Eastern District of Texas Not Going Away as Patent Venue–But One Question Remains After TC Heartland, Raytheon

What Chaos TC Heartland Has Wrought

A couple of months ago, the Supreme Court ruled in TC Heartland v. Kraft Foods Grp. Brands LLC, 137 S.Ct. 1514 (2017), that venue for patent cases was strictly circumscribed to 28 U.S.C. § 1400(b) (“Any civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”). The Supreme Court narrowed the term “resides” from its general use in other federal venue statutes (namely, 28 U.S.C. § 1391(c), which applies the definition supplied therein), and held that “resides” only refers to a company’s state of incorporation. Whether this decision is right or wrong really does not matter right now. It is the law of the land (although I have to say that purporting to construe the “plain text” in holding that an incorporated business “resides” in the district of incorporation makes no sense and is an absurd reading, since companies are incorporated in a “state”, not a district. But I digress…).

I was interviewed by the Dallas Business Journal (Texas Law Book) and I said that I thought the celebration was premature. Indeed, the number of patent filings in the District of Delaware — where a large percentage of U.S. Companies choose to incorporate —  has risen dramatically in the past two weeks. But I think this is temporary and is cold comfort to defendants. I would much rather defend a patent case in the Eastern District.  The Eastern District has been a friendlier jurisdiction to defendants than the District of Delaware; it is closer to where more parties have business centers (Plano, Frisco and McKinney are in the Eastern District of Texas, and are the fastest growing cities in the Dallas area owing to the influx of Fortune 500 companies bringing their operations there…which means the jury pool is going to change), and the Dallas area is way easier to get to than the Delaware (no offense to my Delaware friends). The fact that Raytheon involved two large businesses further demonstrates the issue. While the national media has utilized fake news to besmirch the Eastern District, they overlook the fact that it is home to an absurdly high concentration of business headquarters or major operations including Raytheon, Toyota, Capital One, JC.. Penny’s, Frito Lay, JP Morgan,  Hewlet Packard, EDS, Ericsson…to name a few.

Immediately following the decision, almost every patent defendant in the Eastern District of Texas filed (in our case, late) Rule 12(b)(3) motions for improper venue or Sec. 1406 motions to transfer. The problem for them is that they had already answered and/or filed a 12(b) motion already.  Under Rule 12(h), you waive your Rule 12(b)(3) venue challenge if you don’t include it in your first pleading or 12(b) filing. And Section 1406(b) expressly says that subsection (a) does not revive waived venue challenges.

Other defendants who did not file late, filed while conveniently ignoring the fact that they maintained robust sales organizations in the Eastern District of Texas.

So the issues that seemed to remain after TC Heartland were: (1) Did that opinion revive defendants’ right to seek to dismiss for improper venue under Rule 12(b)(3) or to transfer under 28 U.S.C. § 1406(a)? And (2) when a defendant is not incorporated in Texas, what does “where the defendant has committed acts of infringement and has a regular and established place of business” mean?

Now: Raytheon v. Cray Creates Some Clarity and Guidelines

The latter issue was resolved by Judge Gilstrap in Raytheon Company v. Cray Inc., Case No. 2:15-cv-01554-JRG (E.D. Tex., June 29, 2017).  Raytheon sued Cray for infringing four of Raytheon’s patents for high performance computing. Cray filed and lost a motion for improper venue back in 2015. Then, following the issuance of TC Heartland, Cray refiled its motion to dismiss for improper venue, or to transfer venue under 28 U.S.C. § 1406(a). Cray contended that it did not reside in the Eastern District because it was not incorporated in Texas (it is incorporated in Washington), and that its headquarters were also in Washington, and therefore could not be said to “maintain a regular and established business” in the Eastern District either.

Judge Gilstrap left open the question of who bears the burden of proving the propriety of venue, but determined that irrespective of who bears it, the evidence demonstrated the propriety of venue in the Eastern District.  He easily found that under 35 U.S.C. 271, “‘an act of infringement’ includes making, using, offering to sell, or selling a patented invention, or inducing such conduct.” And therefore, Cray’s sale, for example, of a XC40 supercomputer which was orchestrated–and where the “offer to sell” came from Cray’s employee in the Eastern District, albeit and sold to the University of Texas system in Austin, met the qualification. This was indeed cumulative of millions in sales generated from the Eastern District, for the direct benefit of Cray.

As for the “regular and established business” prong, the Court relied on In re Cordis Corp., 769 F.2d 733 (Fed. Cir. 1985) for the proposition 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.” The Court found that this prong was met because Cray maintained sales representatives in the district, whom it paid as full time employees, and who had been there for seven years, and was the “Account Manager” for the territory embracing the Eastern District. Cray also provided its in-District employee (Mr. Harless) with paid cell phone with a local area code, and administrative support supplied from Cray’s Minnesota office. Mr. Harless developed new accounts, solicited sales, and overall was responsible for Cray’s business in the Eastern District.

Judge Gilstrap went further to prescribe some elements for determining venue in the future, or “in the modern era” to provide administrative simplicity as he put it in his opinion:

• Physical Presence in the District — including but not limited to “property, inventory, infrastructure, or people.” But noting that the “lack of a physical building in the district is not dispositive.”
• Defendant’s Representations – does the defendant represent either internally or externally that it has representatives in the district.
• Benefits Received — how much sales revenue in total dollars [what about as a percentage of revenue, even if total dollars are low] is generated from sales in the district.
• Targeted Interactions with the District — how defendant interacts with existing customers (e.g., isolated, arbitrary sales here or there vs. ongoing contractual relationships) in the district, as well as how it engages potential customers, clients, or purchasers for its products or services in the district. Marketing efforts and sales directions are key issues.

The Raytheon Court said that none of these factors is singularly dispositive. But they open the door to the fact that enough sales in the Eastern District — even without a local employee — combined with marketing or sales efforts targeted at the District, could be sufficient to meet this test if (and only if) there is also evidence of infringement in the district under Sec. 271’s definition.

One Question Remains: What About Partnerships, LLCs, LPs, and other “Unincorporated Associations”?

The question remains what the impact of TC Heartland will be for unincorporated associations. The issue is this: for anyone with the misfortune to sue an LLC, for example, you now know that its “residence” for purposes of venue, diversity jurisdiction, etc. is not the state of incorporation…because it has no state of incorporation. For those inquiries, the law is that an unincorporated association is a resident of every state in which its members themselves reside. So for an LLC, every member’s residence counts as the residence of the LLC.

TC Heartland seems to wash over this (albeit, bizarre) rule.  But it will continue to unravel the more the Supreme Court tries to gerrymander the venue statutes’ reach.

Photo Credit: Texas Courthouse Trail