The Federal Circuit has held that “virtual” business operations are insufficient to establish patent venue. And it rejected the widely discussed four-factor approach to patent venue adopted by the Eastern District of Texas, which until recently was the nation’s busiest patent venue.
For almost 30 years, venue of patent cases utilized the general federal venue statute, 28 U.S.C. § 1391(c), which allows a corporation to be sued “in any judicial district in which such defendant is subject to the court’s personal jurisdiction.” VE Holding Corp. v. Johnson Gas Appliance Co., 917 F.2d 1574, 1578 (Fed. Cir. 1990). That approach allowed almost any national firm to be sued in the Eastern District of Texas, the favorite venue for patent plaintiffs, leading to as much as 40% of all patent cases in the nation being filed there.
All that changed earlier this year. In TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514, 197 L. Ed. 2d 816 (2017), the Supreme Court held that 28 U.S.C. § 1400(b) was the sole and exclusive venue statute for patent infringement actions. Section 1400(b) provides that suits for patent infringement may be brought only “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.”
Following TC Heartland, many patent defendants in the Eastern District of Texas sought a change of venue. The new venue fights focused attention on the meaning of “a regular and established place of business,” a little used phrase for which the case law was sparse and divergent.
In Raytheon Co. v. Cray, Inc., No. 2:15-cv-01554-JRG, 2017 WL 2813896 (E.D. Tex. June 29, 2017), the Eastern District court denied a motion to transfer venue. The evidence showed that Cray did not rent or own an office or property in the Eastern District, but it allowed a sales executive to work remotely from his home in the district. He provided price quotations to customers and identified his home telephone number as his office number with an Eastern District area code. However he did not maintain Cray products or product literature at his home, and Cray did not pay the employee for the use of his home or publicly advertised his home as a Cray place of business. The district court held that a fixed physical location in the district was not a prerequisite to proper venue, and that Cray was subject to venue under the holdings of In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985).
After announcing its opinion, the court identified, for the benefit of future litigants, four factors for inquiries into what constitutes a regular and established places of business “in the modern era.” The four factors included physical presence, a defendant’s representations, benefits received, and targeted interactions with the district. Raytheon Co. v. Cray, supra at *11–14. Cray sought mandamus from the Federal Circuit, arguing that its limited contacts in the Eastern District did not constitute a “regular and established place of business.”
The Federal Circuit agreed with Cray. It started with the observation that “the world has changed since 1985 when the Cordis decision issued.” It noted that not all companies have brick-and-mortar locations, business can be conducted virtually, employees can telecommute, and products may not be warehoused given the just-in-time delivery paradigm. But despite these changes, under TC Heartland the focus must be on “the full and unchanged language of the statute” in ways not explored in Cordis.
Without saying so expressly, the Court applied an “original intent” approach to interpreting Section 1400(b). It reviewed the history of patent venue leading up to the enactment of Section 1400(b)’s predecessor in 1897, and admonished courts to “be mindful of this history in applying the statute.” It considered the plain meaning of each word as it was understood at the time of enactment, citing sources like the first edition of Black’s Law Dictionary (1891).
Using those sources, the Court interpreted a “place of business” under Section 1400(b) to mean “a physical, geographical location in the district from which the business of the defendant is carried out.” A place of business does not refer to “a virtual space or to electronic communications from one person to another.”
A “regular” place of business means a steady, uniform, orderly, and methodical manner. Sporadic activity is insufficient. A “regular and established” business is not transient. It must be settled certainly, or fixed permanently. A business can move its location but must for a meaningful time period be stable and established. If an employee can move their home out of the district without approval of the defendant, that fact would cut against the employee’s home being a place of business of the defendant.
Finally, the regular and established place of business must be “the place of the defendant” not solely a place of the defendant’s employee. A defendant must establish or ratify the place of business not the employee on their own. It is not sufficient that a defendant advertises a place of business or sets up an office in the district. It must actually engage in business from that location. “In the final analysis, the court must identify a physical place, of business, of the defendant.”
The Court held that the district court erred in denying Cray’s motion to transfer venue, and that its four-factor test was not “sufficiently tethered to the statutory language” and thus failed to inform future litigants of the necessary requirements.
Venue of the suit against Cray was not proper in the Eastern District of Texas because Cray did not have a regular and established place of business there that was the place of the defendant. The only showing was that there was within the district “a physical location where an employee of the defendant carries on certain work for his employer.”
The Court vacated the district court’s order denying Cray’s Rule 12(b)(3) motion and ordered the district court to grant the motion to transfer under Section 1406(a) to an appropriate venue to be determined by the district court.