocates for more restrictive venue do not acknowledge the resulting costs to inventors, startups, small businesses, universities… But like the economic law of supply and demand, refusing to acknowledge the costs neither negates them nor makes them go away as a policy concern.” Mossoff testified that TC Heartland would not substantially answer the problem of high concentration of patent cases in district court, simply shifting into California and Delaware courts which are noted for being friendly to defendants. Mossoff also raised the example of Josh Malone, the inventor of Bunch O’ Balloons who asserted a patent that was declared invalid at PTAB, an actual inventor who would end up fitting the definition of “patent troll” supported by many at that day’s hearing. (We’ve reported on another instance where a legitimate inventor asserting patent rights against Apple was misrepresented as a patent troll.) “The guiding principle for patent legislation ought to be, ‘First, do no harm,’” Mossoff said.
Following Mossoff was John Thorne, partner at Kellogg Hansen Todd Figel & Frederick PLLC (the same firm where Supreme Court Justice Neil Gorsuch worked from 1995 to 2005), who testified that he’s represented both plaintiffs and defendants in patent infringement cases in Eastern Texas. He said that venue issues were not solved by the TC Heartland decision and that the fight over the proper definition will likely occur on two fronts: first, what constitutes a regular place of business; and second, when should a judge transfer in the interests of justice. Thorne questioned Mossoff’s written testimony, especially the assertion that the TC Heartland case was hijacked by interests looking to weaken patent rights. “Nothing in the opinion talks about that,” Thorne said. Of course, if nothing in the opinion mentions the words “Texas” or “Marshall,” the Texas city where E.D. Tex. holds court, as Thorne notes, and yet news report after news report after news report after news report ties Texas and/or “patent trolls” to the case, that would seem to support Mossoff’s point that, somewhere along the line, the media narrative on the case got hijacked. Thorne said he agreed with Mossoff that TC Heartland was one-sided in its result, though his perspective was that SCOTUS had unanimously decided to return to the original statute. Thorne argued that, as the courts decide the proper definition of venue following TC Heartland, due in large part to a lack of case law surrounding the second part of the statute, perhaps a few franchised Culver’s franchised locations within a district shouldn’t be considered a regular established place of business, or that delivering a product sold from one state to a consumer in a second state shouldn’t create venue in the state through which the product traveled. “If the courts are not careful, the incentives will be against growth,” Thorne said.
In questioning, Goodlatte asked Anderson how “patent trolling” behavior discourages business activities for restaurant chains like Culver’s. Anderson noted that it limits what the restaurant can do in marketing its locations and that it tends to take a step back from any marketing involving cell phones or social media. “We’re very wary of a small provider who can’t indemnify us,” he said.
Goodlatte then asked Mossoff if he thought it was acceptable that one judge would hear 25 percent of all patent cases, namelessly referencing Judge Rodney Gilstrap of the Eastern District of Texas. Mossoff answered that it was unclear why patent litigation was driven towards E.D. Tex., noting that while there have been allegations that the district is more favorable to plaintiffs in patent infringement cases, citing a PwC study which showed that the district has slightly lower affirmance rates than other districts. Citing the harms caused by unintended consequences from legislation, Mossoff clearly recommended to Goodlatte that the committee should take a step back to clearly assess the impact of not only this case but a decade of patent legislation. Goodlatte responded that “I’m not sure I buy your argument” on the public perception of E.D. Tex. being different than the reality based on data provided by PwC.
Conyers asked Mossoff what he meant when he said that the TC Heartland decision restricted rights for all patent owners. “Because it changes the ability to file for all patent owners,” Mossoff responded. Again, Mossoff brought the individual inventor angle to the hearing through the example of Malone, who now has to file suits in districts where allegedly infringing entities are located and not in Texas, where he actually lives. This imposes additional costs on top of the $12 million which Malone has already invested into his patent infringement cases. Chien later added that the decision essentially shifts the turf advantage on the venue rule from the plaintiff to the defendant.
Chien also spoke to the question as to why Eastern Texas was seen as favorable to plaintiffs in patent cases. She noted that, while the substantive law doesn’t differ in that district, the district has procedural differences which results in 101/Alice or stay motions from not being heard. Thorne noted that he had recently heard that patent plaintiffs were increasingly looking to the U.S. International Trade Commission (ITC) and German courts as friendly venues.
Rep. Nadler asked if it would be helpful if Congress made a rule that certain districts should hear all patent cases or if there was any value in concentrating patent cases in one district. Thorne responded that he was a fan of the Patent Pilot Program but in terms of district concentration, he noted that different judges will have different experiences and that it was the location of the evidence important to the case which should have a more important impact on venue.
An interesting viewpoint was expressed during questioning from Rep. Andy Biggs (R-AZ), who asked Chien what does the court’s decision mean for companies like Culver’s. “I personally don’t believe that they should be dealing with patent litigation assertions,” Chien said, adding that the company was a retail business and not a traditional developer. “They’re adopting technology but they’re not on the cutting edge of developing it,” she said. Of course, given the fact that a patent is supposed to give someone the right to exclude others from using the technology, and thus adopting a technology is as much infringement as the sale of that technology, Chien’s statement here evinces a lack of understanding of patent rights. Biggs then asked Mossoff what the “sweet spot” was between protecting patent holders and preventing frivolous lawsuits. Again, he noted that the definition of “patent troll” employed by Chien, United for Patent Reform and others includes individuals, startups, universities and licensing operations. “Licensing has been a key component of what has been the success of the U.S. patent system in driving our innovation economy for well over 200 years,” he said. Mossoff noted that one important point was that there are no actual rigorous studies following standardized norms providing statistical analysis to conclude that there has been widespread abusive litigation. He also pointed out that the current “troll” definition would apply to famed American inventors like Thomas Alva Edison and Nikola Tesla. “I never thought I’d hear Edison called a troll before Congress,” Issa said, chuckling in response. He also got a good laugh to hear Mossoff later cite his own study of 1,700 patent applications which received patents in Europe and China but not in the U.S. “I’ll now note that I’ve now heard that China is the country we’re gonna base the high mark of [laughter] of patent tolerance on,” Issa said. (This exchange comes at about 1:21:40 of the archived webcast of the hearing.)
Near the end of the hearing, Issa displayed the first patent issued by the U.S. Patent Office, a method for making potash which was signed by George Washington and Thomas Jefferson. “Anytime someone wants to talk about 101 and Alice, it’s a 227-year-old standing of what Jefferson believed it should be,” Issa said. Issa asked if the U.S. system of innovation has worked well under that standard for 227 years, a statement to which Chien and Thorne agreed. Mossoff pointed out that the patent for a method for making potash was likely unpatentable subject matter under recent Supreme Court decisions. “I think even Patent No. 5, the improvement of rye whiskey distillation, probably would still be patentable,” Issa responded.