For years, the Eastern District of Texas has been the most popular forum for patent cases because it has generally been viewed to have patentee-friendly juries, judges, and procedures. But recent rulings from the Supreme Court (TC Heartland LLC v. Kraft Food Group Brands LLC, 137 S. Ct. 1514 (2017)) and the Federal Circuit (In re Cray Inc., No. 2017-129) are making it easier for defendants to escape the Eastern District for friendlier venues.
The patent venue statute, 28 U.S.C. § 1400(b), provides that patent infringement suits may be filed either (a) “in the judicial district where the defendant resides,” or (b) “where the defendant has committed acts of infringement and has a regular and established place of business.”
The Supreme Court addressed the first prong in TC Heartland, holding that a domestic corporation “resides” only in its state of incorporation. In Cray, decided last Thursday, a panel of the Federal Circuit provided specific guidance on the second prong, particularly what qualifies as “a regular and established place of business.”
The Federal Circuit rejected the broad interpretation of the second prong adopted by the Eastern District as “not sufficiently tethered to” the statutory language, and identified “three general requirements” relevant to determining whether a defendant has “a regular and established place of business” in the district: “(1) there must be a physical place in the district; (2) it must be a regular and established place of business; and (3) it must be the place of the defendant.” Venue is improper under the patent statute if any of the requirements is not satisfied and the defendant does not otherwise “reside” in the district. While the Federal Circuit stressed that this inquiry is fact dependent, it provided guideposts for determining whether the requirements are satisfied, as discussed in more detail below.
TC Heartland Changed the Venue Landscape
The Supreme Court upended patent venue practice in TC Heartland. Before that decision, venue was generally considered proper as long as a defendant corporation was subject to personal jurisdiction in the district and therefore “reside[d]” there under the general venue statute, 28 U.S.C. § 1391(c). After TC Heartland, if a plaintiff opts against filing in the defendant’s state of incorporation, its options are limited under the patent venue statute Section 1400(b) to “where the defendant has committed acts of infringement and has a regular and established place of business.”
Whether a defendant has “a regular and established place of business” in the forum district has increasingly become a hotly disputed issue since TC Heartland, with new decisions issuing on a seemingly daily basis. Parties and courts have struggled with that question given the lack of appellate case law guidance. While Federal Circuit law governs what the patent venue statute requires, the Federal Circuit had only previously addressed the “regular and established place of business” phrase once, in its decades-old mandamus opinion, In re Cordis Corp., 769 F.2d 733, 736-37 (Fed. Cir. 1985). The analysis is further complicated by today’s landscape in which business is conducted virtually, employees telecommute, and inventory storage practices have changed. Acknowledging “the uncertainty surrounding and the need for greater uniformity on this issue,” the Federal Circuit therefore sought to clarify the legal standard in its Cray opinion.
The Cray District Court Decision
Raytheon Co. filed a patent infringement suit against Cray Inc. in the Eastern District of Texas based on Cray’s sales of advanced supercomputers. Cray moved to transfer the suit for improper venue.
Cray is a Washington corporation with its principal place of business there. While Cray did not rent or own any property in the Eastern District, it allowed employees to work remotely from their homes in the district. One Cray employee (Mr. Harless) worked in the Eastern District as a Cray sales executive for approximately seven years. Cray reimbursed him for business expenses, such as his cell phone use, travel, and internet fees. Cray’s internal “Americas Sales Territories” map identified Mr. Harless’s location as his home, and his communications with customers listed his home phone number as his “office” number. Mr. Harless did not maintain any Cray products or product literature at his home. Additionally, Cray never paid Mr. Harless for the use of his home, nor did it publicize that his home was a Cray place of business.
The district court rejected Cray’s argument that it did not have a regular and established place of business and set out a broad-reaching test for determining what constitutes a regular and established place of business “in the modern era.” Cray petitioned the Federal Circuit for a writ of mandamus to reverse the denial of its transfer motion.
The Federal Circuit’s Analysis
In Cray, a Federal Circuit panel (Judges Lourie, Reyna, and Stoll) analyzed the case law, statutory history, and language of the patent venue statute to derive the “three general requirements” noted above. Of relevance, the panel noted that the “main purpose” of the patent venue statute was to “give original jurisdiction to the court where a permanent agency transacting the business is located” and cited the Supreme Court’s instruction against giving a liberal construction to the venue requirement.
The panel emphasized that the analysis of whether a defendant has a regular and established place of business in a district “must be closely tied to the language of the statute.” In interpreting the statutory language, the panel held that the patent venue statute “requires that ‘a defendant has’ a ‘place of business’ that is ‘regular’ and ‘established.’”
The “three general requirements” outlined by the court inform whether the necessary elements exist, “but do not supplant the statutory language.”
The Guideposts for the “Three General Requirements”
In addressing each of the “three general requirements,” the Federal Circuit provided guideposts for determining whether the requirement is satisfied, the key points of which are highlighted below.
1. There must be a physical place in the district
- “Place” defined: a building or a part of a building set apart for any purpose or quarters of any kind from which business is conducted.
- What is required: a physical, geographical location in the district from which the business of the defendant is carried out.
- What is not required: a fixed physical presence in the sense of a formal office or store.
- Examples that are not a “place”: a virtual space; electronic communications from one person to another.
2. It must be a regular and established place of business
- “Regular”: the doing of a single act pertaining to a particular business will not be considered engaging in or carrying on the business; yet a series of such acts would be so considered.
- Examples that are “regular”: operating in a steady, uniform, orderly, and methodical manner.
- Examples that are not “regular”: sporadic activity; merely temporary business; some special work or particular transaction.
- “Established”: the place must be settled certainly or fixed permanently. It must not be transient but must be stable for a meaningful time period.
- Examples that are “established”: five-year continuous presence.
- Examples that are not “established”: semiannually displaying products at a trade show; employee’s home whereby the employee can move out of the district without approval of the defendant.
3. It must be the place of the defendant
- What is required: must be a physical place, of business, of the defendant, and not solely a place of the defendant’s employee. The defendant, not the employee, must establish or ratify the place of business. The defendant must actually engage in business from the place.
- Relevant considerations: whether the defendant owns, leases, 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; storing materials at a place for distribution or sale; marketing or advertisements indicating that the defendant holds out a place for its business; defendant’s representations that it has a place of business in the district (e.g., listing the place on a website or in a directory or placing its name on a sign associated with or on the building); the nature and activity of the place of business in the district in comparison with that of other places of business of the defendant in other venues.
Application to the Facts of the Case
Ultimately, the panel found that the district court abused its discretion in denying Cray’s motion to transfer. The third requirement above was the determinative factor in the panel’s analysis in that the facts did not show that Mr. Harless’s home was a place of business of Cray. For example, Cray had no property interest in the home, did not store inventory or conduct demonstrations there, and did not condition employment on the maintenance of an Eastern District location. And, no evidence indicated the importance of an Eastern District location to Cray. As the court noted, the fact that Cray allowed its employees to work from the district was insufficient to establish that the place of business was that of Cray.
While the question of whether a defendant has “a regular and established place of business” is a fact-intensive inquiry, the Federal Circuit’s decision in Cray provides valuable guidance for answering that question and should eliminate some of the uncertainty that has been plaguing litigants in the wake of the Supreme Court’s TC Heartland decision.