The IP Litigation Team at Fried Frank is continuously tracking the impact of TC Heartland. Every week, we provide a roundup of the courts’ latest orders and opinions concerning venue-related issues in patent infringement cases.
This week, our update focuses on the recent decision in Symbology Innovations LLC v. Lego Systems, Inc., 17-cv-0086 (E.D. Va. Sept. 28, 2017) (“Slip Op.”), which addresses many of the topics that have arisen following TC Heartland.
In January 2017, Symbology Innovations filed a lawsuit against Lego Systems, Inc. alleging infringement of four patents directed to quick response (“QR”) codes. (Slip Op. at 2, 4.) Lego Systems is a Delaware corporation with its U.S. headquarters in Connecticut. (Id. at 3.) Lego Systems has a subsidiary company – Lego Brand Retail – that operates Lego retail stores in Virginia. (Id. at 4.)
Prior to the Supreme Court’s decision in TC Heartland, Lego Systems filed a motion to dismiss Symbology’s complaint under Fed. R. Civ. P. 12(b)(6) for failure to state a claim. (Slip Op. at 4-5.) Lego Systems also filed a motion to transfer venue under § 1404, arguing that the District of Connecticut would be a more convenient forum. (Id.) Lego Systems did not argue that venue was improper under § 1400, but did expressly reserve its right to challenge venue based on the outcome of the impending decision in TC Heartland. (Id. at 5.) Following the Supreme Court’s decision, the district court ordered Lego Systems and Symbology to submit supplemental briefing on venue. (Id.)
Waiver of the Venue Objection
The court first found that Lego Systems did not waive the opportunity to challenge venue. (Slip Op. at 11- 12.) The court acknowledged that Lego Systems had failed to object to venue in its initial motion under Rule 12(b), which typically results in a waiver. (Id. at 9-10.) The court also noted that Lego System’s waiver cannot be excused due to an intervening change in the law because “TC Heartland did not change the law – it clarified that the law had not changed.”1 (Id. at 10-11.) Nonetheless, the court held that Lego Systems could challenge venue for a fairly unusual reason: the “liberal pleading amendment policy” under Fed. R. Civ. P. 15 requires courts to “freely allow amendment when justice so requires.” (Id. at 11.) Here, justice required allowing Lego Systems to “amend” its motion to transfer venue under § 1404(a) because the motion was premised on the (faulty) belief that venue was proper, though inconvenient, in the Eastern District of Virginia pursuant to VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990).
Meaning of “Regular and Established Place of Business”
Having resolved the waiver issue, the court turned to determining whether Lego Systems maintains a “regular and established place of business” in the Eastern District of Virginia. As a general matter, the court noted that § 1400(b) is “a restrictive measure” that was meant “to cure the ills created by the old service of process rule, which subjected defendants to venue based on their transitory presence in the forum.” (Slip Op. at 14-15.) The court then acknowledged the Federal Circuit’s recent guidance from In re Cray, -- F.3d --, 2017 WL 4201535 (Fed. Cir. Sept. 21, 2017) as to the requirements for a “regular and established place of business”: “(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.” (Slip Op. at 15-16.) Our prior analysis of the In re Cray decision can be found here.
Under the Cray factors, the court noted that “[r]evenue derived from the forum has no bearing on whether § 1400(b)’s requirements are met.” (Slip Op. at 17.) Similarly, “Lego Systems’ registration as a foreign corporation has no bearing on the Court’s venue analysis.” (Id.) Also, “transitory promotional events do not suggest that Lego Systems maintained a physical place of business” in the district. (Id.)
Symbology primarily argued that venue was proper because Lego System’s subsidiary, Lego Brand Retail, operated three Lego Stores in the Eastern District of Virginia. (Slip Op. at 17.) The court noted, however, that Lego Brand Retail is a separate corporate entity. (Id.) As such, “[f]or the Lego Stores to serve as the ‘regular and established place of business’ permitting venue in this District, Lego Systems and Lego Brand Retail must lack formal corporate separateness.” (Id. at 18.) The court explained that this is a “high standard” for a plaintiff to meet. (Id.) Indeed, “even where the parent corporation controls a subsidiary’s operations and the companies share a unitary business purpose, the subsidiary’s presence in the forum cannot be imputed to the parent company so long as they maintain formal corporate separateness.” (Id. (citing Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333, 335 (1925).) Here, the court found that Lego Systems and Lego Retail Brand maintained their formal separateness and, as such, the Lego stores were not a “place of the defendant” justifying venue. (Id. at 20.)
The Symbology decision highlights an issue that will likely continue to generate significant debate in the context of venue: when may the operations of a defendant’s corporate affiliates be attributed to the defendant for the purpose of establishing venue? Symbology suggests that the test will be akin to the standards for piercing the corporate veil. Symbology, however, is also internally inconsistent. While the court held that the Lego Stores cannot be attributed to Lego Systems, the court also held that the activities of Lego Store employees could be treated as “acts of infringement” of the defendant. (Slip Op. at 13.) The court did not provide a rationale or explanation for these seemingly disparate findings.
Notably, in apparent contrast to the decision in Symbology, the District of Delaware (Judge Stark) has hinted that venue may be based on the operations of a corporate affiliate. In Bristol-Myers Squibb Co. v. Mylan Pharmaceuticals Inc., C.A. No. 17-cv-0379 (D. Del. Sept. 11, 2017), Judge Stark held that venue could be proper in Delaware where a West Virginia company belonged to a corporate family with 40 Delaware entities. (Our analysis of the Bristol-Myers Squibb decision can be found here.)
Availability of Venue-Related Discovery
The court also addressed the standards for obtaining venue-related discovery. As we previously noted here, courts are generally unwilling to allow such discovery in the absence of some threshold showing that venue is likely proper. The court in Symbology followed this trend, holding that a plaintiff must offer more than “speculation or conclusory assertions” to obtain discovery. (Slip Op. at 21.) The court therefore denied Symbology’s discovery request “because the company has not offered a basis to believe discovery will yield information supporting venue” and, instead, discovery would amount to an unwarranted “fishing expedition.” (Id. at 22.)
Decision on Where to Transfer Venue
Finally, having found venue to be improper, the court addressed where to transfer the case against Lego Systems. The court noted that Lego Systems sought transfer to Connecticut, while Symbology argued that Delaware would be preferable. The court found that venue was proper in both jurisdictions, but opted to transfer the case to the District of Connecticut. The court reasoned that it would be unfair to allow Symbology to obtain its “second-choice forum,” having originally filed in an improper venue. “Having chosen an improper venue in the first instance, Symbology’s attempt to tap its ruby slippers and make another wish is uncompelling.” (Slip Op. at 26.)
Harsh Words for the Eastern District of Texas
Perhaps the most remarkable aspect of the Symbology decision is the court’s apparent disdain for forum shopping in general and the Eastern District of Texas in particular. The court noted that forum shopping has resulted in “litigation in distant forums largely unrelated to the alleged infringement,” which “has given a few federal district courts . . . inordinate power over the interstate market for innovation.” (Slip Op. at 1.) The court then accused the Eastern District of Texas of attempting circumvent the venue laws. In particular, the court noted that the decision in Raytheon Co. v. Cray, Inc. – F. Supp. 3d –, 2017 WL 2813896 (E.D. Tex. Jun. 29, 2017) – which the Federal Circuit recently overturned – “ignored both the statutory language and the statutory purpose” of the venue laws and, “[i]n practice, . . . rendered § 1400(b) a nullity.” (Slip Op. at 15, n.12.) The court then noted that “[t]his might have been by design” due to the reported desire of the Eastern District of Texas “to attract and keep patent cases, including by denying motions to transfer.” Seeing such open criticism of a sister court is, of course, fairly rare.