Corporations are cheering a U.S. Supreme Court decision limiting where they can be sued for patent infringement, but some intellectual property lawyers say loopholes in the ruling likely mean lawsuits will continue to be filed in plaintiff-friendly jurisdictions.
The Supreme Court ruled on Monday that patent infringement cases can only be heard in a court either where the defendant is headquartered or where an act of infringement has occurred and the defendant has a “regular and established place of business.”
Legal experts said a sale of a product was sufficient as an act of infringement and the definition of a regular and established place of business was broad enough that companies could probably still be sued in a jurisdiction if they had stores, warehouses or even remote employees there.
“I saw a lot of anti-patent people doing a victory dance yesterday without really understanding what this decision means,” said David Pridham, chief executive of Dominion Harbor Group, a Texas-based company that buys patents and seeks to license them to other companies.
Technology companies in particular had sought Monday’s ruling as a means of combating plaintiffs, including patent holding firms often derided as “trolls.” According to PricewaterhouseCoopers, 39 percent of all patent lawsuits in fiscal year 2016 were filed in the largely rural Eastern District of Texas, which borders but does not include Dallas, home to several Fortune 500 companies.
Monday’s ruling came in a lawsuit Kraft Heinz Co (KHC.O) brought against the beverage flavoring company TC Heartland LLC. Though the case involved a beverage sweetening technology, it attracted the attention of Dell Inc, HP Inc, Adobe Systems Inc (ADBE.O), SAP America Inc (SAPG.DE), Wal-Mart (WMT.N) and other companies, as well as the American Bankers Association and the Financial Services Roundtable, all of whom filed briefs supporting the defendant.
Defendants claim procedural rules favor plaintiffs and the district’s judges rarely dismiss cases before trial, making litigation there expensive and increasing the pressure to settle.
“The overall effect of the ruling will be to limit cases in the district,” said Q. Todd Dickinson, the former director of the U.S. Patent and Trademark Office now in private practice at the law firm Polsinelli. “But it’s not a panacea. There are ways to get around it.”
The Supreme Court’s “regular and established place of business” could be as simple as a retail store, said Michael Smith, a patent lawyer with Siebman, Burg, Phillips & Smith in Marshall, Texas who often represents defendants. He noted Apple Inc (AAPL.O), a frequent target for East Texas patent lawsuits, has stores in Plano and Frisco, two Dallas suburbs that fall within the district.
Distribution or call centers might also qualify, said Pridham, and there are court decisions suggesting even companies with only remote employees in East Texas could still be sued for patent infringement there.
Several lawyers said they expected plaintiffs to also begin suing independent retail companies who merely sell allegedly infringing products. If that were to happen, the product makers would almost certainly have to indemnify their retailers, said Paul Janicke, a professor at the University of Houston Law Center.
Smith said he expected plaintiffs to try to add retailers as defendants to more than 1,000 pending cases in the hopes of keeping them in the district. “What this ruling does is put a target on the back of every retailer operating in the Eastern District of Texas,” he said.
Dickinson said a wave of lawsuits against retailers could prompt Congress to enact legislation shielding them from patent lawsuits relating to products they do not manufacture.
There are other potential loopholes unrelated to the “place of business” language. Matthew Rizzolo, an IP lawyer with Ropes & Gray who represents both plaintiffs and defendants, noted Monday’s decision did not address either foreign companies or limited liability companies, leaving both still potentially vulnerable to lawsuits in the Eastern District.
“Now you are going to see a lot of fights over those issues,” he said.
(Reporting by Jan Wolfel; Editing by Anthony Lin, Bernard Orr)