On September 26, 2017, the Northern District of Illinois became the first district court to apply the Federal Circuit's decision in In re Cray, Inc., No. 2017-129 (Fed. Cir. Sept. 21, 2017), which clarified the test for a “regular and established place of business” under 28 U.S.C. § 1400(b). In Talsk Research Inc. v. Evernote Corp., 16-cv-2167 (N.D. Ill. Sept. 26, 2017), Judge Thomas Durkin held that a software company did not maintain a regular and established place of business in Illinois merely because it had a network of independent contractors in the district who promoted the defendant's products.
The plaintiff, Talsk Research Inc., filed suit in 2016 alleging that the defendant, Evernote Corp., intentionally copied Talsk’s patented note-taking software tool following a demonstration of the invention. After the Supreme Court’s decision in TC Heartland, the court held a status hearing to address whether venue was proper in the Northern District of Illinois. Talsk asserted that venue was proper because Evernote maintained a “regular and established place of business” in the district sufficient to satisfy § 1400(b). In particular, Talsk argued that seven residents of the district participated in Evernote’s “Community Program.” This program provided “Community Members” with an online training course in Evernote’s software and incentivized them to recommend the software to others in exchange for certain financial benefits. According to the terms of their agreement with Evernote, these Community Members were “independent contractor[s] and not…employee[s].” (Talsk slip op. at 7.)
The court rejected Talsk’s venue arguments. Judge Durkin first noted that the seven residents of the district were not Evernote “Community Members” at the time the case was filed. As such, Talsk could not rely on their activities because venue must be tested at the time of filing. The court, however, went on to analyze the factors set forth in In re Cray for determining a “regular and established place of business”: (1) there must be “a physical place in the district” that is (2) “a regular and established place of business,” and is (3) “the place of business of the defendant.” (Talsk slip op. at 8-9 (emphasis in original).) The court found all of these requirements lacking in Talsk.
First, the court held that the defendant had “no fixed physical presence in [the] District, and relying on customer use of [the] [d]efendant’s software within the district as a substitute for a fixed physical location would not be proper.” (Talsk slip op. at 10.) Second, the Community Members’ activities on the defendant’s behalf were not shown to be “sufficiently stable or established to be seen as the operation of [the] [d]efendant’s business in this District.” (Id.) Third, the defendant did not have “the necessary control over its Community Members for the Court to consider their physical presence in the District [the] equivalent of [the] [d]efendant’s presence.” (Id. at 11.) Finally, “there [was] no indication in the record of the physical location out of which each Community member operate[d] that would establish those physical locations…[as] not [being] solely the location of the Community Members.” (Id. (emphasis in original).)
As Talsk demonstrates, venue is not proper merely because a defendant uses third-party independent contractors within the district. Moreover, the court emphasized that even when a plaintiff has revenues and customers in the state, “having a ‘regular and established place of business’ under § 1400(b) [is] not the same as merely ‘doing business’ in a district.” (Talsk Slip Op. at 12, n.6.)
Talsk will likely be the first in a long line of decisions that grapple with applying the In re Cray factors to technology companies that conduct much of their business online. As the Federal Circuit foreshadowed in Cray when it noted that a “place” does not “refer merely to a virtual space or to electronic communications from one person to another,” the venue choices for suits against online companies are likely to be quite limited without statutory amendment of § 1400(b). (See In re Cray, slip. op. at 11.)