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TROLL HAMMER: WHY THE U.S. SUPREME COURT'S RECENT RULING ON PATENT LAW IS GOOD FOR FRANCHISES AN

On May 22, 2017, the United States Supreme Court issued a unanimous 8 - 0 ruling in TC Heartland LLC v. Kraft Foods Group Brands LLC that significantly limited the scope of venue in patent infringement lawsuits against domestic corporations.

What does this mean and why is this important?

Prior to the TC Heartland ruling, plaintiffs in patent infringement cases routinely engaged in "forum shopping," i.e., filing lawsuits in "plaintiffs friendly" Federal District Courts where the odds were stacked in their favor. This resulted in a disproportionate number of patent infringement cases being heard in jurisdictions that had nothing to do with the plaintiff or the alleged infringing defendant.

Often times, these plaintiffs were merely rights holders of patents that made no manufacturing or licensing use of their patents, and their business was essentially to file patent infringement lawsuits. These "patent trolls" routinely filed in jurisdictions such as the Eastern District of Texas, forcing many defendants to incur the expense of litigating out-of-state in a jurisdiction that favors plaintiffs.

In light of the Supreme Court's ruling, plaintiffs may only file patent infringement lawsuits in a domestic corporate defendant's State of incorporation. Put differently, a plaintiff must come to a corporate defendant's home turf to file a patent infringement lawsuit instead of "forum shopping" for a more favorable jurisdiction.

This ruling has wide reaching implications for businesses everywhere, including franchisors and franchisees. This is because in addition to licensing trademark rights through franchise agreements, many franchisors also license other forms of intellectual property to franchisees, including copyrighted works or patented inventions.

Given that a potential patent infringement defendant under 35 U.S.C. Section 271 includes anyone "who, without authority, makes, uses, offers to sell, or sells any patented invention" in the United States (in other words, the entire vertical distribution chain, down to the end user), this can place an entire franchise system in the cross-hairs of a patent infringement plaintiff.

For example, the San Diego-based company Ameranth, Inc. has filed more than 30 patent infringement lawsuits in the Southern District of California since 2011 involving alleged infringements of patents involving technologies for hospitality software used in many franchise systems. The ongoing Ameranth litigation has also included a lawsuit against franchisors Pizza Hut, Dominos, and Papa John's.

While patent infringement lawsuits are a potential risk in many franchise systems, both franchisors and franchisees can nevertheless rest a little easier knowing that it is less likely that a patent troll can haul them into court in an out-of-state, unfamiliar jurisdiction.

Please feel free to contact Eric J. Hardeman if you have any questions about the TC Heartland case or how patent law can affect your franchised business.

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