December 19, 2017 Top Story

Federal Circuit Sets New Venue Test

Now a remote employee's place of residence alone is not sufficient to establish patent venue

Martha L. Kohlstrand

There is a new test for determining a defendant's "regular and established place of business" under  28 U.S.C. § 1400(b), which governs venue for patent infringement cases. In In re Cray Inc., the Federal Circuit's decision resolved a split in the lower courts. Now a remote employee's place of residence alone is not sufficient to establish patent venue, and patent venue will be more narrowly construed than its general venue counterpart under 28 U.S.C. §1391(c).

Photo illustration by Genuine Pyun | iStockphoto by Getty Images

Filing Suit Based on the Residence of Remote Employees

Raytheon sued Cray for patent infringement in the U.S. District Court for the Eastern District of Texas. Cray had no property or offices within the forum. Its principal place of business and place of incorporation were in Washington, with additional facilities in other cities. Because the only connection that Cray had to the Eastern District was through two remote employees who resided there, Cray moved to transfer the suit, arguing venue was improper under Section 1400(b). That provision states that venue is appropriate "where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business."

The district court denied Cray's motion to transfer, finding it factually similar to the circumstances in In re Cordis, where the Federal Circuit declined a mandamus request to reverse an order denying transfer for improper venue. The defendant in Cordis employed two remote employees who resided and worked in the forum and provided them with administrative support within the forum, but otherwise lacked connections to the district. Noting the discord amongst lower courts on what constituted a "regular and established place of business," the Cray district court fashioned a four factor inquiry that included (1) a defendant's physical presence, (2) representations regarding its presence, (3) benefits received from the district, and (4) the extent of its targeted interactions within the forum.

Three-Prong Test for Determining "Regular and Established Place of Business"

he Federal Circuit vacated the district court order, holding that an employee's residence in the district, without more, does not establish venue. The appellate court observed that the legislative history reflected an intent to limit patent venue by rejecting previous provisions allowing venue to lie wherever the defendant could be served. It then set forth the following three-prong test for determining whether a defendant has a "regular and established place of business" under §1400(b):  "(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."

Elaborating upon those elements, the appellate court clarified that a "physical place" requires "a physical, geographical location in the district from which the business of the defendant is carried out", though it does not necessarily require an office or store. Thus, it concluded that virtual space and electronic communications are insufficient to meet this requirement. It also ruled that sporadic activity is insufficient to establish the element that a business be "regular and established".

Additionally, the Cray court explained that only where the defendant establishes or ratifies a place of business, or otherwise exercises control over the location, can it be considered to be "the place of the defendant". It looked at factors such as whether the defendant rented or owned the premises, conditioned an employee's employment upon residence in or storing materials within the district, and marketing that reflects defendant holds itself out as conducting business within the district.

Applying that criteria, the Federal Circuit concluded that the employee's home was not the place of business of Cray. Because Cray did not own or rent the employee's home, select the location, store inventory there, or condition employment upon residence within the district, there was no indication that the employee's location was material. Nor did the company provide any support from within the district or hold itself out as being present there. The court further noted that its decision was in accord with decisions from the Fourth and Seventh Circuit Courts of Appeal construing proper patent venue in cases where employees worked from home.

Implications of Cray

The Cray opinion clarifies that a typical remote employee will not create a "regular and established place of business" for a defendant. This is important because "more and more professionals are working outside their company's main location," notes Emily J. Kirk, O'Fallon, IL, cochair of the ABA Section of Litigation's Solo & Small Firm Committee. Other Section of Litigation leaders agree. "With so many companies having employees work remotely, fact investigation to determine where that company is doing business becomes more complex, like peeling layers of an onion," explains Angela Foster, North Brunswick, NJ, cochair of the Section of Litigation's Intellectual Property Litigation Committee.

This nuanced factual analysis "will create more fodder for pre-merits litigation. Cray creates an opportunity for defendants to engage in the same kind of forum selection analysis that plaintiffs engage in when filing suit," observes Bradford S. Babbitt, Hartford, CT, cochair of the Section's Intellectual Property Litigation Committee.  Given the new standard, "patent owners seeking to determine jurisdiction should carefully review the physical presence of the defendant rather than merely focusing on the defendant's employees," advises Foster. 

 

Martha L. Kohlstrand is a contributing editor for Litigation News.

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