Tax regulators and acquisition sponsors have long been embroiled in a cat and mouse game in the context of corporate inversions—cross-border transactions in which a U.S.-incorporated public corporation is “acquired” by a foreign entity, and the survivor’s locus of incorporation moved out of the United States. If done in compliance with applicable tax regulations, inversions typically allow American targets to avoid high U.S. corporate tax rates on worldwide income, and make use instead of far lower tax rates applied only to income generated within the survivor’s destination jurisdiction.

As tax inversions grew in popularity, federal authorities responded with a gauntlet of regulations designed to (a) make inversions harder to execute and (b) reduce the availability of post-inversion “profit shifting” of corporate income. Nevertheless, such measures arguably served only to make tax avoidance a more challenging—but still largely solvable—labyrinth for skilled tax practitioners. For example, the Huntsman Corporation recently announced a series of transactions under which it would (i) execute an IPO-spinoff in the United Kingdom of a manufacturing subsidiary (Venator), followed by (ii) an acquisition of what’s left of Huntsman by a Swiss company (Clariant AG). This deal structure appears likely to skirt most (though not all) of the existing regulatory constraints on inversions. Of the remaining constraints, many predict that the Trump Administration’s April 2017 Executive Order will ultimately bring about considerable relief, too, all in the name of regulatory competition.

Regulatory competition, however, is complicated. In a 2015 publication, I argued that international tax dynamics interact in subtle ways with non-tax dimensions of regulatory competition that are similarly tied to corporate residence. Profit maximizing firms contemplating inversions therefore need to balance tax savings against countervailing considerations in making their residency choice. In that 2015 article, I highlighted one such consideration: the traditional dominance of Delaware corporate law. Because most public companies are incorporated in Delaware, expatriating typically requires an aspiring inverter to leave the state, too, forsaking in the process the high quality and predictability that have come to be hallmarks of Delaware law. The quality of corporate law jurisprudence in the destination jurisdiction, in contrast, is typically unsettled and less predictable. The loss of Delaware law thus represents a material cost that a would-be inverter had to be willing to bear.

At least that used to be the case. During the opening decades of the 21^st century, the ability of Delaware’s gravitational pull to deter inversions began to falter, as federal securities reforms (such as the Sarbanes-Oxley and Dodd-Frank acts) progressively preempted large swaths of corporate governance that were historically the province of state law. Most significantly, because both domestic and foreign corporations are subject to federal securities law simply by listing (but not incorporating) in the U.S., I argued, Delaware’s historical ability to deter corporate inversions had been gradually—if unwittingly—undermined by U.S. securities law reforms.

On Monday, an unlikely understudy stepped into the role traditionally played by Delaware as a principal foil to corporate inversions: patent trolls (sometimes called “non-practicing entities” or NPEs). NPEs assemble portfolios of patents, not to produce new goods and services themselves, but rather to extract payments from productive companies under the threat of an infringement lawsuit.

In an important decision handed down on May 22, 2017, the United States Supreme Court substantially defanged such threats, holding that U.S. corporations are subject to patent infringement lawsuits (with very few exceptions) only in their state of incorporation. The unanimous opinion (authored by Justice Thomas) overturned years of lower court rulings that had permitted wide-ranging forum shopping – a system that culminated in an astonishing concentration of litigation within a single plaintiff-friendly district in East Texas. In Monday’s ruling, the Court held that a standalone 1897 statute tying patent litigation venue to the state of incorporation had never been altered by reforms to the general-purpose venue statute—the one that opens the door to forum shopping. Consequently, in future patent litigation against U.S. corporations and LLCs, plaintiffs (trolls included) must advance their claims in a court where the defendant is incorporated.

But what of foreign-incorporated defendants? Justice Thomas’ opinion is limited to domestic entities, dropping only a passing clue about the fate of foreign companies: In a footnote, the opinion leaves intact a half-century old precedent that held foreign corporate defendants are subject to the general-purpose venue statute – the very one that the Court eschewed in Monday’s case. Consequently, it appears that foreign corporations will continue to be subject to venue shopping in patent litigation, unable to reap the appreciable bounty that Monday’s opinion bestows on their domestic counterparts.

And that brings us full circle to corporate inversions. Although the loss of Delaware corporate law may no longer represent a prohibitive cost for many would-be inverters, non-tax aspects of regulatory competition still carry appreciable weight. Patent law is one obvious consideration for inversion-prone industries (which tend to be patent intensive). Aspiring inverters must now contemplate what they stand to lose from Monday’s ruling should they expatriate. They will continue to face challenges from a host of NPEs, whose focus will now be trained more than ever on those targets that remain susceptible to forum shopping: foreign-incorporated defendants. (Eastern District of Texas: Don’t let those courtroom lights go dark just yet.)

The ironic implications for national tax policy are hard to escape: The oft-derided patent troll seems poised for a George-Takei-Betty-White-like reinvention as popular hero, deploying its collection booth at the national border and reestablishing a competitive advantage for U.S. companies that neither corporate law nor a phalanx of tax regulations could sustain.

NOTE

Monday’s Supreme Court opinion is TC Heartland LLC v. Kraft Foods Group Brands, Inc. (No. 16–341) (May 22, 2017), available here.

This post comes to us from Eric Talley, the Isidor and Seville Sulzbacher Professor of Law at Columbia Law School.