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.
WHAT WAS THE DECISION?
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.
SO WHAT DOES THIS MEAN FOR ME?
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.