Supreme Court Could Alter Powerful Tool Of Patent Trolls - Venue Shopping

12/21/2016 04:10 pm ET

Our patent system is supposed to help promote innovation, creativity and disseminate their advantages so as to help society in general. But over the years a variety of distorted practices and policies have undermined that purpose. Rather than being able to intensely focus on inventing and innovation, thousands of companies have faced expensive legal threats from those abusing the patent system. There is now hope for some relief in the new year as the Supreme Court looks at one abuse: venue shopping.

The Court has agreed to hear a case on venue shopping, a practice that has fueled the rise of companies, known as patent assertion entities, whose main product is lawsuits. For PAEs or patent trolls, the tiny town of Marshall, Texas, has become their playground of choice. The Eastern District of Texas was assigned more than 1200 patent cases this year -- more than a fifth of all patent cases in the country.

For companies that produce products, lawsuits by companies whose business is patent suits, are so expensive to fight that most will readily hand over 100s of thousands of dollars to patent trolls -- rather than spend the millions needed to fight, even if they are likely to win, the lawsuit in Texas.

Bessen and Meurer have calculated patent trolls cost legitimate US companies $29 billion a year with lawsuits that are unlikely to succeed. But they are able to force settlements that then fund the next round of legal antics in large part because they can shuffle their legal case over to the Eastern District of Texas, which benefits the economies of Tyler and Marshall, Texas.

A group of businesses in Tyler advertises the town as friendly to patent holders, and it is. A company facing a patent lawsuit there can look forward to local rules that run up their costs astronomically just weeks after being sued.

Another obvious reason to have the case heard in Texas is that most defendants don’t have operations there. They must fly engineers, corporate officers there, stay in hotels and hire local counsel to help make their case. In addition to being expensive for defendants, these costs contribute to the thriving local economy. Another boon for Marshall are the nearly empty office buildings rented by patent assertion entities used to claim a local presence, which allows them to bring their legal case in the Eastern District of Texas.

The bigger problems are ones that company lawyers know all too well: caseload backup and a process that the Eastern District follows that front loads costs. Even if the defendant can show that a lawsuit is frivolous, that company will be out a huge amount of money.

It’s not just that a fifth of all patent cases are brought to the Eastern District of Texas, it’s that one judge, Rodney Gilstrap, gets assigned most of them - about 8 percent of all patent cases in the country.

Judge Gilstrap’s caseload, 794 patent cases assigned as of October of this year, is more than twice the 311 patent cases assigned to the entire state of Delaware, the next highest ranked venue as many companies incorporate there. Just to keep up, Judge Gilstrap would have to hear almost 800 patent cases a year - or more than two a day. As most companies know, that’s not realistic, so it creates pressure to just pay the patent troll rather than fight the case and pay years of legal fees.

If that weren’t enough, Judge Gilstrap uses rules and procedures that place the discovery costs, the most expensive part of the case, early on. So a would-be defendant must decide between paying 100s of thousands of dollars to go through that phase to fight the suit, or just give the bully their lunch money and go home. Sure, they can file a motion to transfer the case to another venue, but Judge Gilstrap rarely agrees to that. Patent assertion entities point to their sham offices as proof of a local connection and usually win.

Congress is aware of the problem and has proposed legislation that would require patent holders to bring the case in cities where either they or their target is producing products related to the patent. The proposed reform would prevent most patent trolls from being able to sue in the Eastern District of Texas because, honestly, not many products are made there.

But with the gridlock in Congress, companies are now turning to the Supreme Court, hoping the justices will review how laws to protect patent holders are being abused - and rein in that abuse. The Supreme Court is expected early next year to take up the question, “Can a company be sued for patent infringement anywhere it conducts business?”

“The answer to this question is a matter of concern to every domestic corporate manufacturer, distributor, retailer, service provider, or end user that is potentially subject to suit for alleged patent infringement,” Heartland, the company responding to a patent suit brought by a competitor, said in its petition asking the high court to review the case.

The high court has a chance to rein in decades of misuse of the patent system by taking away a key tool for patent trolls - venue shopping. We hope they use it.

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