Supreme Court Considers Why Patent Trolls Favor Texas Courts
nytimes.com
nytimes.com
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-...
[2] https://blog.newegg.com/lee-cheng-holds-reddit-ama-explains-...
Hey MediaFire, go reincorporate in Ireland, seems to work wonders for everyone else.
These threats are regularly frivolous and unfair, but big companies have a habit of bullying smaller players with legal force. There is no way to win; either you spend millions on something with no value (a legal defense), or you comply/settle and get the aggressor to agree to back off. If you try to fight, you end up doing both when you go bankrupt 5 years into the proceedings.
I only caught snippets of Judge Gorsuch's confirmation hearing, but it was awesome to hear him decry the evils of law school and the "ethics rules" that lawyers have installed for themselves, which he explicitly calls out as a money-making scheme responsible for over $10B+ in excess legal spending each year (somewhere around the 2.5 hour mark on the second day).
Sensible people and companies build up trust gradually.
His main point was that legal costs are out of control. One of the mentioned factors was that in the U.S., law school is 3 years, unlike most international law schools which are 2, and how it's sad that most law school graduates are unable to afford their own services. He discusses how the attorneys' self-imposed ethical rules contribute to the expense and prevent things that would improve the accessibility of legal services.
I'll post a transcript of his answer when I get back to my workstation. On phone now.
EDIT:
Video link from the hearing: https://www.youtube.com/watch?v=gWRzx3gZK7M&start=14409
Here's the transcript of his entire response to the question posed by Senator Cornyn according to C-SPAN's closed captioning (which is the only place I could find it recorded; lines and capitalization quickly corrected, please excuse any errors):
> I really appreciate this opportunity to be talking about
> these things. Because I -- these I care about and can talk
> about as a judge. I wrote that article in conjunction with
> some input from a lot of wonderful people, so I can't take
> total credit for it. And I thanked them. My point there was
> three fold. Starting with the fact that too few people can
> get to court with legitimate grievances today. That's a
> fact. Too few people can get lawyers to help them with their
> problem. I teach young folks law, who leave law school
> unable to afford their own services. Think about that.
> think about that. And hundreds of thousands of dollars in
> debt. How do they go be "Main Street" lawyers? How do they
> help people who need legal services? And I pointed to three
> potential sources of problems where we lawyers maybe should
> look internally rather than blame others for the problem.
> there is plenty of blame to go around. I'm not a big blame
> guy. I am a look inside guy. What do I see in my profession.
> three thing I pointed to, first, our own ethical rules. It
> is a very unusual profession where we're allowed to regulate
> ourselves. It is quite an extraordinary privilegefvilege
> privilege, usually the legislature. Lawyers regulate
> themselves. And do all of our rules help clients or do some
> of them help us more than they help our clients? And i
> point to some that for instance in regarding the
> unauthorized practice of law, why is it you have to be a
> lawyer to help parents with disabled children and
> administrative proceedings to seek relief under idea? Was it
> an example I pointed to. Why is it that every time certain
> companies that provide online legal services for basic
> things get sued every time they move into a new state? Why
> is it I can go to walmart and get my hair, teeth, eyes,
> taken care of, but I can't get a landlord tenant contract
> drawn up. Those are all results of our ethical rules. I'm
> not sure whether they're worth the price that we pay for
> them. It is estimated I heard I can't verify it that our
> ethical rules result in $10 billion a year surplus to
> lawyers and clients every year. That was one. Number two
> was our own rules and procedure which yield cases like the
> one we talked about, took 25 years to resolve. That's
> wrong. That's wrong. Should be able to resolve cases in
> less time than it takes from my law clerks to be born,
> raised and get through law school. And the third thing i
> pointed to was our legal educational system. Where we have
> three years of post graduate education for everybody who
> wants to -- who have anything to do with lawyering. The
> best lawyer in the country in this history came from your
> state, senator durbin, he didn't ever go to law school. And
> he always said the best way to become a lawyer, read the
> books. Still true. And other countries around the world
> don't have three years of post graduate legal education.
> this is where justice scalia and I -- a disagreement, he
> thought three years was necessary for everybody. I'm not
> convinced. In england where I studied, you could become a
> lawyer through three years of an undergraduate degree or one
> year as a post graduate degree followed by a lot of on the
> job practical training. I wonder whether all that debt is
> worth it. Whether it induces people to pick jobs they have
> to pick to pay their debt ranger than serve the people they
> like to serve. Those are the problems I talk about in that
> article.Unfortunately, it seems like the edit window on that comment has expired. If it's obnoxious, I can ping dang and see if he can fix it.
> horizontal scrolling
That part didn't give it away to yourself?
[1]http://www.law.com/sites/almstaff/2016/10/03/outspoken-paten...
The only hope for fixing laws that aren't upsetting publicly-listed companies is that the case will get an activist judge who will take an extremely broad reading of the statute and establish that interpretation as precedent. From a strictly legal perspective, in many such cases, it's quite clear that the law forbids the activity, which is what leads to a lot of unsatisfactory rulings.
I like the Constitution as much as the next guy, but we have to be honest with ourselves here and admit that the legislative arm is really not functioning anymore; they cannot fix the major problems that threaten innovation and small business. That whole branch needs to be rethought.
Maybe it is just a matter of dividing into 300 states so that there can be more local representation (fewer constituents per rep).
IMHO one solution to this is to keep them all in their home states and vote on issues remotely. Keep all communication public, and exclude influence from anyone outside their home state. This would force them to get their input from the people who elected them.
On another note, every state should ban election advertising from anyone outside the state. There is little reason to allow outsiders to influence state elections. Hey, if you're going to get upset that maybe the russians influenced a US election, why not be upset when some national organization (including political parties) tries to influence a state election?
How is this not a first amendment violation?
That is a key question. But how is it not outside interference in an election? OTOH, what if a candidate did some bad things in another state and someone just wanted to let you know? But the main thing is to eliminate corporate interference, and the notion of first amendment rights being applicable to corporations is long story. If we revoke the notion of corporate personhood that would help quite a bit.
I agree with your concern, but I hope you can see the value in trying to find a workable solution along these lines.
EDIT: changed "reasonable solution" to "workable solution" because we don't want politics involved finding "compromise".
If I live in a reliably blue or red state, it doesn't much matter what I do at election time. I'll go and play my role and cast my vote but as an individual, I can't change the outcome of my state. I can pool my money with others to buy campaign advertising in a swing state that might legitimately change the outcome. If the Senators and Representatives are going to the nation's capital and passing laws that effect everyone, in every state, we should have a way to influence results outside of our own state of residence.
Oh. I'm not talking about presidential elections. That is a different story. But I'd say it is wrong for you to contribute to a group buying campaign advertising in another state for their congresspersons or senators. And that includes influence from national party organizations. Only people who live in a state should be doing that stuff (if any).
Eh, maybe there's a decent argument for that when it comes to their state reps or governors. But the federal government is a national government, and elections for the Senate or House are no less national than those to elect members of the Electoral College.
I don't think artificial restrictions on political involvement are the right way to go about a resolution. That ultimately just forces participants underground.
Instead, we need an updated electoral process that allows full engagement from all interested parties and still has a desirable outcome for the everyman, small innovators and entrepreneurs.
IMO the biggest problem over the last century has been the consolidation of credible information sources into a handful of media conglomerates. The internet is helping reverse that, at least partially, though it's at risk too with Facebook and Google controlling the vast majority of the traffic.
I don't see any justification for someone in Florida funding a campaign for a senator in Michigan or California.
[1] https://www.congress.gov/bill/114th-congress/house-bill/9
[2] https://arstechnica.com/tech-policy/2014/05/how-the-patent-t...
Would having to deposit some kind of money up front before the case is accepted be a solution to this? Then you cannot spam-sue everybody, and if you lose you cannot just claim bankruptcy to escape having to repay the defendants' costs.
If you are going to assume it's an extortion, just don't accept the case, or ask for evidence before calling the defendant in.
Raising the bar into requiring evidence before the court accepts the case solves the problem. No need to invent an access to court tariff.
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.
Out of curiosity, where's "over here"?
The principle that a judge may not rule on a case where his close relative is an attorney seems to fairly universal. I don't understand how that could be accepted in Texas.
Judges and Lawyers need to be like Casers wife above suspicion
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.
It's the reason that a lot of businesses are incorporated in either Deleware or Nevada.
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.
It's not well developed law when the decisions are so disproportionately weighted towards one side of the courtroom.
I'm not denying that there are also network effects but if you got ride of the tax benefits and secrecy those network effects would go too.
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.
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?
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?
http://www.law.com/sites/almstaff/2016/10/03/outspoken-paten...
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.
Does Amazon get sued then? Then you get into weird Commerce-y issues. Amazon will probably pull your product rather than be a legal proxy for you
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.
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.
You'll be taxed wherever you operate, not where you incorporate.
"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.
First, the elephant in the room is patent trolls and East Texas. It's pretty much the only reason that anyone cares about the case, and SCOTUS did explicitly ask Kraft if it should matter. The response was that Congress can do a better job.
The more important wrinkle, though, is that the law was amended and an intervening case (VE Holding), not held by the SCOTUS (and thus not binding precedent to SCOTUS) more or less overturns Fourco in its interpretation of the relevant text. This opens up room for unclear interpretation of the text, at which point legislative intent comes into play--and the legislative intent isn't exactly helpful. Kraft argues that the changes to the law in 2011 were meant to clarify the definitions of residency based on the ALI report--but the ALI report also recommended deleting 1400(b) (which is causing the confusion), which Congress did not do.
In the oral arguments, TC Heartland doesn't seem to me to have defended its interpretation well. It basically requires holding that VE Holding was bad case law and overturning 30 years of assumed precedent--which SCOTUS tends to be reluctant to do. On the other hand, TC Heartland did make a fairly compelling case that adopting its interpretation wouldn't bring down the end of the world for the judicial system. Kraft also seems to have slipped up in their defense--but, having the better prior case, it's not so problematic.
Basically, what it comes down to is if East Texas is worth influencing the decision process. There is ample judicial cover for deciding the case in either direction, although the narrow-venue case is somewhat more tortured.
I also don't think it's quite fair to characterise anything but textual originalism as "interpretation through the lens of policy decisions". In this case one could, for example, argue that that an interpretation which renders parts of the law completely useless (1391 in this case) is illegitimate, at least if the act that created the ambiguity could have also eliminated it. it would also seem proper to err on the side of the earlier legislation simply as a mechanism to encourage better legislation.
I wouldn't even agree, but it's usually the conservative argument that judges shouldn't try to fix laws when they're poorly drafted (c.f. the last Obamacare case at SC).
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.
I wouldn't be surprised if they would dwarf whatever remedies are awarded by the court to the plaintiffs.