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IP Alert: Employee’s House Not a “Regular and Established Place of Business” Under TC Heartland

October 3, 2017

The Supreme Court’s decision in TC Heartland narrowed the possible venues in which a defendant may be sued for patent infringement to those in which a defendant is incorporated or has a regular and established place of business. In the aftermath of TC Heartland, the Federal Circuit in In re Cray Inc. rejected a four-factor test developed by the Eastern District of Texas to determine whether a defendant has a regular and established place of business in a venue. In reversing the Texas court’s finding of proper venue, the Federal Circuit announced three requirements relevant to that inquiry.

In TC Heartland, the Supreme Court significantly narrowed venue choices for a plaintiff filing a patent infringement suit against a defendant. Before TC Heartland, courts typically construed the venue statute to allow defendants to be sued in any district in which they had committed allegedly infringing activities. For companies with nationwide sales, this essentially meant that the company could be sued in every federal court in the nation. In TC Heartland, the Supreme Court ruled that this reading of venue standard was too broad. The court required instead that plaintiffs establish venue over defendants by showing that the defendant is either incorporated in a judicial district or has a regular and established place of business in that district.

Since TC Heartland, numerous cases have issued from district courts addressing what it means to have a regular and established place of business in a district. This question is not always easy to answer, and is particularly murky when the location at issue is the residence of one of the defendant’s employees.

In In re Cray, Raytheon sued its competitor Cray, a well-known manufacturer of supercomputers, for patent infringement in the Eastern District of Texas. Cray is not incorporated in Texas, and Cray moved to transfer the case on the grounds of improper venue. The Texas court set out a four-factor inquiry into what constitutes a regular and established place of business, including (1) physical presence, (2) defendants’ representations, (3) benefits received, and (4) targeted interactions with the district. Cray has a senior sales employee who lives within the Eastern District of Texas, and that employee works out of his home. Based on this, and applying its four-factor test, the Texas court denied Cray’s motion to transfer venue out of Texas. Cray petitioned for writ of mandamus, asking the Federal Circuit to reverse the district court’s finding.

The Federal Circuit determined that the district court’s four-factor test was not sufficiently tethered to the statutory language of the venue statute, 28 U.S.C. 1400(b). The court then revealed three general requirements relevant to the inquiry: "(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." According to the court, if any of these requirements are not satisfied, venue is not proper.

Factor 1—A physical place in the district. The Federal Circuit found that the district court erred as a matter of law in holding that a fixed physical location in the district is not a prerequisite to proper venue. The Federal Circuit acknowledged that “place” need not be formal office or store, but there must still be a physical location in the district from which the business of the defendant is carried out. According to the Federal Circuit, examples of physical place include a location in which literature, documents, and products may be stored, a distribution center, or a location from which administrative or secretarial services are performed.

Factor 2—The place must be a regular and established place of business. The Federal Circuit found that a business may be regular if it operates in a steady, uniform, orderly, and methodical manner; sporadic activity from a location is insufficient to support venue. The Federal Circuit noted that while a business can move its location, it must, for a meaningful time period, be stable and established. The Federal Circuit further noted that if an employee is free to move his or her home out of a venue without the approval of the employer, then the employee’s home is not considered a place of business of the defendant.

Factor 3—A place of the defendant. The Federal Circuit emphasized that the place must be a place of the defendant and not solely a place of the employee. Relevant considerations include whether the defendant owns or leases the place, whether the employer conditioned employment on the employee’s continued residence in the venue, or whether the employer’s materials are stored at the employee’s residence so that they can be distributed or sold from that place.

Applying these three requirements, the defendant’s presence in the district was too attenuated. While the plaintiff argued that a sales employee’s home in the Eastern District of Texas satisfied venue in the district, the Federal Circuit found that the employee’s home was not listed in any business directories or websites, that he did not maintain product literature or products at his home, and that he was the only employee within the district. In addition, the defendant paid no part of the employee’s home or rent and it stored nothing there. Those facts did not support a finding that the employee’s home was a regular and established place of business of the defendant.

Although this case definitively rejected the Eastern District of Texas’s test for venue, it still leaves open many questions in the venue analysis. At a high level, the type of analysis needed to evaluate the three requirements set forth by the Federal Circuit is fact-intensive. In many cases, a venue analysis will require venue discovery.

Another nuance in the Federal Circuit’s decision was that it relied heavily on an over 30-year-old case in providing examples of what it meant to have a physical location in a district. The court pointed to facts such as literature and documents in a location, or distribution centers, inventory, and secretarial services located in the location. That approach may not provide useful guidance for modern businesses whose product literature may be distributed online instead of in physical form, or that may not even have a product conductive to being stored in a location, e.g., a software business. Moreover, the use of secretarial and administrative services is much less prevalent today than it was 30 years ago. In addition, it is unclear why the Federal Circuit relied so heavily on the locations of documents and inventory, instead of focusing on the location of the company’s employee. It might be argued that an employee is every bit as much an asset of the company as are its documents and products, which can just as easily be moved.

The court’s reliance on the lack of presence of any product or inventory in the district is also interesting. Cray is a manufacturer of supercomputers that do not physically lend themselves to storage in an employee’s home. It is unclear how a court would address that factor where there either is no inventory or the inventory could not feasibly be stored in a location within the district.

The court also based its analysis on whether an employee can move his or her home out of the district without the approval of the defendant. This factor would seem to rely heavily on the employee’s employment contract and appears to focus more on some prospective fact, i.e., whether the employee could move out of the district, instead of whether the employee is actually in the district.

The court also relied heavily on the fact that the employee’s home was not paid for or leased by the defendant. Of course, another relevant fact may be whether the employee’s compensation was somehow adjusted upward because the employee was working out of his home rather than requiring the defendant to lease office space.

How the Federal Circuit’s three-requirement test will play out remains to be seen. Nevertheless, this is an important decision in the rapidly evolving law of venue in patent cases.

For more information, please contact Fitch Even partner Joseph F. Marinelli, author of this alert.

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