Noting that the law was unclear and the error understandable, the Federal Circuit on Thursday, September 21, 2017, tossed the post-TC Heartland venue factors crafted by Eastern District of Texas Judge Rodney Gilstrap, holding that they were not sufficiently tethered to the statutory language of the patent venue statute, 28 U.S.C. § 1400(b). In granting the petition of the defendant, Cray Inc., and ordering transfer of venue, the Federal Circuit emphasized that “a regular and established place of business” means “(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. If any statutory requirement is not satisfied, venue is improper under § 1400(b).” In re Cray Inc., Op. at 8.

Cray, a manufacturer and seller of “supercomputer” systems, is incorporated and based in Washington state. Raytheon nonetheless sued Cray in the Eastern District of Texas for alleged patent infringement. Raytheon Co. v. Cray, Inc.,No. 2:15-CV-01554-JRG, 2017 WL 2813896, at *1 (E.D. Tex. June 29, 2017). Following the TC Heartland decision, Cray filed a motion to transfer because it is not incorporated in Texas, and did not rent, own, or maintain any office, facility, or property in the Eastern District of Texas. Op. at 2. However, it allowed two employees to work remotely from their homes in the Eastern District — one as a “senior territory manager” from 2010 to 2011, and the other as a “sales executive” (i.e., to develop and manage accounts) for more than seven years. Id. With respect to the latter employee, sales amounting to more than $345 million were attributable to him. Id. Internally within the company, Cray identified the employee as being located in Texas and reimbursed him for business costs such as cell phone usage, Internet access, and mileage, but it did not compensate him for the use of his home for business operations or advertise the home as a business address. Id. at 2-3.

Relying in part on certain similarities between the facts at hand and In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985), which also involved a defendant’s employees who worked from home, Judge Gilstrap denied Cray’s transfer motion, and set out four “[f]actors pertaining to regular and established place of business in the modern era” — the extent to which a defendant: (1) “has a physical presence in the district, including . . . property, inventory, infrastructure, or people”; (2) “represents, internally or externally, that it has a presence in the district”; (3) “derives benefits from its presence in the district, including . . . sales revenue”; and (4) “interacts in a targeted way with existing or potential customers, consumers, users, or entities within a district, including . . . through localized customer support, ongoing contractual relationships, or targeted marketing efforts.” Id. at *10-14.

In overturning the denial of Cray’s venue transfer motion, the Federal Circuit rejected Judge Gilstrap’s four factors as being “not sufficiently tethered to th[e] statutory language and . . . fail[ing] to inform each of the necessary requirements of the [venue] statute.” Op. at 10. Noting that “[t]he requirement of venue is specific and unambiguous; [and]. . . not one of those vague principles which . . . is to be given a liberal construction,” Op. at 9, the Court instead emphasized the need for a physical place of business, that it be regular and established, and that it be “of the defendant” and not that of an employee. Op. at 8. As the Court explained, “The statutory language we need to interpret is ‘where the defendant . . . has a regular and established place of business.’ 28 U.S.C. § 1400(b). The noun in this phrase is ‘place,’ and ‘regular’ and ‘established’ are adjectives modifying the noun ‘place.’ The following words, ‘of business,’ indicate the nature and purpose of the ‘place,’ and the preceding words, ‘the defendant,’ indicate that it must be that of the defendant. Thus, § 1400(b) requires that ‘a defendant has’ a ‘place of business’ that is ‘regular’ and ‘established.’ All of these requirements must be present.” Op. at 10.

There must be a physical place in the district. Elaborating on the first general requirement listed above, the Federal Circuit specifically disagreed with Judge Gilstrap’s statement that “a fixed physical location in the district is not a prerequisite to proper venue” (emphasis added), finding that it “impermissibly expands the statute.” The Court specifically noted that the requirement is not met by a virtual space or “electronic communications from one person to another,” but requires “a building or a part of a building set apart for any purpose or quarters of any kind from which business is conducted.” Op. at 11 (internal quotations omitted).

It must be a regular and established place of business. With respect to its second requirement, the Federal Circuit offered that “[a] business may be regular, for example, if it operates in a steady, uniform, orderly, and methodical manner” — and is therefore not “sporadic activity.” Op. at 11-12 (internal quotations omitted). And the place must be “settled certainly or fixed permanently” — “not transient.” Op. at 12 (internal quotations omitted).

It must be the place of the defendant. With respect to the third requirement, and relevant to the facts of Cray, the Court noted 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 of the defendant.” Op. at 12-13. Rather, because employees are transient, “the [actual] defendant must establish or ratify the place of business,” for example by buying or leasing the place, or “exercis[ing] other attributes of possession or control.” Op. at 13. “Another consideration might be 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.” Id.

With respect to Cray, because the home of the Texas sales executive did not meet the “crucial” requirement of being “the place of the defendant,” the Court determined that the facts could not support a finding that Cray had a regular and established place of business in the Eastern District of Texas. Op. at 15.

What This Means For You

Judge Gilstrap’s four-factor test has attracted significant attention in the wake of TC Heartland, which left the “regular and established place of business” language of § 1400(b) open to interpretation. Many had speculated that the four-factor test would permit an expansive view of § 1400(b), allowing venue to be found where a defendant’s “place of business” consisted of an employee’s home office or existed only as a virtual space or electronically.

The Federal Circuit has closed the door to virtual reality as a basis for venue, limiting § 1400(b) mostly to bricks-and-mortar locations owned, leased, or otherwise controlled and used by the defendant to conduct business in a regular and established fashion. It is important to note, however, that a proper application of § 1400(b) is not without flexibility. The Cray court distinguished its earlier Cordis opinion in part because the defendant there: (a) “used its employees’ homes to store its ‘literature, documents and products’ and, in some instances, like distribution centers, [to] stor[e] inventory that the employees then directly took to its clients”; and (b) “engaged a secretarial service physically located in the district to perform certain tasks.” Op. at 11. Cray’s employee, on the other hand, did not store any materials in his home and Cray did not engage any third-party presence to support that employee. Going forward, a § 1400(b) inquiry based on an employee’s presence within a district is likely to focus on the extent to which the employee’s home is used as a proxy for the defendant’s place of business. Courts will likely examine the degree of control exercised by the defendant over the employee’s location, the use of the employee’s premises to store sales materials and inventory, and similar factors.