KANSAS CITY, Mo.
On Dec. 7, 2018, the Federal Circuit issued a decision in Jack Henry & Associates, Inc. v. Plano Encryption Technologies
, case number 16-2700, holding that non-practicing entities (companies whose only business is to acquire and enforce patents through litigation) may be subject to venue and jurisdiction wherever they send demand letters because the sending of a demand letter into a jurisdiction is “doing business” in that jurisdiction, which may satisfy the test for personal jurisdiction. This ruling will allow companies to institute declaratory judgment actions where they reside rather than waiting to be sued in the non-practicing entity’s choice of venue.
In the case, Plano Encryption sent out dozens of demand letters to Jack Henry customers alleging they were infringing Plano Encryption’s patents. Rather than waiting to be sued, Jack Henry and its customers filed a declaratory judgment action against Plano Encryption in the United States District Court for the Northern District of Texas, seeking a ruling that Jack Henry and the customers did not infringe Plano Encryption's patents.
Plano Encryption filed a motion to dismiss for improper venue, asserting that venue would only be proper in the Eastern District of Texas. Plano Encryption argued that it did not do business in the Northern District and had no contacts outside the Eastern District of Texas, relying on Red Wing Shoe Co. v. Hockerson–Halberstadt, Inc.,
148 F.3d 1355 (Fed. Cir. 1998) and other cases, which it claimed precluded courts from exercising personal jurisdiction based solely on demand letters. The district court agreed and dismissed the action, holding that venue was improper due to Plano Encryption’s lack of contacts with the Northern District of Texas.
Led by Polsinelli Shareholder Jay Heidrick
, Jack Henry and its customers appealed the ruling to the Federal Circuit. Heidrick and team argued that Plano Encryption’s sole business is to enforce its patents, and that by sending its demand letters to banks in the Northern District of Texas, it was engaging in its sole business in the Northern District of Texas.
Heidrick argued that every other business is subject to jurisdiction if it conducts business in a particular jurisdiction, that non-practicing entities like Plano Encryption “do business” where they direct demand letters and that non-practicing entities should not be treated any differently than other businesses.
The Federal Circuit agreed and wholly adopted Jack Henry’s arguments. The court noted that Plano Encryption purposefully directed its activities to the Northern District of Texas by sending its demand letters, which is Plano Encryption’s sole business. The court therefore held that jurisdiction was proper because the lawsuit stemmed from Plano Encryption’s activities in the Northern District, and that Plano Encryption had failed to provide a compelling reason why it should not be subject to jurisdiction in that district.
In stating additional views, Judge Stoll, joined by Judge Wallach, noted that the Federal Circuit’s earlier holding in Red Wing
has been consistently misinterpreted by district courts, and encouraged the Federal Circuit to revisit the Red Wing
decision in order to clarify that no special jurisdiction rules apply to non-practicing entities in patent infringement cases.
The case represents a drastic change and a powerful new tool for companies to battle non-practicing entities. If a non-practicing entity sends a demand letter, it may subject itself to jurisdiction in the venue where its target resides and face a declaratory judgment action by the target. On the other hand, if a non-practicing entity files a lawsuit without sending a demand letter, it may subject itself to an award of fees under 35 U.S.C. § 285 if it has not conducted a good faith investigation into an alleged infringement. Therefore, this ruling has great potential to curb non-practicing entities from extorting settlements from companies by sending demand letters and threatening suit in a jurisdiction of the patent non-practicing entity’s choosing.