By: H.W. Pfabe | June 20, 2017


When starting a business, there are a lot of things to keep in mind. One question that many small businesses tend to overlook is that of where they should incorporate. Some just incorporate right in their home state. Others say “I hear a lot of companies are based in Delaware. I’ll do that.” However, as of May 22, 2017, the Supreme Court has given businesses some more to think about.





The members of the US Supreme Court rarely all agree. In fact, that’s part of the point. They come from different backgrounds, with different political beliefs, and decisions are made by a majority. Sometimes those who are more liberal end up happier with the decisions, and sometimes those who are more conservative do. However, in TC Heartland v. Kraft Foods, the court reached a UNANIMOUS decision (with brand new Justice Gorsuch not taking part in the case).


Kraft had sued TC Heartland, which distributes brands such as Sunkist and Skinnygirl, for patent infringement. Kraft sued in Delaware, which is a favorite state for incorporation of many companies for a number of reasons, including taxation and fairly predictable courts.


TC Heartland ships products to Delaware, but otherwise has arguably nothing to do with the state. TC Heartland had argued that this was improper venue and wanted to move the case to their home state of Indiana.


The question of where the lawsuit could be tried went all the way to the Supreme Court (not the case itself, mind you, just the question of where the case should be heard).






Where you can bring a case to court is known as “venue.” Venue for suing a company for Patent Infringement is guided by 28 U.S.C. § 1400(b), which says that an infringement suit can be brought in the judicial district where 1) the defendant resides, or 2) where the defendant has committed acts of infringement AND has a regular established place of business. If you want to sue someone for infringement where they don’t have a regular place of business, you’re stuck arguing that they “reside” there.


So what does “reside” mean when you’re talking about a corporation? That is the real question here.


The general venue statute, which is used for the majority of cases in the US, is 28 U.S.C. § 1391(c)(2). It says that an entity resides wherever it is subject to the court’s personal jurisdiction. For corporations, this has traditionally meant anywhere where they benefit from being able to do business, such as any state where they actively sell products.


The interaction between § 1400 and § 1391 (and their predecessors) has been somewhat in flux for the last century. However, since 1990 and a case known as VE Holding, patent infringement lawsuits have largely been interpreted to be able to happen anywhere the defendant does virtually ANY business.


Twenty-seven years of this interpretation has given rise to “venue shopping”, where the plaintiff picks a court which is uniquely favorable to their case. As many of you probably know, the town of Marshall, Texas, despite being home to less than 25,000 residents, hosts around 40% of all US patent lawsuits.


The local court rules have proven VERY favorable to plaintiffs. Additionally, based on which day of the week you file your lawsuit, you have a near-certainty of which judge you will get. One judge, a favorite of many plaintiffs, had almost 1,700 cases in one year.


Wooing juries is also a huge industry. The judge interprets the law, but the jury decides whether there was any actual infringement. Samsung, a regular defendant in Marshall, has gone so far with their PR efforts as to build an outdoor ice skating rink… in Texas.


Change where you can sue or be sued for infringement, and you can completely change the number of lawsuits that take place, and sometimes even who wins and loses.





In a unanimous, and very clearly argued and written, decision, the Supreme Court stated that § 1400 is NOT beholden to § 1391’s definition of “resides.”


“The use of “resides” “negat[es] any intention to make corporations suable, in patent infringement cases, where they are merely ‘doing business,’ because those synonymous words [“inhabitant” and “resident”] mean domicile and, in respect of corporations, mean the state of incorporation only”.


This is how many of us already viewed the law, but you wouldn’t know it from how cases were being tried. No one had stood up, since the last iteration of § 1391 in 2011, and actually argued this point.


So what does this mean?


It is now very clear, if you want to sue someone for Patent Infringement, or if someone wants to sue you, it can only happen in the state where the Defendant is incorporated or has a regular place of business.





When starting a business, many people just incorporate where they live. Others incorporate in states that are known for having well established and predictable laws for businesses, with courts that have a lot of experience in corporate law, such as Delaware. Others will incorporate in states with favorable tax codes. Delaware and Nevada, for instance, do not tax income on the licensing of intangible assets. This means that, if you want to set up a company which will have significant income from licensing your Patents or Trademarks, these states can often make sense (at least for a holding company).


The risk of being sued, however, often had little effect on your decision. You might incorporate where you wanted to sue others (if it came to that), but you knew you could be sued virtually anywhere in the US.


Now, on the other hand, where you incorporate is very likely to be where you get sued.


Should you incorporate your business in your home state? Maybe. It may be more convenient to defend a lawsuit there (assuming your attorneys are there as well), and juries do tend to look more favorably on the local business defendant than on the out of state plaintiff.


However, your local judges might have little-to-no experience dealing with Patent Infringement cases. Patent Law is a complicated matter, and the last thing you want is a judge who has no experience with it and interprets it unpredictably or even incorrectly. Before going to court, you want to have a decent idea of whether it is worth fighting.


Even if you are going before a judge with Patent Law experience, there may be a backlog, and you don’t want your case to drag on for years and years.


Remember Delaware? More than half of US publicly-traded companies are incorporated in Delaware. 64% of Fortune 500 companies “reside” in Delaware, with more than 90% of IPOs in 2012 being based there. Going forward, when these companies find themselves sued for Patent Infringement, it may very likely be in Delaware.


Delaware… which has only FOUR full-time district judgeships.


Before incorporating your business, make sure you don’t only think about where it is convenient to be based, and where the tax laws may be favorable. Think about where you want to be sued… just in case.