On September 21 2017 a Federal Circuit panel rejected an Eastern District of Texas judge's proposed four-factor test for determining whether venue is proper over a defendant in a patent infringement action under the 'regular and established place of business' prong of the US patent venue statute. In its place, the Federal Circuit introduced three requirements, under which a 'regular and established place of business' must be:
- a physical place;
- a regular and established place of business; and
- the place of the defendant, rather than the defendant's employee.
The US patent venue statute (28 USC Section 1400(b)) provides that:
"[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business." (Emphasis added.)
In May 2017 the Supreme Court in TC Heartland LLC v Kraft Food Group Brands LLC (137 S Ct 1514 (2017)) ruled that a domestic corporation resides only in its state of incorporation. Therefore, patent litigants have shifted the focus of their venue battles to the second prong of Section 1400(b), and in particular to the issue of whether a defendant has a regular and established place of business in the chosen venue.
Improper venue
In this case, Raytheon sued Cray in the District Court for the Eastern District of Texas for patent infringement. Cray moved to transfer the suit to the Western District of Wisconsin for improper venue. In a June 29 2017 opinion, Judge Rodney Gilstrap of the Eastern District of Texas denied the motion. Although Cray did not own any property in the Eastern District of Texas, it nevertheless employed a sales executive, Harless. Gilstrap found that Harless' activities were similar to those of the sales representatives in In re Cordis Corp (769 F2d 733 (Federal Circuit 1985)), in which the Federal Circuit previously had rejected a mandamus request to reverse an order denying a motion to transfer for improper venue.
While Gilstrap found that Cordis resolved the venue dispute between Cray and Raytheon, his June 29 2017 opinion proceeded to propose, "[f]or the benefit" of other litigants, four non-dispositive factors for determining whether a defendant has a regular and established place of business in the chosen venue, as follows:
- physical presence in the district;
- the defendant's representations that it has a place of business in the district;
- the benefits received by the defendant from the district, including sales revenue; and
- targeted interactions with the district, including ongoing contractual relationships between the defendant and customers in the district.
Although Gilstrap did not apply his four-factor test to the Cray-Raytheon venue dispute, he noted that, had he done so, "the result would remain the same".
Petition for writ of mandamus
Cray subsequently petitioned the Federal Circuit for a writ of mandamus vacating the district court's denial of its motion to transfer. In a September 21 2017 decision from Judges Lourie, Reyna and Stoll (In re Cray Inc, 2017-129), the Federal Circuit granted mandamus and concluded that:
"the district court misunderstood the scope and effect of our decision in Cordis, and its misplaced reliance on that precedent led the court to deny the motion to transfer, which we find to have been an abuse of discretion."
The Federal Circuit began by observing that the 1985 Cordis decision did not evaluate venue in light of the statutory language of Section 1400(b), and that following TC Heartland "we must focus on the full and unchanged language of the statute, as Cordis did not consider itself obliged to do". The Federal Circuit also noted that a need for uniformity on the issue of venue in patent suits constituted "an appropriate basis" on which to grant mandamus.
The Federal Circuit subsequently set forth its three requirements for determining what constitutes a regular and established place of business.
Federal Circuit requirements
The Federal Circuit noted that the requirements hew close to the statutory language of Section 1400(b), whereas "[t]he district court's four-factor test is not sufficiently tethered to this statutory language".
The Federal Circuit proceeded to address the errors in the district court's June 29 2017 opinion under the above three requirements.
Regarding the first requirement, the Federal Circuit asserted that the district court had "erred as a matter of law in holding that a 'fixed physical location in the district is not a prerequisite to proper venue'". It clarified that the reference in Section 1400(b) to a 'place' cannot be read to refer to a "virtual space" or to "electronic communications from one person to another". It also explained that, while a 'place' need not be a formal office or store, "there must still be a physical, geographical location in the district from which the business of the defendant is carried out".
In respect of the second requirement, the Federal Circuit asserted that "[t]he district court's test fails to recognise that the place of business must be 'regular'". It clarified that sporadic activity and single acts within a district do not suffice to create venue. It explained that "while a business can certainly move its location, it must for a meaningful time period be stable, established" and that:
"if an employee can move his or her home out of the district at his or her own instigation, without the approval of the defendant, that would cut against the employee's home being considered a place of business for the defendant."
Concerning the third requirement, the Federal Circuit explained that the 'place' in Section 1400(b) must be that of the defendant, "not solely a place of the defendant's employee". The Federal Circuit clarified that considerations relevant to this requirement include:
- "whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place";
- "whether the defendant conditioned employment on an employee's continued residence in the district or the storing of materials at a place in the district so that they can be distributed or sold from that place";
- "a defendant's representations that it has a place of business in the district" (but cautioning that "the mere fact that a defendant has advertised that it has a place of business or has even set up an office is not sufficient; the defendant must actually engage in business from that location"); and
- "the nature and activity of the alleged place of business of the defendant in the district in comparison with that of other places of business of the defendant in other venues".
The Federal Circuit determined that the activities of Cray's Texas sales executive, Harless, did not satisfy the third requirement for venue. It noted that, among other things, there was "no indication that Cray owns, leases or rents any portion of Mr. Harless's home", nor that Cray had any intention to maintain a place of business in the Eastern District of Texas in the event that Harless decided to leave the district or that his presence was "material to Cray". The Federal Circuit concluded that:
"the facts here do not show that Cray maintains a regular and established place of business in the Eastern District of Texas; they merely show that there exists within the district a physical location where an employee of the defendant carries on certain work for his employer."
The Federal Circuit also cautioned that Section 1400(b) was intended as a "restrictive measure" on venue in patent suits, and that:
"[c]ourts should be mindful of this history in applying the statute and be careful not to conflate showings that may be sufficient for other purposes, e.g., personal jurisdiction or the general venue statute, with the necessary showing to establish proper venue in patent cases."
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact Christopher Loh at Fitzpatrick, Cella, Harper & Scinto by telephone (+1 212 218 2100) or email ([email protected]). The Fitzpatrick, Cella, Harper & Scinto website can be accessed at www.fitzpatrickcella.com.
