The Federal Circuit has installed a new three-part framework for what constitutes a “regular and established place of business” for finding proper venue under the second prong of 28 U.S.C. § 1400(b) in its order on Cray’s appeal of Judge Gilstrap’s decision in Raytheon v. Cray.
The Supreme Court’s bright-line rule for patent venue based on a corporation’s “residency,” issued in TC Heartland on May 22, 2017, quickly shifted focus to the second prong of 28 U.S.C. §1400(b) and specifically to whether the corporation has a “regular and established place of business” in the proposed forum. Because there previously had been little occasion for the Federal Circuit to offer guidance on this issue, district courts undertook the task of shaping new law. In particular, Judge Rodney Gilstrap of the Eastern District of Texas provided a comprehensive analysis and four-factor test as part of his ruling in Raytheon v. Cray, where he found venue proper under the second prong. Cray appealed the decision and, on September 21, 2017, the Federal Circuit vacated the ruling and installed a new framework for the “regular and established place of business” inquiry of Section 1400(b). Notably, the court explained that “no precise rule has been laid down” and that “each case depends on its own facts.”
In an apparent reference to Judge Gilstrap’s “modern era” analysis, the court acknowledged the “world has changed” since its 1985 In re Cordis decision such that corporations no longer all operate under a “brick-and-mortar model” and can conduct some business “virtually.” Notwithstanding these changes, the court noted that the patent venue statute has remained unchanged. In setting up its analysis, the court recounted the statute’s legislative and judicial history, noting it was intended as a “restrictive measure, limiting a prior, broader venue” and therefore should not be given a “liberal construction.” In particular, the court warned against conflating patent venue analysis with other showings, such as personal jurisdiction or the general venue statute. Against this backdrop, and after stressing the importance of the statutory language, the court conducted a grammatical dissection of Section 1400(b) and explained there are “three general requirements” relevant to the second prong’s inquiry: (1) the presence of a “physical place in the district,” (2) whether it is a “regular and established place of business,” and (3) whether it is “of the defendant.” In expounding on these requirements, the court identified certain factors that are relevant to the analysis, and its order represents a first glimpse into what the Federal Circuit views as proper venue following the Supreme Court’s ruling in TC Heartland.
1) Physical place in the district
Relying on the text of the statute, the Federal Circuit unequivocally stated that a “physical place in the district” is required. Although the place “need not be … a formal office or store,” as it explained in Cordis, there “must still be a physical, geographical location in the district from which the business of the defendant is carried out.” In particular, the court ruled out the possibility that the statute could encompass a “virtual space” or “electronic communications [that are sent] from one person to another.” Depending on the facts of a given case, however, the court explained this requirement could be met by the home of a local employee or by the engagement of locally provided services, such as the secretarial service in Cordis.
2) Regular and established place of business
In describing the second requirement, the court again conducted an in-depth textual analysis of the language. Citing a number of sources, including legal dictionaries, the court explained that “regular” requires “steady, uniform, orderly, and methodical” operations or a “series of such acts.” In other words, the court explained, “sporadic activity cannot create venue.” The court applied similar reasoning to and support for the “established” limitation, explaining that it required the place of business to be “stable,” “settled certainly,” or “fixed permanently.” The court specifically noted that this concept of permanence comported with the statute’s “main purpose” as identified in its legislative history. For illustration, the court pointed to Knapp-Monarch Co. v. Casco Prods. Corp., where the Seventh Circuit held a company’s semiannual trade show presence was only temporary, and Remington Rand Bus. Serv. v. Acme Card Sys. Co., where the Fourth Circuit held a five-year continuous presence demonstrated the business was sufficiently established for venue. In sum, the court explained, the location must be stable for a “meaningful time period.”
3) Place of the defendant
In addressing the final requirement of its new framework, the Federal Circuit emphasized that the “physical place” must be a place “of the defendant,” and not solely a place of its employee. In drawing this distinction, the court explained that the defendant itself must “ratify” or “establish” the place of business, and it is not enough for the employee to do so on his or her own. The court identified several relevant factors, including whether the defendant owns or leases the place, exercises other attributes of control or possession of the place, conditions employment on the employee’s continued residence in the district, or stores inventory or materials at the place. The court agreed with Judge Gilstrap that a defendant’s representations regarding its location are relevant, which may be made, for example, in marketing materials, websites, or telephone listings, or on buildings or other signage. The court stressed, however, that the defendant must actually engage in business from the location.
In applying its analysis to Cray, the court found the third requirement “crucial” and found insufficient evidence to support a finding that the employee’s home was a place of business “of the defendant.” The court noted a lack of evidence that Cray owned or leased any portion of the home, played any role in selecting its location, stored inventory or conducted demonstrations there, conditioned employment on residence in the district, or made any public representation about its location or business in the district. Instead, the court found the facts showed only that there was a location in the district where the employee conducted work for Cray.
Although its new framework requires a factual analysis that may provide a basis for argument by litigants on both sides, it is clear that the Federal Circuit is intent on narrowing the scope of what may be considered a proper venue.
Reprinted with permission from the "September 28, 2017" edition of the “Corporate Counsel”© 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.