Federal Circuit Shoots Down Eastern District of Texas Patent Venue Test

Friday, September 22, 2017

September 21, 2017.  On a petition for writ of mandamus, the Federal Circuit ordered the U.S. District Court for the Eastern District of Texas to transfer venue of a patent action—rejecting the four-part venue test proposed by Judge Rodney Gilstrap following the U.S. Supreme Court’s ruling in TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct. 1514 (2017). The Federal Circuit ruled that venue in a patent case requires three facts: (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, rather than merely a place of an employee. In re Cray Inc., No. 2017-129 (Sept. 21, 2017). Under the court’s ruling, the presence of a remote employee working from home in the district generally would not be sufficient to establish venue.

 

Background

The decision is part of the aftermath of the TC Heartland decision, in which the Supreme Court rejected long-standing precedent that the patent venue statute allows a defendant to be sued in any district where sales are made. In TC Heartland, the Supreme Court renewed emphasis on the “regular and established place of business” language of 28 U.S.C. § 1400(b), holding that a domestic corporation “resides” only in its state of incorporation. As a result, for most corporate defendants a patent owner has two venue options: It may file the infringement action in the defendant’s state of incorporation, or in a judicial district where the defendant allegedly has committed acts of infringement and has a “regular and established place of business”.

After TC Heartland and as part of his decision in Raytheon Co. v. Cray, Inc., No. 2:15-cv-01554-JRG, 2017 WL 2813896 (E.D. Tex. June 29, 2017), Judge Gilstrap outlined a four-factor venue test:

(1) The extent to which a defendant has a physical presence in the district, including but not limited to property, inventory, infrastructure, or people.

(2) The extent to which a defendant represents, internally or externally, that it has a presence in the district.

(3) The extent to which a defendant derives benefits from its presence in the district, including but not limited to sales revenue.

(4) The extent to which a defendant interacts in a targeted way with existing or potential customers, consumers, users, or entities within a district, including but not limited to through localized customer support, ongoing contractual relationships, or targeted marketing efforts.

Id. at 22-25.

In Raytheon, Judge Gilstrap ruled that venue was proper over the defendant, Cray Inc., in Texas even though Cray was not incorporated in Texas and did not own any property or operate an office in the Eastern District of Texas. Venue was based on two Cray sales employees who worked remotely from their homes in the district.

 

Federal Circuit Ruling

In the decision by Judge Lourie, the Federal Circuit granted Cray’s petition of mandamus and ordered the Eastern District of Texas to grant a transfer of venue. Although mandamus is a remedy reserved for exceptional situations, the appeals court noted the widespread confusion about the applicable venue standard after TC Heartland and concluded that “mandamus here will further supervisory or instructional goals on an unsettled and important issue.” Slip op. at 7.

The sole issue decided by the appeals court was the proper scope of “regular and established place of business” under § 1400(b). Establishing a uniform test to be applied nationwide, the court cautioned that venue should not be conflated with personal jurisdiction issues, since the standard for a “regular and established place of business” requires more than minimum contacts necessary for establishing personal jurisdiction over a defendant. Parsing the language of § 1400(b), the appeals court concluded that Judge Gilstrap’s “four-factor test is not sufficiently tethered to [the] statutory language and thus it fails to inform each of the necessary requirements of the statute.” Id. at 10.

Instead, the Federal Circuit identified a three-prong test for venue in patent cases. First, there must be a “physical place” within the federal judicial district, requiring a “physical, geographical location in the district from which the business of the defendant is carried out.” Id. at 11. Second, the appeals court ruled that there “must be a regular and established place of business,” which requires a business that is “steady,” “uniform,” “orderly,” and “methodical” in manner. “In other words, sporadic activity cannot create venue.” Id. at 12.

Finally, venue requires that the physical place in the juridical district must be a place “of the defendant,” not solely a place of the defendant’s employee. In determining whether this requirement is satisfied, a court must consider numerous facts, such as whether the defendant exercises control over the place, how the place is used in relation to the business and whether compensation is provided for use of a home as a place of work. Id. at 13.

Applying this three-prong test to Cray’s employees in the Eastern District of Texas, the Federal Circuit ruled that venue was lacking. In short, the court noted that while no one fact was controlling, “[T]he facts here do not show that Cray maintains a regular and established place of business in the Eastern District of Texas; they merely show that there exists within the district a physical location where an employee of the defendant carries on certain work for his employer.” That was not enough to establish venue over Cray.

 

Practical Significance

The In re Cray decision resolves a developing divergence of district court decisions applying § 1400(b). See, e.g, Boston Scientific Corp. v. Cook Group Inc., C.A. No. 15-980-LPS-CJB (D. Del. Sept. 11, 2017) (finding that temporary employees located in Delaware were not a “regular and established place of business”). The decision will provide needed clarity on where a patent owner may file suit against a defendant after TC Heartland, and the applicable standard for defendants opposing venue in an unfavorable forum.

In light of In re Cray, companies should consider reviewing their policies and procedures for remote or “telework” employees, to make sure that the arrangements do not unwittingly create an opportunity for a patent plaintiff to file suit in an unfavorable venue.