Patently Unpredictable? Patent Venue Laws After TC Heartland & In Re Cray

A.  TC Heartland Shifts the Patent Venue Landscape by Limiting Where Corporations    “Reside”

Venue for patent infringement cases is governed by 28 U.S.C. § 1400(b), which states that patent infringement suits can be brought in the judicial district (1) where the defendant resides or (2) where the defendant has committed acts of infringement and has a regular and established place of business. In last year’s much anticipated decision, TC Heartland LLC v. Kraft Foods Group Brands LLC (decided May 22, 2017),[1] the Supreme Court shifted well-established precedent that defendants in patent cases could be sued in any district they were subject to the court’s personal jurisdiction, which subjected most companies of any significant size to being sued anywhere in the country. Faced with such wide-ranging venue options, plaintiffs have historically flocked to plaintiff-friendly jurisdictions, such as the Eastern District of Texas, which is known for its knowledgeable and experienced judges with well-established rules and procedures – making it a powerhouse for patent dockets.

In deciding whether “resides” in 28 U.S.C. § 1391(c) applies to § 1400(b) for patent infringement cases, the Supreme Court in TC Heartland concluded it did not, holding that for patent infringement actions, which are “in a class by themselves”, a U.S. corporation resides only in the state of its incorporation – dramatically reducing a plaintiff’s venue options in many cases. Following TC Heartland, Delaware, where more than half of all publicly traded companies are incorporated, experienced a forty percent spike in patent litigation and is priming to surpass the Eastern District of Texas – which has seen a sixty percent decrease – as the venue where the most patent cases are filed. If TC Heartland was not enough, the Court of Appeals for the Federal Circuit recently held in In re BigCommerce, Inc. (decided May 15, 2018)[2] that in States with multiple districts, a defendant can only “reside” in one particular judicial district – that is, where it maintains a principal place of business, or failing that, the judicial district in which its registered office is located – further limiting the scope of proper venue.

B.  The Federal Circuit in In re Cray Clarifies the Meaning of Having a “Regular and Established Place of Business”

Despite the limitations imposed by TC Heartland, § 1400(b) offers an alternative path to a desired district “where the defendant has committed acts of infringement and has a regular and established place of business.” Merely months after TC Heartland, which did not address this alternative, the Federal Circuit in In re Cray[3] rejected the Eastern District of Texas’ expansive four-factor test and set forth three requirements for determining whether a defendant has a “regular and established place of business” in the district: (1) there must be a physical place in the district; (2) it must be regular and established; and (3) it must be the place of the defendant.

First, the Federal Circuit found that, while a formal office or store is not required, “a physical, geographical location in the district from which the business of the defendant is carried out” is required and “cannot refer merely to a virtual space or electronic communications from one person to another.” Next, the Federal Circuit explained that a business is “regular” if it is steady and methodical – sporadic activity and single acts are not enough to create venue.  The Federal Circuit further clarified that an “established” business must be settled and permanent – an employee working out of his home for the defendant is insufficient as a place of business if the employee can move out of the district without approval of his employer.

Finally, the Federal Circuit clarified that the “place of the defendant” cannot solely be that of defendant’s employee. Relevant considerations include (a) whether the defendant owns or leases the place or exercises other methods of control over the place; (b) whether the employee’s employment is conditioned on their residence in the district or in the storing of materials at a place in the district so that they can be distributed or sold from that place; (c) whether the defendant lists its place of business on a website or telephone directory; (d) whether the defendant places ads in the district; and (e) the nature and activity of the alleged place of business of the defendant in the district in comparison with that of other places of the defendant in other venues.

C.  Decisions following TC Heartland and In re Cray   

Over the last year, several courts have tackled venue disputes in light of TC Heartland and In re Cray. Below are summaries of the way courts have addressed this issue.  You will notice that many of these venue disputes involve whether or not the defendant has a “regular and established place of business” in the district. In addition to seeing how the different districts are applying the factors set forth in In re Cray, you will notice that courts are allowing venue-related discovery to help resolve these venue disputes.

1. Texas (Eastern District) – Distributor’s place of business cannot establish venue for its supplier

In EMED Technologies Corp. v. Repro-Med Systems, Inc.,[4] Judge Bryson transferred the case to the Southern District of New York, holding that a place of business of a corporation’s distributor that buys and resells its supplier’s products, even if a “necessary distributor”, is not an appropriate basis to establish venue for a patent infringement suit, and courts should “be careful not to conflate showings that may be sufficient for other purposes” – such as personal jurisdiction or the general venue statue. More importantly, the court laid out a laundry list of case law from other district courts that held a distributor’s place of business cannot establish venue for its supplier:

• Third-party distribution centers insufficient (S.D. Texas);
• Suppliers close relationship with distributors insufficient to establish regular and established place of business in the district, as any such physical presence in the district belongs to the distributor and not the supplier (N.D. Ohio);
• “[A] distributor or subsidiary of a parent corporation selling the infringer’s product does not demonstrate that a defendant has a regular and established place of business in th[e] district.” (S.D. California);
• Presence of third-party sales representatives insufficient (N.D. Texas);
• Physical locations of defendant’s dealers in the district “are irrelevant to the Court’s analysis under § 1400(b)” (S.D. Florida);
• “[A] regular and established place of business does not arise solely from a defendant simply shipping goods into a district – whether to an individual or for distribution by third parties.” (D. Delaware);
• Using third-party company to sell products is insufficient (N.D. California);
• In re Cray leaves no room for plaintiff to argue that a handful of non-employee, independent contractors present in the district constitute a “regular and established place of business” for defendant within the meaning of § 1400(b) (N.D. Illinois);
• Physical location of distributors does not establish venue when defendant does not own, rent, lease, or occupy these locations or any other property or equipment in the state (D. Idaho).
• Connections with distributors, retailers, and consumers in the district insufficient (M.D. Tennessee).
• Selling infringing products at Home Depot stores in the district does not establish a place of business for the manufacturer (D. Arizona);
• “It is well settled that the mere presence of independent sales representatives does not constitute a ‘regular and established place of business’ for purposes of Section 1400(b).” (W.D. Texas).

2.  Texas (Eastern District) – Google’s servers housed by a third-party in the       district is sufficient for venue 

In Seven Networks LLC v. Google LLC,[5] Judge Gilstrap denied Defendant Google’s motion to transfer venue to the Northern District of California, holding that Google’s servers housed by third-party internet service providers in the district allowed the suit to stay. Disagreeing with Google’s argument that it did not have a “regular and established” place of business in Texas, Gilstrap, relying on the factors set forth in In re Cray, held: (1) Google’s exclusive control over the servers themselves and the physical space in which the servers were located meets the statutory requirement of a “physical place in the district”; (2) Google’s servers are a “regular and established place of business”, regardless of the server’s minimal business contribution or the fact that they are manufactured by third parties, because they store information in local districts to provide Google’s users with quick access to cached data and avoid delays associated with distant data retrieval; and (3) in addition to Google’s own ratification, Google’s servers are “of Google” because Google has exclusive control over the servers and the physical location in which they reside.

3. California (Northern District) – Actions of unaffiliated independent retail distributors insufficient for venue purposes and venue-related discovery denied

In Green Fitness Equipment Co., LLC. v. Precor Inc.,[6] Plaintiff Green Fitness presented evidence that Defendant Precor had several retail stores and several employees that lived within the district. The court agreed with Precor, which argued that independent retail distributors, not Precor, operated the retail locations, and that merely having employees in the district was insufficient to establish “a place of business” for venue purposes. Even the use of Precor’s logo, while a relevant consideration, was insufficient by itself to show that Precor was engaging in business out of these retail locations, which Precor asserted were neither subsidiaries nor affiliates of and did not have employees of Precor. Relying on In re Cray, the court further held that Green Fitness failed to present any evidence to support a finding that Precor’s employee’s homes are the regular and established places of business of Precor. Lastly, the court denied Green Fitness’ request for venue-related discovery, reasoning that to allow such would not change the results on this issue.

4. Florida (Southern District) – Revenue and possible sales in a district insufficient for venue and venue-related discovery denied

In Patent Holder LLC v. Lone Wolf Distributors, Inc.,[7] the Southern District of Florida transferred venue of the case to the District of Idaho, rejecting Plaintiff Patent Holder’s argument that Lone Wolf has a regular and established place of business in the forum and denying venue-related discovery. Relying on In re Cray, the court rejected Patent Holder’s argument that deriving revenue from sales in the district was sufficient for venue – warning that this type of analysis is relevant to determining personal jurisdiction and has no bearing on whether §1400(b)’s physical place requirements are met. The court further rejected the argument that local dealers may be selling Lone Wolf products in the District through evidence of a “Dealer Sign Up” link on Lone Wolf’s website, reasoning that, even if true, fails to establish that Lone Wolf maintains a physical place in the district or that it is “of Lone Wolf.”

5. Delaware – Venue-related discovery allowed to determine whether actions of affiliate attributable to parent to establish venue

In Mallinckrodt IP v. B. Braun Medical Inc,[8] Plaintiff Mallinckrodt argued, and the court agreed, that the place of business of any B. Braun entity, including B. Braun affiliates, subsidiaries, or alter egos, may be attributable to B. Braun for venue purposes of establishing a regular and established place of business – justifying the need for venue-related discovery. Judge Stark relied on the fact that In re Cray failed to disturb prior precedent that “venue in a patent infringement case may be proper with regard to one’s corporation by virtue of the acts of another, intimately connected, corporation” – among the pertinent circumstances to consider being whether the formalities of corporate separateness are preserved. In response, B. Braun asserted that its affiliates are separate companies and maintain all corporate formalities. Mallinckrodt, however, insisted that the companies share executive officers and regularly work together on various projects. While unable to rule one way or another, the court found it necessary for Mallinckrodt to have the opportunity to conduct venue-related discovery and for B. Braun to renew its challenge on venue in the district.

D.  Conclusion

As courts continue to grapple with this developing area of law post-TC Heartland and In re Cray, it is important to keep an eye out on the types of actions by a defendant that are sufficient to establish a “regular and established place of business” in the forum. It is equally important to monitor whether venue-related discovery becomes the new norm, as it may lead to additional costs and effect early settlement discussions.

[1] TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S.Ct. 1514 (2017).

[2] In re BigCommerce, Inc., 890 F.3d 978 (Fed. Cir. 2018).

[3] In re Cray, 871 F.3d 1355 (Fed. Cir. 2017).

[4] EMED Technologies Corp. v. Repro-Med Systems, Inc., 2018 WL 2544564 (E.D. Tex. June 4, 2018).

[5] Seven Networks LLC v. Google LLC, 2018 WL 3634589 (E.D. Tex. Jul. 19, 2018).

[6] Green Fitness Equipment Co., LLC. V. Precor Inc., 2018 WL 3207967 (N.D. Cal. June 29, 2018).

[7] Patent Holder LLC v. Lone Wolf Distributors, Inc., 2017 WL 5032989 (S.D. Fl. Nov. 1, 2017).

[8] Mallinckrodt IP v. B. Braun Medical Inc., 2017 WL 6383610 (D. Del. Dec. 14, 2017).