On paper, Kraft v. TC Heartland is not a very exciting case. It’s a lawsuit involving artificial sweeteners and the plastic containers they come in. It’s not the kind of case one would expect to make it all the way to the US Supreme Court and have sweeping implications for the future of the US technology industry. But let’s back up.
Kraft makes a product called MiO, a liquid artificial sweetener it calls a “Liquid Water Enhancer.” TC Heartland, a limited-liability company based in Indiana, makes a similar product: the ”Refreshe Fruit Punch Drink Enhancer.” Kraft sued TC Heartland in 2014, saying it infringed upon three patents related to the containers the products come in.
Kraft originally filed the lawsuit in Delaware, but TC Heartland wants the suit to be tried in Indiana, where it’s incorporated and headquartered. Arguing that the trial should be carried out in the state where it’s based, and that it does very little business in Delaware, TC Heartland filed a motion to transfer. It was denied by lower courts on the basis of a 1990 federal court decision that defendants in patent cases can be sued nearly anywhere they do business. That’s what brought this case to the Supreme Court, three years after it was filed: not the question of whether one company stole a container design from another, but where the trial will be held. Attorneys from both sides presented oral arguments at the Supreme Court last week.
The tech industry, of course, does not have a vested interest in artificial sweetener containers, or where this particular lawsuit is hosted, but it does have an interest in patent trolls. Patent trolls, in short, are companies or individuals who do little more than buy and stockpile patents, and file lawsuits over them. They don’t invent products or provide services; they exist only to sue. The practice has become rampant in the tech industry, with many cases being filed over software patents that cover ubiquitous technology. (One such patent, for example, claimed intellectual ownership of interactive web pages—yes, just any web page a person can interact with—and was used to successfully sue Microsoft for $521 million.)
The Kraft case has drawn the interest of Silicon Valley because patent trolls like to file lawsuits in certain courts that some say favor plaintiffs. And if TC Heartland wins at the Supreme Court, patent-holders would have to file their lawsuits in the states where the defendants are incorporated. That would essentially prohibit trolls from picking and choosing courts where they may have an advantage–a practice lawyers call ”forum shopping.” Kraft filed its case in the District of Delaware, which has a history of favoring the rights of patent-holders, but is a popular venue for intellectual property cases for many other reasons as well. Silicon Valley’s primary interest is not in Delaware but in another court, which is widely seen as a haven for trolls: the Eastern District of Texas.
There are 94 federal courts in the United States, and patent lawsuits can be filed at any of them. But a whopping 34.6% of all patent suits from 2014 to 2016 were filed in this one court.
Not only does the East Texas court get a disproportionate amount of all patent lawsuits, but more than three quarters of the cases that end up there are suits that were filed by highly litigious plaintiffs (read: likely patent trolls).
Clearly, the idea here is that patent trolls have some sort of advantage in East Texas. But what is it? Do juries in this court tend to lean toward the plaintiffs? That was a question Justice Anthony Kennedy put to Kraft’s lawyer, William Jay, during the arguments last Monday. He asked whether “generous jury verdicts enter into this, or is that something we shouldn’t think about?”
“I think that at least one scholar has said that the outcomes are not significantly different in cases that go to trial,” Jay said. “We don’t have a position on that. We haven’t crunched—crunched the numbers ourselves.”
Jay argued that the issue of forum shopping is outside the scope of the legal question at hand, which is whether patent lawsuits can be filed anywhere the defendant does business, as opposed to the place where it’s incorporated. That’s why Kraft doesn’t have a position on it, and why it hasn’t crunched the numbers. But the numbers have indeed been crunched.
According to Brian Howard, a data scientist and associate general counsel at Lex Machina, the verdicts in East Texas are consistent with outcomes in other districts, and don’t seem to favor plaintiffs: “Claimants and defendants win about as often as elsewhere,” he said.
The thing is, when Justice Kennedy asked about “generous jury verdicts,” he may have been asking the wrong question. Plaintiffs in patent lawsuits are often not looking to go to trial; they’re looking to settle. And the Eastern District of Texas, Howard said, has a much higher settlement rate than the rest of the federal courts. In East Texas, 89% of cases between 2015 and 2016 settled; in other courts, 70% did.
But how can the court in East Texas control settlements, which happen out of court? The answer, according to Howard’s analysis, lies in the number of summary judgments the court grants. Summary judgments allow defendants to ask the court to rule that a plaintiff’s case is invalid, without going to trial. In patent cases, particularly those that involve low-quality patents (like the one that covered interactive web pages), a summary judgment is an opportunity for a defendant to shut down a troll without having to pay a settlement or endure a costly trial.
In the Eastern District of Texas, 72% of motions for summary judgment filed between 2013 and 2015 were denied. In the other 93 federal courts, only 43% were denied.
“The corresponding risk and cost of facing trial may drive settlement,” according to a 2016 report by Lex Machina. “Not only are summary judgment motions less likely to be granted in [the Eastern District of Texas], but summary judgment motions are less likely to be filed in the first place.”
“Several judges in the Eastern District of Texas,” the report continues, “have until recently required parties to file a 5 page letter brief seeking permission before even filing for summary judgment. In cases where this permission is not granted, no summary judgment motion is filed.”
In a brief filed to the Supreme Court in support of TC Heartland, signed by 48 companies including Oracle, Adobe and HP, the tech industry made its contempt for the current system plain.
“Under current Federal Circuit caselaw and the realities of modern e-commerce,” the brief said, “[the signing companies] can be sued in virtually any district in the country and they are sued again and again in inconvenient districts preferred by plaintiffs.”
The brief added that when plaintiffs shop for favorable venues, it “adversely affects innovation, which is contrary to the constitutional purpose of the patent system, namely, to promote the progress of science and useful arts.”
A win for TC Heartland would mean that many patent lawsuits against Silicon Valley companies would have to be filed in California. Many others would have to be filed in Delaware, as Kraft’s was, because many companies choose to incorporate there. The Supreme Court is expected to rule on the case this summer.