Federal Circuit gives patent venue win to defendants

For many years, the only thing general counsel feared more than learning that their companies were sued for patent infringement was that the lawsuit was filed in the District Court for the Eastern District of Texas. Historically viewed as favorable to patent owners, the Eastern District of Texas attracted plaintiff's attorneys who were able to avoid early rulings on summary judgment. Being sued in the district often meant settling just to avoid the enormous costs of discovery. And many companies that did not settle and went to trial often wound up on the wrong side of whopping damages verdicts. It was enough to make Samsung -- a frequent target of patent trolls -- build an outdoor ice skating rink in Marshall, Texas, to try to build some good will with the community.

The heyday of patent litigation in the Eastern District of Texas ended last year when the U.S. Supreme Court decided TC Heartland LLC v. Kraft Foods Grp. Brands LLC. The court held that under the patent venue statute, 28 U.S.C. Section 1400(b), a company incorporated in the United States can be sued only in: (1) its state of incorporation or (2) where it "has committed acts of infringement and has a regular and established place of business." After TC Heartland, many companies sued in the Eastern District of Texas were able to transfer cases based on improper venue.

Plaintiffs' lawyers haven't all given up on seeking favorable venues without a fight. Where a defendant has some contacts with a district, plaintiff's lawyers have tried to show that those contacts are a "regular and established place of business." But defendants involved in continuing skirmishes on this issue won a significant victory this week. On May 14, the U.S. Court of Appeals for the Federal Circuit held that the burden of establishing proper venue under Section 1400(b) is on the plaintiff in patent cases, not the defendant challenging venue. In re ZTE, 2018 U.S. App. LEXIS 12498. [ruling attached below] The plaintiff, American GNC Corporation, is a California company that filed suit in the Eastern District of Texas against ZTE USA Inc., the U.S. subsidiary of Chinese smartphone manufacturer ZTE. ZTE USA is incorporated in New Jersey. It therefore filed a motion to dismiss the complaint for improper venue, arguing that it did not have a regular or established place of business in the Eastern District of Texas and that venue was improper under Section 1400(b).

The district court denied a motion to transfer the case to the Northern District of Texas based on improper venue, rejecting ZTE USA's argument that it did not have a "regular and established place of business" in the Eastern District of Texas. To conclude that a regular and established place was established, the district court relied on a single document indicating that ZTE USA had contracted with a call center company in Plano, Texas, that employed 60 operators. The district court held that, in the absence of discovery into the details of the call center, that single document provided an adequate basis to establish venue. Critically, the district court ruled that the burden of establishing improper venue was on ZTE, the party challenging venue, and that here, ZTE had failed to meet its burden of showing that venue was improper.

Reviewing this decision on mandamus review, the Federal Circuit reversed. It first considered whether it should follow regional circuit law on this procedural issue. Noting that where the burden of proof is placed is critical to the determination of venue in patent cases, the Federal Circuit held that the issue should be governed by Federal Circuit law. As a result, a split among other circuits on the burden-of-proof issue did not affect the Federal Circuit's analysis.

Next, the Federal Circuit considered American GNC's argument that the burden of proof should be on the defendant because venue is an affirmative defense and defendants generally bear the burden to establish affirmative defenses. The Federal Circuit rejected this argument, finding that establishing proper venue is analogous to establishing personal jurisdiction, and noting that plaintiffs bear the burden of affirmatively establishing personal jurisdiction.

In addition, the Federal Circuit held that the district court erred when it concluded that a call center operated by a third party was "a regular and established place of business" of ZTE USA. The district court had summarily concluded that ZTE USA established the call center "in partnership" with a call center company and found that this was sufficient to show that there was a regular and established place of business. To be complete, the Federal Circuit held, the district court's analysis should have given reasoned consideration to all relevant factors or attributes of the relationship in determining whether they warranted treating a call center operated by a third party as a regular and established place of business of ZTE USA. For example, the district court should have considered: (1) whether ZTE USA itself possessed, owned, leased or rented the office space for the call center or owned any of the equipment located there; (2) whether any signage on, about or relating to the call center associates the space as belonging to ZTE USA; and (3) whether the location of the call center was specified by ZTE USA or whether the company that operated the call center would need permission from ZTE USA to move its call center outside of the Eastern District of Texas or to stop working for ZTE USA.

The result of In re ZTE will make it easier for defendants in patent cases to transfer cases away from districts in which they have only remote contacts through third parties or other vendors. Patent owners can no longer defeat motions to transfer for improper venue by relying on tangential comments made in marketing documents, for example, websites touting a vendor's relationship with a defendant as a "partnership." Instead, patent owners will be well advised to thoroughly investigate the connections that a potential defendant has to a district well before filing suit so that they can justify their choice of venue, not only to the district court but also to the Federal Circuit on appeal. Corporations wanting to avoid suit in these jurisdictions, on the other hand, will want to review their relationships with third parties and evaluate whether they are putting themselves at risk of being found to have a regular and established place of business where they would prefer not to be sued.