On September 21, 2017, the US Court of Appeals for the Federal Circuit in In re Cray, Inc. clarified the rules for determining proper venue in patent suits, building on the US Supreme Court’s May 2017 ruling in TC Heartland v. Kraft Foods. The Federal Circuit rejected a ruling by the Eastern District of Texas that relaxed the focus on the physical presence of a defendant. In this latest ruling, the appellate court highlighted three requirements for finding proper venue: (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 the place of the defendant. Also of note are two earlier rulings from the District of Delaware that comport with the Federal Circuit’s Cray decision. Overall, these pro-defendant rulings further restrict where patent plaintiffs may file lawsuits in the future, and place an increasing focus on the physical presence and business activities of defendants.

I. Background

In May 2017, Eversheds Sutherland reported on the TC Heartland, LLC v. Kraft Foods Grp. Brands, LLC, 581 U.S. __ (2017), ruling that required patent holders to follow the specific patent venue statute, 28 U.S.C. § 1400(b). That statute requires suing “where the defendant resides,” or “has committed acts of infringement” and where the defendant “has a regular and established place of business.” The Supreme Court further reaffirmed a prior holding that “resides” for a domestic company refers only to the state of incorporation.

In July 2017, Eversheds Sutherland reported on the first district court decision to apply the Supreme Court’s TC Heartland ruling. In Raytheon Company v. Cray, Inc., Judge Gilstrap of the Eastern District of Texas took a broad view of proper venue under TC Heartland. Judge Gilstrap set forth a four-part test to be applied to the “totality of the circumstances,” but only one part of that test related to a defendant’s physical presence in the district. The remaining three factors focused on derived benefits and focused interactions with that district, untethered to any physical presence within the district.

Applying the district court test, Judge Gilstrap denied defendant Cray, Inc.’s motion to transfer. Although Cray maintained no physical presence in the district, Judge Gilstrap focused on the fact that Cray did have one employee who telecommuted from his home within the district. As a result, the district court held that Cray’s employee gave the company a place of business there and satisfied the venue requirement under Section 1400(b). Not surprisingly, Cray petitioned the Federal Circuit for a writ of mandamus to vacate the district court’s decision denying the motion to transfer.

II. The Federal Circuit Clarifies Venue Requirements in In re Cray, Inc. 

On September 21, 2017, the Federal Circuit granted Cray’s writ of mandamus and ordered the district court to vacate its refusal to transfer the case. The Federal Circuit held that “[t]he district court’s four-factor test is not sufficiently tethered to [the] statutory language and thus it fails to inform each of the necessary requirements of the statute.” The Federal Circuit analyzed the statute and case law, which “reveal three general requirements relevant to the inquiry: (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 the place of the defendant.” The Federal Circuit then applied each of those requirements to the underlying facts.

For the first factor, there “must be a physical place in the district.” The statute requires a “place,” that is, “[a] building or a part of a building set apart for any purpose” or “quarters of any kind” from which business is conducted. The district court “erred as a matter of law in holding that ‘a fixed physical location in the district is not a prerequisite to proper venue.’” The Federal Circuit further noted that the statute “cannot be read to refer merely to a virtual space or to electronic communications from one person to another,” which “would seemingly be authorized under the district court’s test.”

For the second factor, the Federal Circuit held that “sporadic activity cannot create venue” and “[t]he district court’s test fails to recognize that the place of business must be ‘regular.’” Providing clarity, the Federal Circuit noted that “business may be ‘regular,’ for example, if it operates in a ‘steady[,] uniform[,] orderly[, and] methodical’ manner.” “The doing of a single act pertaining to a particular business will not be considered engaging in or carrying on the business; yet a series of such acts would be so considered” regular and established.

For the third factor, the place of business must “be a place of the defendant, not solely a place of the defendant’s employee. . . the defendant must establish or ratify the place of business. It is not enough that the employee does so on his or her own,” the court held. Thus, the Federal Circuit concluded that the facts of the case showed that the employee’s home office was not Cray’s place of business, especially because the employee was free to move his residence out of the district without his employer’s permission.

III. Earlier Rulings in Delaware Comport with the Federal Circuit’s In re Cray Decision

Also of note are two recent rulings from Chief Judge Stark of the US District Court for the District of Delaware. Since the TC Heartland ruling, Delaware has become even more popular for patent suits, because many companies are incorporated (i.e., “reside”) there. On September 11, 2017, Judge Stark issued two rulings, which appear to comport with the Federal Circuit’s latest ruling in In re Cray, Inc. 

In Boston Scientific v. Cook Grp., Inc. and Bristol-Myers v. Mylan, Judge Stark noted that the patent venue statute requires some physical presence, although “no fixed space in the sense of a formal office or store is necessary.” Thus, the inquiry is fact-driven and examines whether the defendant has some meaningful physical manifestation in the district from which it does business. For example, proper venue can be established if the business stores products or maintains agents in the district. Judge Stark also indicated what is insufficient to find venue in Delaware. If a company only is registered to do business (as opposed to being incorporated) in Delaware, ships goods into the state, or has an online presence accessible by Delaware residents, “then this district is an improper venue for the lawsuit.” 

Applying that analysis, Judge Stark transferred the Boston Scientific suit from Delaware, finding that Boston Scientific’s sales representatives visiting Delaware were insufficient to overcome Boston’s lack of physical presence in the venue analysis. But, in the Bristol-Myers case, the court ordered venue-related discovery to determine whether the defendant has a regular and established place of business in Delaware.

IV. Conclusion

The Federal Circuit’s ruling in In re Cray, Inc. re-focuses the venue analysis on physical presence and rejects the somewhat amorphous Eastern District of Texas test. As a result, defendants facing lawsuits in undesirable venues should take a hard look at transfer motions. Similarly, in the future, patent plaintiffs are expected to be more careful in determining where to sue.

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