United States: The Federal Circuit Provides A Tutorial On Patent Venue

The Federal Circuit in In re Cray, Inc., Appeal No. 2017-129 (Fed. Cir. Sept. 21, 2017), has provided extensive guidance to district courts on the meaning of an alleged infringer's "regular and established place of business" under the second prong of the patent venue statute, 28 U.S.C. § 1400(b). It granted a petition for a writ of mandamus to do so in order to carry out its mandate to bring uniformity to patent law. Slip op. at 6-7 (citing Panduit Corp. v. All States Plastic Mfg. Co., 744 F.2d 1564, 1574 (Fed. Cir. 1984); In re Queen's Univ. at Kingston, 820 F.3d 1287, 1291 (Fed. Cir. 2016)).

Although § 1400(b) and its substantively identical predecessor statute date back to 1897 and have received numerous interpretations by federal courts of appeals, for almost the past three decades patent owners could sue alleged infringers wherever they did business under the general venue statute, 28 U.S.C. § 1391, rendering § 1400(b) null. See Allen Sokal, The Supreme Court, Reversing the Federal Circuit, Holds That "Residence" in the Patent Venue Statute Refers to Only a Domestic Corporation's State of Incorporation (May 24, 2017). The Supreme Court resurrected § 1400(b), however, in TC Heartland LLC v. Kraft Foods Group Brands LLC, 137 S. Ct. 614 (overruling VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990)), by holding that § 1400(b) is the exclusive provision for determining venue in patent infringement suits. Consequently, alleged infringers sued in what they regard as unfavorable districts, such as, in this case, the Eastern District of Texas, or districts where the plaintiff/patent-owner maintains its principal place of business, are now moving under § 1400(b) to dismiss or to transfer venue. In In re Cray, the Eastern District of Texas denied the defendant's motion to dismiss or transfer, and the defendant's petition for a writ of mandamus provided the Federal Circuit an opportunity to expound on the requirements of § 1400(b) in a discussion that goes far beyond the facts of the case.

Before explaining why the district court erred in determining that venue was proper in the Eastern District of Texas, the court addressed at length the meaning of § 1400(b). Slip op. at 7-14. It quoted and then parsed the language of the statute: "Any 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." Now that TC Heartland has decided that under § 1400(b) a corporation "resides" only where it is incorporated despite the broader definition of residence under the general venue statute, the second prong of § 1400(b) provides the only other possibilities for proper venue. Although the Federal Circuit considered the statute's legislative history and a number of 20th-century appellate decisions, including the Supreme Court's admonition that because of the specificity of the patent venue requirement, it should not be given a liberal construction, slip op. at 9 (citing Schnell v. Peter Eckrich & Sons, Inc., 365 U.S. 260, 264 (1961)), the Federal Circuit parsed § 1400(b) to proclaim four requirements for venue: "§ 1400(b) requires that 'a defendant has' a 'place of business' that is 'regular' and 'established.' All of these requirements must be present." Id. at 10. While acknowledging that "each case depends on its own facts," id., the court then discussed in considerable detail each of the four requirements.

It addressed first the requirement for a "place of business." That requires "a physical place in the district," not just "a virtual space or . . . electronic communications from one person to another." Id. at 11. But the "place" "need not be a 'fixed physical presence in the sense of a formal office or store.'" Id. (citing In re Cordis Corp., 769 F.2d 733, 737 (Fed. Cir. 1985)). Nevertheless, "there must still be a physical, geographical location in the district from which the business of the defendant is carried out." Id. The court pointed out that in Cordis, the defendant stored its literature and products in employees' homes in the district and engaged a secretarial service in the district, factors that supported venue despite the absence of a formal office or store. Id.

The court next addressed the requirements for "a regular and established" place of business. The court exemplified "regular" as operating a business in a "steady, uniform, orderly, and methodical" manner, which excludes merely "sporadic activity." Id. at 11-12. Thus, a single act will not suffice, but a series of acts might. Id. at 12. The court similarly described "established." Referring to Black's Law Dictionary's 1891 definition, the statute's legislative history and 20th-century appellate cases, the court observed that this third requirement meant "not transient" but rather "fixed permanently." Id. at 12. Thus, displaying products semiannually at a trade show in a district was insufficient, while a five-year continuous presence in the district did suffice. Id. But "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 of the defendant." Id. at 12-13.

That leads to (or perhaps belongs to) the final requirement, the only one that really mattered in the case before the Federal Circuit: that the regular and established place of business be that of the defendant. "Thus, the defendant must establish or ratify the place of business. It is not enough that the employee does so on his or her own." Id. at 13. Numerous considerations apply to this key requirement: does the defendant own or lease the place, or exercise other attributes of possession or control; "a small business might operate from a home" if that is the defendant's place of business; does the defendant condition employment on residence in the district or on storing materials at a place in the district for distribution or sale; does the defendant represent that it has a place for its business in the district such as by marketing, advertising, or listing the place in the district on a website or telephone or other directory or placing its name on a sign on a building in the district. Id. at 13-14. But those factors may not suffice unless the defendant actually engages in business from the place in the district.

A final, somewhat ambiguous, consideration for the fourth requirement "might be 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. Such a comparison might reveal that the alleged place of business is not really a place of business at all." Id. at 14. The court further explained in a footnote that "a relative comparison of the nature and activity may reveal, for example, that a defendant has a business model whereby many employees' homes are used by the business as a place of business of the defendant." Id. at 14 n.*.

After that lengthy tutorial on the patent venue statute, the court then explained why in the case before it the home of a Cray employee was not Cray's place of business and therefore did not satisfy the fourth requirement of § 1400(b). The employee's home was not listed anywhere publicly as Cray's business, the employee did not maintain product literature or products in his home, Cray stored nothing there, and Cray paid for no part of the employee's home or rent. The Federal Circuit concluded that the fourth requirement described above remained unsatisfied. "The statute clearly requires that venue be laid where 'the defendant has a regular and established place of business,' not where the defendant's employee owns a home in which he carries on some of the work that he does for the defendant." Id. at 16 (quoting American Cyanamid Co. v. Nopco Chem. Co., 388 F.2d 818, 820 (4th Cir. 1968)). Moreover, the patent owner pointed to no evidence that Cray considered the employee's location in the district material or required the employee to live there. Furthermore, the employee was reimbursed for expenses and received administrative support solely from outside the district, and the employee's social media profiles indicated at most that he, not Cray, conducted business from the district. Id. at 15-17.

The Federal Circuit found support for its decision in a number of 20th-century appellate court decisions addressing the issue of venue based on employees' homes within a district. Id. at 18. The court concluded, "Similarly, 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." Id. at 19.

Needless to say, this case reinforces the significant impact of TC Heartland. The shift of patent infringement cases away from districts such as the Eastern District of Texas to Delaware and other districts has already begun. Part of a patent owner's prelitigation investigation should now include research to determine the district where the alleged infringer is incorporated, the districts where the alleged infringer has a regular and established place of business, and which of those districts appears most favorable to the patent owner. Potential defendants, on the other hand, should take steps to limit the number of districts where they might be sued, such as by not holding themselves out as doing business in a district simply because an employee works out of his home in the district, by not requiring the employee to live in the district, and by not requiring or even permitting the employee to store the potential defendant's literature or products in his or her home. Finally, both parties in patent litigation should prepare for early discovery on venue whenever the question of whether the alleged infringer has a regular and established place of business appears to be close.

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