Client Alert

Reading the Tea Leaves from the TC Heartland LLC v. Kraft Food Group Brands LLC Oral Argument

March 30, 2017

By Chad J. Peterman, David Okano, Nicholas A. Tymoczko & Chloe X. Jiang

On Monday, the Supreme Court heard oral argument in TC Heartland LLC v. Kraft Food Group Brands LLC, a case in which the Court could alter the longstanding interpretation of the venue statutes as applied to patent infringement actions. This potential venue upheaval could both limit the ability of non-practicing entities to bring suit in the Eastern District of Texas and alter the dynamics of Hatch-Waxman and other patent litigation involving pharmaceutical and biotechnology companies in substantial ways. Although the Court was expected to overturn the current interpretation of those statutes, several justices seemed to express hesitation in departing from the current status quo.

Currently, courts have interpreted the venue statutes to allow plaintiffs to bring patent infringement actions where a defendant is subject to personal jurisdiction. This has effectively granted plaintiffs the ability to bring suit against defendants in a jurisdiction of their choice under state “long-arm” statutes and stream-of-commerce theories. Plaintiffs, and in particular non-practicing entities, have used this freedom to bring a substantial proportion of all patent infringement cases (more than 40% of all patent cases in 2015)[1] in the Eastern District of Texas, a district perceived to be plaintiff-friendly. On the pharmaceutical side, the current venue rules permit a majority of Hatch-Waxman cases to be filed in the Districts of Delaware and New Jersey, which have gained experience in even-handedly addressing these cases. Thus, while the question presented in TC Heartland is one of statutory construction, this legal question is presented against a varied backdrop of seeming abuses of the litigation process by non-practicing entities through forum shopping on the one hand, and a delicate balance resulting in efficiencies for resolution of Hatch-Waxman cases between branded and generic drug manufacturers on the other.

The legal question revolves around two statutes, 28 U.S.C. §§ 1391(c) and 1400(b), and two cases, Fourco and VE Holding.[2] Section 1400(b) authorizes patent suits to 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.” In contrast, § 1391(c), which applies to the venue for “all civil actions” “except as otherwise provided by law,” states that “for all venue purposes,” a defendant “shall be deemed to reside . . . in any judicial district in which such defendant is subject to the court’s personal jurisdiction.”

In 1957, the Supreme Court determined in Fourco that § 1400(b) was the “sole and exclusive provision controlling venue in patent infringement actions, and that it is not to be supplemented by the provisions of 28 U.S.C. § 1391(c).”[3] The Court also determined that for purposes of the statute, corporations are deemed to reside only in their state of incorporation.[4] If § 1400(b) is the sole and exclusive venue provision—as Heartland[5] contends—plaintiffs can only bring patent infringement suits against defendants (1) in the judicial district where the defendant is incorporated, or (2) where the defendant commits an act of infringement and has a “regular place of business,” a phrase that has been interpreted by courts to require more than the physical presence of the business. Such restrictions would limit the ability of plaintiffs to file suit in the Eastern District of Texas, as few companies are incorporated or have “regular places of business” there.

In VE Holding, the Federal Circuit determined that an amendment to § 1391(c) in 1988—which rearranged and modified the clause “for venue purposes” to “for purposes of venue in this chapter”—redefined the term “resides” in § 1400(b).[6] According to the Federal Circuit, this amendment resulted in venue for patent infringement actions to be supplemented by § 1391(c), effectively expanding permissible venue to include wherever the defendant is subject to personal jurisdiction. In 2011, Congress further amended § 1391, removing language relied on by the Federal Circuit in the 1988 amendments and adding a new subsection (a) stating that the venue provisions of § 1391 apply “[e]xcept as otherwise provided by law” and clarifying that subsection (c) applies “[f]or all venue purposes.”

Due in part to the Supreme Court’s historically high reversal rate of the Federal Circuit, many believed a change in the interpretation of venue statutes was imminent when the Court granted Heartland’s petition for certiorari. However, questions from the bench during oral argument seemed to indicate that at least several justices were struggling to reconcile both parties’ positions with the current statutory regime.

To begin, despite the looming policy ramifications of this case, questions from the justices signaled that the Court viewed this case first and foremost as an issue of statutory construction. Justice Breyer most colorfully illustrated this through an early exchange with Heartland: “The Amici briefs] [a]re filled with this thing about a Texas district which they think has too many cases. . . . But is there some relevance to it?”[7] He professed not to know whether this relevance would be “good, bad, or indifferent” to the outcome.[8]

As for Heartland’s position, several justices observed that Fourco, in interpreting § 1400(b), dealt only with corporations, and not with other entities such as limited liability companies (like Heartland). Justice Sotomayor asked Heartland: “So what do we do with unincorporated associations? . . . [T]hose are not defined by [§] 1400.”[9] Justice Breyer asked Heartland: “Is there a holding that [§ 1400] includes you?”[10] These justices appeared to suggest that Fourco’s gloss on § 1400 was not broad enough to encompass all patent venue scenarios. For example, Justice Kennedy questioned Heartland as to “what law do we look at to see where an LLC resides?”[11] And Chief Justice Roberts appeared to chide Kraft in failing to “raise the significance of the fact that [Heartland] was an unincorporated association” at the jurisdictional stage.[12]

Several justices on the Court also appeared hesitant to embrace Heartland’s contention that it should sweep aside the Federal Circuit’s interpretation of § 1400(b) in VE Holding, focusing much of its questioning on the interplay and effect of the 2011 amendments to § 1391(c) in view of the Federal Circuit’s decision. Justice Kagan provided the sound bite, observing that “today’s accidental theme is: When 30 years of practice goes against you, what happens?”[13] More to the point, she observed: “for 30 years the Federal Circuit has been ignoring our decision and the law has effectively been otherwise. And then the question is, well, what is the backdrop against which Congress is legislating? . . . [1]f I were a congressman, I’d think that the practical backdrop against which I’m legislating is not Fourco; it is instead the Federal Circuit’s decision in VE Holding.”[14] Justice Ginsburg concurred: “[M]aybe the Federal Circuit was wrong in not following Fourco, but the question is now before us.”[15]

But the justices also expressed skepticism that the 2011 amendments to § 1391(c) overruled Fourco’s interpretation of § 1400(b) in favor of the Federal Circuit’s in VE Holding. Chief Justice Roberts was the most pointed questioner, stating “I would have thought that if Congress were trying to make a significant change [in the venue laws], there’d be a lot more evidence of it other than just changing the particular nuances of—of the words.”[16] He continued: “But there’s no real evidence of any—including in the nuances you talk about—of such a significant change.”[17] Justice Kagan asked Kraft “exactly which words [in the 2011 amendment] do you think changed the thing?”[18] She suggested that the amendments were “all the same” and “the effect [of the 2011 amendment] was exactly the same, wasn’t it?”[19]

Justice Kagan also noted that “the [Federal Judicial Code Revision project] wanted to get rid of [§] 1400, and Congress didn’t do that.”[20] Justice Breyer similarly questioned Kraft “[Did the 2011 amendments say:] [D]on’t worry about repealing 1400. If you pass this, you will be rid of the Supreme Court’s interpretation in Fourco.”[21] On hearing Kraft’s answer, Justice Kennedy further probed: “It seems to me your answer is quite proper as to 1400(a), but how does your answer apply to 1400(b)?”[22]

The justices also appeared to have differing opinions of whether Kraft’s interpretation of the interplay between §§ 1400(b) and 1391(c) was correct. For example, Justice Breyer asked Kraft why the “except as otherwise provided by law” clause in subsection (a) of § 1391 would apply to subsection (b), but not to subsection (c).[23] Justice Sotomayor pushed Kraft to explain how its interpretation would not render § 1400(b) a nullity: “[Section] 1400(b), the second part of it, gets subsumed by 1391. There’s no—you keep saying there’s work for this, but . . . where?”[24] Justice Ginsburg expressed a different view, noting that “the only thing that left [in 1400(b)] was to govern a suit against an individual.”[25] Justice Ginsburg’s rationale, however, did not appear to be persuasive to Justice Sotomayor, who asked Kraft: “Tell me what patent case we’ve ever had an individual sued that wasn’t an agent of a company. . . . I couldn’t find one.”[26]

Justice Breyer appeared to contemplate a third path: venue under § 1400(b) extending only to corporations. Justice Breyer pointedly remarked to Kraft: “I’m not worried about [what to do] if you win. What I’m worried about what to do is if you lose.”[27] He mused: “If you’re right, you win. . . . If you’re wrong, then you have another point, and that is that Fourco doesn’t apply really to unincorporated associations. So why isn’t it the right thing to do for us to decide the issue, . . . and if you lose, you send it back and we say to the lower court, if you haven’t forfeited the point, maybe you could raise it and argue it. Is that the correct way to handle this?”[28]

Finally, although the focus of the arguments was on statutory construction, the Court did not ignore the policy ramifications underlying the dispute. Chief Justice Roberts asked Kraft: “So we shouldn’t worry that 25 percent of the nationwide [patent] cases are [in the Eastern District of Texas]?”[29] Justice Kennedy similarly questioned: “Generous jury verdicts [in the Eastern District of Texas] enter into this or is that something we should not think about?”[30] Justice Kagan noted that the “complaint is that [the current venue rules] allow[] a kind of forum shopping, right? . . . [L]et’s go down to Texas where we can get the benefit of a certain set of rules.”[31] Justice Sotomayor shifted the policy focus from the tech to the drug industry, asking Heartland what to do with “all of the cases, like the pharmaceutical cases that will be upended and made completely impractical by ignoring 1391.”[32]

In short, the Court’s ultimate resolution of this case is now unclear. Unlike many recent appeals from the Federal Circuit, there appear to be competing views on the Supreme Court, with Chief Justice Roberts supporting the petitioner Heartland and Justice Ginsburg supporting the respondent Kraft. None of the other justices clearly laid out their position, with Justices Breyer and Kagan asking tough questions of both sides, Justices Kennedy and Sotomayor offering limited questioning, and Justices Alito and Thomas entirely silent. Justice Breyer suggested a possible third path, a limited application of § 1400(b) solely to corporations, but it is unclear whether this was a mere hypothetical and whether his suggestion had support from the other justices. It is also possible, like the Court did in Bilski v. Kappos, 561 U.S. 593 (2010), that the Court could end up in a 4-4 split on party lines. This would maintain the status quo, but leave the issue unsettled so that it could be reargued, for example, after another justice is confirmed to the Court.

As for next steps, for defendants in patent litigation against non-practicing entities, we suggest to continue the preservation of venue challenges, as the Court’s track record of reversing the Federal Circuit cannot be ignored. However, we believe there is also some chance that the current interpretation of the venue statutes will stand, or be left deadlocked for a full Court to hear again with a better-positioned petitioner (i.e., a corporation, rather than a limited liability company).

For branded pharmaceutical companies, any disruption of the current venue rules will likely curtail the available forums for Hatch-Waxman plaintiffs. Given the reality of multiple generic challenges occurring at approximately the same time, should the Supreme Court alter the current interpretation of the venue statutes, there may, as a result, be an increase in concurrent litigations involving the same patents but different generic defendants in a number of different forums. Not only would this introduce systemic inefficiencies, it could also increase the cost of patent litigation and create the risk of inconsistent rulings regarding the same patents, which would then need to be resolved within the applicable 30-month stays. Whether the Judicial Panel on Multidistrict Litigation or other mechanisms for partially consolidating cases across districts are sufficient to address such issues remain to be seen.

Regardless of the outcome, TC Heartland illustrates the importance of venue to the policy analysis of patent litigation. And it is apparent from the questioning by the justices on Monday that the Court may not believe the existing statutory regime can support venue rules appropriately tailored to eliminate abusive forum-shopping without upsetting the current Hatch-Waxman practices or creating problems for the interpretation of venue in different areas of law. Should the Court comment on the inadequacy of the venue statues to address both the high-tech and the pharmaceutical industry, it could highlight the need for Congress to intervene. This could return focus to several pending bills in Congress, such as H.R. Rep. No. 114-235 and 114th Cong. 2d Sess. S. 2733, that may render any resolution by the Court to be short-lived.

[1]   Pet’r’s Br. at 15.

[2]   Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222 (1957); VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1584 (Fed. Cir. 1990).

[3]  Fourco, 353 U.S. at 229.

[4]  Id. at 226.

[5]   TC Heartland LLC d/b/a Heartland Food Products Group (“Heartland”).

[6]  VE Holding, 917 F.2d at 1578.

[7]  Oral arg. tr. at 14:2–7.

[8] Id. at 4–7.

[9]  Id. at 4:15–16 and 4:19–20.

[10]   Id. at 15:18–19.

[11]  Id. at 17:10–11.

[12]  Id. at 28:25–29:3.

[13] Id. at 19:4–5.

[14] Id. at 11:23–12:6.

[15]  Id. at 19:20–22 (emphasis added).

[16] Id. at 24:18–21.

[17] Id. at 25:4–6.

[18]         Id. at 36:11–14.

[19] Id. at 37:3–5 and 37:14–15.

[20]  Id. at 30:22–23.

[21] Id. at 32:1–3.

[22] Id. at 52:9–11.

[23]         Id. at 39:4–7, 40:5–10, 40:15–16, and 40:18–19.

[24]         Id. at 33:17–20.

[25] Id. at 33:2–4.

[26]         Id. at 34:10–12 and 34:14.

[27]        Id. at 30:8–10.

[28]        Id. at 29:12–20.

[29]         Id. at 45:2–3.

[30] Id. at 46:1–3.

[31]         Id. at 45:12–15.

[32]        Id. at 54:9–12.

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