The Supreme Court’s Recent Cut-back of Patent Holder Advantages: Possible Implications for Patent Arbitration?

Two very recent decisions by the United States Supreme Court have eliminated some of the advantages to which patent holders have become accustomed in the last few decades.

Goodbye Texas

The first is TC Heartland v. LLC v. Kraft Foods Group Brands, LLC, No. 16-341 (May 22, 2017).  Sixty years ago, the Supreme Court decided where a corporation “resides” for purposes of the patent venue statute, 28 U.S.C. § 1400(b).  That statue provides that “la]ny 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.”  In Fourco Glass Co. v. Transmirra Products Corp., 353 U. S. 222, 226 (1957), the Court decided that a corporation resides only in it state of incorporation for purposes of patent venue.

Fast forward to 1990. By then, the Federal Circuit had been established as a specialty appellate court to, among other things, hear appeals of patent matters.  The Federal Circuit noted that the general venue statute had been amended in 1988.  It decided that meant that, for purposes of patent venue, a corporation resides in any judicial district in which it is subject to personal jurisdiction at the time the action is commenced. VE Holding Corp. V. Johnson Gas Appliance Col, 917 F.2d 1574 (1990).

Following VE Holdings, certain districts became popular with patent plaintiffs, particularly the Eastern District of Texas.  Many patent plaintiffs were convinced that they were more likely to be successful there.  This was particularly true for non-practicing entities (“NPEs”) whose success rates in East Texas were almost double the nation average, according to the Price Waterhouse Cooper 2017 Patent Litigation Study.  NPEs are companies that don’t make products or practice methods covered by their patents, but seek damages for infringement.  They are sometimes referred to as “patent trolls” by those claiming NPEs abuse the patent system to make money.

In TC Heartland, the Supreme Court reversed VE Holding Corp. It reaffirmed its 1957 holding in Fourco Glass and rejected any notion that a defendant in a patent case could be sued anywhere it was subject to personal jurisdiction.  Instead, corporate defendants in patent cases may be sued only in their state of incorporation, or where they committed acts of infringement and have a regular and established place of  business. That  means many defendants will no longer be subject to jurisdiction in Texas or other districts favored by NPEs and other plaintiffs.

Exhausting patent rights

The second recent case is Impression Products, Inc .v. Lexmark International, Inc., No. 15-1189 (May 30, 2017).  It involved toner ink cartridges.  When Lexmark sold cartridges covered by its patents, it gave its customers two option. They could buy cartridges at full price with no restrictions. Or they could pay less if they signed a contract agreeing to use the cartridges only once and to transfer them to no one but Lexmark.  This program was designed to prevent other companies from getting hold of Lexmark cartridges, refilling them, and reselling them.  Lexmark sued Impression Products for cartridges it had acquired, refilled and sold in the US.  Some were acquired abroad, refilled and sold back into the US.

There has long been a doctrine of patent law known as exhaustion. Patent holders have the right to exclude others from making, using, offering for sale, or selling their inventions. Patent exhaustion, however, limits that right to exclude.   When the patent holder sells an item, it is no longer within the patent monopoly and becomes the private property of the purchaser. There is no longer any right to exclude the use or sale by the buyer of the patented item.  Impression relied on the exhaustion doctrine to preclude Lexmark’s patent infringement claim.

The Federal Circuit had held that a patent holder “presumptively” grants authority for a buyer to use or resell a patented item. But it also held that the patent holder could limit the buyer’s rights by an express restriction, and could enforce the restriction. Lexmark, it said, had the right to sue Impression for selling refilled cartridges that were subject to Lexmark’s restrictions on reuse or transfer.

The Supreme Court disagreed, finding that the Federal Circuit’s logic was faulty. The exhaustion doctrine is not, it said, a presumption about the authority that comes with a sale.  It is a limit to a patent holder’s rights.  Period.  And an authorized sale, whether within or outside the US has the same result.  While the patentee may be able to enforce a contractual restriction against the buyer, it cannot enforce patent rights it simply no longer has after a sale has exhausted those rights.

Effect on patent arbitration?

Are these cases likely to have an effect on patent arbitration? It depends.

Patent arbitration usually happens only if the parties have an existing contract in which they agree to arbitrate disputes. This is usually a license, supply agreement, development agreement, or employment agreement.  It would be the rare case that a party would have such an agreement with an NPE, with the possible exception of some sort of license.

Still, it may be that some patent holders entering into contracts could now be a little more open to arbitration. Some patent holders may have been particularly enamored of being able to bring suit in a venue they find favorable, like East Texas, if there was a dispute with their licensee.  Thus, they would not want to agree to arbitrate and foreclose what they saw as a more favorable forum.  That usually will not be a consideration, since Texas or other forums favored by some patent plaintiffs is unlikely to be an available forum after TC Heartland.  And the other advantages of arbitration, including efficiency, lower cost, input into determining the decision maker, and all the rest could convince them arbitration of the dispute is a good idea in the new climate.

The newly-clear exhaustion doctrine will only apply in those cases where a seller seeks to restrict later use or sales. The number of those cases is limited.  Still, clarification that the restriction can be applied only as a matter of contract instead of patent law will be quite useful in resolving those disputes. And since there must be a contract to have such a restriction, it may be that parties could find it to be more efficient to use arbitration to resolve any disputes over the restriction.