One little-publicized part of the new tax law (Tax Cuts and Jobs Act of 2017) may negatively affect the value of some patents and other intellectual property.  It does so by changing the tax treatment of income from sales of “patents, models and secret formulas or processes” from capital gains to ordinary income.

Prior to the amendment of Tax Code Section 1221(a)(3), income from sales of (1) “patents, models and secret formulas or processes,” (2) held by the IP creator, (3) for more than one year, was taxed at the capital gains rate.  This resulted in lower tax than the ordinary income tax rate that applied to other types of IP, such as copyrights, literary, musical, and artistic compositions.  Congress has now taken this tax advantage away.

The change in the law affects those that sell or license IP in the “primary market” only —in other words, the original creators of the IP.  It generally does not affect those that have paid to own the IP, including the IP creators’ employers.

There still remains an exception under Tax Code Section 1235 providing for lower tax on sales and licensing of all rights to patents, secret formulas and trade names (but only these types of IP).  For other types of IP, adjustments in sale prices and license royalties will need to compensate for the higher tax under the new law.

Our tax and IP groups can help you assess the new law’s impact on these valuable assets.

For a number of years, patent owners have had broad discretion to bring patent infringement lawsuits in court locations, or “venues,” based on perceived strategic advantages and their own convenience.  A federal district court in eastern Texas, for example, has – for several reasons – been one of the favorite venues for patent owners.  Another favored jurisdiction, perceived as “plaintiff-friendly,” is the District of Delaware.

Courts have upheld patent plaintiffs’ choices of venue even when the alleged infringer’s only connection to the chosen locale was that the defendant sold some allegedly infringing products there.  The inconvenience of litigating in a jurisdiction far from the defendants’ home, along with other perceived plaintiff-friendly aspects of certain courts, has often provided significant leverage to patent plaintiffs.

No longer.  In TC Heartland LLC v. Kraft Foods Group Brands, LLC, No. 16-341, the United States Supreme Court limited patent plaintiffs to filing suit where the defendant is incorporated or where the defendant both has a “regular and established place of business” and also infringed the patent at issue.

In TC Heartland, Kraft alleged that TC Heartland – a manufacturer of flavored drink mixes – infringed one of Kraft’s patents.  Kraft sued TC Heartland for patent infringement in federal court in Delaware.  TC Heartland was an Indiana company headquartered in Indiana.  Its only connection to Delaware was that it sold product there.

Under the patent venue statute, a patent infringement case may be brought in a district where the defendant “resides” or where the defendant has infringed the patent and has a “regular and established place of business.”  Kraft did not contend that TC Heartland had a regular and established place of business in the District of Delaware.  Instead, Kraft argued that “resides” means anywhere the defendant is subject to personal jurisdiction.  Kraft relied on the federal statute that provides the general rule for venue choices in non-patent cases.  In an 8-0 decision delivered by Justice Thomas, the Supreme Court rejected the argument that the general venue statute should be used to interpret the patent venue statute and held that the word “resides” in the patent venue statute, as applied to U.S. corporations, means only the state where they are incorporated.

After TC Heartland, patent holders will be limited to filing suit: (1) in the state of the alleged infringer’s incorporation; or (2) the state where the infringer committed an infringing act and has a regular, established place of business.  The decision removes one of the tools in a patent plaintiff’s shed to bring additional pressure against alleged infringers, and plaintiffs will have to refrain from filing lawsuit in state’s that have a tangential relationship to the defendant’s home jurisdictions.

In what some perceive as a major shift from decades of precedent, the United States Supreme Court held last week that laches – unreasonable delay – is no longer a valid defense against a claim for patent infringement so long as the patent owner brings suit  within the 6-year look-back limitation period prescribed in 35 U.S.C. § 286.

In SCA Hygiene Products Aktiebolag v. First Quality Baby Products, LLC, SCA, held a patent concerning the manufacture and sale of certain adult incontinence products.  In October 2003, SCA sent a letter to First Quality asserting that First Quality was infringing SCA’s patent rights.  In response, First Quality maintained that the patent at issue was invalid and could not support an infringement claim.  SCA took no further action until July 2004 when, without notifying First Quality, asked the Patent and Trademark Office (PTO) to initiate a reexamination proceeding to determine whether the relevant patent was valid in light of certain pre-existing patents.  Three years later, in March 2007, the PTO issued a certificate confirming the validity of the relevant patent.

Over three years later, in August 2010, SCA filed a lawsuit for patent infringement against First Quality.  First Quality moved for summary judgment based on laches and equitable estoppel, and the District Court granted the motion on both grounds.  SCA appealed to the Federal Circuit, which affirmed the District Court’s holding that laches can be asserted to defeat a claim for damages incurred within the 6-year period set out in the patent statute.

On appeal, the Supreme Court reversed, in part, basing its decision on the plain language of the statute, which it found evinced a judgment by Congress that a patentee may recover damages for any infringement committed within six years of the filing of the claim.  The Court went on to find that it “would be exceedingly unusual, if not unprecedented, if Congress chose to include in the Patent Act both a statute of limitations for damages and a laches provision applicable to a damages claim.”  Thus, the Court held, that the doctrine of laches cannot bar an otherwise timely claim for damages under the patent statute.  The Supreme Court did note, however, that the doctrine of equitable estoppel can still provide protection against some of the problems that may arise when patentees induce potential targets of infringement suits to invest in the production of arguable infringing products.

In view of this decision, parties accused of patent infringement should be cognizant that they are potentially liable for six (6) years from the time of alleged infringement, regardless of how diligent the patent owner is in pursuing its claim.

Under United States law, the holder of a patent on a brand-name, FDA-approved drug can bring suit for patent infringement against a generic drug manufacturer even before the generic manufacturer brings the drug to market.  That right to sue is triggered by the generic manufacturer’s filing of the short-cut application to the FDA to sell the drug known as an Abbreviated New Drug Application, or “ANDA.”  On March 18, 2016, the Federal Circuit Court of Appeals held that a generic drug manufacturer’s intent to manufacture and market drugs in a particular state – even before they start selling there – is enough to sue the generic manufacturer in the federal court in that state.  The decision will go a long way in cementing “home field advantage” for branded drug companies that traditionally bring suit in their home state before the generic drug is ever actually manufactured or marketed there.

The decision came in the context of two separate actions brought in Delaware against generic drug manufacturer Mylan Pharmaceuticals Inc.  In both cases, the plaintiffs sought to halt Mylan’s efforts to manufacture and market allegedly infringing generic drugs described in Mylan’s ANDA’s filed with the FDA.  Mylan moved to dismiss both cases on the basis that Delaware could not exercise jurisdiction over Mylan because Mylan lacked sufficient “minimum contacts” with Delaware as required under the United States Constitution.  The Federal Circuit held that Mylan’s efforts to obtain FDA approval to manufacture and/or sell its generic drugs in Delaware, along with Mylan’s established distribution channels, satisfied the minimum-contacts standard.  Although fairness and undue burden should always be considered, generally speaking, the courts need not wait for a product to be manufactured or sold within a particular state before hearing a case in which the propriety of such future, potentially infringing conduct is considered.

It has become commonplace for branded drug companies to bring ANDA-related lawsuits in their home states, most commonly New Jersey and Delaware, with the generic manufacturer vigorously fighting to dismiss and/or remove the case to another state (such as the generic company’s state of incorporation) based on jurisdictional arguments.  Barring an appeal to the United States Supreme Court, the Federal Circuit’s decision should greatly reduce the number of such disputes, with the majority of cases remaining in New Jersey and Delaware, where the sheer volume of ANDA cases has resulted in a familiarity and expertise among the judiciary that remains largely unmatched throughout the country.


A case decided this month by the Federal Circuit Court of Appeals involving technology for preparing multi-cryopreserved liver cells reminds how critical experts can be in deciding patent disputes, including in the context of preliminary proceedings.

The patent involved in Celsis In Vitro, Inc. v. Cellzdirect, Inc. concerns mechanisms for the preservation of liver cells through multiple freezing processes, which enables researchers to have increased access to cell samples over time, and a larger population of donors. Celsis brought suit alleging infringement and, following limited discovery and an evidentiary hearing, obtained a preliminary injunction barring the sale of the accused products.

The principal issues on appeal were the correctness of the trial court’s conclusions as to infringement and validity (that the patented method was not obvious in view of the prior art), as well as the determination of irreparable harm. Applying the abuse of discretion standard of review applicable to rulings on preliminary injunctions, the Federal Circuit relied heavily on the district court’s assessment of expert testimony (or lack thereof) in affirming the injunction.

On the infringement issue, the district court heard testimony from the parties’ competing experts and found the patent owner’s expert was “helpful in carefully explaining how [the defendant’s] accused process [met] all the limitations of the asserted claims” whereas the defense’s experts “didn’t offer anything in the way of opinions to address the proper interpretation of the patent’s claims.” Finding the plaintiff’s expert more persuasive, the district court had ruled that the patent owner was likely to succeed on its claim, weighing in favor of the issuance of an injunction. On appeal, the Federal Circuit held that the district court did not abuse its discretion in finding a likelihood of success as to infringement.

Similarly, the Federal Circuit deferred to the district court’s determination that the testimony of the defense’s experts on issues of obviousness were not credible, opining that the district court “has wide discretion to weigh expert credibility” and the Federal Circuit will defer to those determinations.

On the issue of irreparable harm, the district court found that Celsis would suffer irreparable harm in the form of price erosion, loss of goodwill, damage to reputation and loss of business opportunities based on the unrebutted expert testimony of Celsis’ expert. The Federal Circuit held that there was “no error in the district court’s reliance on Celsis’ unrebutted expert testimony” and based on such testimony, found no reason to revise the district court’s fact determinations. Relatedly, on the district court’s conclusions regarding the balance of harms weighing in Celsis’ favor, the Federal Circuit opined: “This preliminary injunction factor is also affected by [the defense’s] decision not to present expert testimony to rebut Celsis’ expert testimony.”

The Celsis case highlights the significance of both the credibility of dueling experts on issues before the court, as well as the determination of whether to present rebuttal expert testimony.