NPEs flock to Western Texas for extra speed and leverage

In a move that could reshape the tech litigation landscape in the US, non-practising entities are flocking to the Western District of Texas to file cases, while many are moving away from the District of Delaware, in an effort to drive cost efficiencies and build new leverage over tech defendants.

Data taken from the Docket Navigator database shows that western Texas is slightly ahead of Delaware in the number of patent cases this year. This is the first time since the US Supreme Court’s (SCOTUS) 2017 TC Heartland v Kraft Foods ruling that another venue has even come close to Delaware’s patent litigation numbers, let alone overtaken it.

The reason for this shift is the influx of NPE cases into the Western District of Texas. According to Unified Patents, 133 of the 163 cases filed in that jurisdiction between January 1 and April 1 2020 (80%) were by NPEs.

Patent assertion entities are still largely the most prolific litigators at the district, while tech companies make up the majority of the most challenged defendants.

Top 10 plaintiffs and defendants in the Western District of Texas in 2020 (as of April 13)
Rank	Plaintiff	Cases	Rank	Defendant	Cases
1	WSOU Investments	22	1	ZTE	12
2	Castlemorton Wireless	15	2	Huawei	9
3	Neodron	8	3	Samsung	8
4	EcoFactor	5	4	Amazon	4
-	Far North Patents	5	-	Apple	4
-	Kamino	5	-	Google	4
-	NavBlazer	5	7	BestBuy	3
8	Aeritas	4	-	Facebook	3
-	Browse 3D	4	-	HP	3
-	Ikorongo Texas	4	-	LG	3
-	Terrestrial Comms	4	-	NXP	3
-	VoIP-Pal.com	4	-	Verizon	3
			-	WSOU Investments	3

The Texas court received 208 NPE matters and 257 cases in total for the whole of 2019, representing an average of 52 matters filed by patent assertion businesses per quarter.

The District of Delaware, on the other hand, took in an average of 158 NPE matters per quarter last year. It only received 108 in the first quarter of 2020 – but the number of such matters at this venue could pick up later in the year.

That case filing trend, which suggests that some NPEs are now moving away from the Wilmington court and trying their luck with the courts in Austin and Waco, puts the Texas district well on track to become the top venue for these types of matters in 2020, and probably for the foreseeable future.

Unified Patents has calculated that should this trend continue at the current rate of filings, the Western District of Texas could accumulate 632 cases by the end of the year, 505 of which will come from NPEs.

This main reason for this NPE exodus, beyond patent venue concerns, is that the promised speed of proceedings at the Texas court gives these businesses an opportunity to improve their chances of quick settlements or wins, which will in turn buttress their cash flow forecasts.

This influx of rapidly tried cases will also put tech-focused operating companies that are typically sued by NPEs at a considerable disadvantage compared to recent years, when they might have been fighting many of these cases in Delaware.

“I certainly would not want to be in west Texas,” the chief IP counsel at a financial services company tells Managing IP. “I’ve litigated in west Texas in the past, when judge Alan Albright was the local counsel on the other side, and I got a fair shake there.

“But with Albright’s push to get litigation to come to his district, I would not want to be there again now.”

Delaware was a hugely popular venue for patent matters before the SCOTUS 2017 TC Heartland ruling, and has, apart from the Patent Trial and Appeal Board (PTAB), been the most-used IP forum for the past two years.

A lot of the matters filed there are life sciences cases, and apart from the District of New Jersey, Delaware has had the most applications for Abbreviated New Drug Application cases this year. But many more cases there – approximately 62% of those filed in 2020 so far – come from NPEs.

Prior to SCOTUS’s patent venue ruling, the Eastern District of Texas under judges such as Rodney Gilstrap was the preferred venue of choice for NPEs.

But these entities flocked to Delaware after 2017 to meet the requirements set out by TC Heartland that a plaintiff can only sue an alleged infringer in a district where the infringer is incorporated or has a regular and established place of business.

Eastern Texas is a small district and doesn’t have much of a tech industry, so it became increasingly difficult for plaintiffs to argue that a given tech defendant had a significant presence there. By contrast, more than 60% of US-based companies are incorporated in Delaware because of the state’s up-to-date incorporation statute and its sophisticated corporate courts.

Delaware thus became the only district, apart from the northern and central districts of California – which have famously pro-tech jury pools – where NPEs could realistically file patent cases.

But that all has changed now that former Bracewell partner and patent litigator Alan Albright is on the western Texas district’s bench. By promising to quickly and expertly process cases after he joined in late 2017, he has attracted just under a fifth (18%) of all US district patent cases filed this year to his court.

The fact that the Western District of Texas covers some key tech-hub cities such as Austin and San Antonio also makes it easier for NPEs to adhere to patent venue rules when they sue there.

Both the Delaware and western Texas districts offer considerable benefits to patent litigators, including those working for NPEs, over other forums in terms of their experience and, to a certain extent, predictability.

Nisha Patel, partner at Dechert in Silicon Valley, points out that Albright tends not to grant early Section 101 motions to dismiss that are filed in advance of a Markman hearing, which inevitably favours plaintiffs – NPE or otherwise.

But the speed at which Albright at the Western District of Texas conducts his proceedings offers a key advantage to NPEs. Most patent assertion businesses are essentially investment vehicles that buy and assert intellectual assets and whose only source of income is licensing or litigation-related revenue.

Unlike operating companies, which also sue to generate income but whose main revenue streams are derived from selling goods and services, NPEs are completely reliant on the speed of court proceedings for their cash flow. 

And of course, the faster NPEs can bring matters to a favourable conclusion, the faster they can file more cases or buy new patents that will enable them to file cases in the future.

As Managing IP reported last month, one of Albright’s most attractive promises to litigators has been to adjudicate proceedings faster than the PTAB so that he doesn’t have to stay cases in lieu of inter partes review (IPR) rulings, and to bring matters to trial within 12 to 14 months of the Markman hearing.

That timeline means that trials should happen within 18 to 21 months of a case being filed, compared to an average of 30 months for a matter in Delaware.

“The judge at the Western District of Texas is very good,” says Khaled Fekih-Romdhane, president and CEO of Longhorn IP, a patent licensing company, in Dallas. “People have been saying he will not stay a case when an IPR is filed, which is important because an IPR could put a case on hold for a couple of years, so that is an advantage for us at the district.”

Reza Mirzaie, partner at Russ August & Kabat in Los Angeles, adds that NPEs may like the fact that they can file cases against several defendants in western Texas and keep cases consolidated efficiently for claim construction and other discovery.

“There aren’t that many other districts in the US where so many tech companies have offices,” he says.

From the perspective of tech-focused operating companies that are typically sued by patent assertion entities, the influx of NPE cases to the Western District of Texas is a threat to them in the same way as the Eastern District of Texas was before TC Heartland.

The speed of proceedings in the new Texas rocket docket has forced companies to either quickly ramp up resources to defend against a Markman discovery hearing that’s difficult to avoid and that’s progressed at an accelerated schedule or to settle for a percentage of the litigation cost.

“The rise of this jurisdiction and speed at which it gets through cases has reinforced NPE leverage and reincentivised companies to settle for something that’s divorced from the value of the patent but is rather related to cost of litigation,” says Jonathan Stroud, chief IP counsel at Unified Patents in Washington DC.

“It’s a purely economic lever to pull,” he adds.

In Delaware, on the other hand, tech companies can work on the general assurance that they won’t see the inside of a courtroom for about three years after a case has been filed, which means they had more time to push off their discovery costs or file for a dispositive motion.

The fact that these cases sit in tech firms’ dockets for such a long time also means that a lot less pressure is put on them to settle quickly.

Considering how quickly the Western District of Texas’s patent docket has grown in just two years, tech companies are concerned that the district could reach the same levels of NPE litigation as the Eastern District of Texas before TC Heartland, or perhaps close to it.

Stroud at Unified Patents says that despite post-2017 patent venue rules, western Texas is likely to receive even more NPE filings in the future because of the difficulty any party would have in trying avoid its jurisdiction.

“It was theoretically possible not to have any corporate partners or sell in the Eastern District of Texas, but the same is not true for the west,” he says.

He says that people often point to the famous case of Apple shutting down its stores in the Eastern District of Texas as an example of how tech companies can avoid patent suits under TC Heartland. But Apple and many other tech retailers have far more stores that do far more business in Austin.

Stroud adds that a lot of companies have corporate partners in Austin, while others have server storage or rent space there or a relationship with the universities.  

Operating companies based elsewhere might also try to get a case launched against one of their customers transferred from the Western district of Texas with a customer suit exception. But here again, Stroud points out that Albright has already denied such motions in the In re Sprouts Farmers Market case, and that this denial was upheld by the Court of Appeals for the Federal Circuit last month.

“It really is not feasible to avoid that big of a region of the country,” he says. “And it seems far less likely that plaintiffs will experience a TC Heartland problem there.”

Stroud says it is worth noting that if the data bears out and the Western District of Texas receives new filings at the same or an increased rate, Albright will eventually get overwhelmed. When that happens, he will have to do something to reduce the number of matters on his docket – whether by ruling on 101 motions or transferring motions, or just hiring new staff.

But until then, Albright has a relatively clear docket to fill up, and it is likely to fill up quickly.

The Western District of Texas is likely to become the new home for NPE litigation. Tech companies need to be ready for that eventuality so they’re not caught unprepared for a situation similar to that at the Eastern District of Texas before 2017.