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Lindman: Determining where to incorporate after TC Heartland

June 14, 2017
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By Constance Lindman

lindman-connie-mugLindman

Recently, the Supreme Court of the United States made the problem of deciding where to incorporate a little more complicated. Sure, your client could still choose Delaware for its well-developed business laws. But how does Delaware stack up in patent litigation? This question isn’t on the checklist of most corporate attorneys, but after TC Heartland LLC v. Kraft Foods Group Brands LLC, 581 U.S. ____ (2017), decided on May 22, maybe it should be.

The patent venue statute, 28 U.S.C. §1400(b), provides that “[a]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.” The Supreme Court established 60 years ago that a domestic corporation “resides” only in its state of incorporation for purposes of §1400(b). Fourco Glass Co. v. Transmirra Products Corp., 353 U.S. 222, 226 (1957). In contrast, the general venue statute, 28 U.S.C. §1391(c), explicitly provides that “[e]xcept as otherwise provided by law” a corporation “shall be deemed to reside […] in any judicial district in which such defendant is subject to the court’s personal jurisdiction.”

For years, patent owner plaintiffs have relied on the more generous “residence” definition of §1391(c) to bring patent infringement suits in any court that had personal jurisdiction over the defendant. Activities directed to a state, such as direct sales of the allegedly infringing products, could be sufficient for a venue even if the defendant was not incorporated in the state and had no offices or other physical presence there. The Eastern District of Texas became a favored court for patent infringement plaintiffs and a hated one for the thousands of companies across the country that had to defend themselves in Marshall, Texas.

With TC Heartland, the Supreme Courtchanged all of that by holding that §1400(b) and Fourco’s limitation of “residence” to the state of incorporation, controls over the general venue statute §1391(c). Patent suits against a U.S. corporation must now be brought either: (a) in the state where it is incorporated or (b) in a state where it has committed acts of infringement (e.g. sold the accused products) and has a regular and established place of business.

That’s a big “and” because it’s not always clear what qualifies as a “regular and established place of business.” A large corporate headquarters with hundreds of employees clearly qualifies, but what about a sales field office with a handful of employees? What about a single salesperson working out of his or her home? Starting litigation with an expensive legal battle over whether the court is a proper venue may not be an attractive proposition for plaintiffs. A plaintiff that wants certainty can opt to file in the state where the defendant is incorporated and, frequently, that state is Delaware.

While it will take some time to sort out all of the effects of Heartland, certain smaller companies may want to consider the impact of Heartland before simply deciding to incorporate in Delaware. Take, for example, a company with its headquarters in Indiana and no “regular and established place of business” outside of Indiana. If this company is also incorporated in Indiana, then it might rest a little easier knowing that any suit for patent infringement would be brought in Indiana. If this company was incorporated in Delaware, on the other hand, it could find itself defending a patent infringement suit in a distant forum.

Does this mean that all companies with operations in a single state should avoid incorporating in Delaware or another outside state? Not necessarily. Each company, like each person, is unique, and the benefits of a Delaware incorporation might outweigh the risk of a Delaware patent suit for some companies. Other companies, facing a higher risk of patent claims, may want to be more cautious about incorporating in Delaware.•

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Constance Lindman is chair of SmithAmundsen’s Intellectual Property Practice Group. She oversees a team providing comprehensive services in the protection, commercialization and defense of intellectual property in the U.S. and internationally. Contact Connie at clindman@salawus.com. The opinions expressed are those of the author.
 

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  1. The voices of the prophets are more on blogs than subway walls these days, Dawn. Here is the voice of one calling out in the wilderness ... against a corrupted judiciary ... that remains corrupt a decade and a half later ... due to, so sadly, the acquiescence of good judges unwilling to shake the forest ... for fear that is not faith .. http://www.ogdenonpolitics.com/2013/09/prof-alan-dershowitz-on-indiana.html

  2. So I purchased a vehicle cash from the lot on West Washington in Feb 2017. Since then I found it the vehicle had been declared a total loss and had sat in a salvage yard due to fire. My title does not show any of that. I also have had to put thousands of dollars into repairs because it was not a solid vehicle like they stated. I need to find out how to contact the lawyers on this lawsuit.

  3. It really doesn't matter what the law IS, if law enforcement refuses to take reports (or take them seriously), if courts refuse to allow unrepresented parties to speak (especially in Small Claims, which is supposedly "informal"). It doesn't matter what the law IS, if constituents are unable to make effective contact or receive any meaningful response from their representatives. Two of our pets were unnecessarily killed; court records reflect that I "abandoned" them. Not so; when I was denied one of them (and my possessions, which by court order I was supposed to be able to remove), I went directly to the court. And earlier, when I tried to have the DV PO extended (it expired while the subject was on probation for violating it), the court denied any extension. The result? Same problems, less than eight hours after expiration. Ironic that the county sheriff was charged (and later pleaded to) with intimidation, but none of his officers seemed interested or capable of taking such a report from a private citizen. When I learned from one officer what I needed to do, I forwarded audio and transcript of one occurrence and my call to law enforcement (before the statute of limitations expired) to the prosecutor's office. I didn't even receive an acknowledgement. Earlier, I'd gone in to the prosecutor's office and been told that the officer's (written) report didn't match what I said occurred. Since I had the audio, I can only say that I have very little faith in Indiana government or law enforcement.

  4. One can only wonder whether Mr. Kimmel was paid for his work by Mr. Burgh ... or whether that bill fell to the citizens of Indiana, many of whom cannot afford attorneys for important matters. It really doesn't take a judge(s) to know that "pavement" can be considered a deadly weapon. It only takes a brain and some education or thought. I'm glad to see the conviction was upheld although sorry to see that the asphalt could even be considered "an issue".

  5. In response to bryanjbrown: thank you for your comment. I am familiar with Paul Ogden (and applaud his assistance to Shirley Justice) and have read of Gary Welsh's (strange) death (and have visited his blog on many occasions). I am not familiar with you (yet). I lived in Kosciusko county, where the sheriff was just removed after pleading in what seems a very "sweetheart" deal. Unfortunately, something NEEDS to change since the attorneys won't (en masse) stand up for ethics (rather making a show to please the "rules" and apparently the judges). I read that many attorneys are underemployed. Seems wisdom would be to cull the herd and get rid of the rotting apples in practice and on the bench, for everyone's sake as well as justice. I'd like to file an attorney complaint, but I have little faith in anything (other than the most flagrant and obvious) resulting in action. My own belief is that if this was medicine, there'd be maimed and injured all over and the carnage caused by "the profession" would be difficult to hide. One can dream ... meanwhile, back to figuring out to file a pro se "motion to dismiss" as well as another court required paper that Indiana is so fond of providing NO resources for (unlike many other states, who don't automatically assume that citizens involved in the court process are scumbags) so that maybe I can get the family law attorney - whose work left me with no settlement, no possessions and resulted in the death of two pets (etc ad nauseum) - to stop abusing the proceedings supplemental and small claims rules and using it as a vehicle for harassment and apparently, amusement.

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