Moving the Trolls Out of Texas
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Background
Though Silicon Valley, San Francisco, and Boston are regarded as the epicenters in science and technology, East Texas has been the major venue in patent litigation for leading tech companies such as Apple, Samsung, and IBM. A significant number of the disputes in East Texas is litigation brought by non-practicing entities (NPEs), also known as “patent trolls”, that do not develop research or technology but rather use patents and amass patent portfolios to threaten companies with patent infringement litigation. District courts in East Texas have drawn the ire of NPEs for the courts’ favorable treatment towards plaintiffs asserting their patents. NPEs have consistently had higher success rates litigating in Eastern Texas at 52% than in other popular districts such as Northern California at 13% and Delaware at 25%. Unsurprisingly, Eastern Texas hosted the most decisions involving NPEs as well. This blog post will touch upon the changing forum landscape trends of patent litigation involving NPEs, as well as the existing issues that still need resolution.
NPEs’ real estate in the patent landscape
Despite the patent system’s goal to promote progress through incentivization, NPEs have established a substantial piece of real estate in the patent landscape with NPEs making up 22% of total patent decisions from district courts. NPE companies such as Intellectual Ventures, own, manage, and build patent portfolios to assert their patents through litigation or sell their patents to companies looking to strengthen their own patent portfolios. Intellectual Ventures has amassed over $2 billion in licensing revenue alone and advertise “a portfolio of more than 35,000 IP assets.” Round Rock Research LLC, another known NPE, also engages in the tactic of building portfolios with the purpose of making revenue by litigation and licensing of their patents. This NPE activity has been primarily responsible “for a decline of $22 billion in venture investing over a five-year period” with surveys showing that 41% of software startups affected by patent troll lawsuits. In a survey published by the New America Foundation’s Open Technology Institute in 2013, “about 75% of venture capitalists and 20% of venture back startups with patent experience have been impacted by an NPE demand.”
Patent litigation reform
Bills such as the Innovation Act and the Venue Act were introduced in 2016 as potential dampeners on patent litigation, but ultimately stalled in Congress. The Supreme Court’s 2017 decision, TC Heartland LLC v. Kraft Food LLC, has served as a much needed measure in patent litigation reform to hinder the patent troll activity that Congress had previously failed to address.
In TC Heartland, the court unanimously decided that patent lawsuits could only be filed in 1) districts where the defendant are incorporated, or 2) where the defendant has committed acts of alleged infringement and has a “regular and established place of business.” NPEs have established whole empty office headquarters in East Texas giving them personal jurisdiction to file suit in the district. As a result of this decision, NPEs employing this tactic are now barred from suing without the venue requirements laid out in TC Heartland.
Ninety days after the TC Heartland decision, the number of patent cases filed in the Eastern District of Texas dropped by about fifty percent compared to the ninety days before the decision. Before the TC Heartland decision, a total of 960 patent cases filed within the span of two years. After the decision, 3884 patent cases filed in East Texas in the two years (for a depiction of the trend in patent suits in East Texas surrounding TC Heartland, see Graph 1). Since TC Heartland, the courts have followed clarified In Re Cray, that the defendant has a “regular and established place of business” for purposes of venue. The court established a three-pronged test requiring that “(1) there must be a physical place in the district”; (2) “it must be a regular and established place of business; and (3) it must be place of the defendant.” These venue requirements require NPEs and tech companies to navigate a new patent venue landscape. Apple has closed two of their East Texas locations to avoid litigation.
Graph 1: Patent suit volume per month prior to and after TC Heartland decision (Source for data points, Graphed using Mathematica program)
Despite this deterrence to patent troll forum shopping, the Post-TC Heartland landscape requires further solutions. In Re HTC Corp. exposed one hole in the patent system where the Federal Circuit held that the venue requirements established in patent suits for U.S. corporations as defendants did not extend to foreign corporations, allowing foreign corporations to be sued in any U.S. district. Holding international patent holders and inventors subject to suit in East Texas presents a disadvantage in patent rights that may disincentivize the introduction of foreign technologies. Even though the patent troll filling has decrease in East Texas, there is still a possibility that patent troll filing will increase in the Western District of Texas. The Western District of Texas is geographically advantageous to the Eastern District because the district encompasses the prominent tech hub of Austin, Texas. The Western District may also favor the plaintiffs more in patent claims that drew NPEs towards the Eastern District. In addition to be being more favorable towards the plaintiff, the Western District also has a judge that is pushing to make Waco the new hotbed for patent litigation.
Moving forward
Both Congress and the courts must address methods of definitively curbing the effects of NPEs rather than merely mitigating their use of forum shopping. The problem of NPEs would ultimately require a multifaceted reform involving previously suggested solutions of reasonable royalty reform, and working requirements for patent owners. Reasonable royalty reform would require regulation of the amount of damages NPEs may obtain if successful in a patent infringement suit. This may entail considering damage awards to NPEs as nominal damage—damage that may count as a reward but is otherwise insubstantial in value. By greatly restricting the potential damage awards for NPEs, NPEs are substantially deterred by sunk costs of litigation, and aggressive licensing because the threat of litigation has diminished. Working requirements mandate that patent owners must practice their patented invention to enforce their patent. Working requirements on patents have been employed to restrict compulsory licensing in countries such as China and have been thought off as potential tools to combat NPE activity in the United States. Nevertheless, to fully evaluate whether the current patent landscape will revert back to a system of extreme forum shopping, or initiate a larger trend of patent litigation reform that serves to make trolling an inviable or unrewarding practice, more time is necessary.
Anthony Bautista is a second-year at Cornell Law School. He attended Johns Hopkins University where he earned a degree in Biophysics while conducting research in computational chemistry. Anthony serves as President for the Latino American Law Student Association. He also enjoys watching his hometown Los Angeles Lakers.
Suggested Citation: Anthony Bautista, Moving the Trolls out of Texas, Cornell J.L. & Pub. Pol’y, The Issue Spotter, (Oct. 28, 2019), https://live-journal-of-law-and-public-policy.pantheonsite.io/moving-the-trolls-out-of-texas/.