IP Recap - 8/07/19


The inaugural edition of Engine's periodic update on IP developments relevant to the startup community. Want to subscribe to IP Recap? Sign up here.

Westech v. 3M, patent venue law, & what it means for startups 

Startups facing patent litigation should be aware of recent, positive developments in patent venue law. This area of law dictates where a patentee-plaintiff can file an infringement lawsuit, and requires that a startup (or any company) can only be sued in a location (judicial district) where it has sufficient presence. Importantly, recent legal developments restrict parties—including patent assertion entities (PAEs), sometimes referred to as “patent trolls”—from suing startups in far-flung, plaintiff-friendly judicial districts. This levels the playing field in abusive patent litigation and benefits startups, who should no longer be required to defend litigation far from “home.” 

Most recently, in Westech Aerosol Corp. v. 3M Co., the U.S. Court of Appeals for the Federal Circuit held that a patent infringement complaint must contain more than an assertion that venue is proper. Instead, a patentee-plaintiff must plead facts to support its assertion about where proper venue lies, and if it fails to, it could face sanctions. 

A brief primer on patent venue law.

As we have explained elsewhere, before the Supreme Court’s 2017 decision in TC Heartland LLC v. Kraft Foods Group Brands LLC, a patentee-plaintiff could essentially file a patent suit against a startup-defendant anywhere in the country. For example, a startup with its entire operation in Seattle, WA could be sued in the Eastern District of Texas, a plaintiff-friendly jurisdiction popular with PAEs. 

Under patent venue law, there are two proper venues: the judicial district (1) “where the defendant resides,” or (2) “where the defendant has committed acts of infringement and has a regular and established place of business.” Regarding that first prong—“where the defendant resides”—in 2017 the Supreme Court held that U.S. corporations “reside” only in the state where they are incorporated. Therefore, since 2017 many patentee-plaintiffs have turned to the second prong of the statute—where the defendant “has a regular and established place of business”—to argue venue. This second prong has been interpreted in several recent cases, notably In re Cray, Inc. and In re ZTE (USA) Inc. In Cray, the Federal Circuit held that venue was not proper in Texas based solely on the fact that two of the defendant’s employees had home offices there. And in ZTE, the court held that the plaintiff bears the burden of proving proper venue. Therefore, instead of a startup-defendant having to prove a negative—that it lacks a regular and established place of business in a given judicial district—the plaintiff is supposed to prove its case belongs there.

Westech v. 3M and the absence of facts showing defendant’s regular and established place of business.

The latest Federal Circuit case addressing patent venue is Westech Aerosol Corp. v. 3M Co. In early 2017, Westech sued 3M and Northstar in a district court in western Washington state, even though 3M is incorporated in Delaware and primarily located in Minnesota, and Northstar is incorporated in Massachusetts and primarily located in Georgia. After TC Heartland was decided, Westech amended its complaint and asserted that venue was proper in western Washington because “3M has one or more regular and established places of businesses in [that] judicial district.” Importantly, Westech did not identify any 3M locations in western Washington nor any facts to suggest such locations could be “regular and established places” of 3M’s business. And Westech did not even assert that defendant Northstar had a Washington presence. The district court dismissed the case based on improper venue, and Westech appealed. During the pendency of the case the Federal Circuit decided Cray and ZTE

On appeal, the Federal Circuit affirmed the district court’s decision, and criticized Westech’s failure “to plead any facts showing 3M had a regular and established place of business physically located in the Western District of Washington.” Instead, the court found that Westech’s amended complaint merely recited the language of the venue statute, which is not sufficient to establish venue—Westech was required to point to facts and connect those facts to the law.  

3M separately asked the Federal Circuit to sanction Westech, because (it argued) the appeal was frivolous. The Federal Circuit agreed that Westech engaged in misconduct and that its appeal, as argued, was frivolous, noting that Westech’s behavior “borders on sanctionable.” But, due to the timing of the Cray and ZTE decisions—and how those recently-decided cases (decided while Westech was pending) created a “unique procedural posture”—the Federal Circuit did not sanction Westech.

What Westech and patent venue law means for startups.

The Westech decision should signal to patentee-plaintiffs, including PAEs, that courts are taking the venue requirement seriously. Before a plaintiff brings or even threatens suit against a startup, it will have to determine where the startup is located, collect evidence showing that, and establish (and file any complaint) where venue is proper. If the plaintiff does not do that, and instead brings suit in its preferred district, it may face sanctions and financial consequences. 

For startups, the advantages of this include: (1) startups can only be subject to patent litigation close to “home” and (2) the amount of abusive, PAE litigation should start to decline. 

There are benefits to being sued at “home.” Litigation is expensive, but it is less expensive to defend litigation in nearby judicial districts because a startup does not need to spend as much time or money traveling to hearings, make witnesses available in far away states, or lose as much engineer and product development time to litigation. Startups may also enjoy a “home court” advantage when local juries consider their case. 

Strict application of patent venue law also rebalances the leverage in abusive patent litigation because it makes it more difficult for PAEs to “forum shop.” Historically, PAEs have favored specific courts, such as the Eastern District of Texas, because statistically higher success rates make it easier for PAEs to coerce nuisance value settlements. But empirical evidence suggests that, since TC Heartland, PAE litigation is moving out of that specific district and that, over the last five years, PAE success rates have started to decline.  

Startups should pay attention to where suits are filed or threatened, because they may be able to move to dismiss or transfer cases that are filed in the wrong venue and could benefit from defending cases closer to home. Westech’s confirmation that courts are taking patent venue law seriously should also level the playing field in pre-suit discussions, and help reduce prospects for abusive PAE litigation. 

Disclaimer: This post provides general information related to the law. It does not, and is not intended to, provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.