On September 21, 2017, a Federal Circuit panel rejected an Eastern District of Texas judge's proposed four-factor test for determining whether venue is proper over a defendant in a patent infringement action under the "regular and established place of business" prong of the United States patent venue statute. In place of the Eastern District of Texas's test, the Federal Circuit set forth three requirements for determining what constitutes a "regular and established place of business" under the patent venue statute: (i) it must be a physical place; (ii) it must be a regular and established place of business; (iii) it must be the place of the defendant, rather than that of the defendant's employee.
28 U.S.C. §1400(b), the United States patent venue statute, provides that "[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business." (emphasis added). In May 2017, the Supreme Court in TC Heartland LLC v. Kraft Food Group Brands LLC, 137 S. Ct. 1514 (2017) ruled that a domestic corporation "resides" only in its state of incorporation. As a result, patent litigants have shifted the focus of their venue battles to the second prong of §1400(b), and in particular to the issue of whether a defendant has a "regular and established place of business" in the chosen venue.
In this case, Raytheon sued Cray in the District Court for the Eastern District of Texas for patent infringement. Cray moved to transfer the suit to the Western District of Wisconsin for improper venue. In a June 29, 2017 opinion, Judge Rodney Gilstrap of the Eastern District of Texas denied the motion. Although Cray does not own any property in the Eastern District of Texas, it nevertheless employed a sales executive, Mr. Harless, there. Judge Gilstrap found that the activities of Mr. Harless were similar to those of the sales representatives in In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985), in which the Federal Circuit previously had rejected a mandamus request to reverse an order denying a motion to transfer for improper venue.
While Judge Gilstrap found that Cordis resolved the venue dispute between Cray and Raytheon, Judge Gilstrap's June 29, 2017 opinion proceeded to propose, "[f]or the benefit" of other litigants, four non-dispositive factors for determining whether a defendant has a "regular and established place of business" in the chosen venue, namely (i) physical presence in the district; (ii) the defendant's representations that it has a place of business in the district; (iii) the benefits received by the defendant from the district, including sales revenue; and (iv) targeted interactions with district, including ongoing contractual relationships between the defendant and customers in the district. Although Judge Gilstrap did not apply his four-factor test to the Cray-Raytheon venue dispute, he noted that, had he done so, "the result would remain the same."
Cray subsequently petitioned the Federal Circuit for a writ of mandamus vacating the district court's denial of its motion to transfer. In a September 21, 2017 decision from Judges Lourie, Reyna and Stoll (In re: Cray Inc., 2017-129), the Federal Circuit granted mandamus and concluded that "the district court misunderstood the scope and effect of our decision in Cordis, and its misplaced reliance on that precedent led the court to deny the motion to transfer, which we find to have been an abuse of discretion."
The Federal Circuit began by observing that the 1985 Cordis decision did not evaluate venue in light of the statutory language of §1400(b), and that, following TC Heartland, "we must focus on the full and unchanged language of the statute, as Cordis did not consider itself obliged to do." The Federal Circuit also noted that a need for uniformity on the issue of venue in patent suits constituted "an appropriate basis" upon which to grant mandamus.
The Federal Circuit then set forth three requirements for determining what constitutes a "regular and established place of business": (i) there must be a physical place in the district; (ii) it must be a regular and established place of business; (iii) it must be the place of the defendant. The Federal Circuit noted that these three requirements hew close to the statutory language of §1400(b), whereas "[t]he district court's four-factor test is not sufficiently tethered to this statutory language."
The Federal Circuit next proceeded to address the errors in the district court's June 29, 2017 opinion under the above three requirements.
As to the first requirement, the Federal Circuit asserted that the district court "erred as a matter of law in holding that a 'fixed physical location in the district is not a prerequisite to proper venue.'" The Federal Circuit clarified that the reference in §1400(b) to a "place" cannot be read to refer to a "virtual space" or to "electronic communications from one person to another." The Federal Circuit also explained that, while a "place" need not be a formal office or store, "there must still be a physical, geographical location in the district from which the business of the defendant is carried out."
As to the second requirement, the Federal Circuit asserted that "[t]he district court's test fails to recognize that the place of business must be 'regular.'" The Federal Circuit clarified that sporadic activity and single acts within a district do not suffice to create venue. The Federal Circuit further explained that "while a business can certainly move its location, it must for a meaningful time period be stable, established," and 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 for the defendant."
As to the third requirement, the Federal Circuit explained that the "place" in §1400(b) must be that of the defendant, "not solely a place of the defendant's employee." The Federal Circuit clarified that considerations relevant to this requirement "include whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place"; "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"; "a defendant's representations that it has a place of business in the district" (but cautioning that "the mere fact that a defendant has advertised that it has a place of business or has even set up an office is not sufficient; the defendant must actually engage in business from that location"); and "the nature and activity of the alleged place of business of the defendant in the district in comparison with that of other places of business of the defendant in other venues."
The Federal Circuit then determined that the activities of Cray's Texas sales executive, Mr. Harless, did not satisfy the third requirement for venue. The Federal Circuit noted that, among other things, there is "no indication that Cray owns, leases or rents any portion of Mr. Harless's home," that Cray had any intention to maintain a place of business in the Eastern District of Texas in the event that Mr. Harless decided to leave the district, or that his presence there was "material to Cray." The Federal Circuit concluded that "the 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."
The Federal Circuit also cautioned that §1400(b) was intended as a "restrictive measure" on venue in patent suits, and that "[c]ourts should be mindful of this history in applying the statute and be careful not to conflate showings that may be sufficient for other purposes, e.g., personal jurisdiction or the general venue statute, with the necessary showing to establish proper venue in patent cases."