How did TC Heartland Affect Firm Value?

In Recalibrating Patent Venue, Colleen Chien and I did a nationwide study of forum shopping in patent cases (shocker - everybody did it, and not just in Texas), and predicted that many patent cases would shift from the Eastern District to the District of Delaware. And, lo, it has come to pass. Delaware is super busy. This has been good for us at Villanova (only 30 miles away from the court), as our students are getting some great patent experience in externships and internships.

But how much did firms value not being sued in Texas? The TC Heartland case is a clear shock event, so an event study can measure this. In Will Delaware Be Different? An Empirical Study of TC Heartland and the Shift to Defendant Choice of Venue, Ofer Eldar (Duke Law) and Neel Sukhatme (Georgetown Law) examine this question. The article is forthcoming in Cornell Law Review and a draft is on SSRN. Here is the abstract:

Why do some venues evolve into litigation havens while others do not? Venues might compete for litigation for various reasons, such as enhancing their judges’ prestige and increasing revenues for the local bar. This competition is framed by the party that chooses the venue. Whether plaintiffs or defendants primarily choose venue is crucial because, we argue, the two scenarios are not symmetrical.

The Supreme Court’s recent decision in TC Heartland v. Kraft Foods illustrates this dynamic. There, the Court effectively shifted venue choice in many patent infringement cases from plaintiffs to corporate defendants. We use TC Heartland to empirically measure the impact of this shift using an event study, which measures how the stock market reacted to the decision. We find that likely targets of “patent trolls”— entities that own and assert patented inventions but do not otherwise use them—saw their company valuations increase the most due to TC Heartland. This effect is particularly pronounced for Delaware-incorporated firms. Our results match litigation trends since TC Heartland, as new cases have dramatically shifted to the District of Delaware from the Eastern District of Texas, previously the most popular venue for infringement actions.

Why do investors believe Delaware will do better than Texas in curbing patent troll litigation? Unlike Texas, Delaware’s economy depends on attracting large businesses that pay high incorporation fees; it is thus less likely to encourage disruptive litigation and jeopardize its privileged position in corporate law. More broadly, we explain why giving defendants more control over venue can counterbalance judges’ incentives to increase their influence by encouraging excessive litigation. Drawing on Delaware’s approach to corporate litigation and bankruptcy proceedings, we argue that Delaware will compete for patent litigation through an expert judiciary and well- developed case law that balances both patentee and defendant interests.

As I discuss below, I have a like/dislike reaction to this paper.

I like the empirical setup - comparing companies that will be sued in Texas with those that will be sued in Delaware and with those that will be sued outside of Delaware (because they are incorporated elsewhere). The most robust results are that being sued anywhere else increased value, though there are some barely significant results that firms did even better in Delaware. This was interesting and useful.

But I dislike event studies generally, for a variety of reasons. The big issue here is uncertainty about how districts will change behavior in the long term. Thus, there is no way the authors could have waited for a correction (they note this, of course). But this means (which they also note) that this is a market prediction about firm value from not being sued in Texas - but that tells us very little about the actual impact of actual litigation or changes in the future. It may be that Delaware is already perceived as better than Texas, or it could be that the market is simply wrong about the cost of being in Texas.

I like the theoretical setup - that Delaware has attracted incorporation through its court behavior and laws, and using bankruptcy as an example. This adds a lot, though the empirical results only weakly support the theory (in a predictive sense) from a patent point of view. But the thought that Delaware will move to be pro-defendant (or at least less pro-plaintiff in their view) is an area for explanation.

But I dislike the theoretical conclusions. I believe the paper relies too heavily on the "forum selling" motif without critical analysis. There is at least one article (Colleen's and mine) that discusses other reasons why local scheduling winds up looking bad for defendants, such as congestion. Of course, we discuss selling as well, but we make the explicit point that the jury is out as to whether Delaware will be so friendly once the volume of cases doubles with its only four judges.

To that end, one would think that Delaware always had this pro-defendant (or balanced) approach if we buy the forum selling theory. But then why did so many plaintiffs (including NPEs) sue there even before TC Heartland? Doesn't that seriously crimp either a) a selling theory, or b) a post-TC Heartland change?

But I do like their further discussion of this about a two-stage venue selection game: 1) select where to incorporate or have facilities, and 2) select where to sue. This would be an interesting theoretical paper in the future, or even something to be tested. I wonder whether Delaware's incentives to treat plaintiffs/defendants a certain way will have much of an effect if the result is plaintiffs suing in other districts (which will often not have very helpful scheduling rules).

In the end, none of these are answered by the interesting empirical results. So, while I like the empirical analysis, I dislike that the analysis is not tied to the conclusions in a meaningful way.