Court Competition for Patent Cases
There are ninety-four federal district courts in the United States, but nearly half of the six thousand patent cases filed in 2013 were filed in just two of those courts: the District of Delaware and the Eastern District of Texas. In the Eastern District of Texas and the District of Delaware—neither of which is home to a major technology industry —patent litigation comprises an astounding proportion of each court’s docket: twenty-eight percent of 2013 filings in the Eastern District of Texas were patent cases while fifty-six percent of 2013 filings in the District of Delaware were patent cases. In fact, the two judges with the busiest patent dockets—Judge Rodney Gilstrap in the Eastern District of Texas and Judge Leonard Stark in the District of Delaware—have larger patent dockets than does the entire Central District of California, the district that receives the third most patent cases in the country.
While the popularity of the Eastern District of Texas and the District of Delaware with patent plaintiffs is a relatively recent phenomenon, the litigation tactic of selecting the court that offers the greatest odds of success—otherwise known as forum shopping—is not. Forum shopping has been a significant concern in the patent system for over forty years. Forum shopping is generally understood to be driven by the search for favorable substantive law, favorable procedural rules, or “home court advantage.” However, the persistence of forum shopping in patent law cannot be fully explained by substantive legal differences or home court advantage. Patent litigants cannot obtain substantive legal differences by forum shopping because all federal district courts are bound by the same legal rules that come from the U.S. Court of Appeals for the Federal Circuit. Furthermore, the fact that the majority of patent cases are filed in district courts that do not have sizeable technology industries indicates that most forum shopping is not the result of major technology companies seeking the advantages of litigating at the nearest courthouse.
That leaves procedural differences. This Article theorizes that forum shopping in patent law is driven, at least in part, by federal district courts competing for litigants. This competition occurs primarily through procedural and administrative differentiation among courts. All patent infringement cases are heard in federal court and are therefore governed by the Federal Rules of Civil Procedure. Despite the existence of the Federal Rules, district courts across the United States have adopted local rules specifically for patent cases. Intriguingly, some districts have adopted local patent rules despite almost never hearing patent cases in their courtrooms, suggesting that local patent rules serve a signaling function for courts looking to attract potential patent litigants.
An Inconvenient Truth: How Forum Non Conveniens Doctrine Allows Defendants To Escape State Court Jurisdiction
Imagine you are a foreign citizen. You have been injured in a foreign country due to the negligence of a U.S. company and have a legitimate tort claim for millions of dollars against the company. You file suit in the state court in Missoula, Montana—located at 200 W. Broadway, Missoula, Montana 59802. The defendant company removes the case, on the basis of diversity of citizenship, to the United States District Court of Montana—located at 201 E. Broadway, Missoula, Montana 59802 —and argues that the case should be dismissed under the doctrine of forum non conveniens. The state court probably would not have granted the motion, but rather would have allowed the case to proceed to the merits. But now that the case has been moved just two blocks away to a federal district court, that court can exercise its discretion under federal forum non conveniens doctrine and dismiss the case. This sequence of events does not occur infrequently.
Because almost every federal court applies federal forum non conveniens law in diversity cases, defendants can remove cases to federal court solely for the purpose of getting them dismissed on forum non conveniens grounds. In cases where a state would not dismiss under its own forum non conveniens doctrine, it is unfair for defendants to exploit removal to obtain dismissal. Allowing defendants to engage in this practice undercuts the rights of the parties and undermines the purpose of the forum non conveniens doctrine.
The appropriate remedy is for courts to find that defendants who remove from state court waive their right to argue forum non conveniens in federal court when the state would not have dismissed the case under its forum non conveniens law. This would prevent the injustice of defendants using removal as a mechanism for dismissal. However, courts may be unwilling to adopt waiver. Ultimately, I propose that Congress remedy this injustice by amending the removal statute to permit remand to the state court when the federal court dismisses on forum non conveniens grounds.
Comptroller v. Wynne: Internal Consistency, a National Marketplace, and Limits on State Sovereignty to Tax
On November 12, 2014, the U.S. Supreme Court heard oral argument in Comptroller of the Treasury v. Wynne. The case, which has already been called the Court’s most important state tax case in decades, asks how the dormant Commerce Clause restrains state taxation of individual income. Because Wynne lacks the usual indicia of “certworthiness,” the case raises the possibility that the Court will reshape the constitutional balance between the states’ sovereign interest in collecting taxes and the national interest in maintaining an open economy.
The challenge for the Court, whose dormant Commerce Clause rulings have attracted intense criticism, is to delineate clear limits on state taxation that promote a national market economy without unduly restricting the states’ taxing authority. In earlier writings, we developed a framework to resolve tax discrimination cases in a consistent and intuitive manner that provides states with broad flexibility while maintaining an open interstate market. In this Essay, we apply that framework to Wynne to demonstrate how Maryland’s current system violates the dormant Commerce Clause. We also describe how our approach addresses Maryland’s arguments and resolves many issues that seemed to trouble the Justices at oral argument.
The rest of this Essay proceeds as follows. After providing the factual and legal background of the case, we show that the contested Maryland income tax regime fails the Court’s long-standing internal consistency test and so would be struck down were the Court to apply that test. We then respond to Maryland’s three major arguments why the Court should not apply the internal consistency test. Drawing on our earlier work, we first show that Maryland’s principal claim, that its tax law does not discourage cross-border commerce because residents are taxed at the same rate on in-state and out-of-state income, whereas non-residents are taxed at a lower rate on in-state income and not at all on out-of-state income, is not dispositive. Maryland’s argument should not prevail because economic analysis shows that the comparison of tax rates that Maryland offers is too simplistic to reveal whether the Maryland tax system discourages cross-border commerce. Second, Maryland claims that any interference with the Wynnes’ cross-border commerce stems from the interaction of different states’ tax systems rather than Maryland’s tax regime alone. This claim is wrong, and we show that Maryland’s tax system would burden interstate commerce even if no other state imposed taxes. Third, we show that Maryland’s claim that a decision for the taxpayer would allow residents with out-of-state income to free-ride on Maryland’s public services is overstated because the internal consistency test provides states with wide flexibility to tax.
The arguments in Wynne largely followed the outline above, with an important exception. The taxpayer argued that the dormant Commerce Clause requires Maryland to eliminate double taxation of their interstate commerce for the simple reason that Maryland is their state of residence. But the Court’s dormant Commerce Clause doctrine does not clearly support the interpretation that the state of residence must eliminate double taxation. Nor is such an interpretation needed for the Wynnes to win their case. Rather than requiring elimination of double taxation, the dormant Commerce Clause prohibits states from discriminating against interstate commerce. We show that Maryland discriminates against interstate taxation, and this discrimination would persist even if no other states imposed taxes. It is, therefore, independent of any double taxation that arises under the Maryland tax, and it is also independent of any action other states take. Double taxation is not the focus of the dormant Commerce Clause, and avoiding double taxation is not the same as not discouraging cross-border commerce. As we show, a state can discourage cross-border commerce even though there is no double taxation, and double taxation can occur without discouraging cross-border commerce.
The Sonnabend Estate and Fair Market Valuation of Canyon
In late 2007, Ileana Sonnabend, a renowned gallerist and art-scene mainstay, passed away, leaving behind a massive collection of art worth hundreds of millions of dollars. At the helm of two galleries in Paris and New York, Sonnabend worked for decades to promote and foster contemporary art and artists, and her galleries displayed the works of many well-known artists, such as Roy Lichtenstein and Robert Rauschenberg. Among the artworks in Sonnabend’s personal collection at her death was Rauschenberg’s Canyon, a celebrated collage painting from the artist’s Combine series. Rauschenberg created Canyon from an array of materials, including a stuffed American bald eagle. Canyon, already famous, gained notoriety when it came time to value Sonnabend’s estate for federal estate tax purposes.
The legal restrictions of the Bald and Golden Eagle Protection Act (BGEPA) and the Migratory Bird Treaty Act (MBTA) banned the sale or other disposition of Canyon, and therefore those administering Sonnabend’s estate listed a value of zero for the painting when assessing Sonnabend’s significant property interests. To reach its determination of zero fair market value, the estate consulted three professional appraisals, all in concurrence. The Internal Revenue Service (IRS) rejected this position and instead estimated Canyon’s fair market value at $65 million. The IRS then notified the estate of a $29.2 million tax liability deficiency on the painting, and because the Internal Revenue Code empowers the IRS to assign a penalty in the event that a taxpayer makes a “substantial valuation understatement,” it also imposed an $11.7 million penalty.
This Note assesses the IRS’s valuation of Canyon as an application of fair market valuation principles in federal taxation. The Note begins with a background of relevant tax rules, followed by a discussion of prior case law dealing with illegal and other restricted property and artwork. In light of this context, the Note then criticizes the IRS’s analysis in its valuation of Canyon: The IRS’s position is problematic, and it demonstrates some of the unique difficulties with applying fair market valuation principles to artwork. Both the IRS’s and the estate’s conclusions are imperfect, but the $65 million valuation stands too many degrees removed from a realistic determination.
King v. Burwell and the Validity of Federal Tax Subsidies Under the Affordable Care Act
Set for oral argument on March 4, 2015, King v. Burwell brings to the Supreme Court yet another challenge to the Affordable Care Act (ACA). The King plaintiffs cite 26 U.S.C. § 36B to attack the validity of certain federal health insurance subsidies provided by the Internal Revenue Service (IRS) through the ACA. Specifically, because § 36B authorizes subsidies for low-income taxpayers who purchase health insurance from an “Exchange established by the State,” the plaintiffs allege that such subsidies are not valid on exchanges operated by the federal government where the states refused to operate a state-sponsored exchange. Given that the federal government operates exchanges in thirty-four states, the Supreme Court’s ruling will potentially affect nearly ten million taxpayers nationwide.
Professors Eric Segall and Jonathan Adler debate the merits of King v. Burwell, and each suggests how the Court should rule. Professor Segall argues that the Court should follow the IRS’s interpretation of § 36B—namely, that federal tax subsidies are available in a state with a federally operated exchange, because the law allows the federal government to operate the “Exchange established by the State.” Professor Segall emphasizes that Chevron deference requires the Court to defer to the IRS interpretation. In response, Professor Adler contends that Chevron deference is unnecessary because the statutory language is clear: an “Exchange established by the State” cannot be an exchange established by the Department of Health and Human Services. Professor Adler argues that, given the unambiguous language in the statute, the Court need not defer to the IRS interpretation and should rule for the plaintiffs.