Client Alert

ED Texas Interpreting TC Heartland-What Constitutes "Regular and Established Place of Business"?

July 06, 2017

By Wei Wang

Under 28 U.S.C. § 1400(b), “[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). On the heels of TC Heartland v. Kraft Foods Group Brands LLC, where the Supreme Court held that § 1400(b) “is the sole and exclusive provision controlling venue in patent infringement actions,” Judge Rodney Gilstrap of the Eastern District of Texas—in an opinion published on June 29, 2017—laid out a four-factor test for determining what constitutes “regular and established place of business.”

In Raytheon Co. v. Cray, Inc., No. 2:15-cv-01554-JRG (E.D. Tex.), a patent infringement suit brought in the Eastern District of Texas, the defendant Cray, Inc. (“Cray”)—an alleged seller of supercomputers—is incorporated in the State of Washington and thus does not reside in the EDTX. The plaintiff contended, however, that Cray satisfied the second prong of §1400(b), i.e., it “has committed acts of infringement and has a regular and established place of business,” in the Eastern District of Texas.

The basic, venue-related facts in this case are as follows: (1) one of Cray’s sales executives, Mr. Douglas Harless, had been working exclusively for Cray from within the EDTX for over seven years; his job responsibilities included “new sales and new account development” in the Central U.S. as well as “management of key accounts” within certain industrial sectors; (2) Cray paid Mr. Harless a salary and maintained his compensation plan through its human resources department, which outlined his territory (including an EDTX city) and assignments (including as an account manager at the EDTX location); (3) Mr. Harless received reimbursement for his cell phone, Internet fees, and mileage or other costs for business travel, as well as “administrative support” from Cray’s Minnesota office; (4) Mr. Harless contacted and sold products to customers from a telephone number with an EDTX area code; (5) from 2010-2011, Cray had a second employee who resided in the EDTX and sold Cray’s supercomputers; and (7) Cray sold a supercomputer accused of patent infringement to the University of Texas System; it had been delivered and installed at the U.T., Austin campus but was accessed via remote terminals at various U.T. facilities, including two campuses within the EDTX.

The Court started by rejecting Cray’s argument that “a remote employee with a private residence” cannot meet the “regular and established place of business” standard. Citing In re Cordis, a Federal Circuit venue decision that predates VE Holding (abrogated by TC Heartland), the Court found that “the appropriate inquiry is whether the corporate defendant does its business in that district through a permanent and continuous presence there and not…whether it has a fixed physical presence in the sense of a formal office or store.” In Cordis, the Federal Circuit denied the defendant’s petition for a writ of mandamus based on improper venue, where the defendant had employed two full-time sales representatives in the challenged venue, provided them with—among other things—a company car and local secretarial services, listed a local telephone number on the representatives’ business cards, and tasked the representatives with acting additionally as technical consultants to local customers. Finding the activities performed by Cray factually similar to those performed by the representatives in Cordis, the Court concluded that Cray’s activities in EDTX are sufficient to satisfy the “regular and established place of business” requirement.

While acknowledging that the holding in Cordis is alone adequate to support its conclusion in the instant case, the Court did not stop there. To “provide guideposts to point the venue analysis in a single coherent direction,” the Court laid out a four-factor test—based on a review of the relevant case law—to determine the scope of “regular and established place of business”:

  • Factor One: Physical Presence, which means “the extent to which a defendant has a physical presence in the district, including but not limited to property, inventory, infrastructure, or people.” While “the lack of a physical building in the district is not dispositive,” “a retail store, warehouse, or other facility in the district weighs strongly in favor of finding a regular and established place of business.”

  • Factor Two: Defendant’s Representations, which means “the extent to which a defendant represents, internally or externally, that it has a presence in the district.” Examples of such representations include advertising that a defendant permits regarding that location and the fact that “the defendant naturally expected customer inquiries to be directed toward its agent there,” and, in Cray’s case, an internal presentation featuring Mr. Harless as a named account manager in a EDTX city.

  • Factor Three: Benefits Received, which means “the extent to which a defendant derives benefits from its presence in the district, including but not limited to sales revenue.” This factor supports a regular and established business, “especially where a defendant has generated significant revenue” from its business in a particular district.

  • Factor Four: Targeted Interactions with the District, which means “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.” In particular, “a defendant’s ongoing contractual relationships with customers in a district may be some evidence that it maintains an established and continuous presence in the district.”

According to the Court, none of these factors is alone dispositive, and the inquiry should focus on “whether a domestic business enterprise seeks to materially further its commercial goals within a specific district through ways and means that are ongoing and continuous.” The Court ultimately did not apply the four-factor test to the instant case, but it believed that, had the test been applied here, the result would remain the same.

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