
Supreme Court Considers Why Patent Trolls Favor Texas Courts - hvo
https://www.nytimes.com/2017/03/27/business/supreme-court-patent-trolls-tc-heartland-kraft.html
======
redm
We (MediaFire) were part of the Amici brief submitted to the Supreme Court
regarding the eastern district of Texas. [1]

It is a serious issue. Being a Texas company, we have been sued numerous times
primarily because we are in Texas and it allows the other defendant's cases to
be tried in the Eastern District of Texas.

The patents are always baseless, but it matters little. In almost all cases,
the board of directors wants to settle the case quickly instead of fighting it
out, even (in many cases) if the CEO or inside counsel wants to fight. It's
cheap(ish) to settle and very expensive and time-consuming to fight; in short,
it's a big distraction, one that can be solved with money. Since most of the
plaintiffs are shell companies run by lawyers, there is little cost to them
even if they loose and no value to the defendant if they win.

The exception to all this being Lee Chang at NewEgg who always fights. That
works if you have a CEO and board who is willing to spend the time and money
to establish a reputation but that is seemingly rare. Newegg also signed onto
this Amici. [2]

This problem has been going on for a long time (8 years for us), and while we
keep hoping for some reform, Congress is yet to act in a meaningful way.

On a side note, our former patent defense attorney, who clerked for the patent
judge in Marshall, TX, left defense a few years ago and became a plaintiff's
attorney. His reasoning? Much more profitable.

[1] [http://www.scotusblog.com/wp-
content/uploads/2017/02/16-341-...](http://www.scotusblog.com/wp-
content/uploads/2017/02/16-341-pet-amicus-48-Internet-Companies.pdf)

[2] [https://blog.newegg.com/lee-cheng-holds-reddit-ama-
explains-...](https://blog.newegg.com/lee-cheng-holds-reddit-ama-explains-
fights-patent-trolls/)

~~~
amunster
Minor nitpick: Lee Cheng left Newegg in late 2016 to be COO of Gibson Brands
(the guitar company). He will not be "fighting" in his new role. [1]

[1][http://www.law.com/sites/almstaff/2016/10/03/outspoken-
paten...](http://www.law.com/sites/almstaff/2016/10/03/outspoken-patent-
critic-lee-cheng-leaves-newegg/)

~~~
6stringmerc
He's traded fighting Weaponized Patents for fighting Counterfeit Goods in that
respect, re: Chibsons.

------
clamprecht
This video from Austin Meyer (creator of X-Plane) is pretty eye-opening:

[https://youtu.be/sG9UMMq2dz4](https://youtu.be/sG9UMMq2dz4)

Apparently there are TWO judges in the district, BOTH of whose own sons are
lawyers in the same district. And BOTH sons handle a lot of the patent
litigation, in front of their own fathers, the judges. Pretty incredible.
Watch the video starting at about 5 minutes to see it.

~~~
devoply
sounds like a plot of a movie. brother vs brother in front of their father.

~~~
optimuspaul
With their long lost half sister is on the jury and their mother is the
Bailiff. I'd watch that if there was nothing else on.

~~~
haikuginger
Hell, I'd watch that even if there was other stuff on.

------
ridgeguy
This is such a widely known situation in legal circles.

The United States District Court for the Eastern District of Texas described
by the NYT is known as the "rocket docket" and the go-to forum for patent
trolls.

A friend who is a patent litigator in a major US IP law practice, recently was
moved to TX to be near the Court's location. Relocation driven by the
disproportionate economic activity surrounding that jurisdiction.

Hope the Supremes will do something to mitigate the disproportionate influence
of the Eastern District Court in patent matters.

~~~
Spivak
The counterargument being that having a high concentration of cases in a given
area means that the law is well developed and there will be few surprises when
bringing a suit.

It's the reason that a lot of businesses are incorporated in either Deleware
or Nevada.

~~~
lhopki01
Yes. A well developed legal field is completely why lots of companies
incorporate in Deleware. It's got nothing to do with highly favourable tax
regimes. I'm sure it's the same reason Ireland and Luxembourg are so
favourable.

~~~
whafro
Anecdata: the well-developed legal field is the prime reason why my corporate
attorney always pushes his clients to incorporate in Delaware. He and his firm
know what to expect throughout the process, and can offer much more reliable
advice than when you incorporate elsewhere or in your home state (even
California).

Delaware residents certainly have a favorable tax situation, with zero sales
tax and very low property taxes, but that's mostly because they get tons of
income from the franchise taxes applied to corporations registering there.

And if you're a first-time founder getting your first Delaware franchise tax
bill, you're not going to consider the process favorable by any means.

~~~
Thrillington
And filing in Texas is the same for patent prosecution. The plaintiffs know
what to expect: interpretations from the bench that heavily favor them.

It's not well developed law when the decisions are so disproportionately
weighted towards one side of the courtroom.

~~~
TheCoelacanth
A key difference with Delaware is that the people choosing to incorporate
there typically don't know which side of the law suit they will end up on. The
location of incorporation mainly matters for when shareholders sue the company
which means they are effectively suing the other shareholders.

------
jimrandomh
Quotes in the article suggest that the justices want to consider only
legislative intent, and not deal with the issue of forum shopping or of East
Texas in particular.

This may technically be legally correct, but it is a serious mistake. East
Texas has a reputation for unfairness, and that reputation is undermining the
credibility of the US legal system as a whole.

~~~
BearGoesChirp
>that reputation is undermining the credibility of the US legal system as a
whole.

Once someone studies the impact of wealth on outcome of court cases, such as
the difference between hiring a good lawyer and getting a public defender, is
there anyone who still thinks of the US legal system as credible? I think of
it as a pay to win system with a monopoly on violence that is a threat to
anyone caught up in it. I've seen poor people completely destroyed for far
lesser crimes that what rich people are allowed to walk with. Once you count
in stacking charges to force plea deals, and the rate at which plea deals
happen, how can anyone defend seeing any credibility left in the system?

------
RangerScience
Huh. If you block IP addresses from this part of Texas, can you claim to not
to business there, and thus cannot be tried there?

Edit: Actually... Could you have one company make the product, and one company
resell the product, and pick where the first company does business to be
advantageous to themselves during patent litigation? Or can the reseller be
sued for patent infringement?

~~~
tyingq
Not a lawyer, but I know you can force resellers to destroy patent infringing
inventory. Not the same as being sued for damages, but ends your business
model anyway.

------
nathancahill
Was hoping for a cameo appearance of Lee Cheng, the (edit: former) Chief Legal
Officer for Newegg. He's a force to be reckoned with when it comes to patent
trolls in East Texas.

~~~
sandipc
former chief legal officer for Newegg...

[http://www.law.com/sites/almstaff/2016/10/03/outspoken-
paten...](http://www.law.com/sites/almstaff/2016/10/03/outspoken-patent-
critic-lee-cheng-leaves-newegg/?slreturn=20170227214412)

~~~
nathancahill
Thanks. Can't read the article, but hopefully he's continuing to fight the
good fight.

~~~
rayiner
[https://www.musicrow.com/2016/10/legal-executive-lee-
cheng-j...](https://www.musicrow.com/2016/10/legal-executive-lee-cheng-joins-
gibson-brands-as-cooevp). NorCal to Nashville. I approve.

------
microcolonel
> That decision said defendants in patent cases, as in other cases, may be
> sued essentially anywhere they do business.

If this is the case, it seems like it would make sense to simply stop doing
commerce in hostile jurisdictions. It might constitute a short term loss for
some vendors, but it might kill the cottage industry of plaintiff-slanted
patent hearings.

~~~
saosebastiao
I've been mulling over putting in a TOS clause in my product prohibiting its
use within the jurisdiction of the Eastern District of Texas. And if I'm
understanding this right, not only would it be impossible to sue me there, it
would also be possible to bring both criminal and civil complaints against any
East Texas patent trolls accessing my site for violation of the CFAA.

~~~
AndrewKemendo
Would this actually work?

~~~
georgemcbay
I am certainly no lawyer but I suspect it wouldn't work just based on the fact
that if it did it would be standard procedure for tech companies. For a lot of
companies, losing business in that one region would be worth the trade
(again.. if it actually worked to shield you from patent trolls).

------
droithomme
> a few companies urged the justices to retain the current rules, saying there
> was a value in letting cases be considered by courts that have developed
> expertise in patent matters.

Fair enough, let's have an IQ and competency test for Judge T. John Ward and
see if this claim by various corporations that he is truly the century's most
brilliant jurist on the topic of IP or not.

~~~
talmand
That "developed expertise in patent matters" excuse is biggest pile of
bullshit I've ever heard of concerning patent issues.

------
prance
> That could lead to overcrowding in the federal court in Delaware, he said,
> given the large numbers of corporations incorporated in the state.

Wouldn't that actually be fair? As it is now, it seems that Delaware can give
all those tax breaks, and not bear any consequences.

~~~
jaredklewis
What Delaware tax breaks? To my knowledge incorporating in Delaware doesn't
have any tax advantage.

You'll be taxed wherever you operate, not where you incorporate.

~~~
lazyasciiart
> Delaware today regularly tops lists of domestic and foreign tax havens
> because it allows companies to lower their taxes in another state — for
> instance, the state in which they actually do business or have their
> headquarters — by shifting royalties and similar revenues to holding
> companies in Delaware, where they are not taxed. In tax circles, the
> arrangement is known as “the Delaware loophole.”
> [https://mobile.nytimes.com/2012/07/01/business/how-
> delaware-...](https://mobile.nytimes.com/2012/07/01/business/how-delaware-
> thrives-as-a-corporate-tax-haven.html)

------
rayiner
The case is a good example of why popular reporting about how the Supreme
Court works often misses the mark. The case really isn't about patent trolls--
the policy question of balancing patent rights versus other consideration is
squarely in Congress's wheelhouse. Instead, this is a dispute about what
Congress has already said. Specifically, what it has said about "venue" in
patent cases.

"Venue" is the idea that several courts may have the _power_ to hear a case (
_i.e._ they have jurisdiction over the case and over the defendant), but that
for various reasons we may want to funnel the litigation to particular courts.
Venue rules are set forth in federal law.

28 U.S.C. 1400(b) states: "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." That's a venue provision specific to patent cases. It
tends to limit where venue is proper ( _i.e._ where lawsuits can be brought),
because ordinarily "residency" for a corporation is defined pretty narrowly.

There is also a more general venue provision, 28 U.S.C. 1391(a)-(c), which
provides for venue in, among other places, wherever a corporate defendant is
subject to personal jurisdiction. That tends to permit venue in more places,
because corporations can be subject to personal jurisdiction almost everywhere
they have a substantial business presence (under the theory that if you do
business somewhere, you can't complain about being taken to court there).

The Supreme Court held in 1957, in _Fourco Glass v. Transmirra Products_ ,
that in patent cases, only section 1400 applies, not the more general venue
provision in section 1391. That is, until the Federal Circuit determined that
subsequent amendments to section 1391 had the effect of making the more
general venue provision of section 1391 applicable to patent cases too.

Now, whatever you think of patent trolls, you kind of have to handicap the
case in favor of Kraft (the party arguing for broader venue). The text of the
current version of section 1391 is pretty clear: an action may be filed in "a
judicial district in which any defendant resides," where the "residency" of
corporate defendants is defined as "any judicial district in which such
defendant is subject to the court’s personal jurisdiction with respect to the
civil action in question," _for "all venue purposes."_

Kraft argued at the Supreme Court the definition of "residency" in 1391(c)
applies "for all venue purposes," including for purposes of section 1400.
Thus, even if section 1400 is the exclusive venue provision in patent cases,
it incorporate's 1391(c)'s broad definition of where a corporate defendant
"resides."

Undoubtedly, many pages will be spent arguing about the effect of one reading
of the statutory text versus the other vis-à-vis patent trolls. Some justices
will care about that, because they view statutory interpretation through the
lens of policy decisions. Others will not care. Not because they do or do not
like patent trolls, but because to them statutory interpretation is a matter
of what the words on the page say, not policymaking.

~~~
comex
> The Supreme Court held in 1957, in Fourco Glass v. Transmirra Products, that
> in patent cases, only section 1400 applies, not the more general venue
> provision in section 1391. That is, until the Federal Circuit determined
> that subsequent amendments to section 1391 had the effect of making the more
> general venue provision of section 1391 applicable to patent cases too.

What you're leaving out is that the amendment to the relevant part of 1391 was
only from:

> (c) A corporation may be sued in any judicial district in which it is
> incorporated or licensed to do business or is doing business, and such
> judicial district shall be regarded as the residence of such corporation for
> venue purposes.

to:

> (c) For purposes of venue under this chapter, a defendant that is a
> corporation shall be deemed to reside in any judicial district in which it
> is subject to personal jurisdiction at the time the action is commenced.

It seems highly improbable that this minor wording change was intended to
affect whether or not it applied to section 1400, and the Federal Circuit
didn't find any evidence that Congress intended it to. Thus, even if the
original Supreme Court interpretation was 'wrong' from a textualist
perspective, the Federal Circuit was still bound by it and should have
followed it, rather than using some blustery argument to decide that they
could treat the new text "as a matter of first impression" \- basically an
excuse to "ignore our decision", as Justice Kagan put it. My guess is that the
Federal Circuit was just as motivated by policy desires in doing so as you
blame the Supreme Court for being; at least, this would fit very neatly into
the usual pattern of the Federal Circuit consistently making IP-friendly
rulings and the Supreme Court frequently overruling them.

As you allude to, 1391 has since been amended further, but again not in a way
that suggests Congress intended a functional change wrt this question.

~~~
rayiner
Petitioners brief does a great job by making it seem like moving the words
from the end to the beginning was the only change. But note that Congress
changed it from "for venue purposes" to "for purposes of venue _under this
chapter_." Now it's "for all venue purposes." The latter suggests at least a
clarification about the intended scope of the residency definition.

------
nomercy400
How about moving the specialized court to the US Patent Office area (not same
building), and have both the 'anywhere' and the 'incorporated' part solved?
The specialism is around the corner, the government can set up the court
basics and scale to demand. Incorporated Delaware isn't overloaded. And
finding the best court to go to for trolls disappears.

~~~
hugenerd
we're just talking about the lower courts here. that exists for appeals.
[http://www.cafc.uscourts.gov/](http://www.cafc.uscourts.gov/)

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anonymousDan
So if I'm starting a new company today, what's the best place to incorporate
to avoid patent trolls, both in the US and/or globally? What other strategies
are there to avoid patent trolls (e.g. never do business in the state of
Texas?).

~~~
driverdan
If you're starting a new company you should be thinking about building a
product and finding customers, not patent trolls.

------
rodionos
What this article fails to emphasize and report on is the amount of settlement
payments and related legal expenses produced by cases filed with the EDT
court.

I wouldn't be surprised if they would dwarf whatever remedies are awarded by
the court to the plaintiffs.

