Multiple Patent Defendants Under TC Heartland

The Supreme Court’s May 2017 decision in TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514, 1521 (2017), limited the locations where a patent owner can sue a U.S.-based business for infringement. This decision now provides defendants a right to a potentially more convenient forum and, in some cases, the ability to have infringement claims litigated separately from similar claims the patent owner brings against other defendants.

By limiting consolidated litigation against multiple defendants, this development provides procedural benefits to accused infringers being sued by patent owners. Patent owners will now bear greater litigation costs pursuing lawsuits in multiple districts. There will be a greater possibility for patent litigation to produce inconsistent results as several judges address common issues. Defendants will also be less likely to have their arguments diluted or confused by proceedings involving unrelated companies in the same court. In multi-defendant situations, these developments have significant implications for the parties’ patent litigation strategies, and for the approaches courts may implement when a court decides that the case was filed in the wrong venue.

The Context of TC Heartland

TC Heartland concerned the application of the special venue statute (28 U.S.C. § 1400(b)) that is applicable to patent infringement lawsuits. As was true before the decision, that statute restricts the venue for such lawsuits to districts “where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.” This statute’s restrictive effect, however, was limited in a 1990 patent decision (VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1584 (Fed. Cir. 1990)) by the U.S. Court of Appeals for the Federal Circuit. VE Holding held that the then-newly enacted 28 U.S.C. § 1391(c)(2) prescribed a broad meaning of “resides,” so that a business entity is deemed to reside in any district where it is subject to the court’s personal jurisdiction. As a result, from 1990 to 2017, entities could be sued for infringing patents wherever they sold the allegedly infringing products, without setting foot in the district.

In TC Heartland, the Supreme Court overruled VE Holding, concluding that 28 U.S.C. § 1391(c)(2)’s definition of “reside” is inapplicable to venue for patent cases. Thus, a domestic corporation accused of patent infringement “resides” only in its state of incorporation. The law is unclear whether a defendant can be sued in all districts within its state of incorporation. In Stonite Products Co. v. Melvin Lloyd Co., 315 U.S. 561 (1942), the Supreme Court interpreted an earlier version of 28 U.S.C. § 1400(b) (which used the term “inhabitant” rather than “resident”) to limit the venue of a lawsuit against an in-state corporation to districts where it has regular and established places of business. Recent cases are split on whether suit can be brought throughout the state of incorporation, or only where it has its principal place of business.

To sue a defendant elsewhere, a patent owner now has to invoke § 1400(b)’s alternative venue — where the defendant engages in infringing acts and “has a regular and established place of business.” This limits a patent owner’s choices, especially since the Federal Circuit (In re Cray Inc., 871 F.3d 1355, 1360 (Fed. Cir. 2017)) has interpreted the phrase “has a regular and established place of business” to require that: (1) there is a fixed physical location (rather than virtual presence) in the district; (2) the location is a regular and established place of business, not just a temporary or sporadic location; and (3) it is the defendant’s location, not just the home of an employee who resides at a location of the employee’s choice.

Additional Wrinkles

Although these new restrictions limit a patent owner’s choices in seeking to sue a single infringer, they can also make it impossible to find a single court where the patent owner can assert its patent against multiple defendants. In patent-infringement lawsuits, venue must be proper for each defendant. (Stonite Products Co. v. Melvin Lloyd Co., 315 U.S. 561, 563-64 (1942).) Thus, in situations where multiple entities incorporated in different states are alleged to infringe, the patent owner can sue in a single location only if all the U.S.-based entities commit acts of infringement and have regular and established business locations in the same district.

This can create significant problems for the patent owner, particularly where the accused infringers comprise a supply chain for a particular product that stretches from district to district.

Notably, TC Heartland did not limit the choice of venue to sue foreign corporations, which in some cases will be the first seller in the supply chain. Brunette Mach. Works, Ltd. v. Kockum Indus., Inc., 406 U.S. 706, 706-07 (1972), held that a general venue statute (now 28 U.S.C.§ 1391(c)(2)) allows foreign entities to be sued for patent infringement in any district. In TC Heartland, the Supreme Court did not express an opinion on Brunette’s continued viability, thereby leaving it intact.

In many situations, different actors in the chain must be sued in different courts. If the resulting lawsuits proceed in parallel, the patent owner will likely incur increased litigation costs. By having to pursue infringers in separate courts, moreover, the patent owner faces increased risk that one court or another may issue an unfavorable pre-trial ruling, which defendants in other cases can use in their defense. For example, one court may construe a patent’s claims so narrowly that infringement cannot be proved, or so broadly that the patent impermissibly covers the prior art and would be invalid.

Correspondingly, having separate forums can benefit defendants. Where different defendants are accused of selling different products, they will find it easier to highlight distinctions relevant to non-infringement. And where issues have been argued in prior lawsuits, defendants sued in other courts can adjust their arguments in ways that would be difficult if all defendants were sued in a single court. In short, the patent owner normally prefers concentrating enforcement efforts in a single forum, while multiple defendants often prefer splintered litigation.

Strategies for Patent Owners

Various considerations motivate patent owners in choosing where to sue to enforce their patents. These include convenience of location, familiarity with the court and its judges, suitability of the court’s procedures to presentation of the case, the nature of any local patent rules, and the reputation of the patent owner and defendant in the district. And although patent laws apply uniformly throughout the country, geographic variations concerning such matters as time to trial, courts’ willingness to postpone matters to accommodate parallel patent office proceedings, and the like can affect a patent owner’s chance of prevailing.

When the patent owner wishes to pursue infringement claims against more than one party, moreover, additional considerations come into play. As noted above, patent owners can benefit from having a single court address claims against multiple defendants. This makes it advantageous to select a location where all defendants can be taken to trial.
Notably, patent owners can sue initially wherever they choose. Under the federal rules, plaintiffs are not required to plead that venue is proper. Ripperger v. A.C. Allyn & Co., 113 F.2d 332, 334 (2d Cir. 1940), cert. denied, 311 U.S. 695 (1940); Rocket Jewelry Box, Inc. v. Noble Gift Packaging, Inc., 869 F. Supp. 152, 154 (S.D.N.Y. 1994). It is up to the defendant to object to the venue in its answer or a motion to dismiss. By choosing an objectionable venue, however, a patent owner may cede to defendants an ability to influence the ultimate venue, either by moving to transfer the patent owner’s lawsuit to a preferred forum, or by moving to dismiss and promptly filing a declaratory judgment countersuit in the defendant’s preferred venue.

When proper venue can be found for most but not all targeted defendants in a selected district (such as because many defendants are incorporated in a single state), patent owners may choose to sue only those defendants in that district, while leaving commencement of litigation against other targets until later. If care is taken to avoid raising threats that could justify the unsued defendants bringing an action for declaratory judgment, the patent owner can retain control over the location of initial litigation, while avoiding having to initially litigate in multiple forums.

Strategies for Defendants and Potential Defendants

When a defendant is sued in a district where venue is improper, the defendant can move to dismiss the case and/or transfer it to a different district or, alternatively, allow the case to proceed in the district chosen by the patent owner. If the defendant wishes to preserve venue objections, it must act promptly, since the defendant will likely waive the objection if it fails to raise it by answer or a motion to dismiss the complaint. See Fed. R. Civ. P. 12(h)(1); Foote v. Chu, 858 F. Supp. 2d 116, 120 (D.D.C. 2012).

Even when an objection to venue is initially preserved by being stated in a pre-answer motion or as an affirmative defense in the defendant’s answer, waiver can still occur due to subsequent inaction. In re Micron Tech., Inc., 875 F.3d 1091, 1100-02 (Fed. Cir. 2017) (waiver possible in even where Rule 12(h) objection is made).

In some circumstances, allowing the lawsuit to proceed where initially filed may be the best option. Doing so avoids the cost of a motion to dismiss or transfer, and may be fully suitable if the case can be economically resolved where initially filed. The presence of other defendants in the initial location may also reduce defense costs if another defendant will lead the defense effort. When defendants expect to cooperate closely, such as where they have similar positions, remaining before a single court may facilitate a schedule that provides for a coordinated defense.

Where the defendant chooses to insist on proper venue, different considerations will govern the decision to move either to dismiss or to transfer to a district with proper venue. Moving to dismiss, if successful, will result in a delay of proceedings against the moving defendant, thereby prioritizing the patent owner’s pursuit of cases against other defendants. If the patent is invalidated or its claims helpfully interpreted in a prioritized case, the deferring defendant gains a likely economical exit. Moreover, because dismissal will require the patent owner to file anew, damages recoverable under 35 U.S.C. § 286 (only those incurred within the six years before filing) could be limited. And even if rulings helpful to the defendant do not result in the dismissal of the initial proceeding as pursued against the properly named defendants, rulings in that lawsuit may set the stage for the deferring defendant to present a more effective defense.

In addition, obtaining a dismissal based on improper venue has the advantage of extending defendant’s one-year-after-service deadline (35 U.S.C. § 315(b)) to challenge the patent in the patent office by inter partes review (IPR). Under 35 U.S.C. § 315(b), IPR proceedings must be sought within one year of the petitioner being served with a complaint for infringement. However, under Nautique Boat Co. v. Malibu Boats, LLC, IPR2014–01045, slip op. at 10 (PTAB Nov. 26, 2014) (Paper 13), the involuntary dismissal of an infringement lawsuit without prejudice (such as for improper venue) nullifies the effect of service. Thus, the U.S. Patent and Trademark Office allows IPR proceedings to be instituted despite service years before an earlier lawsuit against the petitioner, where the lawsuit was subsequently dismissed for improper venue. That decision to institute may not be challenged on appeal. Shaw Indus. Grp., Inc. v. Automated Creel Systems, Inc., 817 F.3d 1293, 1301 (Fed. Cir. 2016).

On the other hand, by moving to transfer, the defendant can gain a say in where the lawsuit will ultimately proceed. If the defendant challenging venue wants the lawsuit moved to a particular district, such as where it has a regular and established pace of business, it can present evidence showing that venue would be proper in that district. That evidence gives the district court a basis for transferring to the defendant’s preferred district under 28 U.S.C. § 1406(a), which allows transfer to districts where the lawsuit “could have been brought.” Thus, for higher-stakes cases, moving to transfer to a preferred transferee district may advance a defendant’s cause more than dismissal.

Potential Rulings When Venue Found Improper

Upon concluding that venue is improper, the statute instructs the district court to “dismiss, or if it be in the interest of justice, transfer such case to any district or division in which it could have been brought.” 28 U.S.C. § 1406(a). “Generally, the ‘interest of justice’ requires courts to transfer cases to the appropriate judicial district, rather than dismiss them.” Darby v. U.S. Dept. of Energy, 231 F. Supp. 2d 274, 277 (D.D.C. 2013). Accord, Hand Held Prods., Inc. v. Code Corp., 265 F. Supp. 3d 640, 646 (D.S.C. 2017); Dumitrescu v. DynCorp Int’l, LLC, 257 F. Supp. 3d 13 (D.D.C. 2017); Zaletel v. Prisma Labs, Inc., 226 F. Supp. 3d 599 (E.D. Va. 2016); Bojorquez v. Abercrombie & Fitch, Co., 193 F. Supp. 3d 1117 (C.D. Cal. 2016).

This promotes “expeditious and orderly adjudication of cases and controversies on their merits,” according to Goldlawr, Inc. v. Heiman, 369 U.S. 463, 466-67 (1962), such as by preserving the tolling of time-limitation statutes. Thus, at least in single-defendant cases, district courts normally find that the interest of justice warrants transfer, rather than dismissal.

Where multiple defendants are involved, transfer can present additional difficulties. Particularly under the more stringent venue rules of TC Heartland, cases can arise where venue in the original district is improper as to only some of the defendants, or where venue is improper for all defendants but there is no single transferee district that will be the proper venue for all of them. Faced with a situation in which it is impossible to achieve transfer to a single location, courts have tools that allow them to avoid dismissal in many cases.

Where venue is proper for one or more defendants but not for others, one of the court’s options is to sever the claims against different defendants and transfer only those with improper venue. Such severance, however, is disfavored where there is a single district that can address all the claims, at least where the claims and parties are intertwined. Sunbelt Corp. v. Noble, Tendon & Assocs., Inc., 5 F.3d 28, 33-34 (3d Cir. 2993); Jewell v. Music Lifeboat, 254 F. Supp. 3d 410 (E.D.N.Y. 2017); Loeb v. Bank of America, 254 F. Supp. 2d 581, 588 (E.D. Pa. 2003). In a typical multidefendant patent case, infringement issues for the various defendants ordinarily will be intertwined because, under 35 U.S.C. § 299, joinder of defendants in a single lawsuit is only appropriate where they all make, use, or sell “the same accused product or process.” Where the various defendants are large companies with dispersed physical locations, the goal of transferring to a single, proper district may be achievable. On the other hand, where the defendants are smaller retail sellers, it will sometimes be difficult to find a single district with proper venue, which may require severance.

When venue is improper in the original district as to only some of the defendants, but a transferee court has proper venue for all, courts have kept the case together by transferring the claims against improperly venued defendants under 28 U.S.C. § 1406(a) and those against properly venued defendants under 28 U.S.C. § 1404(a). The latter statute allows transfer from one proper venue to another for convenience of the parties and the interest of justice. Gonsalves-Carvalhal v. Aurora Bank, FSB (E.D.N.Y. 2014); Holmgren v. Allen, 886 F. Supp. 641, 643 (N.D. Ill. 1994). Following a different approach, when considering a case involving a properly venued foreign defendant and an improperly venued U.S.-based defendant, the court in 3G Licensing, S.A. v. HTC Corp. (D. Del. No. 17-cv-83, 12/18/17), gave the patent owner the option of dismissing the improperly venued defendant and pursuing its case only against the foreign defendant.

In some cases, however, there will be no single district with proper venue for all defendants. This situation can arise, for example, where the patent owner has sued a product’s retail sellers that are localized in different parts of the country. In such cases, the court may consider inviting the patent owner to voluntarily dismiss claims against some defendants so as to allow transfer of the principal defendants (such as manufacturers or distributors) to a single court. Alternatively, the court can transfer some defendants to a venue proper for them and invite the other parties to consent to transfer to that district for convenience under 28 U.S.C. § 1404(a).

Before 2011, 28 U.S.C. § 1404(a) allowed transfer for convenience only to a district where the lawsuit might have been brought. The Federal Courts Jurisdiction and Venue Clarification Act of 2011 added an alternative, allowing transfer for convenience to a district “to which all parties have consented.” As noted in Guzzetti v. Citrix Online Holdings Gmbh (D. Del. 2013), this requires consent of the patent owner, as well as all defendants.

If agreements are not forthcoming, the court can also simply dismiss the claims against the defendants as to which venue is improper and allow the patent owner to refile separate cases where venue is proper. At least one court has decided that, where the alternative is “essentially scatter[ing] cases across the country,” the interest of justice is best served by dismissing to allow the patent owner to consider selecting an “efficient” (presumably single) venue. Nichia Corp. v. Vizio, Inc., No. 2:16-cv-001453 at 11 n.5 (E.D. Tex., 2/1/18). Where the patent owner nonetheless chooses to refile in multiple districts, efficiency might be served by the Judicial Panel for Multidistrict Litigation consolidating the cases for pretrial purposes under 28 U.S.C. § 1407.

Another situation involves separate lawsuits filed in a single district against different defendants or groups of defendants. This commonly arises where a patent owner seeks to pursue a patent enforcement program against multiple companies involved in making, distributing, or selling different models of a type of product (e.g., mobile phones). Until 2011, this was normally done by filing a single suit against all the defendants. This practice led defendants to complain that consolidating different brands of products into a single infringement case hindered their ability to effectively present their product-specific defenses. In response, Congress adopted 35 U.S.C. § 299 to prevent joining defendants with distinct product designs into a single trial. In the face of that statute, patent owners soon began to file separate complaints for each brand of product in the same district. Some district courts then began to temporarily consolidate separately filed cases for pre-trial claim-construction and summary-judgment proceedings. To an extent, this frustrates § 299’s goal of facilitating presentation of product-specific defenses by defendants making or selling different accused brands of products.

An interesting question also arises as to whether the presence of parallel lawsuits against other brands should influence the court’s choice of remedy where venue is found to be improper. On one hand, the case law under transfer statutes encourages promoting the interest of justice by facilitating consolidated consideration of a whole controversy. On the other hand, the more restrictive joinder requirements in 35 U.S.C. § 299 can be seen to reflect a congressional judgment that claims against different products should be given separate consideration. The balance of these values will likely be influenced by the circumstances of each case.

Conclusion

By restricting the scope of permissible venue, the TC Heartland decision raises many novel questions for multidefendant cases. Fortunately, the existing law under the statutes governing dismissals/transfers for improper venue (28 U.S.C. § 1406(a)) and transfers for convenience (28 U.S.C. § 1404(a)) allow district courts to address these questions in ways that, in most cases, will permit cases to be assigned to appropriate districts to achieve fair and efficient adjudication of multiparty patent disputes.