June 21, 2017 – Last month, the U.S. Supreme Court upended the 27-year-old venue standard for patent infringement lawsuits, narrowing where plaintiffs may file suit. Will the next Supreme Court term drop an even bigger bombshell?

The Inter Partes Review (IPR) proceeding, introduced in 2012 as part of the landmark America Invents Act (AIA), created a new administrative procedure to challenge patents outside of the court system. Last week, however, the Supreme Court granted certiorari in a case that may hold IPRs unconstitutional.

TC Heartland Upends Venue Standards

On May 22, 2017, the Court issued its decision in TC Heartland LLC v. Kraft Foods Group Brands LLC,¹ reversing the Federal Circuit’s interpretation of the patent venue statute,² first announced in VE Holding Corp. v. Johnson Gas Appliance Co.³

28 U.S.C. § 1400(b) provides: “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.”

VE Holding interpreted “where the defendant resides” in light of the general venue statute, 28 U.S.C. §1391(c), providing that a defendant is deemed to reside “in any judicial district in which such defendant is subject to the court’s personal jurisdiction.”

Since personal jurisdiction usually exists in any jurisdiction where accused products reached the stream of commerce, companies that offered products for sale nationwide also faced suit nationwide.

One result was the growth of certain federal district court jurisdictions, most notably the Eastern District of Texas, but also including the Western District of Wisconsin and others, which attracted plaintiffs who viewed the venues as relatively speedy (“rocket dockets”) or otherwise plaintiff-friendly.

In 2016, for example, over one-third of all patent cases filed in the U.S. were filed in the Eastern District of Texas. At the same time, VE Holding’s permissive venue standard allowed for the less controversial practice of patent plaintiffs filing in their home venue.

Decision Significantly Narrows Venue

In TC Heartland, the Supreme Court held that “resides” as used in Section 1400(b) does not include any venue supporting personal jurisdiction. Rather, it held that earlier Supreme Court precedent limits “resides” in the defendant’s state of incorporation. The Court pointed out that the decision only applied to domestic entities.

Prior decisions suggest that foreign companies “reside” nationwide, though that issue is expected to face future litigation. Thus, a domestic patent defendant can be sued in its state of incorporation or “where the defendant has committed acts of infringement and has a regular and established place of business.” The scope of the latter provision currently is not well-defined, but likely requires a physical presence.

For most Wisconsin companies, the good news is that they most likely will no longer face the potential of a patent infringement lawsuit in Texas or other locations where they do not operate, with a big exception: Any company may be sued in its state of incorporation, regardless of the presence of business operations.

Whether courts in popular states for incorporation, such as Delaware, are inclined to transfer such cases to other venues remains to be seen. But Delaware already requested judicial reinforcements from Pennsylvania in anticipation of increased patent infringement filings.

In addition, certain companies with nationwide operations may still be sued nationwide under the second part of the venue statute, a point made by Steven E. Anderson, vice president and general counsel of Wisconsin’s Culver Franchising System, Inc., during his June 13, 2017 testimony before the U.S. House Subcommittee on Courts, Intellectual Property, and the Internet. Whether a plaintiff or defendant, all parties should take care not to waive venue defenses or file lawsuits that face certain dismissal.

Will Oil States Energy Kill the IPR?

On the heels of its TC Heartland decision, the Supreme Court made another big splash on June 12, 2017, when it granted certiorari in Oil States Energy Services v. Greene’s Energy Group (No. 16-712), on the question of “Whether inter partes review – an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents – violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.”

IPRs Have Changed the Patent Litigation Landscape

Since the first IPR petition was filed in September 2012, petitioners have filed more than 6,000 IPR challenges to previously issued patents.

Though similar to the earlier reexamination proceedings, which also allowed an entity to challenge the validity of an issued patent outside of the court system, the ability for more robust discovery and an expedited schedule – final decisions typically are issued within 18 months of when a petition is filed – have resulted in IPR filings exceeding what the PTO first expected.

One result of this is an impact on the number of cases filed in court and the treatment of cases that are filed. More than 80 percent of patents challenged in IPRs and the related Covered Business Method (CBM) procedure are also being litigated in the federal courts.

When a court defendant files an IPR petition, the PTO usually institutes a proceeding. And in almost all cases the court will stay the litigation before or upon institution. IPR challenges, moreover, are generally successful – in many cases, challenged claims are ruled invalid.

While current trends suggest that IPRs may not be the “death squads” initially feared, the number of filings remains strong. In just a few short years, the IPR (and related CBM and Post-Grant Review (PGR) AIA proceedings) fundamentally changed how patents are litigated in the U.S.

Supreme Court to Address Constitutionality

Now, several years in, the Supreme Court will decide the question of whether the IPR procedure is constitutional.

The challenge to the IPR statute is based on the premise that, once granted, a patent is a private right.  As such, it can be extinguished, in accordance with Article III and the Seventh Amendment to the U.S. Constitution, only through a jury proceeding in the federal courts, and not through an administrative proceeding.

The challenge relies, in part, on McCormick Harvesting Mach. Co. v. C. Aultman & Co.,⁴ which ruled that once a patent is granted, it “is not subject to be revoked or canceled by the president, or any other officer of the Government” because “[i]t has become the property of the patentee, and as such is entitled to the same legal protection as other property.”

The supporters of the statute, on the other hand, including the PTO, take the position that a patent is a public right, whose bounds are dictated by Congress. Under this view, Congress has the power to authorize an administrative agency such as the PTO to review granted patents and revoke such rights if improperly granted.

The supporters see the McCormick decision not as stating an overarching constitutional limit, but merely explaining the statute in effect at the time.

To many observers, the certiorari grant comes as a surprise. The IPR proceeding itself is relatively new but carries on the paradigm of a challenger requesting that the PTO invalidate claims of an issued patent introduced in reexaminations, first authorized by Congress in 1980.

The Federal Circuit upheld the constitutionality of reexaminations, and the Supreme Court declined to review the question. The Federal Circuit first upheld the constitutionality of IPR proceedings in MCM Portfolio LLC v. Hewlett-Packard Co.,⁵ The Supreme Court denied review in that case in 2016, as well as in two other cases also presenting constitutional challenges.

What Now?

The Supreme Court will hear Oil States Energy in the next term beginning October 2017. Despite the fact that the Court previously declined to address constitutional challenges to both reexaminations and IPRs, many suspect that the Court would not have accepted this case unless at least some justices viewed the IPR proceeding as unconstitutional.

If the Supreme Court upholds the constitutionality of IPRs, there will be little to no change to the status quo. If, however, the Court rules IPRs unconstitutional, the impacts will be far reaching. First, IPRs themselves will come to a grinding halt. But if IPRs are unconstitutional, it should follow that PGRs, CBMs, and reexaminations are as well.

What about interference proceedings (now replaced with derivation proceedings under the AIA), that can examine whether another inventor invented the subject matter of an issued patent? Will the ruling apply retroactively, such that patent claims previously ruled invalid in reexamination or IPRs are resurrected?

Will such past rulings constitute takings that entitle patent owners to compensation from the government? As the case proceeds at the Supreme Court, briefing from the parties, the PTO, and others may shed some light on these issues. But substantial uncertainty will exist until the Court decides the case, and potentially even after.

Endnotes

¹ 137 S.Ct. 1514 (2017).

² 28 U.S.C. §1400(b).

³ 917 F. 2d 1574 (Fed. Cir. 1990).

⁴ 169 U.S. 606, 608-09 (1898).

⁵ 812 F.3d 1284 (Fed. Cir. 2015).