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Patently Unfair

Barack Obama and Antonin Scalia agree on one thing: the small East Texas town of Marshall may be the worst thing that ever happened to intellectual property law.

By October 2014Comments

Photograph by O. Rufus Lovett

Shawne Somerford stares across the Marshall town square in the direction of the federal courthouse. I’ve just asked her if she’s worried that Congress might put her restaurant, the Blue Frog Grill, out of business. She smiles faintly and shrugs. “Tomorrow it could all be gone,” she says.

Corporate executives across the world are familiar with Marshall, a town of 24,000 people about twenty miles west of the Louisiana border that over the past couple of decades has become the unlikely patent litigation capital of America. More than 1,500 patent cases were filed in Marshall last year, compared with about 1,300 in the entire state of Delaware, the jurisdiction in which most U.S. companies are incorporated. For more than a decade Marshall juries have meted out billions of dollars in patent awards for and against some of the world’s biggest high-tech companies. Apple, Samsung, Motorola, Dell, and Hewlett-Packard are just a few of the household names that have spent time in the Sam B. Hall Jr. federal courthouse.

Those trials have made a lot of money for some corporations and their lawyers, and they’ve also brought prosperity to the town. Somerford prides herself on the Blue Frog Grill’s organic ingredients and combination of upscale cuisine and small-town charm, but she knows there aren’t enough locals who fancy her chicken-fried ahi tuna (sashimi quality with wasabi cream gravy) to keep the doors open. “Marshall itself doesn’t sustain this kind of restaurant,” she says. “If it weren’t for our catering business, we really wouldn’t be here.” That’s why Somerford frequently checks the court docket. Her staff can double during a big trial; the Blue Frog is so popular with patent lawyers that she has, on occasion, catered both sides of a case.

But outside of town, not everyone is happy about what goes on in Marshall’s courtrooms. After all, there are no major corporate headquarters in Marshall. Yet thanks to federal law, which has traditionally allowed companies to file patent suits pretty much anywhere, the town’s remoteness has not been an obstacle. Over the years, Marshall has earned a reputation as the intellectual property equivalent of a speed trap, a place where juries smack big companies with huge judgments. And over the years federal lawmakers have tried to do something about it, with little success. The U.S. Supreme Court and the federal appeals court in New Orleans have enacted restrictions on new filings. Supreme Court justice Antonin Scalia declared Marshall “a renegade jurisdiction.” During his last State of the Union address, President Barack Obama was likely thinking about the town when he decried “costly, needless” patent litigation. 

As a federal jurisdiction, Marshall has always been a bit unusual. Without an FBI office or a U.S. attorney, its criminal docket is lighter than those at many federal courthouses, which are bogged down with drug cases. But it hardly seems like the ideal venue for intellectual property debates, which are challenging for jurors; only 20 percent of the town’s adult population hold bachelor’s degrees. But the locals have grown up on the edge of one of the world’s richest oil reservoirs, and royalty battles with oil companies have created a strong sense of property rights, whether they relate to patents or minerals. “Marshall was always popular with plaintiff’s lawyers,” says Judith Guthrie, a former federal magistrate judge in nearby Tyler. “The perception was that juries weren’t as sophisticated as in other parts of the district.” 

It was Texas Instruments, though, that really put Marshall on the map. Nearing bankruptcy in the mid-eighties, TI saved itself by turning its patent portfolio into a profit machine. The company began aggressively suing other tech giants for infringing on its patents for the integrated circuit and microprocessor. By the early nineties TI was earning almost $400 million a year from this sideline—more than it was making from operations. But to keep the patent profits flowing, TI needed to get its disputes to trial, and drug cases had clogged the docket in its hometown of Dallas. The company looked for a venue where it could get to trial faster, and Marshall, where criminal cases made up a paltry 10 percent of the docket, seemed ideal. In 1992 TI brought the first patent case to town, against chip maker Micron Technologies. The case settled less than two years later, with Micron agreeing to pay royalties, and a very happy TI kept filing cases in Marshall. 

A few years later, Longview lawyer T. John Ward was asked to be local counsel for Hyundai, the Korean conglomerate, which was accused of infringing on TI’s patents. Ward wound up losing but says the experience shaped his views on patent cases. When he became a federal judge, in 1999, he scheduled a hearing for a patent case that was pending in his court. He spent several hours reading through the briefings and identified nineteen items at issue in the case. He expected the hearing to take most of the day, going through the items one at a time. He was surprised when the lawyers agreed on many of the issues immediately. The hearing was over in less than fifteen minutes. 

The experience taught him that patent cases could be streamlined. “Once you decide three or four of the major claim terms, that pretty much dictates where you will end up on the others,” Ward says. He adopted new rules for speeding up the process. He limited the number of pages lawyers could file in their motions, set strict timetables for hearings, and used a timer to rein in lawyers’ presentations in the courtroom.

Ward’s rules unleashed what became known as the “rocket docket.” In his first year on the bench, Ward heard 5 patent cases. In 2006 his docket had 87. “I did not anticipate that there would be an explosion of lawsuits,” says the now-retired judge.

Judges in nearby towns took notice of what was happening in Marshall. In 2002 Leonard Davis was appointed to the bench in Tyler, which, like Marshall, is located in Texas’s Eastern District. Davis adopted similar rules for speedy patent trials. “I said, ‘Leonard, develop patent rules and they shall come,’ ” Ward says. And come they did. Tyler too has welcomed the economic benefits of patent trials. “It’s very integrated into our downtown culture,” says interim Tyler city manager Susan Guthrie, Judith Guthrie’s niece. “We love saying, ‘We have the rocket docket.’ There’s a civic pride to it.”

It’s easy to see why Ward and his fellow jurists developed a penchant for patent cases. Patent disputes tend to bring in top-notch lawyers, and the cases are interesting, complex, and often draw the attention of the media. Yet Marshall soon gained a reputation the judges may not have welcomed: it became known as a plaintiff’s playground, a place that frequently handed out tens, or even hundreds, of millions of dollars in damage awards. In 2006 the New York Times reported that of the patent cases that went to trial in Marshall, jurors ruled for plaintiffs 78 percent of the time, far more than the national average of 59 percent. From 2001 to 2006, plaintiffs prevailed in eighteen straight verdicts in Marshall. “That set the reputation of the district from then on,” says Michael C. Smith, who grew up in Marshall and graduated from Baylor Law School, in 1992, before returning home to tackle patent cases. 

For those who understood the tightly knit legal community in East Texas, it was clear why plaintiffs were doing so well in Marshall. In most other jurisdictions, patent cases settle before trial because of the long wait to get to court. With the rocket docket, though, intellectual property defense lawyers found themselves in an unfamiliar place: the courtroom. The defense teams, who usually jetted in from out of town, struggled to explain the complicated cases to the local juries, while the plaintiff’s bar had become adept at it. And so, as a rule, defense lawyers began hiring local counsel who knew the courts and juries as well as the plaintiff’s lawyers did. That made a big difference. Today, Smith estimates, defendants win about half the cases in Marshall. 

As all these changes were happening, the nature of the patent cases that came to Marshall began to shift. TI’s strategy in the eighties and nineties had turned patents into valuable assets, and a new type of plaintiff started to appear. Firms that didn’t create or manufacture anything began to acquire and enforce patents as a financial strategy, quickly earning the name “patent trolls.” “The trash cases started coming here,” Smith says. By the end of the aughts, the rocket docket had been infiltrated by the trolls. 

Even though they often lose, the trolls have had a deleterious effect on innovation. A recent study by Harvard and the University of Texas at Dallas found that companies that defend themselves against patent troll claims spend an average of $211 million less on their own research and development in the three years following the litigation. “It can have a chilling effect on the future of a firm,” says Umit Gurun, a UT associate professor who co-authored the study. Gurun also notes that investors spooked by the legal cost of fighting trolls may drag a company’s share price down. 

Tech firms like Google and Apple, which frequently face patent claims, began lobbying for patent law to be revised, and the changes came. In 2011 the Fifth U.S. Circuit Court of Appeals, which oversees the Eastern District, made it easier for patent defendants to obtain a change of venue if the plaintiff did not have a substantial local presence in its preferred district. That same year, Congress passed the America Invents Act, which aimed to prevent plaintiffs from suing multiple defendants in a single case, forcing them to file each claim separately. Neither move has deterred the trolls. In fact, the incidence of patent cases in the Eastern District are accelerating—912 cases were filed this year as of June 30, a 26 percent increase over the first six months of last year. This summer, the U.S. Supreme Court took another tack, issuing a ruling that will eliminate some of the vagaries in software patents and, it is hoped, make trolling less lucrative. 

The only thing that has slowed the rocket docket, ironically, is the effect of the district’s own popularity. Last year, the Eastern District ranked fourth nationally in the average time it took a patent case to get to trial—677 days, which is more than triple the 212 days it took in the Eastern District of Pennsylvania. Of course, the Pennsylvania court had a solitary patent case that went to trial; its Texas counterpart handled 24. 

But Smith says predictions that the rocket docket is flaming out are overblown. “For the last six or eight years, people have been saying, ‘This is the end of the Eastern District,’ ” he notes. But that seems unlikely. The bench in East Texas has several judges who now handle patent cases. If one gets bogged down, another picks up the slack. In June President Obama nominated Amos L. Mazzant III, a magistrate judge in the Sherman court, and Robert W. Schroeder III, a lawyer in Texarkana, to fill vacancies in the district. Both have worked in the area and understand its legacy. For better or worse, the district’s reputation is built on patent cases, and given the backlog on the docket, the new judges aren’t likely to change things. 

“Anybody who applies to be a judge in the Eastern District knows what the deal is,” Judith Guthrie says. “It’s like an unspoken job description. It will continue until the bar decides to file elsewhere or until Congress changes the law.” In the meantime, Shawne Somerford will keep serving up her chicken-fried ahi—and keep one eye on the patent docket across the square. 

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