Please visit our “Into the Heartland” Resource Center at friedfrank.com/IntotheHeartland Fried Frank Intellectual Property Into the Heartland Alert™ No. 17/09/22 09/22/17 A Delaware Limited Liability Partnership Copyright © 2017 Fried, Frank, Harris, Shriver & Jacobson LLP. All rights reserved. Intellectual Property Litigation Practice Group Attorney Advertising. Prior results do not guarantee a similar outcome. Federal Circuit Grants Mandamus in Raytheon Co. v. Cray and Clarifies the Test for Venue in Patent Cases On September 21, 2017, the Federal Circuit issued a significant decision concerning the venue rules governing patent infringement cases. In In re Cray, Inc., No. 2017-129 (Fed. Cir. Sept. 21, 2017), the court held that the “regular and established place of business” prong of 28 U.S.C. § 1400(b) requires “a physical place within the district” that is the “place of the defendant.” (Slip op. at 13.) Applying this standard, the court held that the residential home office of an employee in the Eastern District of Texas is not a “regular and established place of business” for the purposes of venue. (Id. at 15.) The Federal Circuit’s decision directly rejects the much-publicized test for venue that Judge Gilstrap articulated in Raytheon Co. v. Cray, Inc., No. 15-cv-01554 (E.D. Tex. June 29, 2017). (Id. at 10.) The decision will also likely alter the venue analysis that Judge Stark recently set forth in a pair of decisions in Delaware, which required a physical “presence,” but not necessarily a physical “place” that is the “place of the defendant.” See Boston Scientific Corp. v. Cook Group Inc., 15-cv-980 (D. Del. Sept. 11, 2017); Bristol-Myers Squibb Co. v. Mylan Pharmaceuticals Inc., No. 17-cv-379 (D. Del. Sept. 11, 2017). The District Court’s Decision in Raytheon v. Cray The Cray decision arises from a patent infringement case filed by Raytheon Co. against Cray, Inc. in the Eastern District of Texas. (Slip op. at 2.) Following the Supreme Court’s May 2017 decision in TC Heartland LLC v. Kraft Foods Group Brands LLC, No. 16-341, Cray moved to transfer venue. (Id. at 3.) Cray argued that venue was improper in the Eastern District of Texas because Cray does not maintain a “regular and established place of business” within the district. (Id.) Cray noted that it is a Washington corporation with facilities in Washington, Minnesota, Wisconsin, California, and two cities in Texas – Houston and Austin – that are outside of the Eastern District. (Id. at 2.) The district court denied Cray’s motion to transfer, holding that venue was proper because Cray employed a sales representative who worked from his home in the Eastern District. (Slip Op. at 3.) Judge Gilstrap noted that the sale representative’s activities in Texas were analogous to the activities performed by the sales representatives in In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985), where the Federal Circuit found venue to be proper. (Id.) “For the benefit of” other litigants, Judge Gilstrap also set out the four factors that he would consider in future cases to determine whether a defendant maintains a regular and established place of business in the Eastern District of Texas: (1) the defendant’s physical presence in the district; (2) the defendant’s representations about its presence in the district; (3) the benefits the defendant received from the district; and (4) the defendant’s targeted interactions with the district. (Id. at 4.) Our previous article of Judge Gilstrap’s Raytheon order can be found here. Fried Frank Intellectual Property Into the Heartland Alert™ Fried Frank Intellectual Property Into the Heartland Alert™ No. 17/09/22 09/22/17 2 In July 2017, Cray petitioned the Federal Circuit for a writ of mandamus, arguing that Judge Gilstrap’s test for venue was incorrect. The Federal Circuit’s Order in In re Cray In response to Cray’s mandamus petition, the Federal Circuit “stress[ed] that the [venue] analysis must be closely tied to the language of the statute,” even though businesses “[i]n this new era” may not operate under the “brick-and-mortar model” prevalent when the venue statute was enacted. (Id. at 6, 10-11.) The court thus rejected Judge Gilstrap’s test as “not sufficiently tethered to the statutory language.” (Id.) The court was also critical of its own decision in Cordis, which “did not . . . evaluate venue in light of the statutory language of § 1400(b).” (Id. at 6.) The court explained that, based on the statute, there are “three general requirements relevant to the [venue] inquiry: (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.” (Id. at 8.) The court then elaborated on each element. A “Physical Place.” The court first emphasized that there must be a “physical, geographical location in the district from which the business of the defendant is carried out.” (Slip. op. at 11.) The court reiterated the holding in Cordis that the “place” need not be “a fixed physical presence in the sense of a formal office or store.” (Id.) But a “place” is nonetheless “a ‘place,’ i.e., ‘[a] building or a part of a building set apart for any purpose’ or ‘quarters of any kind.’” (Id.) “The statute thus cannot be read to refer merely to a virtual space or to electronic communications from one person to another.” (Id.) “Regular” and “Established.” The court next noted that a “regular” place of business is one that “operates in a ‘steady, uniform, orderly, and methodical’ manner.” (Slip. op. at 11.) By contrast, “sporadic activity” is not “regular.” (Id. at 12.) “Established,” in turn, means “settled certainly, or fixed permanently.” (Id.) By way of example, the court noted that displaying products at a semiannual trade show does not amount to an “established” place of business, while a five-year continuous presence is sufficiently “established.” The court also suggested that an employee’s home would not be considered a regular and established place of business if the “employee can move his or her home out of the district at his or her own instigation.” (Id. at 12-13.) Place “of the Defendant.” Finally, the court explained that the physical place in the district must be one that the defendant “establish[ed]” or “ratif[ied].” (Slip op. at 13.) To determine whether a defendant has established or ratified a place of business, the court noted that “relevant considerations” include (i) “whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place”; (ii) “whether the defendant conditioned employment on an employee’s continued residence in the district”; (iii) whether the defendant “stor[es] materials at a place in the district so that they can be distributed or sold from that place”; (iv) whether the defendant markets or advertises a place of business in the district; and (v) whether the defendant has a business model “whereby many employees’ homes are used by the business as a place of business of the defendant.” (Id. at 13-14.) Applying these factors, the Federal Circuit held that the Eastern District of Texas is an improper venue for the case against Cray. The court noted that the “primary dispute” in the case “concerns whether [a Cray employee]’s home, located in the Eastern District of Texas,” was sufficient to establish venue. (Slip Op. at Fried Frank Intellectual Property Into the Heartland Alert™ Fried Frank Intellectual Property Into the Heartland Alert™ No. 17/09/22 09/22/17 3 14.) The court held that “[t]he facts presented cannot support a finding that [the employee]’s home was a regular and established place of business of Cray.” (Id. at 15 (emphasis in original).) In particular, (i) Cray did not own, rent, or lease any portion of the home; (ii) Cray did not store inventory at the home or conduct demonstrations at that location; (iii) Cray did not require the employee to live in the Eastern District as a condition of his employment; and (iv) there was no evidence that Cray had the intention of maintaining a place of business in the Eastern District if the employee moved. (Id. at 16.) Having found that venue in the Eastern District of Texas was improper, the Federal Circuit instructed the district court to transfer the case “to an appropriate venue to be determined by the district court on remand.” (Slip. op. at 20.) Significance of In re Cray The Cray decision will provide some much needed clarity to district courts that are now addressing venue issues on a daily basis. In particular, the Federal Circuit has made clear that courts should not stretch the requirements of the venue statute to address the realities of business in the “modern era.” Rather, unless amended by Congress, the statute plainly requires a physical “place” of business (even if many companies no longer have “brick-and-mortar” operations). The decision also clarifies that hiring employees who work from home does not create a regular and established place of business in every jurisdiction where such employees reside. Instead, courts will now consider the factors discussed in Cray, such as whether the employer pays a portion of the rent or uses the employee’s home to distribute products. The Federal Circuit’s decision also deals another blow to the ability of the Eastern District of Texas to maintain its position as the dominant forum for patent infringement litigation. Many commentators saw Judge Gilstrap’s malleable four factor test in Raytheon as a way for the Eastern District to minimize the impact of TC Heartland. Indeed, the Raytheon test would arguably have allowed venue in nearly any case in which a defendant is subject to personal jurisdiction – the very standard that the Supreme Court rejected in TC Heartland. Following the decision in Cray, venue will not be proper merely because a defendant conducts business – even substantial business – in the Eastern District of Texas. Rather, venue will only be appropriate where there is a “physical, geographical location” within the judicial district that can be considered a place “of the defendant.” The Cray decision is also likely to impact the District of Delaware’s recent decision in Bristol-Myers Squibb. In that case, Judge Stark held that the “regular and established place of business” prong of § 1400(b) requires a physical “presence” within the district, rather than a physical “place” of business. For example, Judge Stark held that Mylan Pharmaceuticals Inc. may be found to have a regular and established place of business in Delaware due to its frequent involvement in ANDA litigation in the Delaware courts. Under Cray, however, such a “presence” in Delaware, untethered to a “physical geographical location” that belongs to Mylan, should be insufficient to establish venue. * * * We will continue to monitor what constitutes a regular and established place of business and other related TC Heartland venue issues. Please click here to view our “Into the Heartland” Resource Center and keep up on all the latest updates. Fried Frank Intellectual Property Into the Heartland Alert™ Fried Frank Intellectual Property Into the Heartland Alert™ No. 17/09/22 09/22/17 4 Authors: Scott W. Doyle Jonathan R. DeFosse Robert M. Masters Arvind Iyengar* This memorandum is not intended to provide legal advice, and no legal or business decision should be based on its content. If you have any questions about the contents of this memorandum, please call your regular Fried Frank contact or the attorneys listed below: Contacts: Washington, D.C. Scott W. Doyle +1.202.639.7326 email@example.com Jonathan R. DeFosse +1.202.639.7277 firstname.lastname@example.org Robert M. Masters +1.202.639.7370 email@example.com *Admitted to practice only in New York. Supervised by the partners of Fried, Frank, Harris, Shriver & Jacobson. For a complete list of our Intellectual Property Attorneys, please click here.