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2 Quarterly Federal Circuit and US Supreme Court Review - Impacts on Intellectual Property July 26, 2017 Presented By: Thomas Lewry Co-Chair Litigation TLewry@BrooksKushman.com Christopher Smith Shareholder CSmith@BrooksKushman.com

3 Agenda New Venue Rules in Patent Infringement Actions: In TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct (May 22,2017) the Supreme Court reversed the Federal Circuit and restricted venue in patent infringement matters to districts where the defendant is incorporated or both committed acts of infringement and has a regular and established place of business. The decision abruptly diverted case filings from the U.S. District Court for the Eastern District of Texas to other courts, and will force plaintiffs to reevaluate where to file future infringement actions. Court Expands Patent Exhaustion Doctrine: In Impression Prod., Inc. v. Lexmark Int'l, Inc., 137 S. Ct (May 30, 2017) the Supreme Court ruled that even valid and enforceable contractual restrictions on a purchaser s use of a patent article do not prevent an automatic exhaustion of patent rights, and that patent exhaustion results from sales both inside and outside the U.S. This landmark decision will force patent owners to reassess their worldwide distribution strategies for patented products

4 TC HEARTLAND V. KRAFT FOODS 4

5 Background 2016 patent filings by district: Lex Machina 2016 Patent Lit. Report 5

6 Comparative Data Selected Damage Awards by District Lex Machina 2016 Patent Litigation Report Lex Machina Data 6

7 TC Heartland Litigation Background TC Heartland LLC is an Indiana company based in Indiana. Kraft Foods Group Brands LLC is a Delaware corporation. Kraft sued TC Heartland in D. Del., because the defendant allegedly shipped an infringing product to Delaware. The District Court denied motion to dismiss or transfer venue to S.D. Indiana, relying on VE Holding Corp. Federal Circuit denied petition for writ of mandamus, declining to revisit VE Holding Corp. 7

8 Relevant Venue Statutes 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. 28 U.S.C. 1400(b) In Fourco Glass Co. v. Transmirra Prod. Corp., 353 U.S. 222 (1956), Court held that resides means incorporated. In 1990, the Federal Circuit held that resides is co-extensive with subject matter jurisdiction. 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. 28 U.S.C. 1391(c)(pre-2011) 8

9 VE Holding Federal Circuit ruled that 1391(c) modified 1400(b). In the case before us, the language of the statute is clear and its meaning is unambiguous. Absent extraordinary circumstances, our inquiry must end here. Section 1391(c) applies to all of chapter 87 of title 28, and thus to 1400(b), as expressed by the words For purposes of venue under this chapter. There can be no mistake about that. VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1580 (Fed. Cir. 1990). For 27 years, courts applied VE Holding, permitting a patent plaintiff to establish venue in any district that a defendant could be subject to jurisdiction. 9

10 TC Heartland Supreme Court 8-0 Decision by J. Thomas Reverses Federal Circuit, rejects VE Holding, reasoning that Congress did not abrogate Fourco. Fourco established that resides for purposes of patent venue means the state of incorporation Amendment to 1391 lacks any indication that Congress intended to alter 400(b). Thus, the specific patent venue provision prevails over the general venue statute. Furthermore, 2011 amendment to 1391 included a savings clause that it does not apply when otherwise provided by law, that appears to expressly preserve the Fourco exception. 10

11 TC Heartland Supreme Court In Fourco, this Court definitively and unambiguously held that the word reside[nce] in 1400(b) has a particular meaning as applied to domestic corporations: It refers only to the State of incorporation. Congress has not amended 1400(b) since Fourco, and neither party asks us to reconsider our holding in that case. Accordingly, the only question we must answer is whether Congress changed the meaning of 1400(b) when it amended When Congress intends to effect a change of that kind, it ordinarily provides a relatively clear indication of its intent in the text of the amended provision. 11

12 Cases Filed Since TC Heartland Docket Navigator Data 12

13 Cases Filed Since TC Heartland Docket Navigator Data 13

14 Practical Significance Possible Plaintiff Responses: Cases may be filed in D. Del. if defendants are Delaware corporations: District has 4 judges (1 has announced senior status, 1 has announced retirement). 4 E.D. Penn. Judges recently became visiting judges in Delaware to handle expected increase in cases and effect of Judge Robinson s retirement. Suing companies with a presence in E.D. Texas: Retailers (Which manufacturers may need to defend due to indemnification obligations) Companies with facilities in E.D. Texas (e.g. Apple has a store in Plano). 14

15 Practical Significance Where were cases filed before E.D. Texas became a popular venue? K. Moore, Forum Shopping in Patent Cases, N.C. Law Rev

16 Practical Significance Unclear Venue Standard Due to VE Holding, courts had little reason to construe venue based on regular and established place of business In Raytheon Co. v. Cray, Inc., Judge Gilstrap announced a four-point test he will apply prospectively to motions to transfer out of E.D. Texas: 1. Physical Presence in District (may be presence of employees or independent contractors in home offices). 2. Defendant s Representations (internal and external statements that it has a presence website, business cards, etc.) 3. Benefits Received ( the extent to which a defendant derives benefits from its presence in the district, including but not limited to sales revenue ). 4. Targeted Interactions with the District (including customer support and marketing). 16

17 Raytheon Gilstrap ruled that venue was proper in E.D. Texas even though Cray had no physical property in the district. Court ruled that physical presence not required. In re Cordis Corp., 769 F. 2d 733 (Fed. Cir. 1985) (requires permanent and continuous presence, not necessarily a fixed physical presence ). Court noted need to adjust pre-ve Holding caselaw to reflect changes in technology and modes of conducting business. Rep. Issa (R., Cal): Judge Gilstrap interpreted the TC Heartland decision in a way that rejects the Supreme Court's unanimous decision and at least for the time being, ensures that as many of the cases as possible will remain in his courtroom..... While this may be help to the community that Judge Gilstrap represents, to the hotels, to the law firms, it does not serve justice and is in fact an act that I find reprehensible by that judge. 17

18 Practical Significance Can cases pending be transferred? Venue can be waived. Is TC Heartland intervening law? No: e.g., See Cobalt Boats, LLC v. Sea Ray Boats, Inc., No. 2:15cv21 (E.D. Va. June 7, 2017). The Supreme Court has never overruled Fourco, and the Federal Circuit cannot overrule binding Supreme Court precedent. Federal Circuit denied mandamus request in Cobalt. Yes: e.g., Westech Aerosol Corp. v. 3M Co., No. C (June 21, 2017). TC Heartland changed the venue landscape. For the first time in 27 years, a defendant may argue credibly that venue is improper in a judicial district where it is subject to a court s personal jurisdiction but where it is not incorporated and has no regular and established place of business. Defendants could not have reasonably anticipated this sea change, and so did not waive the defense of improper venue by omitting it from their initial pleading and motions. 18

19 Practical Significance Venue rules unclear for LLCs and foreign corporations (not considered in TC Heartland). Plaintiffs may consider suing foreign parent corporation in E.D. Texas, rather than U.S. subsidiary. Possible increase Multi-District Litigation. Plaintiffs will not be able to join multiple defendants in same district, courts may increasingly rely on MDL prodcedures for pre-trial proceedings. 19

20 IMPRESSION PROD., INC. V. LEXMARK INT'L, INC. 20

21 Elements of Patent Exhaustion Patent Exclusionary Right: [W]hoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States, or imports into the United States any patented invention during the term of the patent therefor, infringes the patent. 35 U.S.C. 271(a) The initial authorized sale of a patented item terminates all patent rights to that item. Quanta 21

22 Quanta Computer v. LG Electronics U.S. 617 (2008) Facts: LG owned patents for methods for computer processing using certain microprocessors and chipsets. LG licensed Intel to LG Patents. Agreement also affirmatively stated that the agreement did not alter the effect of patent exhaustion. Separate Master Agreement required Intel to advise customers that although Intel products were licensed, it does not extend, expressly or by implication, to any product that you make by combining an Intel product with any non-intel product. 22

23 Quanta Computer v. LG Electronics Facts: Intel sold licensed chipsets to Quanta, which used them in unlicensed PCs practicing LG s patented methods. LG sued Quanta for patent infringement. Quanta defended based on patent exhaustion. 23

24 Quanta Computer v. LG Electronics Supreme Court held: Patent exhaustion applies to method claims as well as apparatus claims. LG granted unrestricted license to make and sell products under LG s patents, and authorized sales triggered exhaustion. Sale of components exhausts patent if the components substantially embody the claimed invention. Master Agreement was separate contractual undertaking, did not limit scope of license grant. 24

25 Unanswered Questions: Quanta left two important questions unresolved: Does a conditioned sale exhaust rights? Does a sale outside U.S. exhaust rights under U.S. patent? 25

26 Impressions Product v. Lexmark - Facts Lexmark owns patents covering printer toner cartridges. Lexmark sells cartridges in two circumstances: 1. Regular. Higher price, no restriction on use or resale. 2. Return Program. 20% Discount, contains label requiring return on expended cartridge; no right to reuse or re-sell. Lexmark sells cartridges in U.S. and foreign markets 26

27 Impressions Product v. Lexmark - Facts Impression Products purchases expended cartridges in U.S. and foreign countries, refills the cartridges, and imports and resells the cartridges in the in U.S. without express permission from Lexmark. Impression s sole defense was patent exhaustion. Accused Cartridges: Regular Cartridges sold in foreign transactions Return Program Cartridges sold in U.S. Regular Cartridges sold in U.S. not at issue - agreed that patent exhaustion applies. The Federal Circuit held that the patent rights for both remaining categories were not exhausted. 27

28 Federal Circuit Authority Federal Circuit s analysis focused on two prior Federal Circuit cases: Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). Jazz Photo Corp. v. International Trade Com'n, 264 F.3d 1094 (Fed. Cir. 2001). 28

29 Mallinckrodt, Inc. v. Medipart, Inc. Infringement claim based on refurbishment/resale of device that contained label that not for resale and single patient use only. Court held that effective limit on use (apparently under commercial sales law) can preclude exhaustion. Thus, unless a sale restriction is improper under some other body of law, whether within the Patent Act or outside it, a patentee s own sale of its patented article subject to a clearly communicated restriction does not confer authority to sell or use the article in violation of that restriction, i.e., does not exhaust the patentee s 271 rights against such conduct involving that article. 29

30 Jazz Photo v. ITC Infringement based on refurbishment, importation, and resale of singleuse disposable camera boxes. United States patent rights are not exhausted by products of foreign provenance. 30

31 Supreme Court Decision Impression Products, Inc. v. Lexmark Intern., Inc., 137 S.Ct (May 30, 2017) Decision by Chief Justice Roberts Issue # 1 Sale with conditions, even if enforceable in contract, does not avoid exhaustion. In sum, patent exhaustion is uniform and automatic. Once a patentee decides to sell whether on its own or through a licensee that sale exhausts its patent rights, regardless of any post-sale restrictions the patentee purports to impose, either directly or through a license. A different result would upset the smooth flow of commerce. [E]xtending the patent rights beyond the first sale would clog the channels of commerce, with little benefit for the extra control that the patentees retain. 31

32 Supreme Court Decision Practical Significance of Issue #1: Restriction on use enforceable as a breach of contract, but not enforceable as infringement. Breach of contract remedy may be illusory, because downstream users may lack privity of contract. In addition, downstream users may be bona fide purchasers If license authorizes sale of product by licensee, required restrictions on use do not avoid exhaustion. A license may require the licensee to impose a restriction on purchasers.... But if the licensee does so... the sale nonetheless exhausts all patent rights in the item sold[.] Compare General Talking Pictures A licensee that knowingly sells product not authorized by license infringes patent, and purchaser also is an infringer. 305 U.S. 124 (1938). 32

33 Supreme Court Decision Practical Significance of Issue #1: Distribution of products through true license arrangements may avoid exhaustion. [A] license in not about the passing of title to a product, it is about changing the contours of the patentee s monopoly.... Because the patentee is exchanging rights, not goods, it is free to relinquish only a portion of its bundle of patent protections. How practical is a distribution system of product licenses? When is a license a sale, and not a license? 33

34 Supreme Court Decision Practical Significance of Issue #1: What if licensee sells product, despite lack of authority under license to do so (e.g., selling for commercial use when license limited to educational use)? Court distinguishes General Talking Pictures, since the purchaser in that case was aware that sale was not permitted under the license. Sale was as if no license whatsoever had been granted. 34

35 Supreme Court Decision Issue #2:Foreign Sales Court rules that foreign sales exhaust U.S. patent rights. Follows Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct (2013). Copyright Decision, applying 15 U.S.C. 109(a). 35

36 Supreme Court Decision: Issue #2 An authorized sale outside the United States, just as one within the United States, exhausts all rights under the Patent Act. [D]ifferentiating the patent exhaustion and copyright first sale doctrines would make little theoretical and practical sense: The two share a strong similarity... And identity of purpose. Also, many modern products include elements protected both by patent and copyright law. 36

37 Supreme Court Decision Practical Significance Issue #2 Distribution by sales overseas generally will exhaust U.S. patent rights. Patentees must reconsider worldwide distribution strategies. 37

38 Practice Points Avoiding Patent Exhaustion: License, don t sell. Draft licenses making it clear that only certain patents are licensed for certain activities/participants. Impart restrictions on customers via contract to limit use by downstream customers. Draft patents/claims to cover different revenue streams. Be aware of risks of foreign sales. Seek patent protection in foreign countries to broaden ability to seek damages/injunction beyond the U.S. 38