Patent venue after TC Heartland

Venue in a patent infringement action is governed by 28 U.S.C. Section 1400(b). The statute provides two tests to determine whether a particular district is the correct venue to bring an infringement action. First, venue is proper in the “judicial district where the defendant resides.” Second, venue is proper, “where the defendant has committed acts of infringement and has a regular and established place of business.”

Following the U.S. Supreme Court’s decision in TC Heartland LLC v. Kraft Foods Grp. Brands LLC, 137 S. Ct. 1514 (2017), venue disputes have increasingly centered on whether the defendant has a regular and established place of business in the district where the action is filed. But federal district courts have been interpreting this requirement inconsistently. While some courts held that physical presence in the district is not required, others determined that it is.

The U.S. Court of Appeals for the Federal Circuit recently resolved this issue holding that, “(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.” In re Cray, Inc., 2017-129 (Sept. 21, 2017).

The venue tests resulting from TC Heartland and Cray will make it difficult for plaintiffs to maintain infringement suits in districts where the defendant only has a few remote employees. For large companies with a minor physical presence in multiple districts, the venue debate will shift to the convenience factors considered under Section 1404(a).

The last time that the Federal Circuit addressed the issue of whether a defendant has a “regular and established place of business” was in its 1985 decision in In re Cordis Corp., 769 F.2d 733. In that case the court held that, “the appropriate inquiry is whether the corporate defendant does its business in that 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 Cordis’ fact-based analysis falls short of clarifying what constitutes a “permanent and continuous presence” necessary to establish venue, and merely states that a “formal office or store” is not required.

With improvements in technology, the ways that companies conduct business has advanced significantly since Cordis. After TC Heartland, district courts attempted to create guideposts based on Cordis to determine what actions short of a “fixed physical presence” are sufficient to establish venue, and grappled with the question of whether any physical place of business is required at all. Compare Raytheon Co. v. Cray, Inc., CV 2:15-CV-01554-JRG (E.D. Tex. June 29, 2017) with Boston Sci. Corp. & Boston Sci. SciMed, Inc. v. Cook Grp. Inc. & Cook Med. LLC, CV 15-980-LPS-CJB (D. Del. Sept. 11, 2017).

Now, Cray squarely answers the question of whether a physical place of business in the district is necessary for proper venue, holding that, “there must still be a physical, geographical location in the district from which the business of the defendant is carried out.” This rules out the possibility of “a virtual space” or “electronic communications from one person to another” establishing venue. In addition, the court requires that the place must be “regular,” meaning that “sporadic activity cannot create venue,” and it must also be “established” — i.e., it must not be “transient” and “must for a meaningful time period be stable, established.”

Finally, the place must be “a place of the defendant, not solely a place of the defendant’s employee.” The court lists considerations such as “whether the defendant owns or leases the place, or exercises other attributes of possession or control over the place” as relevant to determine whether the place is “of the defendant.” Although “no one fact is controlling” the new test will make it difficult for plaintiffs to maintain suits in districts where the defendant does not operate business from its own physical place.

Although Cray clearly describes factors to analyze to determine whether there is a “regular and established place of business,” there are still unanswered questions inherent in Section 1400(b). For example, under Section 1400(b), venue is proper “where the defendant has committed acts of infringement and has a regular and established place of business.” The Federal Circuit has yet to address whether there must be a relationship between the acts of infringement and the place of business in the district — i.e., is it necessary for the acts of infringement to arise from the regular and established place of business for venue to be proper there? The lower court in Cray noted this outstanding question, but did not address it as the issue was not disputed. In fact, district courts have come out both ways on this issue. Compare Bourns, Inc. v. Allen–Bradley Co., 1971 WL 17177, at *2 (N.D. Ill. Apr. 5, 1971) (“The statute requires only that the defendant have committed acts of infringement in the district and have a regular and established place of business there; there is no requirement that the two factors be related.”) with Scaramucci v. FMC Corp., 258 F. Supp. 598, 602 (W.D. Okla. 1966) (“[T]here must be some reasonable or significant relationship between the accused item and any regular and established place of business of the accused in the judicial district.”). The majority opinion appears to be that no relationship is required. See Gaddis v. Calgon Corp., 449 F.2d 1318, 1320 (5th Cir. 1971); Shelton v. Schwartz, 131 F.2d 805, 808-09 (7th Cir. 1942). This leaves room for an argument that venue is improper even where there is some physical presence if the acts of infringement are committed outside the district.

Despite this outstanding question about the scope of the patent venue statute, the inevitable result of Cray is that more cases will be transferred out of Texas to districts with permanent and established locations, such as California, or districts of incorporation, such as Delaware. And for large companies with many physical locations in which venue may be proper based on a minor physical presence, the venue analysis will shift to the convenience factors of Section 1404(a).