Client Alert

No Physical Place, No Regular and Established Place of Business: The Federal Circuit Strikes Down Judge Gilstrap’s Patent Venue Framework

September 25, 2017

By Yar Chaikovsky, David Okano & Wei Wang

Last Thursday, the Federal Circuit granted a petition for writ of mandamus from Cray Inc., striking down a venue test advanced by Judge Gilstrap in the Eastern District of Texas as being untethered to the statutory language of 28 U.S.C. § 1400(b), and finding Judge Gilstrap abused his discretion by failing to transfer the case under 28 U.S.C. § 1406(a). In a precedential opinion authored by Judge Lourie and joined by Judges Reyna and Stoll (In re Cray, Inc., No. 2017-129 (Fed. Cir. Sept. 21, 2017)), the Federal Circuit identified “three general requirements” that all must be satisfied to establish a “regular and established place of business” under § 1400(b): (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 a place of the defendant.

Relevant Venue-Related Facts and Background

The relevant venue-related facts in this case are as follows: (1) defendant Cray, Inc. (“Cray”), a seller of supercomputers with its state of corporation and principal place of business located in Washington was sued by plaintiff Raytheon Corp. (“Raytheon”) for patent infringement in the Eastern District of Texas; (2) one of Cray’s sales executives, Mr. Douglas Harless, had been working exclusively for Cray from his home within the Eastern District of Texas for over seven years; Mr. Harless’s job responsibilities included “new sales and new account development” in the central U.S. and “management of key accounts” within certain industrial sectors; (3) Cray paid Mr. Harless a salary and reimbursed him for his cell phone, Internet fees, mileage, and other travel costs, as well as providing administrative support from Cray’s Minnesota office; (4) Mr. Harless identified his Eastern District of Texas home telephone number as his “office” telephone number to his customers, who were not located in the district; (5) an internal “Americas Sales Territories” map of Cray identified Mr. Harless as a “Named Account Manger” and the location at his Eastern District of Texas home; (6) Cray did not rent or own an office or any property in the Eastern District of Texas; nor did it pay Mr. Harless for the use of his home to operate its business, or publically advertise Mr. Harless’s home as a Cray place of business; (7) Mr. Harless did not maintain any Cray products or product literature at his home.

Following the Supreme Court’s venue decision in TC Heartland v. Kraft Foods Group Brands LLC, Judge Gilstrap proposed a four-factor test for determining what constitutes a “regular and established place of business” under 28 U.S.C. § 1400(b). See Raytheon Co. v. Cray, Inc., No. 2:15-cv-1554, 2017 WL 2813896 (E.D. Tex. June 29, 2017) (“ED Texas Interpreting TC Heartland—What Constitutes ‘Regular and Established Place of Business?’”).  Judge Gilstrap’s proposed test did not require a “fixed physical location in the district” for venue to be proper, potentially subjecting any company with a website accessible by residents of the Eastern District of Texas to suit in the district.  The Federal Circuit rejected Judge Gilstrap’s four-factor test in its entirety, emphasizing that a test for evaluating venue under § 1400(b) must “be closely tied to the language of the statute,” and holding that district courts must, in any venue analysis, identify “a physical place, of business, of the defendant” that is “regular and established.”

Defendants Must Have a Physical Place of Business in the District

The Federal Circuit held first that—contrary to Judge Gilstrap’s proposed test—“a regular and established place of business” requires “a physical place in the district.”  Simply doing business in the district, the standard under the general venue provision, 28 U.S.C. § 1391(c), is not enough, and Judge Gilstrap erred as a matter of law in holding that a “fixed physical location” was not a prerequisite to proper venue.

Citing to dictionaries contemporaneous to the enacting of § 1400(b)’s predecessor statute in 1897, the Federal Circuit defined “place” for purposes of § 1400(b) as “a physical, geographical location in the district from which the business of the defendant is carried out.”  Even though such a place need not be a “fixed physical presence in the sense of a formal office or store,” it cannot only be a “virtual space” or based on electronic communications from one person to another. Citing In re Cordis as an example, the Federal Circuit explained that a defendant employee’s home could constitute a physical place of business if the home was used to store a defendant’s products, product literature, and documents, or used like a distribution center, storing inventory that the employee delivered to clients. A “secretarial service” physically located in the district (such as the one described in Cordis) could also constitute a physical place of business.

At bottom, the Federal Circuit held that a defendant must “actually engage in business” from the physical location in the district. This could be determined, for example, by examining “the nature and activity of the alleged place of business” in comparison with the defendant’s places of business in other venues.

The Place Must Be Regular and Established

The Federal Circuit next held that the physical place of business must be “regular” and “established.”  “Regular” means that the place operates in a “steady, uniform, orderly, and methodical manner,” and “established” means that the place must be “settled certainly, or fixed permanently.”  A business can move its location, but it must “for a meaningful time period be stable, established.”  In other words, sporadic activity or a transient presence cannot establish proper venue under § 1400(b).

For instance, the Federal Circuit stated that while a continuous, five-year presence in a district is sufficiently “established” for purposes of venue, a business that semiannually displays its products at a trade show in the district has only a temporary presence. While an employee’s home office is not per se ineligible as a “regular and established” place of business, the fact that an employee can move its home out of the district without approval from the defendant cuts against treating the employee’s home as an “established” place of business of the defendant.

The Place Must be a Place of the Defendant

Finally, the Federal Circuit stressed that under § 1400(b)’s express language, the regular and established place of business must be “the place of the defendant,” as opposed to merely a place of the defendant’s employee. This means that the defendant must “establish or ratify” the place of business; the existence of a defendant’s employee in the district is not enough to establish that venue is proper.

The Federal Circuit identified the following considerations as being relevant to this statutory requirement: whether the defendant owns or leases a place, or exercises other attributes of possession or control over a place; whether the defendant conditions 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; whether the defendant lists the alleged place of business on a website, or in a telephone or other directory or places its name on a sign associated with or on the building itself. The court recognized “marketing or advertisements” could be relevant evidence, but only to the extent they show that the defendant itself—and not just the employee—holds out the marketed or advertised place for its business.

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While “no one fact is controlling,” the Federal Circuit made clear that if any of the three “physical place,” “regular and established,” or “of the defendant” requirements are not satisfied, venue is improper under § 1400(b). Applying its venue test to the facts of the case, the Federal Circuit found the “place of the defendant” requirement to be crucial to the determination of whether venue was proper.

The fact that Cray allowed Mr. Harless to carry on certain work from his home in the Eastern District of Texas, according to the Federal Circuit, was not enough to show that Mr. Harless’ home was a regular and established place of business of Cray. There was no evidence, for instance, that Cray owned, leased, or rented any portion of Mr. Harless’s home, or exerted any control over the location of the place, or conditioned Mr. Harless’s employment on his continued residence in the Eastern District of Texas. Nor did Cray store inventory or conduct demonstrations in Mr. Harless’s home. No evidence showed that Cray believed an Eastern District of Texas location would be important to its business, or that it intended to maintain some place of business there in the event Mr. Harless decided to move out of the district. Even though Cray’s internal sales territories map identified Mr. Harless as a “Named Account Manager” and his home location as within the Eastern District of Texas, the Federal Circuit found the map to be of little probative value as it was not advertised publicly.

In re Cray is the Federal Circuit’s first opinion after TC Heartland (and its first opinion since In re Cordis) to interpret the “regular and established place of business” requirement of § 1400(b). By laying out three statutory requirements for establishing a “regular and established place of business”(1) a physical place of business in the district, (2) of the defendant, (3) that is regular and established—the Federal Circuit seeks to end the uncertainty surrounding the determination of proper venue under § 1400(b). Under In re Cray, the Federal Circuit has provided meaningful limits to venue for patent infringement suits. The Eastern District of Texas, for instance, will no longer be a proper venue for a defendant without a physical presence in the district.

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