In a welcome ruling for internet companies undergoing patent infringement suits, the US Court of Appeals for the Federal Circuit weighed in regarding what it means to have a “regular and established place of business” under the patent venue statute.
The US Court of Appeals for the Federal Circuit has shaped the meaning of “regular and established place of business” under the patent venue statute (28 USC § 1400(b)) in three ways. First, a defendant may have a “place of business” even if it does not hold a real property ownership or leasehold interest in the district. Second, a “regular and established place of business” requires the regular physical presence of an employee or other agent of the defendant conducting the defendant’s business at the alleged “place of business.” Third, the venue statute excludes agents’ activities that are merely connected to, but do not themselves constitute, the defendant’s conduct of business.
The case at issue[1] arose from a patent infringement lawsuit filed in the Eastern District of Texas. The plaintiff filed its suit after the US Supreme Court’s decision in TC Heartland LLC v. Kraft Foods Group Brands LLC,[2] which held that “a domestic corporation ‘resides’ only in its State of incorporation for purposes of the patent venue statute,” and the Federal Circuit’s decision in In re Cray, Inc.,[3] which held that a “regular and established place of business” under the patent venue statute must be (1) “a physical place in the district”; (2) “regular and established”; and (3) “the place of the defendant.”[4]
The plaintiff alleged venue was proper in the Eastern District of Texas based on the presence of several of the defendant’s servers.[5] The servers were not hosted within data centers owned by the defendant.[6] Instead, the defendant contracted with third-party internet service providers (TP-ISPs) within the district to host its servers within TP-ISP data centers.[7] It was undisputed that no employee performed installation of, performed maintenance on, or physically accessed any of the servers at issue.[8]
The defendant moved to dismiss the complaint for improper venue.[9] The district court denied its motion.[10] The company then petitioned for a writ for mandamus directing the district court to dismiss the case for lack of venue.[11]
Reviewing its mandamus petition, the Federal Circuit held that the Eastern District of Texas was not a proper venue because the defendant lacked a “regular and established place of business” within the district.[12] As a threshold matter, the court agreed with the defendant that mandamus is an available remedy.[13] The court then resolved its statutory arguments.
1. To have a “place” in the district, a defendant need not have a real property ownership or leasehold.
The defendant argued that the rack space occupied by its servers in the Eastern District of Texas does not constitute a “place” under the venue statute.[14] The Federal Circuit disagreed, reiterating its holding in In re Cray that a “‘place’ merely needs to be a ‘physical, geographical location in the district from which the business of the defendant is carried out.’”[15] The proper question is not “whether the defendant has real property ownership or a leasehold interest in real property” because “a ‘place’ need not have such attributes”:
For example, a defendant who operates a table at a flea market may have established a place of business; the table serves as a “physical, geographical location . . . from which the business of the defendant is carried out.” Similarly, leased shelf space or rack space can serve as a “place” under the statute . . . .[16]
Applying these principles, the Federal Circuit held that the servers are physically located in the district in a fixed, geographic location, which constitutes a “place” under the venue statute.[17]
2. A “place of business” requires a place where an employee or agent of the defendant is conducting the defendant’s business.
In the alternative, the defendant argued that a “place of business” requires a place where an employee or agent of the defendant is conducting the defendant’s business.[18] The Federal Circuit agreed after analyzing the venue statute together with the patent service statute (28 USC § 1694).[19]
The record was clear that the defendant had no employees conducting business in the Eastern District of Texas.[20] This left the question of whether the TP-ISPs acted as the defendant’s agents such that the TP-ISPs data centers in the Eastern District of Texas would constitute its “place of business” under the venue statute.[21]
3. The venue statute excludes agents’ activities that are merely connected to, but do not themselves constitute, the defendant’s conduct of business.
Applying agency law, the Federal Circuit concluded that the TP-ISPs are not the defendant’s agents under the venue statute, for three reasons. First, although the TP-ISPs provide the company with a service, the company has limited control over the TP-ISPs’ provision of network access.[22] Second, each TP-ISP, not the defendant, installs the company’s servers, and these installations do not amount to “conducting [the defendant’s] business within the meaning of the [venue] statute.”[23] Third, although the defendant had a contractual right to request that the TP-ISPs maintain its servers, these maintenance functions “cannot, standing alone, be considered the conduct of [its] business” under the venue statute.[24]
While noting these functions “may be suggestive of an agency relationship,”[25] the Federal Circuit declined to find the TP-ISPs to be the defendant’s agents under the venue statute because “the Supreme Court has cautioned against a broad reading of the venue statute.”[26] To this end, the Federal Circuit articulated certain limits of agency under the venue statute:
The venue statute should be read to exclude agents’ activities, such as maintenance, that are merely connected to, but do not themselves constitute, the defendant’s conduct of business in the sense of production, storage, transport, and exchange of goods and services.[27]
Finding the defendant has no employee or agent regularly conducting its business at the alleged “place of business,” the Federal Circuit held that the Eastern District of Texas was not a proper venue and ordered the district court to dismiss or transfer the case.[28]
This case appears to be a welcome result for internet companies defending against patent infringement lawsuits. Now that the Federal Circuit has cautioned against a broad reading of the venue statute and articulated several of its limits, litigants can expect an increase in mandamus petitions seeking to order district courts to dismiss or transfer cases for improper venue. Litigants can also expect that further litigation will clarify when an agent’s activities are “merely connected to, but do not themselves constitute, the defendant’s conduct of business in the sense of production, storage, transport, and exchange of goods and services.”
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact the author, Dion M. Bregman (Silicon Valley), or any of the following lawyers from Morgan Lewis’s intellectual property team:
Boston
Joshua M. Dalton
Century City
Olga Berson, Ph.D.
Andrew V. Devkar
Seth M. Gerber
Chicago
Michael J. Abernathy
Christopher J. Betti, Ph.D.
Wan-Shon Lo
Krista Vink Venegas, Ph.D.
Jason C. White
Amanda S. Williamson
Houston
C. Erik Hawes
David J. Levy
Rick L. Rambo
Miami
David W. Marston Jr.
Philadelphia
Eric Kraeutler
San Francisco
Brent A. Hawkins
Carla B. Oakley
Silicon Valley
Dion M. Bregman
Andrew J. Gray IV
Michael J. Lyons
Yalei Sun
Washington, DC
Natalie A. Bennett
Eric S. Namrow
Collin W. Park
Wilmington
John V. Gorman
[1] No. 2019-126, slip op. (Fed. Cir. Feb. 13, 2020).
[2] 137 S. Ct. 1514, 1517 (2017).
[3] 871 F.3d 1355, 1360 (Fed. Cir. 2017).
[4] No. 2019-126, slip op. at 2-3 (Fed. Cir. Feb. 13, 2020).
[5] Id. at 3.
[6] Id.
[7] Id. at 3-4.
[8] Id. at 5.
[9] Id.
[10] Id.
[11] Id.
[12] Id. at 17.
[13] Id. at 9.
[14] Id.
[15] Id. (quoting In re Cray, Inc., 871 F.3d 1355, 1362 (Fed. Cir. 2017)).
[16] Id. (citations omitted, ellipses in original).
[17] Id. at 10.
[18] Id.
[19] Id. at 10-13.
[20] Id. at 13.
[21] Id.
[22] Id. at 13-14.
[23] Id. at 14.
[24] Id. at 14-15.
[25] Id. at 15.
[26] Id. at 16.
[27] Id.
[28] Id. at 17.