Diane Lettelleir, senior managing counsel, J. C. Penney Corporation, Inc.

Patent trolls have pursued retailers aggressively for the last decade by filing suits based on overly broad readings of patents.  One of the significant challenges faced by most retailers targeted by patent infringement litigation is they are often forced to litigate in the Eastern District of Texas, where more than a third of all patent cases have been filed in recent years.

The inconvenience of litigating in a venue far from a retailer’s principal place of business imposes additional hard and soft costs on retailers.  Up to now, retailers have been vulnerable to suit in the Eastern District of Texas because venue for patent infringement suits had generally been considered to be nationwide, which has meant that plaintiffs have been able to file wherever they think they have the best chance of success.

Venue Recast for Patent Infringement Litigation

Retailers had hoped that a recent decision by the Supreme Court would offer significant relief.   In TC Heartland LLC v. Kraft Foods Group Brands LLC, the Court considered where proper venue lies for a patent infringement lawsuit brought against a domestic corporation. The patent venue statute allows the filing of a suit in the district where the retailer resides, or where the retailer “has committed acts of infringement and has a regular and established place of business.”

In May of this year, the Supreme Court ruled that a domestic corporation only resides in the state of its incorporation for purposes of determining venue under the patent venue statute.  As a result, if a retailer is incorporated in a state other than Texas, it will no longer be vulnerable to suit in the Eastern District of Texas unless it “has a regular and established place of business in the district.” Over the last 30 years, litigants and courts have paid virtually no attention to the second basis for venue. Whether a defendant has a regular and established place of business requires a fact-intensive analysis.

A recent opinion out of the Eastern District of Texas addresses the parameters of that factual inquiry, and undercuts the significance of the TC Heartland decision. On June 29, 2017, Judge Rodney Gilstrap of the Eastern District of Texas issued an opinion on the venue issue in Raytheon Co. v Cray, outlining how he will evaluate what is a “regular and established place of business.”  The four factors included in Judge Gilstrap’s analysis are: (1) physical presence; (2) defendant’s representations about its presence in the district; (3) benefits received from the district; and (4) and targeted interactions with district.

Most significantly, Judge Gilstrap ruled that the statute does not require a fixed physical presence, only an “established and continuous presence in the district.”  Applying these factors, Judge Gilstrap ruled that the nonresident corporate defendant was subject to suit in Eastern District of Texas.

The defendant is challenging Judge Gilstrap’s ruling in the appellate court. Patent plaintiffs and target defendants alike will be closely watching what the appellate court has to say about Judge Gilstrap’s reasoning.  If the ruling stands, many retailers will be viable targets for patent infringement suits filed in the Judge Gilstrap of the Eastern District of Texas under the second part of the patent venue statute.

Retailers Need to Adopt New Technologies

While retailers wait for the venue dust to settle, the industry is experiencing significant challenges to longstanding business models.  For traditional brick-and-mortar retailers, adoption of new technologies to support evolving omnichannel business models is a critical step in responding to these challenges.  However, the continuing threat of unchecked patent litigation erects an artificial barrier to the adoption of new technologies. The excessive cost of defending against potential litigation that frequently follows adoption of new technologies undercuts the potential return on investment for retailers.

Given the retail industry’s need to evolve, coupled with the reality of the continuing litigation threat and the uncertainty of the protracted battle for legislative reform, targeted retailers are seeking out other means of insulating themselves from the continuing threat of patent troll litigation.

Business-Led Solutions

The good news is that there are a number of organizations pioneering market-driven solutions, such as Unified Patents, Allied Signal Trust, and LOT Network, each tackling a slightly different point of the patent troll litigation lifecycle. LOTNetwork is nonprofit community of companies that agree that if one of their patents falls into the hands of a patent troll, all other LOT members have their conditional license to that patent activated, granting them immunity from patent troll litigation. Members can still use their patents for traditional purposes, like suing other companies or even one another.

Increasingly, members of the retail community, such as JCPenney, Amazon, Macy’s and Bed, Bath and Beyond, as well as major players across industries, like Google, Slack, Dropbox and Intuit, are banding together in communities such as these to leverage the cost efficiencies gained by joining forces.

Businesses simply can’t wait for the government to solve the patent troll problem. Nor can retailers afford to be funneling significant funds away from our core businesses. Standing together gives us advantages—sharing strategies, pooling resources, expanding networks—that aren’t available to us if we face the problem alone. We are stronger together.

Diane Lettelleir is a senior managing counsel for J. C. Penney Corporation, Inc., responsible for all patent litigation.