Federal Circuit Provides Much Needed Patent Venue Guidance Post TC Heartland

by Fenwick & West LLP
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The Federal Circuit has issued a landmark venue decision setting forth the standard for determining what constitutes a “regular and established place of business” under 28 U.S.C. § 1400(b). Section 1400(b) limits venue in patent cases to either the location where a defendant “resides” or where it has both committed acts of infringement and maintains a “regular and established place of business.” Following the U.S. Supreme Court’s decision in TC Heartland v. Kraft Foods earlier this year, which held that the first prong—residence—was limited to a company’s place of incorporation or principal place of business, venue analysis in most cases has focused on the second prong. However, it quickly became apparent that courts lacked sufficient guidance regarding what constitutes a “regular and established place of business.” The Federal Circuit’s precedential opinion in In re Cray Inc. provides that guidance.

In its Sept. 21 ruling in In re Cray Inc., 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.

District Court Proceedings

In 2015, Raytheon sued Cray, a maker of advanced supercomputers, in the Eastern District of Texas.1 Following the Supreme Court’s decision in TC Heartland, because it was neither incorporated nor maintained its principal place of business in Texas, Cray renewed its challenge to venue on the ground that it lacked a “regular and established place of business” in the district. (See our prior analysis on TC Heartland in “Litigation Alert: Supreme Court Announces New Limits on Venue in Patent Cases, Blunting Key Troll Tool”) Although Cray employed a single remote employee—Mr. Douglas Harless—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 the company’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 a petition for writ of mandamus, 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.

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.”

Deconstructing the Three Prongs

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 the 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.

The court, however, left the door open for certain remote offices, even those of employees, to create venue. While no fact is dispositive, the court advised that the following conditions tend toward a finding of a regular and established place of business:

  • The physical location is owned, leased, or paid for by the defendant.
  • The employee is hired because of the employee’s location, or their employment is otherwise conditioned upon their continued residence in that location.
  • The location marketed to the public—such as listing the alleged place of business on a website—as an office or location of the defendants.
  • If the employee moved from the district, the defendant would seek to create a new location in its stead.
  • A comparison of the remote office with the defendant’s other more established offices reveals them as having a similar nature or function.

With these considerations in mind, an employer can assess the potential risk involved in operating smaller offices, or allowing work-from-home employees within certain districts.

 


1 Fenwick & West represented petitioner Cray Inc. in this matter.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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