Lindman: Determining where to incorporate after TC Heartland

By Constance Lindman

Lindman

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 [email protected]. The opinions expressed are those of the author.