US patent litigation on the move again following In re Cray

It is time to move venues again for the
AmeriKat following In re Cray

While the AmeriKat has been traversing the globe over the last few weeks, big changes in US patent litigation have continued apace, especially where venue is concerned  - most recently in Re Cray.  The AmeriKat's  Californian friends at Fenwick & West - Bryan Kohm, Dadvid Tellekson, Melanie Mayer and Reilly Stoler -  summarize the latest position on venue for the Kat's non-US readers:

"Recently, the United States Court of Appeals for the Federal Circuit issued a decision in In re Cray that will likely deal a serious blow to abusive forum shopping engaged in by non-practicing entities.  28 U.S.C. § 1400(b) limits venue in patent cases to either where a defendant “resides” or where it has both committed acts of infringement and maintains a “regular and established place of business.”  The Supreme Court’s decision in TC Heartland v. Kraft Foods, 137 S. Ct. 1514, earlier this year, held that the first prong—“residence”—was limited to a company’s place of incorporation or principal place of business.  

The Cray decision addresses the standard for determining what constitutes a “regular and established place of business” under the second prong of Section 1400(b). 
Specifically, the Federal Circuit set forth three requirements for a “regular and established place of business”: (1) the location must be a “place,” (2) that place must be “regular and established,” and (3) the place must be “of the defendant.”  Applying these requirements, the Federal Circuit held that petitioner Cray’s employment of a remote employee in the Eastern District of Texas did not create venue in that district as to Cray.

Background

In the United States, venue in patent cases is governed by Section 1400(b), which as noted above contains two alternatives for establishing proper venue.  However, since the Federal Circuit’s 1990 holding in VE Holdings that a company “resided” anywhere a defendant purposefully directed its activities, provided that the plaintiff’s claim arose out of those activities.  Some courts broadly construed VE Holdings, which, in effect, rendered venue proper anywhere a defendant engaged in business in any way related to the alleged infringement.

Over time, as a result of this broad interpretation, certain courts favorable to patent plaintiffs became increasingly popular district for patent litigation.  For example, the Eastern District of Texas, which covers a largely rural portion of Texas, emerged as a focal point for patent litigation in the United States.  In fact, in 2016, more than 40% of U.S. patent cases were filed there, and a single judge in the district—Judge Rodney Gilstrap—presided over nearly 25% of all patent cases in the nation.
In TC Heartland, the Supreme Court abrogated VE Holdings and held that a defendant “resides” under patent venue statute only where the corporation is incorporated or maintains its principal place of business.  Given that most companies do not “reside” in the favored patent venues under this standard, the focus in determining venue shifted to the second alternative.  Having previously held that the patent venue statute was irrelevant to the patent venue analysis, the Federal Circuit had not addressed the meaning of “regular and established place of business” in over 30 years.   District Court Proceedings 

In 2015, Raytheon sued Cray, a maker of advanced supercomputers, in the Eastern District of Texas.[1]  Following the TC Heartland decision, Cray challenged venue on the ground that it lacked a “regular and established place of business” in the district.  Although Cray employed a single remote employee that lived in the district, Cray maintained no facilities in the district, nor did it have any customers there.  The district court denied Cray’s motion, finding that Cray’s employment of a single remote employee satisfied the “regular and established place of business” requirement of Section 1400(b).  The court reasoned that the employee made substantial sales while employed at Cray, was supported by the administrative office in Minnesota, and could access promotional materials online from his home in the district.  In doing so, the court formulated a four-factor test to evaluate whether a defendant maintains a regular and established place of business in a district, which notably did not require a defendant to maintain a physical presence in the district.  Cray filed a petition for writ of mandamus in July 2017 asking the Federal Circuit to vacate the district court’s four-factor test and direct transfer to a proper venue.

A “Regular and Established Place of Business” Is a Physical Location of the Defendant

Prior to the In re Cray Inc. decision, the Federal Circuit’s last word on the meaning of “regular and established place of business” came in 1985.  In that case, In re Cordis Corp., the defendant used its employees’ homes in a district to store literature and products, and relied on those employees to deliver products to its customers.  The company also retained a local administrative service to support the employees’ activities in the district and publicly listed the service’s address as its own office.  In denying defendant’s venue challenge, the Federal Circuit wrote that the “appropriate inquiry” is “whether the corporate defendant does its business in [a] 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.”  But the court declined to provide further guidance for evaluating what constitutes a “regular and established place of business.”  The issue remained largely untouched for more than three decades.

On September 21, the Federal Circuit granted Cray’s petition for writ of mandamus, vacated the district court’s denial of transfer and four-factor test, and provided much needed guidance on what constitutes a “regular and established place of business” under Section 1400(b).  Seemingly mindful of the dearth of precedent on the subject, the court explained each step of its statutory interpretation.  As a starting point, it noted that the legislative history of Section 1400(b) indicated an intent by the legislature to restrict patent venue, not expand it.  Further, the court cited the Supreme Court’s instruction that venue is decidedly not “one of those vague principles . . . to be given a liberal construction.”  With these guideposts in mind, the court set forth three requirements:  (1) the location must be a “place,” (2) that place must be “regular and established,” and (3) the place must be “of the defendant.” 

The court addressed each prong in turn.  First, it explained that a “place” must be a physical location.  Although a formal storefront is not required, the court rejected the notion that a “virtual” or “electronic” presence might create patent venue.

Next, the court interpreted the adjectives “regular and established” to require some showing of stability, or continuity over time.  The court specifically noted that sporadic or temporary business activities were not sufficient, but indicated that continuous business for a series of years likely was.

Finally, the court explained that a place is “of the defendant” if the place was “establish[ed] or ratif[ied]” by it.  A number of considerations come into play here, but significantly a place is not “of a defendant” if it is “solely a place of the defendant’s employees.”  The defendant, rather, must have some additional connection or control over that place.

Applying this freshly minted test to the facts of the case, the court determined that venue was lacking because there was no evidence that Mr. Harless’ house was a place of business of Cray.  The court noted that while Mr. Harless conducted business from his house in the district, there was nothing indicating that Cray owned Mr. Harless’ residence, selected its location, conditioned his employment on maintaining his residence, or even believed its location was important to the work he performed.  Stressing that no one fact was controlling in its analysis, the court concluded that “the facts [surrounding Mr. Harless’ home office] cannot support a finding that Cray established a place of business in the Eastern District of Texas.”  Accordingly, the court granted Cray’s petition and directed transfer of venue.

Implications of Decision

In re Cray will guide patent venue analysis going forward.  A key takeaway for employers is that the typical work-from-home employee will not create a “regular and established place of business” for venue purposes.  In rejecting the position that such home offices are sufficient, the Federal Circuit explicitly stated that a “home in which [defendant’s employee] carries on some work that he does for the defendant” does not meet the standard.

More broadly, the decision will likely shift much of U.S. patent litigation out of the Eastern District of Texas.  While many companies, such as national retailers will remain subject to venue in the Eastern District, many, if not most, of U.S. corporations will not."

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[1] The authors represented petitioner Cray Inc. in this matter.